Volatile trading hits CAO's Q4 earnings

Singapore

CHINA Aviation Oil (CAO) took a hit from volatile oil trading conditions in the fourth quarter, with its earnings plummeting 67.2 per cent.

Net profit for the group fell to US$4.43 million for the three months ended Dec 31, from US$13.5 million a year ago. Revenue was little changed at US$4.32 billion, a decrease of 0.7 per cent year-on-year.

While the firm traded higher volumes of jet fuel, rising by 54.3 per cent to 3.95 million tonnes for the quarter, sales volume of other products dropped 12.7 per cent to 1.86 million tonnes.

CAO had chosen to reduce its trading activities in the fourth quarter, preferring to be more conservative in view of the rocky market that was giving rise to credit problems in some of its counterparties, said its chief operating officer Jean Teo. The firm made a provision of US$2.7 million for doubtful debts relating to Dynamic Oil Trading, which was implicated in a US$125 million fraud and a US$150 million risk management loss.

CAO was also affected by the lower oil price through its associate Pudong, which made an impairment provision on the value of its inventory. This, coupled with a higher loss in oil storage terminal Oilhub Korea Yeosu (OKYC), led to CAO's share of profits from associates and joint venture to tumble 50.5 per cent to US$4.62 million.

For the full year, the jet fuel supplier posted a net profit of US$49.2 million, down 30 per cent from US$70.2 million in 2013. Its revenue rose 9.6 per cent to US$17.1 billion on the back of increased trading volumes.

The firm saw trading volume for jet fuel increase by 16 per cent year-on-year to 12.07 million tonnes in 2014, while volumes for other oil products rose 36.4 per cent to 8.28 million tonnes. Despite the higher volumes, gross profit fell 47.8 per cent to US$27.4 million, as volatility in trading conditions dealt a blow to the firm across its various products.

The firm had not been able to optimise gains from the trading of jet fuel, its CEO Meng Fanqiu explained in a results briefing. This led to lower margins compared to the previous year.

Higher storage costs and lower demand for fuel oil also caused a steeper loss in the product, while contribution from its petrochemicals division shrank as well.

Noting that the oil price remains unstable following the drop in the second half of last year, Mr Meng said: "In 2015 we will face more challenges...We need to ensure a stable performance of the company while maintaining a very stringent risk management and control system." But there are also opportunities in terms of storage, he added. The firm is looking at "really good M&A opportunities" as well, with a planned capital expenditure of US$500 million.

CAO is now increasing its inventories to ride on the contango - where prices for oil delivery later are higher than current prices - in the market, said Ms Teo. The firm has also laid the foundation for the internationalisation of its business through three subsidiaries in Hong Kong, US and Europe in the past few years, said Mr Meng. "Now we have a good base for future expansion...So we are very confident about this year."

Shares for CAO fell 2.1 per cent to 70.5 Singapore cents on Thursday before the results announcement.