On Friday, Caltex warned that earnings in the six months to June would be down because of rising costs, plant shutdowns and falling margins and it was a masterclass in conditioning the market. The Australian and the Sydney Morning Herald were typical of the way the media swallowed the spin from the oil refiner about a supposedly sharp downturn in profit.
It’s natural that Caltex would want to emphasise news that its profitability is under pressure. In good times it lowers the actual profit it reports to the taxman. In times of falling profits, it makes the decline look larger than it really is.
It’s called “a replacement cost of sales operating profit (RCOP) basis” and under this method Caltex claims its net profit in the first six months of calendar 2008 is forecast at between $175 million to $195 million, down $294 million in the first half of 2007.
But that’s a fiction, used only by Caltex and recalls the attempts by Australian business to introduce inflation accounting back in the high inflation 1970s and 1980s.
Companies account for profits and sales and pay taxes on a historical basis. On that basis, Caltex is looking at a much smaller downturn in profit from $368 million in the first half of 2007 to a range of $300 to $330 million in the six months ending today.
That’s a more sedate fall of around 8% to 19% and nowhere as dramatic as that headline grabbing 40% under Caltex’s proprietary accounting method. It’s nowhere near as dramatic either for Caltex’s PR spin.
So why did the business media mostly fall for it? Because it looks good and a fall of 40% is a better news story than less than 20% at worst. It also lessens the pressures on Caltex from consumers who believe that the oil companies are ripping them off with oil and petrol prices rising to record levels.
There were a couple of other interesting points out of the Caltex trading update from Friday.
Standard unleaded sales in the first half look like being flat: a reasonable reaction to the savage 46% plus rise in first half world oil prices (38% in the June quarter alone) but sales of premium unleaded are up 5% (used in expensive luxury models in the main, but it’s suggested people are willing to pay more to get the greater energy contained in premium). But more interesting was the 13.8% jump in diesel sales in the first half.
There are more diesel passenger and SUV type vehicles on the market than ever. That explains why diesel prices are now at a wide premium to unleaded petrol. Surging demand is the answer, not market fiddling by the oil companies. But that’s not what the car driving public wants to hear.