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Motor Oil | Record margins, record profits, increased returns

Golden Age fundamentals, valuation disconnect – Refining margins have shot up in 2022 and stand at multi-year highs propelled by a combination of factors. On the demand side, the lifting of COVID-related restrictions across most economies has led to a rebound, evidenced in strong demand for mid-distillates (diesel, jet). On the supply side, the capacity rationalization (shutdowns due to COVID and ageing infrastructure) has been followed by the disruption to Russian exports, further exacerbating market tightness putting upward pressure on product cracks. The extremely tight market for products looks set to underpin very strong margins into Q2-Q3 2022, reminiscent of the high returns achieved in the Golden Age of the refining industry. Although we do concur with the view that this situation is not sustainable, as it ought to eventually lead to demand destruction, we stress that current refining valuations levels are very compelling as they are yet to price in the margin recovery from COVID and the positive refining set-up for the next 12 months.

MOH primed for a record year – Following 3 years during which Motor Oil’s adj. refining margins hovered around $6.5/bbl, 2022 has started on a very strong note (Q1 >$11.6/bbl). With demand for mid-distillates strengthening further amidst declining inventories, we see product pricing remaining high in the coming quarters and now envisage refining margins near $13/bbl in 2022. This will drive MOH’s adj. refining EBITDA above €750m in 2022, thereby leading to group adj. EBITDA >€900m, marking a new record (>40% above the previous one). For 2023, we have assumed margins trend down to $10.5/bbl, but stay higher than the average of the 2013-2020 period. We anticipate margins to gradually fade towards mid cycle levels (c$7.5). Flexing our margin assumption by $1/bbl leads to a c€100m variation to our operating estimates.

RES: faster scaling-up through acquisition of Ellaktor asset – MOH’s installed RES capacity reached c280 MW in 2021 and is set to exceed 360MW in 2023 (EBITDA >€50mn). The recent agreement with Ellaktor – with MOH acquiring 29.9% of the latter’s share capital and 75% of its RES business – will allow the group to quickly scale up its RES portfolio further to > 850MW by 2023, while also tapping a 1.6 GW portfolio of licences. Our model does not include any contribution from Ellaktor RES (as the deal is pending regulatory approvals) but we estimate up to €3.8/share potential incremental value creation. We also expect leverage to stay at comfortable levels (€600m through to 2026e. We have raised accordingly our PT to €22.5 (SOTP-based), still valuing MOH at an undemanding