The deal for Vector to supply New Zealand Refining with more gas will add about 10c per share to the value of NZ Refining and continues the positive momentum for the company, Forsyth Barr broker Peter Young says.
NZR has agreed with Vector to double capacity on the gas pipeline to the refinery, allowing NZR to use more gas.
The advantage of using gas was it was a cheaper feedstock than crude oil for running some of the refinery processes, Mr Young said.
Generally, the more gas NZR could use, the higher the refining margin it created.
NZR had indicated its margin would increase by at least US15c a barrel, increasing to US20c to US25c a barrel if oil prices rose above $US60 a barrel.
As well as the increasing processing-fee income, the deal reduced NZR's margin volatility, Mr Young said.
"Typically, lower oil prices are positive for NZR margins, particularly in an environment with positive end-product demand. If oil prices increase, the increased use of gas will reduce the impact on margins that would otherwise have occurred.''
As well as the "very nice add-on'' of an increased share price value, processing-fee income would increase by about $6.5 million a year, he said.
Forsyth Barr analysis was indicating refining margins would continue to be strong during November and December.
The positive earning story would continue.
Forsyth Barr had an outperform rating on NZR and a target price of $4.10.
The deal would see Vector spend about $25 million to upgrade compression capacity on the northern pipeline and the Marsden 1 delivery point, expected to start in September next year.
NZR chief executive Sjoerd Post said more gas provided further opportunity to grow the refining business.
"Natural gas is a cost-effective and clean energy source that gives us greater flexibility in the crudes selected for processing.''
