Caltex Australia Limited 31 Mar 10

The punt worked but now it’s time to quit

Caltex does not sit well in a resources portfolio. Its key businesses are oil refining and retailing. The retailing business is a steady business but we would not own the company for exposure to the retail sector.

The refining business is a difficult one and in an overall sense is a bad business. There will be periods when refining provides a satisfactory return on invested capital, but not often enough. We are taking advantage of a recovery in refining margins as an opportune time to exit Caltex for a handsome return.

The last time we reviewed Caltex was in FAT-MIN-209 when we recommended the company as BUY at A$9.22 for all Members. We changed the recommendation from HOLD because refining margins were exhibiting a recovery.

Since late January 2010 there has been a strong increase in global refining margins. The biggest increase was West Coast USA where the refining margin has risen from US$0.10 to US$3.11 per barrel.


A table showing refining margins copied from BP is shown below.



Global refining margins overall were lousy at the start of 2010. Since early in 1Q10 the Singapore Refining Margin, which is relevant to Caltex, has risen from US$0.53 to US$0.98. The Global Indicator has risen 69% from US$1.75 to US$2.95 per barrel.

It is pure speculation how high the margins will rise to. If margins return to 1Q09 levels then Caltex’s share price has further to run. Selling now would be way too early.

We don’t like the refining business and we see better opportunities in the mining sector. Moreover the company does not belong in the mining/resources sector as it is firmly identified as an industrial company.

Fat Prophets first put a BUY recommendation on the company at $A2.16 per share in 2001. The company’s glory days were in 2007 when its share price topped $A24.00. Prior to that the company only traded for a few dollars. The share price took-off in 2003 when demand for refined products was very strong and capacity was very restricted.

Many new refineries were built to satisfy the new demand. Excess capacity led to a collapse in margins, which in turn led to a collapse in Caltex’s share price.



SHARE PRICE CHARTS AND COMMENTS:

Fat Prophets initially recommended CTX at $2.15 in the Australasian report in May 2001 (FAT31). Our last review of this stock for the Mining and Resources report was in January (Fat Mining 209).

Turning to the technical picture, Caltex continued to move higher to reach a recent high of $11.72 on March 12. This represents a gain of $3.11 (+38.83%) since touching a low of $8.01 in mid December 2009. The main theme over the short to medium term is consolidation in between support at $10.92 and resistance at $11.72.







Though the short term trend is upwards, the bearish moving average cross formed in late November 2009 remains in place. This suggests that momentum continues to favour the downside and that any upward move would be slow coming over the medium term.








We are using the current strength in the company’s share price to exit.

Caltex Australia is recommended as a SELL ALL for all Members.


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