MOL - B/U Spread Spoiled The Party In Q1

MOL - Instant Earnings Comment

Recommendation: Accumulate (unch.)

Target price (12-month): 3,587 (unch.)

Current share price: HUF 3,296

 

• MOL posted HUF 144 bn clean CCS-based EBITDA for Q1/19 (-9% YoY), 5% below the consensus estimate and slightly better than our forecast. The lower-than expected clean CCS EBITDA results were mainly due to worse downstream earnings and elevated HQs losses.
• Reported net income attributable to equity holders came in at HUF 48.6 bn in Q1/19 (-20% YoY), falling short of analysts’ expectations and our estimate by 5% but better than our estimate by similar percentage. Lower operating results and elevated financial expenses (+124% YoY) took its toll in the bottom line. CCS modification impact on pre-tax reported results was ca. HUF 5.3 bn, with oil prices steadily advancing 9% in USD during the quarter.
• Clean CCS EBITDA fall 18% YoY in USD terms to USD 514 mn in Q1/19 as weaker downstream earnings were more than offset by rising EBITDA in the other business segments.
• Due to change in accounting standards (IFRS 16) MOL’s simplified net debt/clean CCS-based EBITDA and net gearing ratios have slightly increased to 0.57x and 15.4% at 31 March, 2019 vs. 0.41x and 12.0% at 30 December, 2018. On avg. the effect of change in accounting standard on EBITDA is at ca. USD 45 – 50 million and ca. USD 261 million on debt level. WC movements improved significantly in 2019 Q1 vs. last year.
• Upstream clean EBITDA increased by 9% YoY to HUF 79.4 bn (vs. the consensus estimate of HUF 80.3 bn and our estimate of HUF 79.5 bn), as lower oil and gas prices were offset by higher production volume (caused mainly by advanced UK oil production and favorable FX movements. Unit OpEx surprisingly declined by 6% YoY to 5.8 USD/boe thanks to higher production volume (highest quarterly production in for 7 years), FX rates and higher margin Cathcer barrels. In Q2/19 production may moderate by 2% QoQ due to planned Scott turnaround. As for simplified FCF, upstream delivered ca. HUF 55 bn with which the segment has remained the largest contributor to total FCF (82%).
• Downstream clean CCS-based EBITDA plummeted by 30% to HUF 38.6 bn (vs. the consensus estimate of HUF 45 bn and our estimate of HUF 39.7 bn) as a combined result of weaker refining (-40% Y-o-Y) and petchem margins (-5% Y-o-Y) and moderating sales margin, on the other hand throughput was slightly higher (+1% Y-o-Y) and the strength of the USD clearly added to results denominated in HUF (+13% Y-o-Y). Strong volume may be difficult to repeat in the next quarters as two of MOL’s largest refinery will undergo a maintenance in the next months. Volume sold to third parties rose 6% YoY.

The B/U spread kept on falling and is currently around USD -0.7/bbl compared to USD 1.7/bbl in the same period a year earlier.

Seeing the unfavorable movement in B/U spread, management took action to diversify its crude supply and presumably to mitigate the negative effect of further widening B/U spread (-0.02 USD/bbl in Q1 and -0.7 USD/bbl as of 2019.05.03). Thus, MOL purchased its first-ever WTI crude cargoes as a response to oil market developments and continued to invest to expand its ability to buy and process a wide variety of seaborne crude cargoes in the refineries. Also, one might draw the conclusion that as B/U spread approaches to 0 it is worthwhile to look for other crude slates to create “synthetic ural” (special blend of light and extra heavy), though we see rather limited room for MOL for diversification from ural in a short term since MOL’s purchases ca. 32% of its crude intake seaborne and ca. 61% arrives from Russia.

• Consumer Services clean EBITDA rose substantially (+22% YoY) to HUF 24.8 bn (beating both analysts’ expectations of HUF 23.2 bn and our estimate of HUF 23 bn), mostly on a 6% YoY increase in volume sold () helped by robust fuel consumption trends in MOL’s core CEE markets (fuel throughput per site continued to expand). Growth in non-fuel consumption also kept rising (the share of non-fuel margin rose to new high of 27.7% in Q1/19 from 26% in Q1/18).
• Midstream clean EBITDA dropped by 15 % YoY to HUF 18.4 bn (slightly beating both the consensus and our estimates of HUF 18 bn and HUF 15 bn respectively), hit by lower capacity fees and transit transmission volumes to South-Eastern Europe and Ukraine.
• Corporate and intersegment came to more normalized level of HUF - 17 bn -50% Y-o-Y. Overall, downstream together with consumer services accounted for 39% of total clean CCS-based EBITDA in Q1/19 compared to 45% in the same period of 2018, while upstream and midstream segments represented 61% and 55% of clean CCS-based EBITDA.
• All the segments excluding downstream (HUF -8 bn) remained self-funding. Group organic capex was at USD 287 mn in Q1/19, up 79% YoY, albeit from an unusually low level, primarily driven by higher downstream organic and transformational (+322%) capex, in line with MOL’s strategy.
• Management has kept clean CCS-based guidance for FY2019 at USD 2.3 bn, implying a 15% decline YoY, while capex guidance also remained intact at USD 2 bn (+%50 higher YoY), resulting in a simplified FCF of USD 0.3 bn (ca. -80% YoY). In Q1/19 simplified FCF amounted to USD 231 mn. MOL expects its upstream production to grow moderately to 110kboepd vs. 110.6kboepd in 2018. MOL sees refinery margins hovering in a range of USD 4-5/bbl, and petchem margins remaining at the lower end of the range of EUR 400-500/t in 2018.
• MOL is trading at an EV/EBITDA multiple based on our clean CCS-based EBITDA forecast for 2019 of 4.7x, in line with its peers’ valuation. We maintain our 12-month TP at HUF 3,587 a share, implying an 8% upside potential from yesterday’s closing price (plus DIVY of 4,5%), as well as an Accumulate rating on MOL. However, we would like to highlight that given the unfavorable external factor such as unusually strong Ural compared to Brent, risk is tilted to the downside especially in the refinery segment, especially since B/U further deteriorated - 0.7 USD/bbl (as of today according to Bloomberg) vs MOL reported - 0 USD/bbl in the first quarter.
• Investors should follow closely the development of B/U spread as it is a significant factor in refinery margin (correlation is ca. 40%).

 

 

Refinery margin KPI’s; Ural – Brent sprear [BBG]

Source: Bloomberg, Concorde, MOL

Notes: Red squares show MOL’s  monthly group refinery margins in 2019 in the downright chart.

 

 

MAin Extrenal Parameters

	1Q19	1Q18	Ch. YoY (%)
HUF/USD av.	286.0	253.1	13.0%
Brent (USD/bbl)	63.2	66.8	-5.4%
B/U spread (USD/bbl)	-0.02	1.6	-101.1%
Diesel crack (USD/t)	111	86	29.5%
Gasoline crack (USD/t)	70	139	-49.6%
Naphtha crack (USD/t)	-5	47	-110.6%
Fuel oil crack (USD/t)	-106	-154	-31.2%
Petchem margin (EUR/t)	415	438	-5.3%

Profit and Loss Account (HUF Million)

	1Q19		1Q18		Ch. YoY (%)
Net sales	1,142,381		1,001,968		14%
Other revenue	3,286		6,548		-50%
EBITDA	142,577		154,288		-8%
Clean CCS EBIDTA	143,952		158,113		-9%
EBIT	57,290		68,648		-17%
Clean CCS EBIT	58,665		72,473		-19%
Other income, net	900		1,124		-20%
Financial results, net	-4,164		-1,856		124%
Pre-tax profit	54,026		67,916		-20%
After tax profit	47,102		58,595		-20%
Minority interest	1,539		1,667		-8%
Net income to equity holders	48,641		60,262		-19%
Op. cash flows	100,212		50,447		99%
Capex	99,830		58,671		70%
Net debt/EBITDA (x)	0.6		0.7		-21%
Gearing (%)	15.4		17.7		-2.3 ppts
Adjusted margins (%)
	1Q19		1Q18		Ch. YoY (bbs)
Clean CCS EBITDA margin	12.6%		15.8%		-                  318
Clean CCS EBIT margin	5%		7%		-                  210
Segment info (HUF million)
	1Q19		1Q18		Ch. YoY (%)
Upstream
Clean EBITDA*	79,400		72,509		10%
Clean EBIT	39,700		27,824		43%
Simplified FCF	55,400		54,366		2%
Production (boepd)	115,487		110,005		5%
Hydroc. price (USD/boe)	47.5		47.3		0%
Unit production cost (USD/boe)	6.3		6.2		2%
Clean cash margin (USD/boe)*	29.2		31.4		-7%
Downstream
Clean CCS EBITDA	38,636		55,171		-30%
- o/w Refinery	12,409		25,428		-51%
- o/w Petchem	26,227		29,743		-12%
Clean CCS EBIT*	8,646		29,476		-71%
Simplified FCF	-             8,351		40,434		-121%
Volume sold incl. petchem (kt)	4,474		4,196		7%
Refinery throughput (kt)	4,136		4,104		1%
Total ref. margin (USD/bbl)	3.1		5.3		-42%
Core ref. margin (USD/bbl)	3.8		6.2		-39%
Refinery unit margin (USD/bbl)	1.4		3.4		-57%
Consumer services
Clean CCS EBITDA	24,868		20,446		22%
Clean CCS EBIT	17,381		14,405		21%
Simplified FCF	19,291		15,396		25%
Gas midstream
Clean EBITDA	18,353		21,570		-15%
Clean EBIT	15,169		18,594		-18%
Simplified FCF	18,030		21,030		-14%
Corporate and intersegments
Clean EBITDA	-       17,264.0		-             11,583		49%
Clean EBIT	-       22,215.0		-             17,826		25%
Simplified FCF	-       20,943.0		-             13,765		52%

 

 

 

Gellert Gaál
Equity analyst

CONCORDE SECURITIES LTD.

HILLSIDE  
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