Will Job Cuts Turn Around Flagging Fortunes?

SYDNEY -- Caltex Australia (ASX: CTX.AX) has announced it will close its Kurnell oil refinery and turn it into a major transport fuels (petrol, diesel, and jet fuel) import terminal. More than 330 employees will lose their jobs, while up to 300 contractors could face the cut. Caltex said the refinery was old and relatively small and couldn't compete against more modern, large-scale, and efficient Asian refineries.

The refinery has been operating for 57 years, and Caltex said the Kurnell refinery was set up to process sweet crude oil but was increasingly handling heavier crude-oil imports, putting it at a competitive disadvantage.

Closure of the refinery will reduce the company's exposure to volatile refining earnings and cut capital expenditure, as Kurnell needed significant capex to be run safely and reliably. Caltex said Kurnell lost AU$208 million last year and another AU$60 million in the first three months of this year, which forced the company's hand.

The company will spend AU$430 million to close the refinery and spend approximately AU$250 million to convert it to an import terminal, beginning in 2015, once refining is halted in the second half of 2014. Work is expected to take several years.

To pay for the transformation, Caltex is reducing its dividend payout ratio from the current level of 40% to 60% of reported earnings down to between 20% and 40% while the conversion goes ahead, and it will revert to the normal dividend payout ratio in 2014, pending successful closure of the refinery.

Woolworths, which sells about a third of Kurnell's output, said the closure would not affect its retail operations.

Last month, Shell closed its smaller Clyde refinery in western Sydney, also converting it to an import terminal, with the loss of more than 220 jobs. Together with Kurnell, the two refineries represented 27% of Australia's oil refining capacity.

More job cuts
Caltex is not the only company cutting staff. In tough times, companies look to reduce their costs as revenues fall, and the most obvious target is employee costs.

Energy Resources of Australia (ASX: ERA.AX) has warned of job cuts at its Ranger uranium mine as the company suspends mining and begins underground exploration after posting a AU$60 million loss for the six months to June 2012. ERA has warned that the near-term market for uranium remains challenging, but the long-term outlook is encouraging, with China expected to build many more reactors. Rio Tinto (ASX: RIO.AX) owns 70% of ERA.

Another 164 jobs will also go with the closure of a Victorian aircraft engine overhaul facility co-owned by Qantas (ASX: QAN.AX). The company has blamed a decline in demand for engine overhaul services for the closure.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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