Australia’s fuel reserves have remained steady in recent weeks, with imports continuing despite the ongoing closure of the Strait of Hormuz and relatively low starting stocks. As of May 19, Australia had 43 days of petrol supplies and 38 days of diesel, according to the Australian government.

Why it matters: Fuel shortages are unlikely to hit Australia in fiscal 2026 thanks to support from trade partners and drawdown of global storage reserves. But we remain cautious for fiscal 2027, given Australia’s heavy reliance on imports. Some poorer nations in Asia, Africa, and the Pacific already have shortages and rationing.

  • We upgrade our fiscal 2026 adjusted EBITDA forecast by 12%, back close to where it was prior to our April 2 downgrade. We still expect headwinds in fiscal 2027 stemming from the Iran war, before recovery in 2028. Our long-term forecasts are mostly unchanged.
  • High oil prices are likely to accelerate the adoption of plug-in hybrids and electric vehicles, reducing Australia’s reliance on imported fuels. For Transurban, that means the risk to traffic volumes should fall over time.

The bottom line: We lift our fair value estimate for wide-moat Transurban (ASX.TCL) by 7% to $14.20 per security on higher near-term earnings and a slightly lower cost of equity to 7.3%. The stock is fairly valued, offering a forecast yield of 4.9%.

Between the lines: According to the US Energy Information Administration, the US strategic petroleum reserve, or SPR, crude oil stocks have fallen 12% since late March and have been falling about 2% per week recently.

  • The US SPR held 365 million barrels on May 18. At the current rate of drawdown, the legal lower limit of 150 million barrels would be hit in November.
  • Despite some headway toward peace and reopening of the Strait of Hormuz, it could take a couple of years for oil exports from the Middle East to fully recover due to the time needed to repair damaged infrastructure and gradually rebuild oil field pressure.

Potential fuel shortages a risk to near-term darnings, but longer-term outlook is solid

Transurban is a major toll road investor with concessions to operate motorways in Australia and North America. Concessions grant the right to operate the roads and collect tolls for predetermined amounts of time. The core Australian roads are integral parts of the motorway networks in Australia’s three largest cities: Melbourne, Sydney, and Brisbane. The roads benefit from strong competitive advantages, and the assets generate attractive returns on initial investment, warranting a wide economic moat rating.

Granting toll road concessions allows governments to use private capital and expertise to provide necessary improvements to road networks. Typically, concession life and toll profiles are set in negotiation prior to the road’s construction, with the intention of providing a fair return for investors. Tolls increase in line with the consumer price index or at an agreed fixed rate, though some roads with meaningful competition have dynamic tolling, such as Transurban’s US investments. When concessions end, the company returns the roads to the government for no consideration, after repaying all related debt.

Operating cash flow should increase strongly during concession lives, as solid revenue growth, driven by rising tolls and traffic volumes, is leveraged over a mostly fixed cost base. Cash flow available for distribution to investors increases in line with a road’s operating cash flow until about 10 years before the concession life ends; thereafter, a portion of operating cash flow is used to repay debt. Cash flow stops when concessions end. Concessions on the Australian roads are set to end between 2026 and 2065. Including the long-life US assets, the weighted average is about 25 years. To extend its existence, Transurban will look to build new roads or undertake road upgrades that may require new equity issues or increased financial leverage, given that the firm currently pays out all free cash flow as distributions to investors.

Typically, cash flow is defensive and grows strongly, but returns are lower than they appear at first blush, given that the road concessions have finite lives.

Bulls say

  • Core Australian roads generate defensive revenue that grows with traffic volumes and toll price increases, which are at a minimum pegged to inflation. Solid revenue growth and a high fixed-cost base translate to strong cash flow and distribution growth.
  • Transurban owns high-quality infrastructure assets with limited regulatory risk.
  • There are attractive organic growth opportunities, such as the potential widening of roads.

Bears say

  • Building and acquiring new roads can destroy equity value as a result of overbidding and overly optimistic traffic forecasts.
  • Transurban has high financial leverage. This could be an issue if there is another pandemic, fuel shortages, or other disruptions to traffic volumes.
  • Bond yields are likely to trend higher, detracting from profitability and the attractiveness of its distribution yield.