MOL - Widened Wholesale Margin And Efficiency Gains Offset Weak Ref. Margin

MOL - Instant Earnings Comment

Recommendation: Accumulate (unch.)

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

Current share price: HUF 3,004

 

 

Widened wholesale margin and efficiency gains offset weak ref. margin

 

• MOL posted HUF 183 bn clean CCS-based EBITDA for Q2/19 (2% YoY), beat the highest estimates, +5% above the consensus estimate and our forecast. The beat came from the surprisingly strong DS performance (HUF +10 bn; HUF 76bn vs. consensus of HUF 66 bn) mainly thanks to widened wholesale margins as a result of low supply of refined product in the CEE region as a consequence of shutdown of the Dhruzba pipeline, and secondly to the DS 2022 program related efficiency improvement measures (which allegedly added HUF 8 bn to EBITDA in H1). With this better than expected results, MOL has reached half of its FY EBITDA guidance (EBITDA USD 1.15bn), though we flagged earlier that mgmt has rather been conservative (FY EBITDA consensus +5% vs mgmt. guidance) to err on the side of caution.
• Reported net income attributable to equity holders came in at HUF 77.8 bn in Q2/19 (+7% YoY), again beating analysts’ expectations by 13% and our estimate by 8%. Apart from the better operational performance (+5% better EBITDA), lower financial expense and muted tax expense helped to lift profit above the estimates.
• Clean CCS EBITDA fall 5% YoY in USD terms to USD 634 mn in Q2/19 mainly because lower oil and gas prices drove upstream EBITDA down. On a cumulative basis Clean CCS EBITDA is ca. 11% lower in USD terms compared to a year ago level, on weaker refinery (-18% YoY) and lower commodity prices (Upstream segment’s clean EBITDA down 10% YoY).
• In the second quarter MOL essentially doubled CAPEX to HUF 126 bn as transformational CAPEX and sustain CAPEX both increased. The latter due to Rijeka refinery turnaround and higher E&P spending, while transformational CAPEX climbed because of the polyol plant. Despite the elevated spending simplified FCF mounted to HUF 41 bn (-70% YoY). All the segments excluding downstream (HUF - 25 bn) remained self-funding. Net debt/EBITDA and net gearing increased slightly in Q2 2019 (to 0.74x and 19% respectively) as a small build in net working capital and the dividend payment more than offset the simplified free cash flow in Q2.

 

• Upstream clean EBITDA fell by 11% YoY to HUF 77.4 bn (vs. the consensus estimate of HUF 80 bn and our estimate of HUF 79 bn), as higher production volume and favorable FX movements were not able to offset lower oil and gas prices. Additionally, results could have been better if there had been no unsuccessful exploration drilling Unit OpEx surprisingly increased by 4% YoY to 6.4 USD/boe thanks to some non-recurring expenses. In Q3/19 production may moderate by 2% QoQ due to turnaround activities and some unplanned downtime at Scott to ca 110,000 kboed. As for simplified FCF, upstream delivered ca. HUF 53 bn with which the segment has remained the largest contributor to total FCF (129%).
• Downstream clean CCS-based EBITDA stayed surprisingly strong at a time of plummeting refinery margins and even increase by 4% YoY to HUF 76.2 bn (vs. the consensus estimate of HUF 66 bn and our estimate of HUF 67 bn) as a combined result of (I) widened wholesale margin; (II) DS 2022-related efficiency improvement measures (ca. HUF 8 bn in H1-for us this was the surprise factor); (III) strong petchem margins (+15% YoY); (IV) on the other hand throughput was significantly lower due to planned maintenance at Bratislava and Rijeka (-17% YoY); (V) and last but not least the strength of the USD slightly added a little tailwind to results denominated in HUF (+2% Y-o-Y). Looking at Q2 financial figures we can say that MOL was able to capitalize on the Druzhba issue via widened wholesale margin.

The B/U spread is rather important as mgmt explained the drop in refinery margin (-2.0 USD/bbl YoY) by the unfavorable movement of B/U spread (-1.7 USD/bbl). This differential slightly improved during Q2 from 0 to -0.3, however the normalization reversed in July as we can see on the graph below. Should it stay at the current level, it may cause headwinds to MOL as the normalization of wholesale margin (now the Druzhba pipeline is operating at close to full capacity). Though we acknowledge that MOL could look for other types of crude oils to create “synthetic ural” (special blend of light and extra heavy).

 

Source: Bloomberg, Concorde

 

• Consumer Services clean EBITDA rose substantially (+14% YoY) to HUF 33.8 bn (beating both analysts’ expectations and our estimate of HUF 33 bn), mostly on a 3% 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 29% in Q2/19 from 28% in Q2/18).
• Midstream clean EBITDA dropped by 18 % YoY to HUF 6.6 bn, hit by lower capacity fees and higher operating cost.
• Corporate and intersegment came to more normalized level of HUF - 12 bn -50% Y-o-Y. Overall, downstream together with consumer services accounted for 57% of total clean CCS-based EBITDA in Q2/19 compared to 42% in the same period of 2018, while upstream and midstream segments represented 43% and 57% of clean CCS-based EBITDA.
• 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). 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 300-400/t in 2019.

 

• MOL has already reached half of its FY EBITDA guidance in the first six months of the year. Assuming that normalized refinery margins (5.6 USD/bbl) including a normalized B/U spread and a 60 USD/bbl + oil price will prevail in H2, to achieve management’s FY earnings guidance should not be a problem. On the other hand, to reach the consensus estimate for FY EBITDA of HUF 697 bn (+5% compared to mgmt. guidance) seems to be challenging. MOL is trading at an 4.8 EV/EBITDA multiple based on our clean CCS-based EBITDA forecast for 2019, in line with its peers’ valuation. We keep our 12-month TP at HUF 3,587 a share, implying a 20% upside potential from yesterday’s closing price, while also maintaining an Accumulate rating on MOL. However, given some unfavorable external factors such as the unusually strong Ural compared to Brent, we would like to stress that the risk is tilted to the downside especially in the refinery segment as the B/U differential has further narrowed since the middle of July.
• We believe that in H2/19, refinery margin will increasingly drive the financial performance of the downstream segment. In the second quarter, refinery margins were significantly below their 5-year average level (3.5 USD/bbl vs. 5.3 USD/bbl), however it had only a muted effect on MOL’s financial figures (Q2) as widened wholesale margin largely compensated for weaker refinery margins. Thanks to the temporary shutdown of the Druzhba pipeline, a number of few refineries in East Germany did not receive a sufficient amount of crude oils, thus the region remained undersupplied for a while. All in all, MOL could have gain on the Ural oil contamination issue, thereby not losing that much in a weaker refinery environment than it could otherwise do. Nevertheless, since 1 July , Russia fully resumed oil flows via the Druzhba pipeline. Thus the regional refined oil product market should return to be balanced and become indicative for the refinery margin going forward, in our view. In other words, investors should keep a close eye on the development of B/U spread as it is a significant factor driving refinery margins, especially now when the B/U spread turn into negative again.

 

 

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

Source: Bloomberg, Concorde, MOL

Notes: Red square shows MOL group refinery margins in 2019 in the downright chart.

 

 

 

 

Gellert Gaál
Equity analyst

CONCORDE SECURITIES LTD.

HILLSIDE  
55-  61 Alkotás street, H-1123 Budapest.
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