From oil refining to servos – Viva Energy | Summer Series

Bryce: [00:00:16] Welcome to the Equity Mates Summer Series, proudly brought to you by CommSec, the home of investing over 12 episodes with deep diving into some of the most exciting, interesting and well-known companies from around the world. Each episode we'll be unpacking one company with one expert who will be learning from their process, and we'll hear why they like the company. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you?

Alec: [00:00:38] I'm very good, Bryce. Strange inflection. Yeah, I know. I'm excited for this episode. We are talking about an unloved company. 

Bryce: [00:00:48] I can't do it. Yeah, I'm still looking into it, though. I kind of love it.

Alec: [00:00:51] Okay. Oh. That's interesting. I think, you know, again, the beauty of this Summer Series is we get to speak about so many different types of companies. We've spoken about one of the most loved companies of last year, Nvidia, and this company. Look, it was up last year. It was up, I think, about 15% for the year, but it's in a sector which is, I guess, a bit unloved. And I think the whole business here in Australia is a bit unloved. So it's an interesting one to sort of talk about and unpack how you take a contrarian position on a company. So the company we're talking about today is Viva Energy. For context, the unloved part of their business, the main part of their business is oil refining in a high energy cost, high labour cost country like Australia. But that's what we're going to be talking about and the person who's going to be taking us through it. The expert who will be sharing his contrarian take is Oscar Oberg, a lead portfolio manager at Wilson Asset Management. 

Bryce: [00:01:46] Now, the Equity Mate Summer Series is proudly supported by CommSec. If the equity mate's content isn't enough for you, CommSec has a content hub stocked with all the support, information and resources you need to build confidence and make the right money moves. Get $0 brokerage on your first ten trades for Australian markets when you join. Download the CommSec app today or visit CommSec.com.au CommSec T&Cs and other fees and charges apply.

Alec: [00:02:11] Now. Before we get started, we need to remind you that while we are licensed, we're not aware of your personal financial circumstances. Any information on this show is for education and entertainment purposes. Any advice is general advice. Now, Bryce, with that said, before we speak to Oscar, let's unpack Viva Energy. 

Bryce: [00:02:27] Ren, Viva Energy is an Australian energy company. It's in the name. Just like corporate travel. No, it's an Australian energy company that operates in three. Well, it has sort of three distinct businesses within it. So it's got energy and infrastructure. It owns the Geelong Oil Refinery. I think that's one of two refineries left in Australia. It operates in the commercial and industrial fuel space. So the B2B part of the business, you know, fuel and energy for things like planes, ships, agriculture, real industrial, part of the business. And then thirdly is the convenience and mobility. That's what the company calls it. But in other words, that's their retail petrol stations and operation of their retail stores across Australia, shell retail stores across and Coles I should say. So yeah. Three main elements to the business. 

Alec: [00:03:19] Yeah. Now to give you a bit of context and a bit of history, Viva was essentially spun out or it was bought out of Shell's business in Australia. And so I mean, that's why they were involved in shell service stations. So that was in 2014. Then favour was floated on the ASX in 2018. And my experience with Viva. So when I was at Coles, Coles would run the service station shop and then Viva would supply the petrol. They were in charge of the forecourt. And it was really like, this is what you're responsible for. This is what we're responsible for. And I just remember because I didn't work and Coles Express. So not speaking out of school here, this is all sort of just what you'd learn from being in the same building and reading the news. But Coles, it was such a pain point for Coles that their petrol was always more expensive than competitors, and it was always more expensive because Viva weren't making any money from the shop, they were only making money from the fuel. So whereas competitors could price their fuel at cost. And then make money from the shop. Viva, they were if they were going to make money from this business, had to make it from the fuel. And so I just remember there was always negotiations around fuel prices and this and that. It was a bad business structure. And that's my view looking from the outside. And since then Viva have now bought the Coles Express Business. And I think they're in the process of rebranding them. They've also bought a South Australian business on the run, which I'd never heard of. But I asked Alf and he said, so Alf is from Adelaide. And he was like, yeah, yeah, I know it. 

Bryce: [00:05:00] Interesting. 

Alec: [00:05:01] Didn't give me much more than that, but confirmed its existence.

Bryce: [00:05:04] So they have on the run in South Australia and they've got about 710 shell sites operated by. Coles Express Well now operated by Viva Energy across the country. And it makes sense that they're going to roll this up into one single brand across the country. It's a pretty significant network size when you look at it compared to their competitors. It's actually the largest in terms of fuel and convenience, as I said, 710 stores. Then Ampol comes in second and then the 7-Eleven network is third. On the run is the ninth largest. But if you combine on the run and shell together, they're going to be close to a close to 1000 stores across the network.

Alec: [00:05:51] Yeah, it's pretty interesting. I mean, small format retail in Australia. It's not as exciting as it is overseas, I think.

Bryce: [00:06:03] It is massive overseas. Uk, Japan. 

Alec: [00:06:04] We spoke to Asia and you just naming parts of the world South America. So we spoke to Ashish Swarup. Before he pitched at the HM1 conference. He spoke about Uni-President Enterprises Corporation. A funny company name. Like how generic corporate. Could you be a Uni-President Enterprises Corporation? But they, a small format retailer out of Taiwan and in across parts of Asia now. And, you know, he was talking about how good they are, small format retailing. When we went to Japan, like, you're just blown away by the Lawson's and the 7-Eleven. Unbelievable. We spoke to another expert who, spoke about alimentation Couche-Tard to Todd in Canada. I butchered French Canada now, but like 14,000 stores. Apparently, they're great small format retailers. No one does it well in Australia. No. Well, maybe on the run, though. 

Bryce: [00:07:01] We're about to find out. 

Alec: [00:07:03] Well, we're better here. 

Bryce: [00:07:05] Well, I mean, let's find out when they come to New South Wales. 

Alec: [00:07:08] True. 

Bryce: [00:07:10] Because I tell you one thing. For me, it's just still too snacky whenever I go into those places. I think the difference between thinking about Lawson's is you could actually get decent meals there. 

Alec: [00:07:20] Yeah. I mean, you are obsessed with the idea of a deep fryer being next to the counter.

Bryce: [00:07:25] Yeah, well, he doesn't want that. 

Alec: [00:07:28] Anyway, let's get back to Viva Energy. So essentially, the original business was the oil refining business. The second business is B2B selling refined oil to industrial customers, airlines and the like. And then the third business is the small format retail business. It's an unloved part of the market. The oil company, obviously, I feel like 2021 and before then there was a real ESG movement. 2022 saw a bit of an anti ESG shift, and a lot of the oil companies did quite well. But yeah, a Viva wouldn't be in a particularly loved part of the market I would say. 

Bryce: [00:08:09] From an ESG perspective.

Alec: [00:08:10] Just yeah. And just like from an ESG point of view, but also just like the it's not seen as a very future facing industry. Yeah. Let's put it that way. No one thinks there's big structural tailwinds driving oil for the next few decades. Although like we're always going to need it as much as people might not want to hear that. It's just how much we need. And then oil refining in Australia is kind of like aluminium smelting and steelmaking, where it is a high labour cost, high energy cost country. And so a lot of these heavy industrial businesses struggle. So that also makes it unloved. And then retail's brutal. 

Bryce: [00:08:51] Retail is brutal, but they're putting a lot of focus on it. 

Alec: [00:08:53] Well, I guess I guess my point with all that is this certainly feels like an unloved company. 

Bryce: [00:09:00] It does. But I'm looking forward to hearing Oscar's take on Viva because he's obviously going to be pretty bullish on it, I would imagine. 

Alec: [00:09:09] Yeah. Yeah. Well then I think the final element why it's unloved is it's swings between being profitable and being unprofitable. And it's quite it's earnings are quite volatile. So add that all together and Oscar's got a tough break. 

Bryce: [00:09:23] I have a soft spot for retail.

Alec: [00:09:25] You are you for a while you were trying to call yourself retail. 

Bryce: [00:09:28] You were Calling it the retail Sector for a while. 

Alec: [00:09:33] On the show. You were getting that name there. I was Wrong. 

Bryce: [00:09:37] Yes. But look, I'm looking forward to speaking to Oscar. About your point, Ren feels like it could be an unloved company. But where does the future lie for a company that is facing? I would say yeah, probably not as many structural tailwinds as some of the other companies that we're talking about this year. 

Alec: [00:09:53] I don't think it could be an unloved company. I think it is an unloved company. The question is, should it be. 

Bryce: [00:10:00] Well, let's get Oscar in find out. Before we speak to Oscar, if you've just joined us but are feeling a little overwhelmed with where to start or confused about some of the investing lingo in today's episode, then CommSec Stock Content Hub could help stock up on the tips and tools to help you find and research a stock and understand the stock market. Visit Comic-Con Edu for more, and also check out our Get Started Investing podcast. 

Alec: [00:10:24] Nice. We'll be right back with Oscar after this short break. 

Bryce: [00:10:36] Well, it's a pleasure to welcome Oscar Oberg to the studio. Oscar, welcome to Equity Mates. 

Oscar: [00:10:41] Thanks, guys. Appreciate you having me.

Bryce: [00:10:42] So to kick off, can you tell us what Viva Energy do? 

Oscar: [00:10:46] Yeah, sure. So Viva Energy is quite a large company listed on the ASX, I think, back in 2017. And effectively it's got three divisions. So the first division is the retail division. Think of that as Coles Express or Shell service stations across Australia. There's just over 700 of them. They've got a commercial division. And this division supplies fuel to say the aviation industry or the cruise industry or the agricultural mining industry. So obviously outside of retail, call it B2B or business to business. And then you have the refining business. So refining is a very cyclical industry. And think of that as Viva energy receives a lot of the oil that's pumped out of the ground or crude. And then they convert it at their Geelong Refinery, which is this huge facility down in Geelong. And that will then ship off for their own needs or for other petroleum companies. So I think that refineries will refines 25% of Australia's crude oil that comes in every day. So it's very, very important to Australia. So that's probably the three divisions retail, commercial and refining. 

Alec: [00:11:50] Right. Nice. And in terms of the respective sizes of the divisions, give us a sense of how big they are in the context of the company. 

Oscar: [00:11:58] So that's that's I mean, this is why I'm here today because it's an interesting one, this business because refining is a highly, highly cyclical industry. And I think it was through Covid. Yeah. When no one was driving cars. And yeah all the planes were down and no no one was flying. Now that business lost over $100 million of earnings last year because effectively, oil started up again and a number of refineries closed through that Covid period. You know, it did well in excess of $500 million of earnings. So that business varies year to year. But, you know, if we were to assume a mid-cycle level of earnings at this juncture, that business should do around 30 to 35% of earnings, and then the remainder is split pretty evenly between retail and commercial. 

Alec: [00:12:42] Yeah. Okay. So we're going to talk about, I guess, the bull case how you build a thesis. And then the bear case, some of the risks that that you're thinking about when you're looking at a company like Viva. Before we get to that, let's just talk about how you analyse it. So you come to this company. It's got retailing on B2B, and a refining arm. What are the metrics that you're looking at to assess whether it's an interesting company or not? How are you going about analysing it. 

Oscar: [00:13:08] So in terms of, I will stress management where I work, we're always looking for undervalued growth companies and we want a catalyst. And that for us is always the most important thing when we're buying a company. And that catalyst actually came in 2021 for Viva Energy. And what happened was with the refining business, as I said before, it's very cyclical. And it lost a lot of money in 2020. And at that point in time, I think there were four refineries in Australia and two of them said, enough's enough, we're going to close. And sure enough, they did, leaving obviously, the Geelong Refinery and one other. But the government at that point in time was like, hang on here. What about our security of fuel in this country? Like, you know, if we have another Covid event, like, you know, we've lost two refineries, we've only got two in the country, you know, appreciate it's a very hard industry. It's probably shouldn't be done in Australia because of how high costs are. But we need we need to secure our supply of crude oil. And so what the government did was they created what's called a floor, or basically think of it almost like an insurance payment to the refiners such as Viva Energy. So what this payment means is that effectively the lowest amount of earnings that these refiners can make or Viva Energy is $100 million. So that's the lowest it can go. Now, it won't make a loss of say, 200, 300. It'll actually make a profit of 100. And that is the catalyst for us because now we see that the downside to this business is now capped. So that was the initial catalyst for us. 

Alec: [00:14:32] It's crazy that the government don't say we'll get you back to break even. It's crazy that the insurance gets you to 100 million in profit. 

Oscar: [00:14:40] Well it sounds a lot, but these are very capital intensive industries and they're very like you need a whole heap of CapEx, capital of expenditure every year to keep going. And so even if at 100 sounds a lot, but they're probably not even making their cost of capital at that point. So all that is, is effectively preventing these businesses from losing money, which is a good thing because the government effectively needs, you know, security of supply of of fuel in Australia. 

Alec: [00:15:05] It's a good thing for investors as well. 

Oscar: [00:15:07] It's a great thing for investors, which I don't think the market is fully appreciated yet because what happened and you know, typically this is typical in investing isn't it. The government came in and said all we're going to give you this payment. This is great. And then after that point refining margins went up a huge amount, and they've added over $500 million of earnings in that division last year. So it will take for refining margins to fall a long way for the market then to say, well, the worst the business can do is $100 million. And at least that's my back stop! 

Bryce: [00:15:36] Have you seen that? Then flow into how they invest back into the other. What B2B and and retail like if they have this safety net of like costs, we're going to be making 100 million bucks here. Like, has that changed how they operate the other two?

Oscar: [00:15:49] So I think that they've had a massive windfall over the last 12 to 18 months. And a lot of this is getting used for the long term strategy, which I'll talk about in a second. But there is no doubt now in the back of their minds, you know, if you can have a profit of 100 versus a loss of 100, that's a $200 million turnaround. You know, that's huge for your cash flow and your ability to forecast, you know, what you're going to spend in the future. So there's no doubt that would have a benefit to them in the back of their mind. 

Bryce: [00:16:15] Just randomly but if if Ren and I were to start a refinery, would we get that government benefit or is it for existing refineries? 

Oscar: [00:16:22] Good question. I think it it would cost a bomb. Yeah, right. Sorry. So good luck with that. I don't know how you do it, but does. 

Alec: [00:16:30] Wilson want to come in on the Other side?

Oscar: [00:16:33] It's a pretty tough industry to replace. I've been that Geelong refinery. It's enormous. It's enormous. And it. You know, I remember when I went down there, it was losing like $150 million or something that year. And you're looking at it go, whoa, how does this thing lose that amount of money? So impressive. But yeah, like, I mean, who knows? 

Alec: [00:16:51] I mean, yeah, it's I mean, the answer is high energy costs and high labour costs. That's how they lose 150. 

Oscar: [00:16:56] Exactly, exactly. 

Alec: [00:16:58] We want to get to the I guess, the longer term strategy. One more question on the guarantee before then. Well, the insurance policy, is it permanent or is it a Covid era policy. Is that like the market thinking maybe there's a risk that it comes off at some point?

Oscar: [00:17:11] So it's guaranteed I think to 2028. But I think the fact that you've had two refineries leave. Yeah. In the Australian market since that point probably tells you that. Yeah, it's very important for the government. So, you know, whether it gets changed in some way or not in the future. Who knows. But again yeah, $100 million of earnings sounds a lot. But you know, as it falls to the bottom line, if you look at the profit line after depreciation, interest, etc., it's probably maybe breakeven a bit. So so you know, I think what's more important for the government is preventing, you know, if there's a Covid situation again, like we don't have run out of.

Alec: [00:17:50] Or a national security situation where we're, we're a little island in the corner of the map cut off from the rest of the world. 

Oscar: [00:17:58] Think about the Russia-Ukraine war and what's happened in Europe. I think that's what you think about when in terms of what they've done there. 

Alec: [00:18:05] Yeah. So that's the downside we've spoken a little bit about but we're not here to talk about the downside. We're here to talk about the upside. So let's talk about the bull case. What is Viva Energy doing that is really interesting to you. And you know, your long term investors at Wilson, we like to think long term, here at equity mates. So how are they building long term sustainable competitive advantage? 

Oscar: [00:18:28] So I think when people think about Viva Energy in the broader Australian share market, they think about the refining division, which is what I just talked about before. And as I said now, the downsides kept in that division. They've had a windfall over the last year or two. So they've got excess cash on the balance sheet. And what they've done with that is they've effectively done two things. So when you see a Coles Express service station in the past, Viva Energy used to run the fuel. And actually Coles used to run the shop. And Viva made all their money from the fuel. But they didn't make any money from the shop. And so basically about 12 months ago Viva bought I guess the shop from Coles paid them an amount of money for that. Now they control everything. And that's across seven 700 service stations across Australia. But the big thing they've done is about, about nine months ago. So they bought the largest operator of service stations in South Australia called On the Run. Now you might go, oh, South Australia, it's a small state. You know, who cares sort of thing, you know what I mean? And it is.

Alec: [00:19:33] However, that's what you're saying, we love our Adelaide and South Australia listeners.

Oscar: [00:19:40] Yeah. Sorry about that. Adelaide shareholders for WAM capital. You Know, but I mean, this business is on the run, I've been lucky enough to go down and say it and. Yeah. And you know, you South Australian listeners will know this business very well. They've effectively changed call it retailing in, in I guess the service station industry, if you go to one of these and you compare it to, you know, Coles Express or BP, you'd be like, whoa, like, what is this business? And to give you some maths around how well this business does. So the average on the run service station does approximately, I think, $4 million of sales a year. Your average Coles Express service station does about 1.6. The margins and on the run service station, there's about 40% at the gross level, a full corporate overhead. And Coles Express, I think does about 32 or 33. So they generate more revenue. They're more profitable. And Viva has now bought it. Now what Viva is going to do over the next, you know, 5 to 7 years or so is they're going to slowly convert their 700 calls, express service stations across Australia and change them to on the run. 

Bryce: [00:20:48] What are they doing differently? 

Oscar: [00:20:50] Great question. So it's funny like you always say things on a bit of paper and then until you go in there and you sort of get like, you know, you say you got to sort of get that. And you know, I was very sceptical as well. And then I went into one and what went to few, we probably went to ten, spent like a whole day doing it. And it's pretty simple. It's just the retailers and yes, the guy, the founder of the business. Yeah, he's had this view with service stations longer term that electric vehicles, you know, effectively kind of disrupt the industry. So he's built his business not on the fuel but on the shop. It's all about the shop. It's all about convenience. It's all about people coming in, having a great experience and wanting to come again and bite, not just when they feel just in everyday life. And so if you go, yeah, average on the run will have its own franchise. Most service station operators lease that out to someone else. They actually operate it. Yes. Or himself, I think, worked in a subway in the United States a number of years ago for a long time, and understood it and brought it out into Australia, was one of the first service stations to do that. So you got the franchise, they earned more money. You got to take more risk. But that more money, a large percentage as well of his store is private label. So his own brands. And so you actually get a higher margin on that. They have a barista in most of the run. So if you think about it, if a guy all I'm going to I'm going to go to my local service station is five minutes away on the app. It'll come back to the app. On the app you can, you know, get you can order your coffee. Then you go to the servo. Coffee's ready. Thank you very much. I'll get some lollies at the front, you know. Whatever. That's a private label. That's not a random brand you never heard of. They make a good margin off that and take it off where you go. The other thing that they do, which I think is huge, is I don't think as a matter of cricket, maybe correct me if I'm wrong, I don't think I've seen an app for Ampol Coles express or anything like that, really can do anything or BP love within the shop, or these guys have their own app. So effectively what you can do is you go to the server, if you put your petrol in the car and then you can pay at the browser, and also when you pay as well, like a call, think of it like a poker machine comes out up, spins and might say, I'll have a free water or have a free coffee, or you get 10% off your petrol and all that sort of stuff, so it gets you coming back home and look for context Coles express in terms of Coles express service stations that are near and on the run like and certainly within the Adelaide CBD. I don't think, and I think there's a high percentage of those that lose money because these guys are just dominating the industry. So clearly, yeah, if you look at the maths behind the roll out, you think, okay, the 700 service stations, there's a growth pipeline of another 150 with the on the run just from the current growth profile. So we could be sitting here in say 5 or 6 years time where the 700 and service stations go to 1000. In Australia, the guy from Brandon from Coles Express on the run, each service station is earning sales of $4 million instead of 1.6 at a high margin. And you plug that into sort of your numbers and suddenly you've got a retail division that a year ago didn't generate any money from the shop. But in about five years time, we'll do well over 50%. And in terms of valuation. And that's important for us when we look at companies like this today, Viva energy's trading on a valuation of 11 times on a price to earnings multiple. I think the market might be 16, 17 times. So it's a discount to the market. It is trading at a dividend yield of about 5 or 6%. So the stock is very cheap. Woolworths, which is a convenience retailer, is currently trading on a price earnings multiple of around 2223 times earnings. Now, I'm not saying that it goes to 22,23, but does it go to 15? And so you got a period where your earnings, you know, could double for this business in the next five years. But not only can the earnings double, but the valuation could also go up 50% as well. So this is why you know we're very bullish on the stock. We really like it. It's a really good long term play. And we think the share price can more than double from here. 

Bryce: [00:24:53] Pretty convincing. 

Oscar: [00:24:56] It's a good story. They've got this next. 

Alec: [00:24:57] Story really. 

Bryce: [00:24:58] Well where both x ray retail. So I can certainly understand what you're talking about. Ren is a Coles' boy actually.

Alec: [00:25:05] Yeah.

Bryce: [00:25:05] Yeah, I'm a woollies guy. So. 

Alec: [00:25:08] I was saying before we turn the mics on, we, I it wasn't in Coles Express, but we heard about the Coles express in a relationship and Viva always known as very tough negotiators. So you're probably good if you're an investor. So it just reminds me that we've spoken to an expert on the show before about Canadian retail. I'm going to put the name, the alimentation Couche-Tard. Yeah. Who just likes it? Just nailed the small format convenience retail. And I think they've got like 14,000 stores. That's right. Yeah. That's what they're. North America is approaching Australia but then south. So nailing this, nailing this small format retail is something that Australia hasn't really done. Like you go to Asia and like their small format retail is just unbelievable. There's some big plays in America. They're doing it well. I'm here for Australia to get small format right because it would just make our lives better, you know? 

Oscar: [00:26:03] Oh, totally. I mean.

Alec: [00:26:04] Marginally better. Not like a massive change, but, you know. Yeah. 

Oscar: [00:26:08] Absolutely, absolutely. And that's who they're trying to become. I think Couche-Tard tries it. I think all like 10 or 12 times EBITDA and Viva is at five. So that's double the valuation.

Alec: [00:26:20] Yeah. Yeah. 

Bryce: [00:26:21] And then sort of close out I guess the third component before we move to the bear case is I guess any part of the thesis that revolves around that B2B or is that just a nice to have?

Oscar: [00:26:32] Well, the B2B business and the commercial business. If you looked at Viva over the last five years, that's been the highest performing business. And it does get lost in the you know, I think we all take that business for granted. But he's done incredibly well. And management themselves have a target that they put out to market a few weeks ago of getting that business to well over $500 million of earnings in the next five years. I think it's currently doing about 300, 350, but they've done incredibly well taking market share, like as other competitors pulled out of aviation or marine, they actually went stronger when times are tough and they've taken market share there. So there's that more acquisitions that can do in that space in time. But definitely if we looked at Viva today, where the majority of the growth is going to come from and the rewriting of the share price of the high valuations, definitely from the retail division. 

Bryce: [00:27:19] Nice.

Alec: [00:27:20] So let's turn to the bear case. You've laid out the thesis. It's certainly compelling. What are the risks to that thesis? And as someone who's holding the stock what are you watching? And like what would be your sell signal. 

Oscar: [00:27:32] It's its execution execution execution execution. So, I mean, all those metrics, I just talked about them. You know, we need to be making sure that they are achieving that. They're also giving guidance around what they're going to spend on capital expenditure to roll these tools out. And if that blows out and they're not getting the returns that they've said that they would to the market, that's definitely a sell signal. But I think like, you know, the interesting thing with this and you guys worked in retail, not all your listeners work in retail. I always say this to my friends and stuff in the market, you'll know whether it's working or not just by walking into one of them. Yeah, yeah, yeah, you know what I mean. And there's one in I think Lenkov and Sydney and there's this starting to come out in a few states, just walk into one and then compare it to the calls express down the road. You know, and I think with these big acquisitions and this is probably the biggest risk as well as execution is Viva is a big company. It is a huge company. It's combining the Veeva systems, the call systems and the on the run systems. When we look at companies, when they're doing acquisitions, it's always the systems integration. If that stuff's up, that's usually yeah, when things go bad. So he's a big, big job. There's no doubt about it. But we always come back to management. And you know, for us when we look at particularly Jovan, who used to be the chief financial officer at Viva's, now the head of retail, we think he's one of the best guys we've met in the market over the years. And Scott, the chief executive, you know, in terms of what he did through Covid and the minimum support for refining is huge. And he's been in the business forever. I'd like that great management team. I've been lucky enough to meet the executives underneath, and they're very high quality as well. So that gives us some comfort. But, you know, as I said, it's a great story to talk about that it just comes down to execution. And that's what you got to monitor the most. 

Alec: [00:29:15] The South Australian guy, I've forgotten his name. is he's staying with the business. 

Oscar: [00:29:20] Yes he is. Yeah. 

Alec: [00:29:21] Oh that's good. That's right. 

Oscar: [00:29:22] I think he's young as well I so and I think he's you made a lot of these management managers over the years and you know like what their passion is. And I feel with the Yasa is you've been here a couple of times now. It's it's almost like world domination. That's what he wants, right I right? He knows that this industry industries worked like. You know I think he's a lawyer by trade. He came into the industry sort of you know, they had, I think, one service station, Adeline, and he wanted to make it work. And what one becomes two two becomes four eight. Yeah, etc.. And so he started from the ground up. So he wants it to work across Australia and change the industry. 

Alec: [00:29:56] Well one Adelaide person has already achieved world domination with Rupert. So maybe there'll be another one here. 

Oscar: [00:30:03] Yeah, yeah, yeah. 

Bryce: [00:30:05] So us get a summer if all of this plays out as expected and looking sort of beyond that five year time frame that management have sort of put forward, what do you expect the Viva energy to look like as a business in ten years.

Oscar: [00:30:22] I mean this. I'm talking about the same. The thing is, with Viva, there's just. I mean, I'm just talking about the five years here, 5 to 6 years with the retail rollout. And, you know, if that is successful, you know, as I said, shares are trading at $3 at the moment. Really should be $6 with a rewriting of the share price as well. But the business generates great cash flow. So he's got a huge amount of opportunities with it as well. So, you know, some of you haven't talked about today for instance, there thinking hasn't exactly happened yet. But there's, you know, with a number of partners, they're thinking of the excess land that they have at that the Geelong refinery, they wanted to import a terminal for LNG gas. I mean, that could be something that comes that'd be substantial. And they could take an infrastructure style return on that. That'd be huge. The government, with what they did with the refining and the minimum payment to the refiners, they also have minimum storage obligations, which means that a lot of their competitors are forced to have excess crude stored at Ampol, which is obviously a competitive Viva and Viva's refinery. So that could be additional earnings as well. So yeah, I mean, like everything I've talked about today increases the earnings base by more than double. But the business will look vastly different in five years with all this excess cash. And as I said, the business. Yeah. Right. If I'm wrong. Right. The business today has minimal debt. It pays a dividend yield of 6%. It's trading at 11 times earnings. So it's not priced for perfection. It's not priced for this to occur. So you know if I'm wrong I still feel there's like decent downside protection for Cole if that makes sense. So the valuations are very attractive. So I haven't really answer your question. I mean I spoke for a long time. 

Alec: [00:32:10] No, no I think. 

Oscar: [00:32:12] I do. Think like yeah I think they've guided to sort of 1.25 billion in 5 years or so. Like yeah. Would they execute on that. Plus the cash let generate. Like it could be line of sight at that point to 2 billion for a way. Not because there's just a lot they can do and they can take on the run. You know, what can they attack in Asia? As an example. Yeah. It's not something you're talking about, but like, why not if it's successful here generally works in Asia, New Zealand. 

Bryce: [00:32:35] Plenty of opportunity ahead. 

Alec: [00:32:37] So one more question before we end, I know we normally finish on what is the long term vision look like. But a couple of times we've talked about rewriting of the stock. It's an oil company and oil was on the nose. And then I feel last year there was a big anti-air push. And oil stocks seem to outperform. But is the reason that the market has De rated it compared to its peers and compared to the market average because it's in a sector that's a bit unloved at the moment. Is that the. Yeah. 

Oscar: [00:33:05] So I definitely agree. And I still think people associate favour with the old Viva if that makes sense. So they all they've it was dominated by a refining division that would be profitable one year and loss making the next. Now we know that the worst case scenario is, is $100 billion of a dollar of EBITDA. So for me, I think it's going to take and I this might sound silly, but it'll take for that business to lose a heap of money and then for the government to kick in. And it goes back to $100 million of earnings and everyone goes, oh, okay, geez, what do I value that $100 million of earnings on? I think it's a little bit more than I used to value the refining division, because that's underwritten by the government. It's like an infrastructure asset. Yeah. So, I think that for me is probably the case that that'll be the turning point for the company, because at the moment last year and this year, to a certain extent, refining margins coming out of Asia, which dictate the market being very high because there's been a shortage of effectively refined crude, let's call crude oil globally. And so Viva and Ampol have been over earning in that space. And that's a big reason why the shares are trading cheaply, because people think those earnings are too high and will come back at some point. So for me, I think it's when they come back and then the market realised, well, they haven't gone back as far as we thought. That will be a positive for the stock. And then broadly speaking, over the next five years, if they're successful in retail and rolling it out and the commercial business does what it's going to do, you know, suddenly you build a case in five years time that the refining division goes from 30, 35% of earnings to 10 to 15% of earnings. And so it's not as important to the business as it used to be. So that mix change is what really should over time get that valuation higher.

Alec: [00:34:53] Yeah. Fascinating. Well it's a company will be watching. Sounds like it's a company that will be frequenting more and more as we fill up our cars. So we'll walk in and we'll assess if this thesis is playing out. 

Oscar: [00:35:05] Exactly. 

Bryce: [00:35:06] Thanks for your time now. 

Oscar: [00:35:07] Thanks, guys.

Alec: [00:35:07] Appreciate it. Now before we go, we want to say a huge thanks to our Summer Series partner, CommSec, the home of investing. If you're looking for more support and resources to build confidence in the market, head to the Content Hub. Otherwise, you can get $0 brokerage on your first. Ten trades for Aussie markets. When you join brokerage on U.S. stocks from just five U.S. dollars, and you can invest as little as $50 through the Commbank up. Download the Commbank up today or visit commbank.com.au. CommSec T&Cs and other fees and charges apply. Investing in overseas markets exposes you to additional risk. 

Bryce: [00:35:42] And in our next episode for the Equity Mates Summer Series, we're joined by Scott Phillips to unpack Corporate Travel Management.