Legacy Refining Will Falter As EV Shift Accelerates

Key Takeaways

• Heavy reliance on traditional fuel operations and slow renewable diversification put future revenues and asset use at risk amid rapid energy transition.
  
• Regulatory, competitive, and financial pressures threaten margins and earnings, with major investments straining the balance sheet and cash flow.
  
• Expansion of convenience retail, refining upgrades, operational efficiencies, and supportive structural trends are expected to drive sustained growth, stable earnings, and improved cash flow for Viva Energy.

Catalysts

About Viva Energy Group

Operates as an energy company in Australia, Singapore, and Papua New Guinea.

What are the underlying business or industry changes driving this perspective?

• The accelerating shift to electric vehicles and alternative transportation modes threatens to sharply reduce long-term demand for Viva Energy's core fuel retail and refining businesses, leading to potential structural revenue decline and underutilized assets.
  
• Increasingly stringent government regulations and climate policies targeting fossil fuels will likely drive up compliance costs and directly erode transport fuel volumes, resulting in both net margin compression and earnings headwinds across the portfolio.
  
• The company remains heavily dependent on legacy refining and retail operations while its diversification into renewables lags behind the pace of the global and domestic energy transition, placing future revenues and cash flows at risk as decarbonisation efforts intensify.
  
• Major capital investments required for asset upgrades, supply chain integration, and store conversions are straining the balance sheet, with net debt already elevated and free cash flow near breakeven, heightening vulnerability to any revenue or margin pressure in the future.
  
• Rising competitive pressure from discount and unmanned fuel operators-paired with persistent declines in tobacco and weak convenience sales-undermines Viva's ability to sustain margins and earnings, risking longer-term margin erosion even as substantial synergies and cost-outs are pursued.

Viva Energy Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Viva Energy Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Viva Energy Group's revenue will decrease by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.8% today to 0.9% in 3 years time.
• The bearish analysts expect earnings to reach A$250.8 million (and earnings per share of A$0.15) by about September 2029, up from A$226.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$547.1 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.9x on those 2029 earnings, up from 21.7x today. This future PE is greater than the current PE for the AU Oil and Gas industry at 15.7x.
• The bearish analysts expect the number of shares outstanding to grow by 1.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The ongoing expansion and optimization of the company's convenience retail offering, including the integration of OTR, Coles Express, and Liberty Convenience, is expected to drive sustained growth in higher-margin non-fuel sales, which can improve net margins and group earnings as the new retail formats gain scale and efficiency.
  
• Strategic investments in refining operations, particularly upgrades at Geelong and the commissioning of the Ultra-Low Sulphur Gasoline project, position Viva Energy for margin stability and improved EBITDA, especially as refining margins recover and capital intensity normalizes post-2025.
  
• The company's robust synergy and cost-out program across Convenience and Mobility is on track to deliver $90 million in annualized earnings improvements by 2026, with a substantial portion embedded already, supporting higher long-term EBITDA and operational leverage.
  
• Long-term structural trends in Australia such as population growth, urbanization, and resilience in fuel demand from logistics and heavy transport are likely to underpin stable or growing fuel sales for Viva Energy, providing a foundation for recurring revenues.
  
• Government support for domestic refining, including grants and supply obligations, along with constrained refining capacity in the region, help secure base load earnings for incumbent operators and mitigate earnings volatility, supporting cash flow and dividend sustainability into late decade.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Viva Energy Group is A$2.6, which represents up to two standard deviations below the consensus price target of A$3.0. This valuation is based on what can be assumed as the expectations of Viva Energy Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$3.75, and the most bearish reporting a price target of just A$2.6.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be A$27.7 billion, earnings will come to A$250.8 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$3.0, the analyst price target of A$2.6 is 15.4% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.