Stock showdown: Could these ASX fuel players tempt income investors?
Rising EV uptake and the future of refining in Australia are sources of uncertainty, but Ampol and Viva may still offer value.
Welcome to Stock Showdown, where we compare the business and investment merits of different shares using insights from Morningstar’s equity research.
In today’s edition, we’re going to weigh up two ASX listed companies that keep Australia moving - the integrated fuel players Ampol (ADL) and Viva Energy (VEA).
With the help of Morningstar Australia’s energy analyst Mark Taylor, we’ll look at how they make money, two big trends shaping the industry, and how the shares look as investment propositions today.
Section 1: Getting to know Ampol and Viva
Ampol and Viva are both integrated downstream players. In plain English: they don’t produce oil themselves, but they have assets covering most other stages of a barrel’s journey into fuel tanks and other industrial products.
Both companies operate refineries, import terminals, pipelines, storage and other distribution assets. Then you have the service stations.
Ampol has over 1700 of its eponymous stations in Australia and more than 500 stations operated by Z in New Zealand. Viva has around 960 locations in total, including the Reddy Express stores selling Shell branded fuel and its On The Run (OTR) locations.
Figure 1: Viva Energy’s fuel and convenience stores by brand. Company presentation
Service stations don’t just make money on fuel. In fact, the margins on that can be pretty skinny. These businesses make an important chunk of their profit from selling non-fuel items (mostly food and drinks) at higher margins than fuel sales.
In addition to the retail side, both companies have large commercial businesses that distribute fuels, lubricants and other oil-based products to end-users in mining, aviation, agriculture, transport and other industries – including other fuel distributors.
Some of these products are produced by Ampol and Viva at their refineries, but the majority are imported and distributed to the end customers.
Where the profits come from
Ampol and Viva report their segments slightly differently. Ampol lumps its infrastructure business (including refining) in with its commercial fuels segment, while Viva reports them separately.
Here is how the companies’ different segments contributed to underlying profits in fiscal 2024:
- Roughly 28% of Ampol’s $1.8 billion in earnings before interests, taxes and operating lease depreciation came from its fuels and infrastructure segment. 44% came from convenience retail (its Aussie gas stations and stores), and 28% came from its Z operations in New Zealand.
- 30% of Viva Energy’s $800 million in underlying profit after operating lease depreciation came from convenience and retail. Just under 60% came from commercial fuel sales and 12% came from its infrastructure business.
Keep in mind that refining margins are famously volatile and have been terrible recently. If they were to improve, the contribution to both companies’ earnings would be higher in absolute and relative terms than it was in 2024.
What are Ampol and Viva focused on today?
Mark says that both companies have been spending quite heavily on storage facilities to meet strategic energy storage requirements, and on refinery upgrades to produce lower sulphur fuels now required by regulators.
The main focus for both, though, is the retail business.
Despite there being questions about long-term demand destruction here due to uptake of EVs, this approach makes sense. Both firms make attractive profits from their retail networks and may be looking to press on while others have second thoughts.
Viva has expanded aggressively in recent years through acquisitions. It bought the 50% of Liberty fuel stations that it didn’t own already in 2024, following a bigger deal to buy On The Run (OTR) and its 181 stores in 2023.
Viva’s plan is straightforward: cut OTR costs including switching to Viva’s own fuel supply, and convert Reddy Express stores to OTR’s more profitable layouts. OTR also operates some non-fuel stores, providing some diversification away from gas stations.
Ampol has a similar focus on growing its retail footprint while trying to boost earnings by testing out more premium store formats and higher priced products. It has also grown through acquisition, buying Z for NZD 2 billion in 2022.
Are these good businesses?
At Morningstar, our biggest hallmark of business quality is a moat.
A moat is a structural advantage that allows a business to reinvest profitably in its business for an extended period of time – at least 10 years for a Narrow Moat, and at least 20 for a Wide Moat.
Mark does not think that Ampol or Viva have a moat overall. Let’s look at why in the context of their different business lines: refining, gas and convenience, and distribution.
As we will see later, Australian refineries are struggling to compete with modern mega-refineries in Asia. They have no pricing power and must accept regional refining margins. This is clearly No Moat territory.
The gas and convenience store chains are consistently profitable and make decent returns on capital. However, Mark does not think they would merit a moat in isolation either.
There are lots of competitors and little in the way of brand loyalty. Periodically refreshing store layouts to keep up with the competition is capital intensive, while questions about the longer-term impact of EV uptake throws some uncertainty into the mix.
According to Mark, the moatiest parts of both businesses are the distribution networks. The Australian fuels market is rather small, making the investments needed to replicate Viva and Ampol’s import terminal, pipeline, storage and fleet assets quite daunting.
Controlling these assets helps Ampol and Viva operate more efficiently. These assets can also be contributed to shared access agreements, allowing both firms to offer nationwide service to commercial customers. Smaller firms may not be able to do this.
In saying that, competition is still fierce and other large players like BP and Mobil have significant infrastructure assets too. So while Mark sees Ampol and Viva’s networks as a source of advantage, he doesn’t think they justify a moat for either company overall.
Section two: How might big trends impact Ampol and Viva?
Ampol and Viva are often discussed in the context of 1) how hard it is to run an oil refinery in Australia these days and 2) what happens to the gas station business if electric vehicles take over the roads.
Let’s look at the refinery question first.
Will the refineries shut?
Ampol and Viva operate Australia’s last two operational refineries. Ampol owns the Lytton site in Brisbane, while Viva owns the Geelong refinery in Victoria.
These refineries operate in a tough environment. Mega refineries in the Middle East and South East Asia are far larger, newer, and built specifically for exports. Add in cheaper labour and they have what Mark calls an “intractable” cost advantage.
Australia has gone from having eight operational refineries in 2000 to the two remaining today. Mark forecasts both Ampol and Viva to close their refining operations by the end of 2034 and convert them to import terminals.
Indeed, both companies already rely largely on imported refined product. Lytton only covers around a third of Ampol’s Australian refined fuel sales, while Geelong covers around 40% of Viva’s.
Winding down a refinery entails clean-up costs but it could make sense. Mark says that sinking money into competitively disadvantaged refineries could be a “money pit”. Ampol, for example, saw returns on capital increase significantly after closing Kurnell.
Mark does, however, highlight a couple of downsides to taking this option. Both firms would be completely reliant on other refiners and would also forego the opportunity to enjoy occasional large earnings boosts when refiner margins increase.
Mark’s estimate that both firms will stop refining by 2034 could be pushed back further due to the increased strategic importance these plants have taken on.
The Australian government has stepped in with payments to Ampol and Viva at times when refining margins have been weaker – on the condition that the refineries are kept open. Mark sees this as a temporary solution and thinks they will eventually close.
What about the rise of EVs?
The obvious problem with EVs for Viva and Ampol is that they don’t use petrol or diesel and therefore don’t automatically bring drivers into service stations.
The likelihood of either company offsetting through EV charging services is also up for debate. EV drivers can often charge up at home, at the office, or in their local area. Charging EVs also takes a lot longer than filling up an ICE car.
As a result, more space would be needed to service the same number of customers. Though you could also argue that customers may spend more time and money in the shop while waiting. In short, the impact on traditional gas stations is still unclear.
Mark has modelled different scenarios for the impact that growing EV adoption could have on the number of ICE cars in Australia. You can see them in the chart below, where the yellow line shows the base case forecast of 15% per annum growth in EV sales.
Figure 2: Forecast for ICE car numbers in different EV uptake scenarios. Soure: Morningstar
That 15% number reflects Morningstar’s global forecast for growth in new EV sales. And if Australia matches that, Mark says that ICE vehicle numbers here would still grow until 2034 and remain above 2024 levels until 2038.
If new EV sales volumes grow at a quicker rate, the number of ICE cars could fall quickly beyond 2035 and vice-versa. If new EV sales in Australia grow at 10% per year instead, the number of ICE cars could still be higher two decades from now than it is today.
The question, then, is whether Australia will prove a harder market for EVs to crack or not. Its size and often remote nature might make range anxiety and a lack of charging infrastructure more pertinent, potentially helping demand for ICE and hybrid cars..
Mark doesn’t see this persisting though. Eventually, he says, Australia may have little choice to buy and facilitate more EVs. If trends elsewhere dictate that these are the type of car being produced by global manufacturers, Australians may have to follow suit.
Is this a problem for Ampol and Viva?
Lower automotive fuel sales would have a knock-on effect of lower footfall and less high-margin convenience store sales. That is a potential threat to long-term earnings, but it might not all be bad news.
Going by Mark’s projections, you’d need fairly strong EV uptake to hit Viva or Ampol’s retail earnings within the next decade. Meanwhile, growth in demand for aviation fuel and diesel is expected to make up for lower demand in automotive gasoline.
Overall, Mark expects demand for refined fuels in Australia to grow at roughly 1% per year until the mid 2030s. But, of course, those non-automotive sales wouldn’t come with the highly profitable non-fuel purchases in stores.
So far we’ve looked at where Viva and Ampol stand today and at some of the challenges or question marks they are facing. Now we are going to look at what these companies might have to offer investors.
Section three: Are Ampol and Viva good investment candidates?
When it comes to weighing up individual shares, I am very much in the Benjamin Graham mould.
Not because I am looking for net-nets but because I am looking for what Graham called “suitable securities at suitable prices.”
What I take this to mean is that we should try to find investments that align with our goals and strategy, and are available at prices that seem to offer a good chance of delivering the returns we need to achieve our goals.
What kind of goal might Ampol or Viva suit, then? Well, according to Mark, both have the potential to appeal to investors seeking income. Especially if you look out a couple of years when refining margins could improve and especially in the case of Viva.
If Vivia pays out the dividend that Mark expects in fiscal 2025, this would represent a fully franked 4.2% yield. Look further, though, and Viva’s forecast yield approaches 8% in 2026 and 9% in 2027.
This is materially higher than Mark’s forecast yield on cost of 5-6% for Ampol by the same point. Though he also thinks that level of potential income could prove attractive to investors too.
Figure 3: Mark’s forecast dividend payouts and expected yield on cost versus June 2025 share prices. Source: Morningstar
This disparity in forecast yield is due to 1) Viva’s lower starting valuation and 2) Mark crediting it with more earnings growth potential thanks to the OTR rollout and store conversion plan.
As Viva’s policy is to pay out 50-70% of profits, Mark thinks the dividend could rise materially in future years.
On a forward price-to-earnings basis, Viva also looks considerably cheaper than Ampol. This despite the two companies seeming to operate rather similar businesses.
Mark says this probably stems from Viva’s acquisition of OTR. Investors have been disappointed with the integration benefits so far and are concerned about the debt taken on to finance it. This has been magnified by inflation crimping Viva’s retail profits and tough refining conditions depressing near-term profits further.
Mark expects conditions for both companies to improve cyclically and for Viva’s OTR store conversion drive to gather momentum. Both Viva and Ampol recently traded around 10% below Mark’s estimate of Fair Value.
Which company would Mark rather own?
I like to finish these articles by asking the analyst which company they would rather own if price wasn’t an issue – or if the valuation levels were completely equal.
In this case, Mark said he would probably go for Ampol.
He says it is larger and owns a newer, simpler, and more profitable refinery than Viva does. He also thinks there are benefits to owning rather than leasing your service stations.
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