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Introduction to decarbonisation plans

Hellenic Petroleum 6 August 2021 Update
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Hellenic Petroleum

Introduction to decarbonisation plans

Updated strategy

Oil & gas

6 August 2021

Price

€5.78

Market cap

€1,767m

US$1.18/€

Net debt (€m) at 31 March 2021

(excluding lease liabilities)

2,244

Shares in issue

305.6m

Free float

19%

Code

HPI

Primary exchange

ASE

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

(3.7)

(1.7)

6.1

Rel (local)

(6.5)

(0.8)

(25.1)

52-week high/low

€6.59

€4.14

Business description

Hellenic Petroleum operates three refineries in Greece with a total capacity of 344kbod. It has sizeable marketing (domestic and international) and petrochemicals divisions.

Next events

Q221 results

26 August 2021

Q321 results

11 November 2021

Analysts

Marta Szudzichowska

+44 (0)20 3077 5700

James Magness

+44 (0)20 3077 5756

Hellenic Petroleum is a research client of Edison Investment Research Limited

In May, Hellenic Petroleum, a leading oil refiner in Greece, presented its updated strategy (Vision 2025) with a focus on a low-carbon future. It involves accelerating the energy transition towards renewable energy sources (RES) and upgrading Hellenic’s core refining operations aimed at a significant reduction in CO2 (50% by 2030, including both a reduction in emissions and offset through RES). New ESG objectives and corporate restructuring are included. In this report, we present an overview of the new strategy; our forecasts and valuation are still based on the current shape of the company pending more information on the transition. Our valuation is down 3% to €6.73/share, reflecting peer group multiples and uncertain market conditions, nonetheless implying 16% potential upside.

Year-end

Revenue
(€m)

Adjusted EBITDA* (€m)

Net debt**
(€m)

P/E
(x)

Dividend yield
(%)

12/19

8,857

570

1,544

9.5

8.7

12/20

5,782

333

1,673

N/A

1.8

12/21e

7,087

495

1,597

13.0

3.8

12/22e

7,265

626

1,394

7.8

5.2

Note: *Adjusted numbers account for inventory movements and other one-off items. **Net debt excludes lease liabilities.

Energy transition is underway: Focus on RES

Hellenic plans to spend c €1.7bn (out of a total €3.5–4bn capital investment plan by 2030) to boost its RES portfolio up to 2GW by 2030, initially via photovoltaic (PV) and onshore wind projects, growing organically and through acquisitions. That would make Hellenic a significant player on the Greek RES power market (total RES capacity of 19GW by 2030). Hellenic has 26MW of RES in operation and the Kozani 204MW PV project, which should start operations in Q122 and will be the largest solar plant in Greece.

Refining business needs decarbonisation

The upgrades of the core refining business would include energy-efficiency projects, transitioning to cleaner fuels (biofuel) and adopting blue/green hydrogen technologies starting at Εlefsina and Thessaloniki refineries. We await further details from the company on the decarbonisation projects to allow us to incorporate them in our forecasts.

Valuation: Blended valuation of €6.73/share

Our valuation is based on the current shape of the company and is derived from a blend of discounted cash flow (DCF), EV/EBITDA and P/E. Hellenic is trading at a premium to European peers (6.4x FY22e EV/EBITDA versus 5.2x and 7.8x FY22e P/E versus 7.5x). Our blended valuation is €6.73/share, down from €6.91/share, negatively affected by the peer valuation as market uncertainties weigh on stock prices. Our DCF valuation, however, increases to €7.46/share (previously €6.80), supported by the €35m polypropylene (PP) capacity expansion project and PP price movements. We see a potential for upside from the new strategy and we plan to update our valuation once we have better visibility.

Hellenic’s roadmap for energy transition

A flexible, complex European refiner

Hellenic, a leading oil refiner in Greece, operates three refineries that account for 344kbod of capacity and 65% of the Greek refinery output. Two refineries (Aspropyrgos and Εlefsina) are complex, integrated and provide significant flexibility of feedstocks and throughput. The third, Thessaloniki, is small and simple, but houses Hellenic’s petrochemicals units. A composite Nelson complexity index (NCI) of 9.3 for all three refineries indicates the complex’s flexibility and ability to produce a high percentage of light products from every barrel. The refineries are linked, allowing better integration to take advantage of their strengths of location, size, storage and complexity. Hellenic is active in the fuels marketing, power and gas sectors and since 2020 it has built up its renewable power generation capacity, with the acquisition of the Kozani 204MW PV project.

Preparing business for a low-carbon future

Amid future decarbonisation (with the EU’s binding target of becoming carbon neutral by 2050) and the prospect of decline in oil demand in Europe, the company decided to take action to protect its core business. Hellenic has placed its environmental, social and corporate governance (ESG) and greenhouse gas (GHG) emissions targets as core pillars of the strategy of creating a balanced portfolio across its refining business (with improved competitiveness) and its new energy (RES) business. In June 2021 Hellenic amended its corporate governance to comply with new national (L.4706/2020 and L.4548/2018) and European legislation, which ensures a compliant composition of the board of directors with regards to independence and gender representation. By this strategy, Hellenic hopes to ensure its business is competitive for the next decades. This step addresses both investors’ growing focus on ESG factors (affecting market valuation) and significantly increasing costs of CO2 emissions coming from current EU decarbonisation actions.

New corporate structure to facilitate the strategy

Hellenic is also redesigning the group structure, aimed at supporting its Vision 2025 strategy, giving it a fit-for-purpose legal structure and the ability to better capture growth opportunities, through appropriate financing strategies. On 29 July 2021, Hellenic initiated its hive-down process with the spin-off of its refining, supply and trading, and petrochemicals businesses, and their transfer to a new 100% owned entity. The balance sheet and valuation date of the hive-down business has been set as 30 June 2021. Completion of this process is subject to the normal approvals.

The energy transition is accelerating, with the EU leading the way on regulation

The EU has adopted integrated rules towards its 2030 climate and energy targets and international commitments under the Paris Agreement (the objective is to keep the global temperature increase well below 2°C). In April 2021, the EU raised the climate target to reduce net GHG emissions by 55% by 2030 (compared to 1990) from the previous target of a 40% reduction. Achieving that target should be supported by the ‘Fit for 55’ package of climate proposals introduced on 14 July 2021.

EU ETS revision and Fit for 55 proposals: New allowances for fuel suppliers from 2026

One of the tools that supports reducing emissions is the European Union Emissions Trading System (EU ETS), which previously covered roughly 40% of total emissions in the EU. With the Fit for 55 proposals, the EU plans to expand it to other sectors (such as maritime, with the introduction of new ETS for transport and buildings from 2026). The new proposal will affect fuel suppliers as they will have to buy allowances to sell fuel on the market (for transport and buildings). Another proposal that will affect fuel demand includes measures to ban the sale of new gasoline- or diesel-powered vehicles from 2035, thereby mandating a complete switch to electric cars and leading to a further decline in oil demand.

Greece plans to increase RES’s share of its energy mix and close lignite power plants by 2025

Greece is becoming one of the leading countries in the EU in terms of energy transition, exceeding by 30% its 2020 target for the share of RES in gross final energy consumption (24% vs target of 18%). Additionally, the country accelerated the phase out of all lignite power plants by 2025 (versus the previous aim of 2028) and is planning further increases of RES (aiming at 35% RES share in the gross final consumption of energy and 14% in the transport sector by 2030; to be revised upwards to become compliant with Fit for 55) supported by government reforms to standardise and simplify licensing procedures for renewable projects. Greece’s countrywide focus on RES bodes well for Hellenic’s own transformation plans.

Hellenic’s transformation: Vision 2025 decarbonisation plan

To address increasing CO2 costs and changes in regulations, Hellenic intends to drastically decarbonise its activities, aiming at a 50% reduction in CO2 emissions by 2030, which should also improve its competitiveness. It plans to reduce the carbon footprint of its refining operations by approximately 30% in terms of direct (scope 1) and indirect (scope 2) emissions investing in new green technologies. Hellenic wants to achieve this through:

energy-efficiency projects in the short term;

reducing the carbon intensity of the electrical power for its own facilities;

transition to cleaner fuels (biofuels and biodiesel);

the adoption of blue hydrogen technologies, by capturing and storing emissions during their production, and green hydrogen technologies in the long term; and

introduction of plastics recycling (pyrolysis) technologies in its refineries in the long term.

The remaining 20% of CO2 reduction should come from significant expansion of Hellenic’s RES portfolio, with a medium-term goal of 600MW of installed capacity by 2025 and 2GW by 2030. Hellenic plans to realise the targets organically, through acquisitions or joint ventures, allowing for faster market entry and growth.

Exhibit 1: Glossary of technologies discussed by Hellenic

Grey hydrogen

Currently, hydrogen is produced mainly from natural gas; its production generates significant carbon emissions.

Blue hydrogen

The cleaner version of hydrogen; it is also created from fossil sources in the same process as grey hydrogen, but the carbon emissions are captured and stored (CCS).

Green hydrogen

Hydrogen that is generated from water by electrolysers using electricity from renewable sources (this process does not generate carbon emissions).

Pyrolysis
(plastics recycling)

A chemical recycling process that breaks down the longer chain polymers into products that can be processed into chemicals feedstocks or fuels. Unlike the mechanical processes (which currently dominates), pyrolysis does not degrade the quality of the final plastic and requires less intensive sorting of the initial waste.

Biodiesel
(fatty acid methyl ester)

A biofuel produced by transesterification of vegetable oils. It is suitable for the operation of diesel engines. Biodiesel is limited to a maximum of 7% or 10% volumes in diesel distributed in the EU (higher concentrations may negatively affect fuel quality).

Renewable diesel (hydrotreated vegetable oil or HVO)

It is refined from vegetable oils, waste cooking oils and animal fats. Renewable diesel has the same chemical structure as petroleum diesel, so it can be used in engines designed to run on conventional diesel fuel with no blending limit.

Source: Edison Investment Research

Hellenic plans to spend €3.5–4bn on these initiatives by 2030 (implying up to €400m in annual capex on average vs €200m average capex spent 2015–2020), with about half of these investments to be spent on the core refining business, including decarbonisation initiatives as well as maintenance; and the rest (c €1.7bn) on expanding the RES portfolio toward 2GW by 2030.

The strategic plan also includes changes in corporate structure and governance, and in the group's name. Management is considering setting up a new holding company and removing ‘petroleum’ from its name to reflect the new structure, which is not focused on oil alone.

Roadmap of decarbonisation: Refining business and RES

Evolution of the Elefsina refinery into a pioneering energy transition unit

Hellenic plans to implement its strategy starting at the Elefsina refinery (currently 106kbod, NCI 12.0), making the refinery a testbed for energy transition and decarbonisation. It plans to invest in a cogeneration unit to improve the security of supply and make investments towards energy efficiency. In the long term, it plans to derive blue hydrogen through carbon capture, start pilot production of green hydrogen using RES electricity and produce on-site solar energy. However, at this stage no details on these plans have been provided.

Shift of the Thessaloniki refinery into a green refinery

Additionally, Hellenic plans to upgrade the Thessaloniki refinery (current conventional products capacity of 90kbod, NCI 5.8) with a second-generation biodiesel coprocessing unit to increase sustainable feedstock in fuel products. At this stage, it is unclear whether this will be a conversion of conventional capacity or an additional unit. Strategically, this makes sense for Hellenic as it leverages the competencies in its core refining business. We await information from Hellenic on the level and timing of investment, along with targeted biofuel production capacity before including this planned business unit in our forecasts and valuation.

The investment in the biodiesel production would be a response to growing demand for biofuels, supported by the EU’s decarbonisation policy, with the 14% binding target of renewable energy share in the final energy consumption in the transport sector (based on the Renewable Energy Directive (REDII), which is now under revision to comply with the new 2030 target of 55% emissions reduction).

Boost competitiveness of the core business

Further efforts to improve the competitiveness of Hellenic’s refineries include the ongoing digital transformation programme (introduced in 2020) and procurement reorganisation projects. Both should lead to optimisation of the refining operation model, maximising the capabilities of all refineries and the synergies between them, resulting in potential financial benefits. On the trading side, the company plans to increase exports to the Mediterranean and the Balkans (FY20 exports accounted for 61% of total refinery sales), improve international oil trading capabilities and transform fuels marketing towards new energy services and products, such as electric vehicle charging infrastructure. We await details from Hellenic on the targeted number of charging stations and timeline.

Hellenic could become a significant player in the Greek RES market

Hellenic is targeting a significant expansion of its RES portfolio to 600MW by 2025 and 2GW by 2030, initially via PV and onshore wind projects, growing organically and through acquisitions within and outside Greece. In addition to the Kozani 204MW PV project, which is expected to start operations in Q122 and will be the largest solar plant in Greece, the company has secured 300MW of PV and wind projects at an advanced permitting stage (receiving environmental terms and/or binding connection agreements). It has 26MW of RES in operation, comprising 19MW of solar PV and 7MW of wind and the construction of further 2MW PV is expected in 2021 (in Mandra, adjacent to the Elefsina refinery). Hellenic plans to deploy €1.7bn of capital by 2030 to reach its target of 2GW. Wind and solar projects in Greece offer the potential for stable, long-term cash flows based on a combination of feed-in tariffs and power-purchase agreements. Hellenic’s expansion in RES will leverage the experience it has gained in power generation through a 50% stake in Elpedison (the second largest independent power producer in Greece with c 5% market share and 810MW installed capacity). In addition, the company sees potential synergies from the renewable investments with the rest of the business.

The transition would be supported by the local political environment since the Greek government has committed to shutting down all lignite-run electricity production units by 2025 – the Public Power Corporation, controlling all lignite power generation assets in Greece, will phase out c 2.8GW of lignite assets by the end of 2023. Greece has a target (under EU law) of increasing the share of gross energy consumption from renewable sources to 35% in 2030 (vs 24% in 2020). To achieve this, it is targeting 19GW of RES in 2030, up from an estimated 10GW by end-2020; that means Greece needs an additional c 9GW of new RES capacity by 2030. Thus, clearly there is an opportunity for Hellenic to add significant capacity in Greece. If a total of 2GW is invested in new installations in Greece, Hellenic would have a c 20% share in new RES capacity in the country and become a significant market player.

A focus on the growing Petrochemicals segment

Additionally, Hellenic wants to scale up its petrochemical business, deepen vertical integration with refining and expand the output of high-value products. It sees petrochemicals as the main source of global oil demand growth in the coming years. In May 2021, Hellenic announced plans to increase the capacity of its PP plant in Thessaloniki by 25% (to 300,000 metric tonnes). Currently, Hellenic is the only petrochemical producer in Greece, with a market share of c 50% and approximately 72% (in FY20) of sales volumes exported (to Turkey, Italy, the Balkans and the Iberian).

Decarbonisation: A peer comparison

We compare Hellenic’s energy transition plans with those of its peer group. We summarise our findings in the table below (Exhibit 2). We note that Neste is an outlier as it has been an early mover, expanding into renewable diesel for more than a decade. Renewable diesel accounts for more than half of Neste’s earnings (more than 90% in 2020, when conventional refining was especially weak). For the rest of the peer group, which comprises Motor Oil, PKN Orlen, Lotos, Saras and Tupras, we find no significant differentiation. Although most companies have explicit near-term RES targets, only Hellenic and PKN Orlen have 2030 RES targets and committed reduction of c 50% CO2 emissions by 2030. All companies in the peer group with the exception of Neste mention long-term plans for renewable diesel, carbon capture and storage (CCS), blue/green hydrogen and plastic recycling, but with limited specific strategic investment plans or targets for each of these areas.

Neste’s example shows the potential for valuation increase as a result of the transformation from a regional oil refinery to a global leader in renewable diesel. With this transformation process starting in the 2000s, Neste’s 12-month forward P/E valuation has increased from 16.4x in 2010 to 30.8x currently. All mentioned companies (except for Neste) present partial transformation plans, maintaining high-carbon product through investing in renewable sources of energy (eg Saras), or have no clear transition plans but a focus on waste management, emissions and energy consumption (eg Tupras).

Exhibit 2: Peer group summary of decarbonisation plans

Company

Date of strategy announcement

Price increase on announcement

P/E 12M forward at announcement

Current
P/E 12M forward

Price change from announcement

The main targets

Technologies/focus areas included in the strategy

Budget

Refining capacity (kbod)

Hellenic Petroleum

May 2021

6%

11.7

10.1

-6%

CO2 emissions -50% by 2030 (scope 1 and 2):
30% reduction from the refining business and remaining 20% from RES

RES target: 600MW by 2025 and 2GW by 2030

Plan to change corporate structure and rebranding

RES

Digital transformation

Biofuels

CCS

Blue/green hydrogen

Plastic recycling

€3.5–4bn by 2030
(c 50% to RES)

344

Neste

2000s

N/A

16.4*

30.8

1140%*

Carbon neutral production by 2035

100% electricity from RES by 2023

Neste's customers to reduce GHG emissions by at least 20m tons annually (t/a) by 2030

Renewable diesel

RES

Digital transformation

CCS

Plastic recycling

N/A

200

Saras

30 July 2020

11%

11.8

N/A

11%

RES target: 500MW by 2024 (from 171MW Q121)

Bio-fuel capacity expansion (HVO, from 100k t/a currently)

Investment in green hydrogen (long term): 20MW water electrolyser (further expansion up to 100MW)

CCS project, which could reduce CO2 emissions up to 50% in Sarroch refinery (long term)

RES

Digital transformation

Renewable diesel

CCS

Blue/green hydrogen

Plastic recycling

Not disclosed

300

PKN Orlen

30 November 2020

11%

7.1

7.7

35%

CO2 emission cuts by 2030 (scope 1 and 2):
20% reduction from the refining business and remaining 33% from RES

Carbon neutral by 2050

RES target: 2.5GW by 2030

RES

Digital transformation

Biofuels

CCS

Green hydrogen

Plastic recycling

c €31.2bn
(PLN140bn) by 2030
(c 60% for ‘new areas’)

706

Motor Oil

11 February 2021

5%

8.7

7.0

20%

RES targets: from 300MW operational (Q121) to 500–600MW by 2025

Targeting to become a large-scale producer of blue hydrogen before 2030

Improving energy efficiency and electricity autonomy (installing batteries)

RES

Digital transformation – ongoing

Biofuels

CCS - under assessment

Blue/green hydrogen

Plastic recycling

Not disclosed

185

Lotos

N/A

N/A

N/A

8.8

N/A

Investment in green hydrogen (long term) electrolyser park with a capacity of up to 100MW

Developing environmentally friendly asphalt (reducing air pollutants)

RES

Digital transformation

CCS

Green hydrogen

N/A

210

Tupras

N/A

N/A

N/A

9.9

N/A

Improving energy efficiency

Reducing utilisation of natural resources

RES

Digital transformation

Biofuels

CCS

Blue/green hydrogen

40% of annual capex towards ‘sustainability projects’ (c $80m)

608

Source: Company presentations and reports, Edison Investment Research, Refinitiv at 5 August 2021. Note: *As of 1 January 2010.

Financials: Core refining business

Our updated forecasts and valuation are based on Hellenic’s existing portfolio of assets. Due to a lack of information, we have not included any future projects presented in Vision 2025, required capital expenditure or potential returns associated with them in our model. We await more details from Hellenic on its transformation plans, which would enable us to incorporate new strategic projects into our financials and valuation.

Earnings affected by refining margins

For Hellenic, as for all other refineries, earnings are highly dependent on changes in refining margins, affected by global supply/demand and price trends. As a price taker, Hellenic can do little to mitigate this in the short term. However, to address this issue in the medium term, it is focusing on increasing its vertical integration and the share of operations that are not dependant on refining margins, such as the petrochemical business, and diversification towards RES (the Kozani project).

Crude oil prices averaged c US$69/bbl in Q221 compared to c US$61/bbl in Q121 and were significantly higher than the FY20 average of c US$42/bbl. H121 saw a recovery in oil prices from the multi-year lows recorded in Q220, supported by the agreement to control crude oil production and exports from the Organization of the Petroleum Exporting Countries and their allies (OPEC+). Refining margins have seen a recovery in H121, as inventory started to clear, supported by signs of post-COVID-19 economic improvement. After a month of uncertainty (negatively affecting margins) OPEC+ reached a compromise on 18 July to increase oil supply gradually, phasing out the 5.8mbod production cuts it made in spring 2020. As a result of the agreement, crude oil prices are expected to decline and benchmark refining margins have started to increase.

Exhibit 3: Benchmark margins ($/bbl) for fluid catalytic cracking

Exhibit 4: Benchmark margins ($/bbl) for hydrocracking

Source: Hellenic Petroleum

Source: Hellenic Petroleum

Exhibit 3: Benchmark margins ($/bbl) for fluid catalytic cracking

Source: Hellenic Petroleum

Exhibit 4: Benchmark margins ($/bbl) for hydrocracking

Source: Hellenic Petroleum

The overall macroeconomic environment is likely to improve as progress in coronavirus vaccination programmes gradually increases domestic traffic and air travel. Hellenic should benefit from the resultant tourist inflow, with Greece reopened to tourists from mid-May, and from pandemic restrictions lifting around the world. These should drive the increase in domestic demand for jet and road fuel in Greece and neighbouring countries. However, there is rising uncertainty surrounding future demand for oil due to the spread of Delta variant in some regions, although it is difficult to quantify the potential effect and its duration.

Near-term cashflow expectations

We expect an operating cashflow of €458m in FY21 (versus €425m previously), which will cover a high level of capital expenditure of €266m in FY21 (€288m in FY20) and dividend payments of €31m. The elevated capex includes €106m investment in the Kozani PV project (out of €130m) and €160 maintenance capex for scheduled turnarounds (company’s guidance: €150–180m). For FY22 and FY23, we include the €35m PP plant capacity expansion project (assumed €17.5m each year), which should be completed by FY24, and we expect it should generate EBITDA of c €6–7m annually. Apart from those clearly specified investments (PP expansion project) for our forecasts, we include only maintenance capex (€130m annually), which excludes any potential benefit from any future growth programme from Vision 2025 (such as capital costs, revenue or margin improvement).

Exhibit 5: Net debt and net debt/EBITDA estimates

Source: Hellenic Petroleum, Edison Investment Research. Note: Net debt includes leases.

In Q121, higher net debt (€2.2bn excluding leases, versus €1.7bn as of end-2020) was driven by higher working capital (due to increased payables and inventory), mostly affected by a significant increase in oil prices. Hellenic improved its capital structure in FY20, leading to financing costs at multi-year lows and below the €100m annual run-rate. As the capital structure and refinancing plans are under review on account of Vision 2025, we await more details. Hellenic may be able to fund some of its decarbonisation activities through issuing green and sustainable bonds. We note that in Q221 PKN Orlen issued €500m of 1.125% green bonds due in 2028 for its transition strategy initiatives.

Changes to estimates

Key changes to our near-term financial estimates and market expectations include improved performance in petrochemicals in FY21 (+14% vs previous estimates), supported by high margins in PP and higher expected oil prices and the impact of the PP capacity expansion project (that should become operational in FY24), which we now include in our model for the first time. Our oil price assumptions, based on the most recent US Energy Information Administration’s forecasts for FY21 (US$69/bbl), are up 10% compared to our June estimates.

We have lowered our refining margin estimates to reflect realised margins in Q221: Aspropyrgos averaged US$2.19/bbl, Thessaloniki US$1.95/bbl and Elefsina US$0.01/bbl, resulting in a refining margin implied by benchmarks of c US$0.70/bbl versus US$1.50/bbl in our previous estimates. We expect margins to improve in H221, as oil demand should increase with the summer tourist season, the gradual recovery of the global economy and the positive effect of removing the uncertainty around the OPEC+ decision on supply increase. As a result, we keep our refining margin assumptions unchanged for H221.

All in all, our FY21 total adjusted EBITDA estimate is 2% higher compared with our previous estimate, while FY22 EBITDA remains unchanged as the changes offset each other.

Exhibit 6: Changes to Edison forecasts

€m

Actual

Edison new

Edison old

Difference (%)

 

FY20

FY21e

FY22e

FY21e

FY22e

FY21e

FY22e

Adjusted EBITDA, refining

187

253

381

261

386

-3%

-1%

Adjusted EBITDA, petrochemicals

61

133

108

117

103

14%

4%

Adjusted EBITDA, marketing

97

117

119

118

119

0%

0%

Adjusted EBITDA, RES

-

-

18

-

18

-

-

Total adjusted EBITDA

333

495

626

487

626

2%

0%

Associates

30

20

10

20

10

0%

0%

Adjusted EBIT

85

252

379

244

379

3%

0%

Finance costs

(115)

(102)

(85)

(102)

(85)

0%

0%

Adjusted net income

5

136

228

130

228

4%

0%

Source: Hellenic Petroleum data, Edison Investment Research

Valuation

Our forecasts and valuation are based on the current shape of the company. We do not include future projects presented in Vision 2025, capital expenditure or returns associated with them and we await further information from the company.

We value Hellenic using a blend of DCF, leveraged and unleveraged EV/EBITDA, and P/E multiples, arriving at a valuation of €6.73/share, 3% lower versus our last published estimate (€6.91/share). This decline is mainly driven by the lower peer group-based valuation, affected by unfavourable market movements: increases in oil prices and rising uncertainty surrounding future demand for oil due to the spread of Delta variant in some regions.

Our DCF valuation has increased from €6.80 to €7.46 per share on the back of the favourable PP price movements (based on revised oil price assumptions) and €35m PP capacity expansion project (€0.22/share), which we have now included in our model. Changes to our forecasts are shown in Exhibit 6 above. Our valuation is based on cashflows to 2035, using a 7% cost of capital. We incorporate a terminal value, which assumes the unwinding of working capital, and 1% terminal growth.

In the absence of more detailed information from the company, we provide a preliminary, high-level estimate of the potential impact from the addition of the 2GW RES portfolio. We expect this could add c €0.35 per share of potential upside to our valuation with the project internal rate of return (IRR) at 8.3% (IRRs for such projects can vary in the range of 5–8% for acquisition projects and 8–10% for organic development projects). For our estimates, we have assumed the 2GW is 100% solar and based them on the data available for Greece RES market (which includes an electricity price of €40/MWh based on recent auctions in Greece, a capacity factor of 20%, nominal project debt finance of 75%, cost of debt at 2%, total investment cost at €550/kW (engineering, procurement, construction, development) and operation and maintenance costs at €10/kW). In that scenario the RES segment may potentially generate €110–160m in annual EBITDA (when 2GW become operational), leading to a significant addition to total EBITDA (vs €617m average EBITDA during 2017–2020). We note that the company also plans to develop onshore wind as well as batteries and offshore wind projects in the future. At this stage it is too early for us to include these future projects in our valuation.

Hellenic trades at FY22e multiples of 7.8x P/E and 6.4x EV/EBITDA, compared with the European group averages of 7.5x and 5.2x, respectively. Its EV per complexity-adjusted barrel is higher than European peers’ average at $1,577bod. At the same time, it trades at a discount to its US peers on most valuation metrics.

Exhibit 7: Hellenic valuation

Source: Edison Investment Research, Refinitiv. Note: Priced at 5 August 2021. Range in DCF for ±1% WACC

Exhibit 8: DCF (€/share) sensitivity to terminal growth and WACC

Terminal growth/

WACC

-3.0%

-2.0%

-1.0%

0.0%

1.0%

5.0%

9.91

10.45

11.16

12.16

13.66

6.0%

8.25

8.61

9.07

9.69

10.54

7.0%

6.90

7.15

7.46*

7.85

8.38

8.0%

5.78

5.96

6.17

6.44

6.78

9.0%

4.84

4.96

5.11

5.30

5.52

Source: Edison Investment Research. Note: *Base case.

In 2020, the market caps of Hellenic and its peers decreased by an average of c 35%, hitting low points in March and November. Concerns about lower global demand for oil and petrochemicals had a negative effect on global refining systems. Nonetheless, compared with its European peers, Hellenic benefits from a flexible refining system with large storage capacity. Between November 2020 and mid-June this year, its share price increased 59%, in line with peers, as the market responded favourably to the vaccination programme and higher oil demand. However, since mid-June 2021, refining companies’ stock prices were negatively affected by unfavourable market movements and rising uncertainties: between 18 June and 20 July Hellenic’s price dropped c 15%, while its peers declined 17%. That was mostly an effect of US dollar strengthening (translating to higher oil prices in local currencies, which adversely affects oil demand and refiners’ profitability), record-high oil prices (implying high feedstock costs for refiners), uncertainties from the OPEC+ decision, and a decline in refining margins due to lower demand for some oil products (demand for jet fuels has not recovered). With the OPEC+ agreement (on 18 July) to increase oil supply positively affecting benchmark refining margins, share prices have started to increase (Hellenic’s price is up 4% since then).

Exhibit 9: Share price performance of Hellenic and its peers since January 2020

Source: Edison Investment Research, Refinitiv. Note: Priced at 5 August 2021.

Exhibit 10: Peer group valuation

 

Market cap
($m)

EV
($m)

P/E
FY21e
(x)

P/E
FY22e
(x)

EV/EBITDA
FY21e
(x)

EV/EBITDA
FY22e
(x)

FCF yield
FY21e
(%)

FCF yield
FY22e
(%)

P/CF
FY21e
(x)

P/CF
FY22e
(x)

Net debt/
EBITDA FY21e
(x)

Net debt/
EBITDA FY22e
(x)

Div yield
FY21e
(%)

Refining capacity
(kbod)

EV/bod of complexity adjusted capacity
($/bod)

Edison estimate – Hellenic

1,767*

4,011*

13.0

7.8

8.1

6.4

10.9%

21.9%

3.9

3.3

3.2

2.2

3.8%

344

1,577

Grupa Lotos

2,549

3,474

9.9

8.4

5.0

4.5

-16.0%

4.2%

4.6

5.0

0.8

0.7

1.2%

211

1,484

Hellenic Petroleum (consensus)

2,091

5,045

20.1

7.9

9.1

6.8

11.5%

4.2%

3.7

3.2

4.1

3.1

5.4%

344

1,577

Motor Oil Hellas Corinth Refineries

1,770

2,928

8.2

6.2

6.1

4.7

-10.3%

11.8%

3.2

3.2

2.3

1.8

7.0%

186

1,364

Polski Koncern Naftowy Orlen

8,328

11,589

8.4

7.6

4.4

4.1

-2.4%

-3.0%

3.5

3.7

1.4

1.3

1.2%

718

1,754

Saras

741

1,217

-

-

9.4

4.8

5.6%

13.0%

4.7

3.2

4.6

2.4

0.0%

300

347

Turkiye Petrol Rafinerileri

2,889

4,601

17.2

7.2

9.6

6.1

1.9%

8.0%

9.8

5.6

3.2

2.0

0.6%

602

804

Europe average

3,061

4,809

12.7

7.5

7.3

5.2

-1.6%

6.4%

4.9

4.0

2.7

1.9

2.6%

394

1,222

CVR Energy

1,297

2,658

-

20.0

14.1

5.6

14.0%

4.9%

3.8

4.5

5.4

2.2

0.0%

185

1,105

HollyFrontier

4,777

7,289

-

9.6

8.2

5.0

-6.6%

9.7%

8.5

4.4

2.0

1.2

2.2%

457

1,276

Marathon Petroleum

36,868

55,703

-

18.1

8.2

6.6

20.9%

11.4%

7.7

4.9

4.6

3.7

4.1%

2,874

1,828

Phillips 66

32,135

47,794

-

11.8

12.8

7.7

5.0%

9.3%

8.9

7.2

3.6

2.2

4.9%

2,184

1,989

Valero Energy

26,864

39,025

-

14.2

11.7

6.6

6.8%

10.1%

7.9

5.1

3.4

1.9

6.0%

3,100

1,104

Americas average

20,388

30,494

-

14.7

11.0

6.3

8.0%

9.1%

7.4

5.2

3.8

2.2

3.4%

1,760

1,461

Total average

10,937

16,484

12.7

11.1

9.0

5.7

2.7%

7.6%

6.0

4.5

3.2

2.0

3.0%

1,015

1,330

Total median

2,889

5,045

11.3

8.4

9.1

5.9

5.0%

9.3%

4.7

4.5

3.4

2.0

2.2%

457

1,364

Source: Edison Investment Research, Refinitiv. Note: Priced at 5 August 2021. *FX = US$1.18/€.

Exhibit 11: Financial summary

IFRS; year-end 31 December

€m

 

2018

2019

2020

2021e

2022e

Income statement

 

 

 

 

 

 

 

Total revenues

 

 

9,769

8,857

5,782

7,087

7,265

Cost of sales

 

 

(8,770)

(8,052)

(5,818)

(5,962)

(6,544)

Gross profit

 

 

999

805

(36)

1,125

721

SG&A (expenses)

 

 

(475)

(470)

(453)

(431)

(432)

Other income/(expense)

 

 

(10)

6

(13)

(5)

(5)

Exceptionals and adjustments

 

 

(19)

2

(587)

444

(94)

Reported EBIT

 

 

514

341

(501)

689

284

Finance income/(expense)

 

 

(146)

(151)

(115)

(102)

(85)

Profit (loss) from JVs / associates (post tax)

 

 

(2)

18

30

20

10

Other income (includes exceptionals)

 

 

2

(1)

5

5

0

Reported PBT

 

 

369

207

(582)

613

209

Income tax expense (includes exceptionals)

 

 

(154)

(43)

185

(147)

(52)

Reported net income

 

 

215

164

(397)

466

157

Basic average number of shares, m

 

 

306

306

306

306

306

Basic EPS (€)

 

 

0.7

0.5

(1.3)

1.5

0.5

 

 

 

 

 

 

Adjusted EBITDA

 

 

730

570

333

495

626

Adjusted EBITDA margin (%)

 

 

7.5

6.4

5.8

7.0

8.6

Adjusted EBIT

 

 

533

339

85

252

379

Adjusted PBT

 

 

388

205

5

175

304

Adjusted net income

 

 

296

185

5

136

228

Adjusted EPS (€)

 

 

0.97

0.61

0.02

0.44

0.75

DPS (€)

 

 

0.75

0.50

0.10

0.22

0.30

Balance sheet

 

 

 

 

 

Property, plant and equipment

 

 

3,269

3,298

3,380

3,413

3,313

Intangible assets

 

 

106

104

106

105

105

Other non-current assets

 

 

529

744

797

805

813

Total non-current assets

 

 

3,903

4,146

4,283

4,323

4,230

Cash and equivalents

 

 

1,276

1,088

1,203

881

1,084

Inventories

 

 

993

1,013

694

1,165

1,070

Trade and other receivables

 

 

822

840

582

594

565

Other current assets

 

 

3

6

12

13

13

Total current assets

 

 

3,094

2,947

2,492

2,652

2,732

Non-current loans and borrowings

 

 

1,627

1,610

2,131

1,678

1,678

Non-current lease liabilities

 

 

 

169

171

163

163

Other non-current liabilities

 

 

420

448

294

319

319

Total non-current liabilities

 

 

2,047

2,227

2,597

2,160

2,160

Trade and other payables

 

 

1,349

1,402

1,547

1,693

1,625

Current loans and borrowings

 

 

1,109

1,022

745

799

799

Current lease liabilities

 

 

 

31

30

28

28

Other current liabilities

 

 

97

84

8

10

10

Total current liabilities

 

 

2,555

2,539

2,329

2,531

2,463

Equity attributable to company

 

 

2,331

2,262

1,786

2,222

2,277

Non-controlling interest

 

 

64

65

62

62

62

Cashflow statement

 

 

 

 

 

Profit before tax

 

 

369

207

(582)

613

209

Depreciation and amortisation

 

 

197

231

248

243

248

Other adjustments

 

 

237

172

233

201

75

Movements in working capital

 

 

(296)

26

528

(473)

55

Income taxes paid

 

 

(5)

(149)

23

(125)

(52)

Cash from operations (CFO)

 

 

503

486

450

458

535

Capex

 

 

(157)

(241)

(288)

(266)

(148)

Acquisitions & disposals net

 

 

(16)

(5)

(6)

0

0

Other investing activities

 

 

311

29

17

5

5

Cash used in investing activities (CFIA)

 

 

138

(218)

(277)

(261)

(143)

Net proceeds from issue of shares

 

 

(1)

0

0

0

0

Dividends paid in period

 

 

(151)

(155)

(154)

(31)

(102)

Movements in debt

 

 

(97)

(111)

252

(396)

0

Other financing activities

 

 

4

(160)

(144)

(98)

(87)

Cash from financing activities (CFF)

 

 

(244)

(458)

(47)

(525)

(189)

Increase/(decrease) in cash and equivalents

 

 

397

(189)

125

(327)

203

Currency translation differences and other

 

 

5

2

(11)

5

0

Cash and equivalents at end of period

 

 

1,275

1,088

1,203

881

1,084

Net (debt) cash (incl. lease)

 

 

(1,460)

(1,744)

(1,874)

(1,788)

(1,585)

Net (debt) cash (excl. lease)

 

 

(1,460)

(1,544)

(1,673)

(1,597)

(1,394)

Source: Hellenic Petroleum, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Hellenic Petroleum and prepared and issued by Edison, in consideration of a fee payable by Hellenic Petroleum. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Hellenic Petroleum and prepared and issued by Edison, in consideration of a fee payable by Hellenic Petroleum. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for ‘wholesale clients’ within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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