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Motor Oil | “Resilience in adversity”

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, European 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.

Motor Oil maintains feedstock flexibility … – Motor Oil has outperformed the market, largely due to its highly complex refinery (11.54 NCI) that can process heavier types of crude efficiently, resulting in an above average refining margin. In addition, its location in the Mediterranean, close to oil-producing countries in the Middle East, Urals & Caspian, allows for flexible crude-sourcing options. Competitive location coupled with long-term trade relationships with buyers in the region is likely to continue underpinning an outperformance vs. the benchmark, in our view.

… and healthy utilization rates, having completed scheduled run cuts – We expect little-changed throughput in 2020, with MOH taking advantage of low feedstock prices and contango in the market. The group has completed its scheduled maintenance shut-down earlier in the year and is well-positioned to benefit from full refinery utilization in the remainder. This is an advantage vs. peers, given that most refineries in the Mediterranean and Northwest Europe are either planning or are about to start their seasonal run cuts, as initial schedules have been pushed back due to COVID.

Key assumptions & Valuation – In the aftermath of the depressed demand for refining products as a result of the COVID-19 outbreak, we have recalibrated our valuation incorporating the subdued outlook for 2020. We model for blended benchmark margins of c2.8 $/bbl (-20% yoy), expecting that MOH will continue to outperform the market, maintaining a realized spread of 2.7 $/bbl in 2020 (c. -9% yoy). We base our new PT on a SOTP of Motor Oil’s business segments using a DCF for the core refining operations (predicated on 7.6% WACC) and an assumed 5x EV/EBITDA multiple for other fully consolidated operations (marketing, NRG). We set our new PT at €17.10 and reinstate our rating as “Buy”. Our PT values MOH at c4.6x 2-year forward EV/EBITDA, in line with the group’s long-term average valuation.