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Motor Oil | “From resilience to success”

Product cracks recovering, crude spreads widening, fundamentals improving – Following an unprecedented demand shock in 2020, operating trends improved in H1 2021, with crack spreads recovering on the back of more favourable demand dynamics. The bounce-back of product cracks has gathered further momentum recently (e.g. gasoline cracks at 4-year high in Aug-Sep), especially as demand for mid-distillates (e.g. diesel) has increased sharply while inventories continue to decrease. Meanwhile crude differentials have been inching wider, with Urals vs. Brent remaining well into negative territory due to increased sour barrels in the market as OPEC-led production cuts are being withdrawn. All the above set the stage for a recovery in refining margins, a trend already evidenced in Q3 and, primarily in Q4.

Motor Oil continues to outperform vs. benchmark … – In this environment, Motor Oil continues to showcase crude sourcing flexibility and has consistently outperformed the benchmark in terms of refining margins. The group operates above nameplate capacity (throughput + c10k bbl/d in Jul/Aug vs. previous months). Taking advantage of successful crude sourcing and recovering margins, the group has been increasing exports (benefiting from reduced utilization rates by less flexible EU peers), thus mitigating the impact from reduced Greek demand. Against this background, we model for blended benchmark margins at 3.5 $/bbl mark in 2021 (vs. $1.20 in 2020) and expect that Motor Oil will continue to outperform the market, maintaining a realised margin of 7.0 $/bbl (c. +17% yoy). We assume further improvement in 2022e, with benchmark margins picking up to 3.8$/bbl and Motor Oil realizing a 7.5 $/bbl margin (+8% yoy, c4% higher than the 2013-18 average). These lead to a c10-13% upgrade in our group adj. EBITDA numbers, indicating +17% CAGR in 2020-2023.

… while enhancing its asset portfolio – Motor Oil is to introduce a new naphtha unit in Q122 (22,000 bbl/d; €310mn capex; €80-100mn p.a. EBITDA) while seeking to expand in thermal generation (50% stake in a JV developing a 877 CCGT; €187mn proportionate capex; commissioning in 2023; €75-80mn EBITDA generation p.a.). In addition, MOH recently acquired a portfolio of operating and under development RES projects, increasing installed RES capacity to 280 MW (incremental EBITDA > €50mn p.a. upon full deployment).

Valuation; raise PT to €17.0 reflecting improving margins and RES investments – After recalibrating our model to reflect improved refining trends and to incorporate the RES assets, we have raised our PT to €17.0. Our SOTP-based PT effectively values Motor Oil at c6.1x 2022e EV/EBITDA, a bit higher than the EU refining sector. We note that our valuation does not include any value from MOH’s JV related to the new CCGT (to be operational in 2024). The latter would boost our PT by c6-7%. In view of improving refining margins, which are yet to be reflected in valuation, we add Motor Oil in our Top Picks list.