Greek Refineries | Fundamentals still healthy; regulatory intervention not derailing the thesis

HelleniQ Energy
Rating: Buy
Target Price: €8.6

Motor Oil
Rating: Buy
Target Price: €22.5

Stock prices out of sync with fundamentals leaving positive risk-reward skew – Greek refineries are headed for a record year, with Q3 adj. EBITDA poised to triple yoy on our updated estimates following >300% growth in H1. From a price perspective, Greek Refineries have outperformed the ASE ytd (ELPE +19%, MOH +36%). Nonetheless, given the spike in 2022 profitability, there has been a massive de-rating in 12m fwd valuations. Even on more “normal” 2023 estimates, valuations remain subdued, with both stocks trading at 20$/bbl), still more than $17/bbl higher than the last 5 year avg. Demand for mid-distillates remains healthy, underpinned by gas to oil swithching and low global inventories. The strengthening of the $ has been an additional tailwind for EU refineries. Against this backdrop we see Greek refineries on track to generate adj. EBITDA in excess of €800m in 2023 after a bumper year in 2022 (€1.4-1.5bn).
“Windfall profits” tax to cost €540mn on our assumption – Investor sentiment since September has been weighed down by news regarding the enforcement of a “windfall profits” tax on European refineries (and oil companies) as part of the EU’s efforts to battle the ongoing energy crisis. The solidarity levy envisages a tax of 33% on 2022e “surplus” profits (i.e. pre-tax profits in excess of a 20% increase in average profits of the previous 4Y). The actual envelope is yet to be finalised, but our estimates point to a combined figure near €540mn for the two Greek refineries, with press reports also in sync with the aforementioned number. As easily understood, this one-off contribution can be comfortably absorbed by the substantial profit generation in 2022e.
Increasing tilt to RES – Greek Refineries are at a turning point, switching focus to RES expansion, in symphony with the EU energy transition targets. Indicatively, in Q2 HelleniQ Energy’s 204MW solar park in Kozani started commercial operation while in Q3 the Group acquired another 55MW of wind parks. Earlier in 2022, Motor Oil proceeded to the acquisition of 75% of Ellaktor’s RES arm (493MW in operating capacity), with the deal expected to be wrapped up by year-end. We estimate that both Groups will surpass €70mn of EBITDA from RES by 2025 (10%-12% of their EBITDA mix).
Increase in estimates, unchanged PTs due to windfall tax impact and higher discount rates – We have updated our estimates, inputting higher refining margins in 2022 and a stronger $, while also incorporating the windfall tax (€540mn for both refineries) in our numbers. The increase in our estimates is offset by the impact from the windfall tax and the uplift in our WACC assumptions aiming to reflect the tighter monetary policy settings, in line with the rest of our coverage universe.
HelleniQ Energy Q3 preview (results 10th Nov) – We anticipate production ramp up in Q3 rising to c.3.370Kmt (+3% yoy), with sales volumes +4% yoy. Given the brent price and robust refining margins (EEe c$18/bbl), we estimate Q3 revenue at €3.4bn (+39% yoy) with Q3 adj. group EBITDA reaching €440mn (+252%).
Motor Oil Q3 Preview – We are looking for a 2% growth in Q3 production filtering through to a 49% yoy increase in revenues to €4.5bn. Incorporating a refining margin of $18/bbl ($22 in Q2), we estimate Group adj. EBITDA of €432mn (+223% yoy). In terms of bottom line, we expect Q3 net profit to triple yoy rising to €254mn.