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1
Looking ahead
Caltex's challenges and opportunities
Julian Segal, Managing Director & CEO
Caltex Australia Limited
Speech to the American Chamber of Commerce in Australia
Melbourne, 12 November 2009
CHART 1 INCL TITLE: Caltex business montage
The Caltex story
As many of you would be aware, I have been with Caltex Australia less than five months and
it's been an exciting journey. Today I'd like to
share a little of that journey with you. I'll talk
about Caltex's history, what is happening now in the industry globally and at a regional level
and how that affects us in Australia. I'll take you through Caltex's business strategy
where it
is now and where we can go in the future - and some ideas on the corporate culture we need
to achieve success.
Caltex is the largest refiner and marketer of petroleum products in Australia. We produce
petroleum products at our two refineries and we market these locally-refined products and
also petroleum products that we import. We have a wide range of commercial, government
and private customers, which we supply through a network of terminals, depot and service
stations.
CHART 2: Looking back - Caltex history montage
One of the things that first attracted me to Caltex was its longevity. The
company's roots go
back to 1900 as an oil importing company and the Caltex name has been in Australia for
almost seventy years.
The all-Australian oil importer Ampol was listed on the Australian Stock Exchange in the late
1940s. Both Caltex and Ampol opened refineries in the 50s and 60s, Caltex in Sydney and
Ampol in Brisbane, and they competed fiercely in the service station arena and oil product
marketing generally. As the industry started to rationalise, Ampol acquired Total and Caltex
acquired Golden Fleece.
Despite this, Caltex and Ampol were relatively small. Their 1995 merger propelled the
company to be the largest refiner-marketer in Australia, with debt at the time of the merger of
approximately $1.4 billion. Since then the Caltex brand has mostly replaced the Ampol brand.
Caltex is an Australian company - through its listing on the ASX, through its Sydney-based
head office and management team, through its 4000 employees working all around Australia
and through its many Australian shareholders. And while our major shareholder is the US-
based Chevron, Caltex Australia operates independently, with all decisions made in Australia
by the management and board. This is what sets Caltex apart from other refiner-marketers in
Australia.
CHART 3: Caltex share price v All Ords
While the outlook in the mid-1990s was positive, the Asian economic crisis in the late 90s
resulted in surplus refining capacity as new refinery construction in the region met with
reduced growth in demand. This sent Caltex refiner margins down to uneconomic levels and
by September 2001 the co
mpany's
shares had fallen to 90 cents compared with four dollars
in 1997.
The huge debt inherited at the time of the Ampol merger became a millstone around the
company's neck in the face of poor market conditions
. Ansett had recently collapsed, showing
that even iconic companies could fail.
2
What followed was cost cutting and other measures to conserve cash, including the difficult
decision by the Board to withhold dividends for two years. We were helped by the emergence
of China as the growth engine of Asia, which greatly increased petrol and diesel demand and
hence refiner margins in 2003 and 2004. We were also helped by the closure of the Port
Stanvac refinery in South Australia. This shifted the Australian market from long supply to
short, which was positive for refining margins.
Like a true Aussie battler, Caltex Australia pulled through. The company survived. Refining
prospered as Asian economic growth pushed up refinery margins and the focus on growing
marketing also paid dividends as the Australian economy grew.
You could say we got lucky and that's true. But after that shock an enormous amount of work
went into building a company that was able to take advantage of the good times. Those good
times only lasted until 2008 as the global economic crisis took hold. Again, the fall in global
demand caused refiner margins to deteriorate.
The lesson from Caltex's story is that companies like us have to grow and become less
vulnerable to the volatile market for refined products. Our marketing operations, including
convenience retailing, provide some stability. But is it enough? And are our current strategies
for refining and marketing enough to provide sufficient growth? I would say no.
If we want to be here for another 10, 20 or 30 years we need to do more
The state of the industry
Caltex is a well-run company within its industry and we need to achieve the best possible
performance from current assets. So what's the state of the industry that we are operating in?
CHART 4: Global crude oil balance
Globally, there's
a lot of surplus oil production capacity and demand is still weak as a result of
the global financial crisis. Crude oil prices have doubled to over $80 per barrel since their low
point last December, but are well below last year's peak. Lower prices have led to cutbacks
in oil exploration and there are some concerns that economic recovery may drive up oil
demand faster than supply can respond, even with surplus capacity.
Caltex is not in oil exploration or production and has no ambition to be there. However, the
price of crude oil will be fundamental in shaping energy opportunities in years to come,
particularly the competitiveness of alternatives to crude oil. No-one really knows what the oil
price will be, so Caltex needs to remain alert to the way in which the oil price will affect future
opportunities..
Many global oil companies are diversifying their investments, particularly into liquefied natural
gas, which we can see in Australia. There is also a lot of interest in various alternative fuels
including renewables. As
major oil companies'
commitment to LNG and other energy sources
grows, we are seeing them reduce their downstream activities, including in Australia. This
may provide opportunities for Caltex.
CHART 5: Excess regional capacity
While the financial downturn saw many Asian refineries cut crude runs and bring forward
planned maintenance, new refineries have come on stream in China, India and Vietnam and
this is continuing despite a reduction in demand, particularly for diesel. These refineries were
committed to in the years leading up to the GFC to meet soaring regional demand for fuel and
are only now being completed. As they increase output they put pressure on refiner margins
in the region, impacting all refineries, including those in Australia.
Despite this, the Australian market has some structural advantages for Caltex. Key markets
are widely dispersed geographically, which means that marketers must be prepared to
3
operate in many micro-markets relative to global scale. Caltex has spent decades investing in
infrastructure to establish this long-term supply capability and continues to invest in these
assets. Refining capacity in Australia is short, so pricing is based on import parity and high
fuel quality standards attract a price premium. Finally, population and economic growth are
driving healthy growth in demand for petroleum products.
The short term outlook is difficult because of the impact of the global financial crisis but we
are more optimistic about the longer term outlook due to Asian growth. Australia has
managed to avoid the worst of the economic crisis and recovery has begun elsewhere. For
example, China has already experienced growth of almost eight per cent in the past 12
months.
Australian mining and agriculture will experience increasing demand from Asia as its
economies expand and people move out of poverty. This has flow-on effects for transport and
construction and the economy as a whole. That means higher demand within Australia for
diesel in particular. Jet fuel will also benefit from a lift in tourism and business travel.
As you can see, this is an industry experiencing great change. To get ahead, Caltex will need
to be flexible and take a broader view. That means looking outside the traditional framework
of refining and marketing products from crude oil. And I'm ready to take Caltex on this
journey.
Caltex business strategy
As I discussed earlier, running a successful company is not just about surviving the hard
times and taking advantage of the boom times. You need a strategy for sustainable long term
growth. For companies to prosper over many decades, even centuries, they must out-
perform most competitors. This means focusing on the long term as well as the short term
and constantly reinventing themselves as the world changes.
CHART 6: ASX top quartile TSR performers
In my view, long term success requires us to deliver performance that is in the top quartile of
ASX100 companies based on total shareholder return, or TSR.
The numerical value of top quartile TSR will vary over the course of business cycles and the
success of business as a whole in capturing growth opportunities. This chart shows top
quartile performers in a recent 5-year period. Caltex was well below top quartile performance.
Over the past 20 years, Caltex's TSR has been just above the median return for the ASX All
Ordinaries Accumulation Index. However, we are not satisfied with a median level of return.
In any particular year, Caltex's business plan will have a target for net profit after tax.
Employees will receive short term performance incentives based around this target.
However, the challenge is to lift our business plan target to a level that meets or exceeds the
profit required for top quartile TSR performance.
CHART 7: Caltex strategy
So how do we achieve this? A successful company needs to have operational efficiency
starting with the base business, a strong growth strategy and a supportive culture. I like to
think of it as a three-legged stool
if one of the legs is missing, the stool falls over.
What's our starting point? We are in a good financial position despite the global financial
crisis. Caltex remains committed to a conservative balance sheet and will continue to focus
on good cash management. This balance sheet strength has allowed us to continue to invest
in our assets and extract the best value out of them over time, despite the volatility of the
refining industry.
4
However, volatility, in the oil industry, particularly in refiner margins, can play havoc with our
financial results. You only need to look back at the past 18 months to see that.
CHART 8: Profits have been volatile
The first half of 2009 gave Caltex a record profit and it was no accident that we had good
refinery performance and sales growth during this period. But we were also very lucky with
the externalities that affect our business
low crude prices and a low Australian dollar which
buoyed our refiner margins. But refiner margins and refinery reliability negatively impacted our
results in the second half of 2008.
Luck is no way to run a business. Negative external events will always occur, so we must
have a firm grip on those factors we can control. That way we will be better placed to absorb
the impact of factors we can't control.
CHART 9: Operational efficiency - supply chain montage
Operational efficiency
Caltex needs to maintain and strengthen its base business, which includes ensuring
operational efficiency. Our whole supply chain, from refineries and import terminals through to
service stations and commercial customers, must operate safely and reliably. That will help
ensure cost-effectiveness, which is about achieving our operational objectives at least cost.
The other part of operational efficiency is capital efficiency, which is about allocating capital
within the business to where it will earn the greatest return. Each business unit in Caltex will
need to
`
earn the right to grow
'
. If a business unit within Caltex wants to grow then it will have
to demonstrate effective use of capital in its current projects.
It's about
achieving a return on
investments that have been made. If investments are not performing, that capital should be
reallocated to better use within Caltex.
Most importantly, Caltex must operate as one company, with a collective responsibility for
success of the whole business, not just individual divisions. Changes are being made to
management structures and incentives to ensure this occurs.
Cost and capital efficiency are about ensuring we have a solid base to work from, earning the
best return from our current business. I think some companies make the mistake of pursuing
growth opportunities when their current business is performing poorly but a bigger business
does not necessarily mean a better business.
It's only with efficient operation of our existing business that we can begin to create the
second leg of the stool
the growth strategy.
CHART 10: Existing business
Growth strategy
To date, Caltex has successfully grown its existing business. For example, in the first half of
2009, as many companies were challenged by lack of consumer confidence, we still managed
to grow our fuel sales, particularly in premium and jet fuels, as well as our convenience store
sales. And we substantially increased our diesel production capability with the new diesel
hydro-treating unit coming online at the Lytton refinery in July.
Current activities will continue as a key part of Caltex's business strategy. In addition, Caltex
will need to achieve its growth aspirations by executing successful adjacent step out and
merger and acquisition opportunities.
While Caltex has been growing its fuel sales and convenience store sales, it remains smaller
than competitors in key sectors such as retail petrol. The opportunity to expand our retail offer
through the acquisition of the Mobil-owned retail network is a good strategic fit for Caltex.
5
The proposed acquisition is currently under review by the ACCC. The announcement of the
ACCC's findings is scheduled for 2 December 2009.
As I discussed earlier, volatility in the oil industry is no excuse for volatility in Caltex's
business so we must find ways to reduce overall earnings volatility through growth and
diversification within the energy sector.
I recently spoke at an oil and gas forum on the global response to climate change and energy,
We recognise that radical change will occur in the energy sector over time and are already
focusing on what this will mean for our business.
Caltex converts primary energy sources such as crude oil into usable energy like petrol and
diesel then distributes this usable energy to end users. There are many niche opportunities
we will now investigate. We must explore the many opportunities available to Caltex as a
middle-sized company in the Australian energy market.
CHART 11: Culture - Caltex employees montage
Culture
what do we stand for?
The third leg of the strategy stool is culture. But before we can discuss culture, I believe we
must answer a fundamental question about Caltex: what do we stand for and what is our
purpose?
A corporation must make money but that is not its sole purpose. More accurately, it is not the
purpose seen by the majority of stakeholders. In the fallout of the global financial crisis,
society has made clear that pursuit of profit as the sole purpose of a corporation is no longer
acceptable.
Corporations have a fundamental role in free, democratic, capitalist societies to ensure that
private ownership and entrepreneurship are harnessed to the common good. It is individuals
at liberty, exercising a full set of individual rights, that make society operate. Corporations are
merely devices to enable individuals to invest capital collectively.
I would argue the purpose of a corporation is to add value for a wide range of stakeholders.
These include employees, customers and suppliers as well as shareholders and civil society
as a whole. This is what society now demands of business.
To satisfy this purpose, I have defined Caltex's goal as achieving a total shareholder return in
the top quartile of the ASX100 companies.
This won't happen overnight but we are already
working towards it.
Making money is not an end in itself, it is a means. We all want to live a good life. For most
people, this means supporting families, friends and communities rather than just themselves.
Unless Caltex is as profitable as possible, it cannot maximise stakeholder value, so
stakeholders are less able to do what they see as their purposes in life. Only a strong,
profitable corporation acting with integrity can deliver its stakeholders' expectations.
Culture
values and behaviours
While this might seem very theoretical, it is fundamental to identifying what Caltex stands for
and how we see our broader purpose. Caltex's culture must support this purpose or we have
little chance of achieving our purpose or the financial goal that enables it.
Culture is not an easy concept to grapple with. For a corporation, I believe it includes ethical
values and behaviours. Behaviours define how individuals within corporations are expected to
act and are driven by ethical values.
6
Within Caltex, we will go through a formal process of asking employees what they think our
values are and should be. I don't want to prejudge this but values might include integrity,
honesty, trust, respect for others, community and the environment, respect for and
compliance with the law, embracing diversity, transparency, enthusiasm and loyalty. There
will be many more ideas and I welcome them.
Values can and should help to guide decision-making. However, there are a number of
behaviours that offer more specific guidance.
CHART 12: Caltex behaviours
Pursue personal and process safety as the number one goal. It is not acceptable for
anyone to be injured at work or to be exposed to process risk that is not properly
managed.
Challenge the status quo. Take time to think and reflect
why do we do things this way?
Could we do them better? Could we do things differently?
Be open to people and ideas. Discuss ideas
don't be afraid to say what you think but
also listen well and respect the views of others.
Change Caltex from a company that is risk-averse to one that is willing to take greater
calculated commercial risks that we are well equipped to manage. Well-managed risk is
as much an opportunity as a threat and we must take advantage of opportunities as they
arise.
Be outcome focused - work out how we can do things, not why we can't.
Act with urgency once decisions are made.
Take personal accountability for the performance that you are responsible for but also
share responsibility for Caltex's performance as a whole.
Keep our promises
we must do what we say we will do.
This list of behaviours isn't exclusive but if we follow them Caltex will be a more successful
company. If I had to summarise the behaviours in one sentence, it's run the business as if
you own it. We should always ask ourselves, "If I owned the business, would I do this?"
Through our strong culture, our growth strategy and operational efficiency, Caltex can move
forward and cement its position as an energy industry leader. The energy landscape is
changing. I will do my best to ensure Caltex moves with it.
Thank you
CHART 13: Closing slide
1
JULIAN SEGAL
LOOKING AHEAD
12 NOVEMBER 2009
CALTEX'S CHALLENGES AND OPPORTUNITIES
3
Caltex share price vs All Ordinaries Index
10 years to date
4
Global crude oil balance
SOURCE: ESAI GLOBAL
OPEC SUPPLY (RHS)
TOTAL DEMAND (LHS)
24
26
28
30
32
34
36
38
40
74
76
78
80
82
84
86
88
90
Q
1
08
Q
2
08
Q
3
08
Q
4
0
8
2008
Q
1
09
Q
2
09
Q
3
09
Q
4
09
2009
Q
1
10
GLOBAL CRUDE OIL DEMAND
(MILLION BARRELS PER DAY)
OPEC SUPPLY
(MILLION BARRELS PER DAY)
5
80
82
84
86
88
90
92
0
300
600
900
1200
1500
1800
2001
2002
2003
2004
2005
2006
2007
2008
2009^
2010^
2011^
Excess regional capacity is dampening margins
UTILISATION
CAPACITY ADDITIONS
ASIA PACIFIC PRODUCT BALANCE
^FORECAST
SOURCE: FACTS GLOBAL ENERGY
CAPACITY ADDITIONS
(THOUSAND BARRELS PER DAY)
CRUDE UNIT
UTILISATION (%)
6
ASX100 top quartile TSR performers 2003-2008
SOURCE: THOMSON FINANCIAL DATASTREAM, BCG ANALYSIS
136%
102%
77%
48%
44%
41%
38%
35%
27%
27%
27%
26%
26%
26%
25%
24%
24%
23%
23%
22%
22%
21%
21%
PALADIN ENERGY LTD
FORTESCUE METALS GROUP LTD
ARROW ENERGY LIMITED
CSL LIMITED
OIL SEARCH LIMITED
WORLEYPARSONS LIMITED
INCITEC PIVOT LIMITED
ORIGIN ENERGY LIMITED
DAVID JONES LIMITED
QBE INSURANCE GROUP LIMITED
COCHLEAR LIMITED
NEWCREST MINING LIMITED
LEIGHTON HOLDINGS LIMITED
WOODSIDE PETROLEUM LIMITED
BHP BILLITON LIMITED
ARISTOCRAT LEISURE LIMITED
WOOLWORTHS LIMITED
SANTOS LIMITED
COMPUTERSHARE LIMITED.
ASX LIMITED
SONIC HEALTHCARE LIMITED
AGL ENERGY LIMITED
UNITED GROUP LIMITED.
TOTAL SHAREHOLDER RETURN IN PERCENTAGE PER ANNUM, FIVE YEARS TO 31 DECEMBER 2008
Caltex TSR = 17%
7
Caltex strategy
Operational
efficiency
Culture
Growth
strategy
8
RCOP NPAT
CALTEX NET PROFIT AFTER TAX, EXCLUDING INDIVIDUALLY MATERIAL ITEMS (NPAT)
Profits have been volatile
294
150
196
-10
298
-50
0
50
100
150
200
250
300
350
400
1H07
2H07
1H08
2H08
1H09
13
JULIAN SEGAL
LOOKING AHEAD
12 NOVEMBER 2009
CALTEX'S CHALLENGES AND OPPORTUNITIES
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