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Hellenic Petroleum | Weathering the low margin land

COVID-19 and a supply war have upended the oil markets – 2020 is shaping up to be quite an extraordinary year in the history of oil markets, with the Brent price dropping to a multi-year low, amid an unprecedented demand shock as the world’s largest economies remained in lockdown for the most part of Q2 to contain the spread of COVID-19. Price volatility has been largely driven by concerns relating to the impact of the pandemic on the global economy as well as the supply war between OPEC+ and Russia. In an environment of low fuel demand and elevated inventories, crack spreads plunged between February and late April, before bouncing back somewhat in the last month. Given that consumption is not expected to fully recover to 2019 levels in 2021, margins are likely to remain suppressed.

Hellenic Petroleum maintains flexible crude sourcing & healthy middle distillates yield, amid weak operational dynamics – Aside from COVID-driven challenges, Hellenic Petroleum’s highly flexible complex-refinery structure (12 & 9.7 NCI for Elefsina and Aspropyrgos respectively), above average middle distillates yield, location in the Mediterranean (close proximity to the Middle East), and a wide range of product offering ensure that the refiner will continue to outperform its peers. We expect Hellenic Petroleum will maintain flattish throughput in 2020, taking advantage of low feedstock prices and contango in the market. Potential reduction of global utilization rates may further support trading dynamics, as the group could leverage this to increase its exports, thus mitigating the impact from reduced Greek demand.

Our key assumptions – We model for benchmark margins near the 2.2 $/bbl mark in 2020, which suggests a c. 20% decline vs. 2019. We are of the view that Hellenic Petroleum will continue to outperform the market, maintaining a realized spread of 7.8 $/bbl in 2020 (c. -12% yoy). We expect improved trends in 2021 (3.5 $/bbl benchmark margin, with HELPE at 9.5 $/bbl). With regard to the product mix, Hellenic Petroleum is well positioned to take advantage of a shift away from high-sulfur products, having completed the transformation of Aspropyrgos. Weaker enforcement has delayed the full rollout of the IMO regulation, but once the coronavirus concerns recede, HELPE will be at an advantage given that most EU peers are reacting retroactively.

Valuation - Incorporating a subdued outlook for 2020, we have recalibrated our valuation. Under our new assumptions, we revise our 2020e numbers downwards to reflect a deteriorated macro outlook that impacts fuel demand, depressed product cracks and an updated heavy-light crude mix. We base our new PT on a DCF predicated on a 7.2% WACC and lower our PT to €8.0 from €9.3 before. On our numbers, ELPE is trading at