Lotos – No Gain From Low Crude Price Past Upstream
Amid huge volatility across all markets (energy, currencies), underpinned by global economic uncertainty, it is next to impossible under the current circumstances to construct a reliable base-case scenario for Lotos with any degree of confidence. That being said, we have opted to update our view to reflect the developments to date. Below we analyze three scenarios: Best, Base, and Worst, to help better understand the possible risks associated with investing in Lotos in the current environment. We revised our view on energy prices this year, and after cutting average expected quotes by 36% for oil and 19% for natural gas, and after factoring in probable falls in refining and retail volumes in the wake of an expected recession, we lower our target price for LTS to PLN 59.22 per share and we downgrade the stock to reduce. Shares in Lotos have logged a substantial rebound in the last two weeks which we view as premature given the oil price slump and its irreversible fatal effects on the Company's value (upstream, DCU margins) despite the current temporary expansion in diesel cracking spreads. In addition, due to planned capital investment, future FCF might turn negative. Finally, LTS stock is currently trading at a considerable premium to its local rival, PKN Orlen (+20% on 2020-22E EV/EBITDA LIFO), even though its potential for positive surprises after the coronavirus epidemic ends is smaller.
Grupa Lotos is an oil concern which deals with oil extraction and processing and trading of high quality oil products. Co. supplies the market with, unleaded petrol, diesel oil, fuel oil, aviation fuel, industrial oil, asphalt and paraffin, among other things. Co. is engaged in the production and sales of engine oils and bitumen in Poland. Co. maintains oil exploration and production activities in the Baltic, North Sea and Norwegian Sea and operates three refineries in Gdansk, Jaslo and Czechowice, Poland. Co. markets its products in wholesale markets, as well as in retail markets through a network of petrol stations.
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