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Hellenic Petroleum | Moving past the low-margin era

Recovering fundamentals … – Following a volatile 2020, operating trends improved towards the end of 2021, with Brent prices rising as a result of declining inventories and crack spreads recovering on the back of improving demand. The bounce-back of product cracks is now evident across the refined product range, with gasoline having recovered to pre-pandemic levels, diesel cracks picking up momentum in Q4 and jet fuel cracks coming back to near ”normal” levels. On the margin front, recovering demand for oil products has helped reduce inventories and, combined with improved crack spreads, has helped alleviate pressure on margins, which have bounced back to pre-pandemic levels.

… and flexible crude sourcing … – In this environment, Hellenic Petroleum continues to show crude sourcing flexibility and consistently outperforms the benchmark. We expect the group to benefit from the improving price environment, although we caveat that the recovery remains vulnerable due to potential setbacks, including the spread of Omicron/other infectious COVID variants and/or a slower than expected global economic recovery, which would affect travel traffic. In the medium-term, planned capacity additions over 2022/2023 could also affect margin dynamics, if additions are not met with growing demand.

… drive recovery in margins and c10-14% upgrade to our 2022-23e EBITDA – We expect throughput will increase slightly in 2021/2022 (c2% increase p.a. to 17,700-18,000k MT). Meanwhile, we update our model now incorporating benchmark margins near 2.8$/bbl in 2021 and 3$ in 2022e (+10% yoy). We argue that ELPE will continue to outperform the market, maintaining a realized spread of 8 $/bbl in 2021 (c. +17% yoy) and 9.9 $/bbl in 2022 (+24% yoy). These lead to a c10-14% upgrade in our group adj. 2022-23e EBITDA, indicating +19% EBITDA CAGR over 2021-2024.

Portfolio expands through investments in RES – On top of core refining activities, ELPE seeks to expand its footprint in “New Energy” through investments in RES (constructs 204 MW solar project in Kozani, targets 2 GW installed RES capacity by 2030). We have accounted for most of the under construction/under development pipeline, incorporating c300 MW by 2023e and c600 MW by 2025e. We estimate that these have scope to add EBITDA of €55-60mn per annum upon full deployment.

Valuation – We have recalibrated our model to reflect an improving operating backdrop and to incorporate the new RES assets. Following our estimates revision, we lift our PT to €8.30 from €7.20 previously, effectively placing the stock at c6.2x 2022e EV/EBITDA, namely a bit higher than the current median valuation of EU refineries. In light of improving refining margins, which are yet to be reflected in valuation, and given the likelihood of increased cash returns to shareholders in 2022, Hellenic Petroleum should move higher in the valuation spectrum, in our view.