Lotos
The equities of Lotos remain one of our strong conviction calls (Buy + Overweight, 12M EFV of PLN 111.0 per share). Even though we assume strong refining macro deterioration in 2020-2021 as a consequence of global economic slowdown, we still believe (i) the IMO 2020 regulations, (ii) the launch of the coker unit (iii) and the expected over 20% improvement in upstream production volumes should enable the Company to deliver good EBITDA dynamics this year. Perhaps such results will clearly show that the Company’s potential in generating free cash is really amazing, especially since most of the Company’s big capex projects are coming to an end. Even in a relatively poor year the Company is bound to deliver inspiring free cash flows.
Very challenging refining macro environment to hurt Lotos only to a limited extent in 2020? In our view, economic slowdown in tandem with the IMO 2020 regulations have made it very hard for an average refiner. Fortunately, the Company’s unique refining assets following the introduction of EFRA should allow for relatively small negative macro effects in 2020. Although we were expecting negative performance of HSFO cracks in 2020, the current cracks at US$ -40 per barrel (vs. roughly US$ -17 per barrel witnessed in 2015-2019) are a negative surprise for us. In this case, the strong price competition with coal and natural gas (at a time of warm winter and slowing energy demand) most probably acted as a strong negative driver for HSFO. As regards diesel cracks, so far these remain broadly comparable in a yoy comparison around US$ 17 per barrel (it seems that the positive effects of the IMO2020 regulations are just offset by negative economic developments). It is thanks to the Company’s new product slate following the introduction of EFRA that the negative HSFO development will impact the Company’s EBITDA only to a limited extent.
In the case of Lotos, the recent widening of the Ural Brent differential may be supportive for EBITDA. In our view, the current very poor refining margins of most REBCO consuming refineries is the main reason for the recent widening of the differential. Refineries in the region are probably struggling to replace some of its heavy high sulphur feedstocks with lighter grades with a view to limiting the production of very unprofitable HSFO. It is therefore very likely that any possible improvement in diesel or HSFO cracks in latter months would lead to a simultaneous narrowing of the differential. It is very fortunate for Lotos that the very low exposure to heavy products implies that the Company may benefit from relatively wide Ural-Brent differential, while at the same time, it may not be burdened to a strong extend by negative HSFO cracks.
Crude oil prices may not be supportive for the Company’s downstream business this year but it may help upstream. We assume that OPEC members will continue to cut crude oil supplies this year. At the same time, we fear that shale oil production in the US will soon stop growing given the dropping numbers of active oil rigs. Furthermore, the recent political tension in the middle East have unveiled additional risks which may be a meaningful factor for Lotos’s downstream business this year. It is not hard for us to imagine a scenario in which political factors push crude oil prices over US$ 70 per barrel with a detrimental effect on downstream margins (which are already at relatively low levels). Fortunately, such a scenario – if it damages the Company’s refining segment – would probably be offset by positive effects in upstream.
Upstream EBITDA could improve in 2020 by roughly PLN 200 million. The negative EBITDA dynamics observed in previous quarters in the Company’s upstream business could have been one of the main concerns for minority shareholders of Lotos. Fortunately, we expect this negative trend to be halted in 2020 due to two reasons. Firstly, the launch of the Utgard and YME project should allow the Company to improve production volumes by over 20% in 2020. Secondly, starting from 1Q20, the macro environment will cease to have a demanding historical base (please note that natural gas prices reached its highest point in September last year and started to plunge in 4Q19; crude oil prices are currently at comparable levels from a yoy perspective).
We are observing a visible slowdown in gasoline fuel demand in the US. The recent weekly data from EIA suggest visible deterioration of refining macro environment already in 4Q19. While the apparent gasoline demand in the US in 1-3Q19 averaged at an impressive 2% yoy growth, the fourth quarter’s dynamic slowed down to nearly 0%. Moreover, the last weeks of 2019 also revealed a negative change in gasoline inventories. Throughout 2019 (with the exception of January) the gasoline stocks in the US were at a lower level in a yoy comparison. Starting from November, however, the gasoline stocks are higher in a yoy comparison – a switch which perhaps perfectly shows the economic slowdown effects.
Grupa Lotos is an oil concern which deals with oil extraction and processing and trading of high quality oil products. Co. supplies the market with, unleaded petrol, diesel oil, fuel oil, aviation fuel, industrial oil, asphalt and paraffin, among other things. Co. is engaged in the production and sales of engine oils and bitumen in Poland. Co. maintains oil exploration and production activities in the Baltic, North Sea and Norwegian Sea and operates three refineries in Gdansk, Jaslo and Czechowice, Poland. Co. markets its products in wholesale markets, as well as in retail markets through a network of petrol stations.
BOS Brokerage, with over 20-year experience, offers brokerage services on the Polish capital market to satisfy numerous needs of institutional and retail investors.
Our comprehensive offer includes brokerage services on both the stock exchange and the forex market as well as brokerage services on the energy market, debt and equity issues, distribution of investment funds and assets management.
BOS Brokerage analytical team belongs to the most appreciated and acclaimed on the market. According to Parkiet daily’s poll (as of January 7, 2019), DM BOŚ equity research team was selected by institutional investors as the third best in Poland. Moreover, the team members won several individual best analysts awards, including Sobiesław Pająk – IT (best analyst), media/telco (ranked 2.), strategy (ranked 4.), Tomasz Rodak – video games (best analyst), overall ranked 5., Łukasz Prokopiuk – chemicals (ranked 2.), mining (ranked 3.), Maciej Wewiórski – real estate (ranked 3.).
In August 2017 Parkiet daily indicated DM BOŚ recommendations as the most accurate over 12 months and according to the Puls Biznesu daily (as of April 11, 2017) DM BOŚ research team was the most prolific on the Polish market and issued the biggest number of recommendations (247) in the years 2014-2016.
The analysts handle over 80 companies listed on the Warsaw Stock Exchange.
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