Support from Q3 refinery margin rise and IMO 2020

Hellenic Petroleum 10 October 2019 Update
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Hellenic Petroleum

Support from Q3 refinery margin rise and IMO 2020

H119 results

Oil & gas

10 October 2019

Price

€8.05

Market cap

€2,460m

Net debt (€m) at 30 June 2019, ex IFRS 16 lease liabilities

1,398

Shares in issue

305.6m

Free float

19%

Code

ELPE

Primary exchange

ASE

Secondary exchange

LSE

Share price performance

%

1m

3m

12m

Abs

(11.5)

(9.0)

14.5

Rel (local)

(8.7)

(8.1)

(13.8)

52-week high/low

€9.55

€6.78

Business description

Hellenic Petroleum operates three refineries in Greece with a total capacity of 341kbd, and has sizeable marketing (domestic and international) and petrochemicals divisions.

Next events

Q3 results

7 November 2019

Analyst

Dario Carradori

+44 (0)20 3077 5700

Hellenic Petroleum is a research client of Edison Investment Research Limited

Following a 25% EBITDA decline year-on-year in H119, we expect a 55% recovery in refinery margins in Q3 to support a significant recovery in H2 (+9% y-o-y). We expect investor focus to be on the impact of the forthcoming IMO 2020 regulations and continue to believe that Hellenic Petroleum is well placed given its high middle distillate yield, above average complexity and crude slate flexibility.

Year end

Revenue
(€m)

Adjusted
EBITDA* (€m)

Net debt
(€m)

P/E
(x)

Dividend yield (%)

12/17

7,995

833

1,802

5.4

4.2

12/18

9,769

730

1,460

8.0

6.0

12/19e

9,165

683

1,308

9.6

9.3**

12/20e

9,328

817

1,043

6.9

6.2

Note: *Adjusted numbers account for inventory movements and other specials. **Includes special dividend from DESFA proceeds.

Recovery in refinery margins supports stronger Q3

Adjusted EBITDA declined 25% y-o-y to €252m in H119, reflecting a 41% y-o-y reduction in refining, supply and trading. This was driven by record-low benchmark refining margins (the lowest in five years) and problems with Russian crude supplies into Europe that affected pricing of sour grades, especially in Q219. However, refinery margins started to normalise at the end of Q2 and recent datapoints suggest a significant pick-up in Q3, with average benchmark margins up 55% in Q3 vs average levels in H1, suggesting a significant recovery in Q3 results.

Key focus on forthcoming impact of IMO 2020

We have reduced our FY19 and FY20 EBITDA forecasts by 8% and 4% respectively to reflect the lower refining contribution in H119 and more gradual impact of the cost-cutting/efficiencies plan. In FY20, we expect the refining business to drive all of the 20% EBITDA growth. The two key drivers are the normalisation in refining margins (after the very low levels achieved in H1, as described above) and, to a lesser extent, a moderate positive impact from IMO 2020 (our assumption is conservative; more upside may materialise) as we believe Hellenic is well-placed given its high middle distillate yield, above average complexity and crude slate flexibility (see our outlook report).

Valuation: Unchanged at €9.2/share

We believe that robust cash flow generation, the likely strong earnings recovery in FY20 and solid industry positioning in the context of the forthcoming IMO 2020 regulations are the key attractions of the stock. Our valuation is based on a blend of DCF, EV/EBITDA and P/E valuation approaches. It is unchanged at €9.2/share as the impact of lower forecasts was offset by a lower cost of capital for the DCF valuation (WACC is now 7% vs 8% previously), reflecting the recent decrease in country risk premium and the company’s bond yields (the recent €500m bond issue priced at 2.125% yield is around three percentage points cheaper than the ones it replaces). Despite its strong industry positioning, Hellenic trades broadly in line with European peers, (5.5x FY19e EV/EBITDA versus European peers at 5.2x, and 9.6x FY19e P/E compared to the sector’s 11.5x).

Refinery margins recovered significantly in Q3

Refining margins were very weak in H1, but levels started to normalise at the end of Q2 and recent datapoints suggest a significant pick-up in Q3, with benchmark margins for the three refineries up 55% on average in Q3 vs average levels in H1.

Exhibit 1: Evolution of Med benchmark refinery margins

Source: Company data

We incorporate a recovery in margins in Q3 and Q4 in our forecasts, with an average benchmark refinery margin for H2 of $4.6/bbl (slightly higher than the average of $3.8/bbl for Q3) vs $2.7/bbl in H1.

Looking beyond 2019, we expect benchmarks to improve in 2020 due to the forecast impacts of IMO 2020, offset by the impact of global refining capacity additions in the longer term. We continue to believe that Hellenic is well-placed given its high middle distillate yield, above average complexity and crude slate flexibility. We assume an average margin outperformance of $5.7–5.8/bbl relative to Hellenic Petroleum’s benchmark in FY19 and FY20 (this is relative to FY18 outperformance of $6.2/bbl). We have conservatively assumed a fairly moderate impact from IMO 2020, reflecting an increase in realised margin in the period beyond Q419 as a result of increased middle distillate demand, but there is a significant amount of uncertainty on the precise margin impact given unknowns such as compliance, scrubber installations, relative crude discounts and refinery flexibility. Please see our recent outlook report for a detailed analysis of the impact of IMO 2020.

Briefly, Hellenic’s low fuel oil yield and complexity should ensure it is well placed for IMO 2020 and the anticipated switch in demand from high sulphur fuel oil (HSFO) 3.5% to ultra-low sulphur fuel oil (ULSFO) 0.5% and marine gasoil (MGO) 0.5%. Hellenic plans minimal changes to crude processing at Elefsina and Thessaloniki ahead of IMO 2020 as neither refinery produces HSFO. Aspropyrgos, on the other hand, presents an opportunity to reduce high sulphur feed and replace it with lower sulphur crudes, switching current output from 24% HSFO to just 4% HSFO. The company states that it is on track with its plans to deliver very low sulphur fuel oil by the beginning of 2020, confirmed by positive test results of the new crude grades mix conducted at the Aspropyrgos refinery.

Exhibit 2: Historical evolution and forecasts of benchmark margins and margin over-performance

Source: Company data, Edison Investment Research

New bond issue at a significantly lower cost

At the end of September 2019, Hellenic Petroleum issued a new €500m five-year bond with a 2.125% yield (2% coupon). Hellenic Petroleum said it received strong demand for the issue with an order book of €1.4bn (more than 50% from international investors), which led to an increase in the size of the issue to €500m (from €400m). The new bond replaces a much more expensive €325m bond issued in 2014 with a coupon of 5.25%, which was repaid at the beginning of July, as well as a bond maturing in 2021 with a coupon of 4.875% (partial refinancing, with €248m accepted tenders through a tender offer that ran in parallel with new issue). The new bond issue follows a favourable period of falling country risk premium with 10-year Greek government bond yield spreads, which have more than halved year to date vs Germany.

H1 results affected by low refining margins

Hellenic reported H119 adjusted group EBITDA of €252m, down 25% y-o-y, reflecting a 41% y-o-y reduction in refining, supply and trading to adjusted EBITDA of €149m. This was driven by record-low benchmark refining margins (the lowest in five years) and problems with Russian crude supplies into Europe. The contamination of large quantities of Russian crude oil in the Druzhba pipeline, which supplies Central and Eastern European countries, disrupted the supply of Russian crude for most of Q219, affecting the availability and pricing of Urals oil. This had a significant impact on refining margins, quantified by the company as a $1/bbl reduction.

The Petrochemicals division reported H1 adjusted EBITDA of €53m, flat y-o-y with a particularly strong Q2, benefiting from higher volumes and a favourable sales mix. The marketing business benefited from a significant impact in the application of IFRS 16; excluding these, EBITDA was broadly in line with last year. Overall, the positive impact of IFRS 16 on group EBITDA was €19m or 8%.

Adjusted net income dropped 45% to €70m as a result of the lower EBITDA. Financing costs reduced around 10% y-o-y over the course of H1.

Net debt reduced to €1,398m (vs €1,460m at the end of 2018 and €1,916m at the end of H118), thanks to strong cash flow generation. Capex of €78m was 27% higher y-o-y.

On a separate note, in August 2019, a new board of directors was appointed with Ioannis Papathanasiou elected as non-executive chairman and Andreas Shiamishis as group CEO.

Forecast changes

We have reduced our forecasts to reflect the low refining margins in H119, only partly offset by a higher contribution from petrochemicals. In the longer term, we have assumed a more gradual positive impact from cost-cutting and efficiencies (the company targets €100–150m EBITDA improvement over four to five years, thanks to digital and energy transformation, debottlenecking and procurement optimisation). We reduce our FY19 and FY20 EBITDA forecasts by 8% and 4% respectively.

Exhibit 3: Forecasts changes overview

Actual

Edison new

Edison old

Difference

€m

2018

2019e

2020e

2019e

2020e

2019e

2020e

Adjusted EBITDA, refining

543

453

580

528

638

-14%

-9%

Adjusted EBITDA, petrochemicals

100

106

106

92

83

15%

27%

Adjusted EBITDA, marketing

93

134

138

133

133

0%

4%

Other

(2)

(10)

(8)

(8)

(8)

Total Adjusted EBITDA

730

683

817

746

847

-8%

-4%

Associates

(2)

15

10

10

10

Adjusted EBIT

533

452

579

521

622

-13%

-7%

Finance costs

(146)

(130)

(116)

(139)

(116)

Adjusted net income

291

255

355

294

387

-13%

-8%

Source: Company data, Edison Investment Research

Our FY19 and FY20 EBITDA forecasts are broadly in line with consensus expectations.

Exhibit 4: Edison forecasts vs consensus

Edison

Consensus

Difference

 

FY19e

FY20e

FY19e

FY20e

FY19e

FY20e

Adjusted EBITDA, refining

453

580

Adjusted EBITDA, petrochemicals

106

106

Adjusted EBITDA, marketing

134

138

Other

(10)

(8)

Total adjusted EBITDA

683

817

678

816

1%

0%

Associates

15

10

Adjusted EBIT

452

579

454

646

-1%

-10%

Finance costs

(130)

(116)

Adjusted net income

255

355

243

376

5%

-6%

Source: Company data, Edison Investment Research, Refinitiv

In FY20, we expect the refining business to drive all of the 20% EBITDA growth y-o-y. The two key drivers are normalisation in refining margins (after the very low levels achieved in H1, as described above) and, to a lesser extent, the moderately positive impact from IMO 2020 (reflecting increased middle distillate demand), which we currently assume in our forecasts.

Strong cash-flow generation to drive growth capex

After a significant reduction in net debt in FY18 (€341m lower, equal to 14% of the current market cap, mostly thanks to the disposal of DESFA), we estimate strong cash flow generation to continue for Hellenic. We estimate an average free cash flow yield (pre-growth capex) of c 20% pa on average in FY19–21, which we expect to drive a large reduction in leverage. We forecast net debt/EBITDA to reduce to 1.3x in FY20 from 2.0x in FY18. We believe the reduction in leverage and the prospect of healthy cash flow generation opens up opportunities for significant reinvestment, in addition to the €0.25/share special dividend paid in 2019. In particular, Hellenic targets an increase in its renewable portfolio to >300MW (vs c 30MW currently), which we estimate would require c €250m investment. Our forecasts for EBITDA growth and net debt reduction suggest significant room for further investments (including acquisitions) and potentially additional shareholder remuneration.

Exhibit 5: Forecast leverage for Hellenic Petroleum

Source: Company data, Edison Investment Research

Valuation unchanged at €9.2/share

We believe that strong cash flow generation, the likely earnings recovery in FY20 and solid relative industry positioning in the context of the forthcoming IMO 2020 regulations are the key attractions of the stock.

The share price increased c 10% year to date. In our view, Hellenic Petroleum benefited from a significant decline in country risk (10-year bond yield spread more than halved year to date, thanks to post-election stability and clarity and a more positive economic outlook) but was constrained by a weak environment for refinery margins.

Our valuation is based on a blend of DCF, EV/EBITDA and P/E valuation approaches. The valuation is unchanged at €9.2/share as the impact of lower forecasts was offset by a lower cost of capital in the DCF valuation (WACC is now 7% vs 8% previously), reflecting the recent decrease in country risk premium and the company’s bond yields. Despite its strong industry positioning, Hellenic trades broadly in line with European peers (5.5x FY19e EV/EBITDA versus European peers at 5.2x, and 9.6x FY19e P/E compared to the sector’s 11.5x).

Exhibit 6: Financial summary

Accounts: IFRS, year-end: December, €m

2016

2017

2018

2019e

2020e

2021e

INCOME STATEMENT

 

 

 

 

 

 

 

 

Total revenues

 

 

6,680

7,995

9,769

9,165

9,328

9,346

Cost of sales

 

 

(5,673)

(6,907)

(8,770)

(8,202)

(8,307)

(8,377)

Gross profit

 

 

1,007

1,087

999

963

1,021

969

SG&A (expenses)

 

 

(409)

(410)

(475)

(457)

(458)

(459)

Other income/(expense)

 

 

28

(16)

(10)

17

16

16

Exceptionals and adjustments

 

 

110

18

(19)

78

0

0

Reported EBIT

 

 

626

662

514

522

579

526

Finance income/(expense)

 

 

(201)

(165)

(146)

(130)

(116)

(102)

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

 

 

19

31

(2)

15

10

10

Other income (includes exceptionals)

 

 

21

(8)

2

1

0

0

Reported PBT

 

 

466

520

369

408

473

434

Income tax expense (includes exceptionals)

 

 

(137)

(136)

(154)

(95)

(118)

(109)

Reported net income

 

 

329

384

215

312

355

326

Basic average number of shares, m

 

 

306

306

306

306

306

306

Basic EPS (€)

 

 

1.1

1.3

0.7

1.0

1.2

1.1

Adjusted EBITDA

 

 

731

833

730

683

817

764

Adjusted EBIT

 

 

522

644

533

452

579

526

Adjusted PBT

 

 

361

502

388

337

473

434

Adjusted net income

 

 

252

371

291

255

355

 

Adjusted EPS (€)

 

 

0.82

1.21

0.95

0.83

1.16

1.07

DPS (€)

 

 

0.00

0.34

0.49

0.75

0.50

0.50

BALANCE SHEET

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

3,303

3,312

3,269

3,194

3,146

3,128

Intangible assets

 

 

108

106

106

330

330

330

Other non-current assets

 

 

883

864

529

518

526

534

Total non-current assets

 

 

4,295

4,282

3,903

4,042

4,002

3,992

Cash and equivalents

 

 

1,082

1,019

1,276

1,087

951

563

Inventories

 

 

929

1,056

993

1,010

1,024

1,084

Trade and other receivables

 

 

868

791

822

827

834

861

Other current assets

 

 

15

12

3

5

5

5

Total current assets

 

 

2,894

2,878

3,094

2,929

2,815

2,514

Non-current loans and borrowings

 

 

1,456

920

1,627

1,282

882

432

Other non-current liabilities

 

 

423

300

420

585

585

585

Total non-current liabilities

 

 

1,879

1,220

2,047

1,867

1,467

1,017

Trade and other payables

 

 

1,778

1,661

1,349

1,449

1,569

1,612

Current loans and borrowings

 

 

1,386

1,900

1,109

1,113

1,113

1,113

Other current liabilities

 

 

4

7

97

293

293

293

Total current liabilities

 

 

3,168

3,568

2,555

2,855

2,975

3,017

Equity attributable to company

 

 

2,040

2,309

2,331

2,187

2,312

2,408

Non-controlling interest

 

 

102

63

64

62

62

62

CASH FLOW STATEMENT

 

 

 

 

 

 

 

 

Profit before tax

 

 

466

520

369

403

473

434

Depreciation and amortisation

 

 

209

189

197

231

238

238

Other adjustments

 

 

236

207

237

127

106

92

Movements in working capital

 

 

(1,228)

(463)

(296)

61

99

(44)

Income taxes paid

 

 

(16)

(10)

(5)

(65)

(118)

(109)

Cash from operations (CFO)

 

 

(334)

443

503

757

797

611

Capex

 

 

(126)

(209)

(157)

(148)

(190)

(220)

Acquisitions & disposals net

 

 

(0)

0

(16)

(5)

0

0

Other investing activities

 

 

10

24

311

10

10

9

Cash used in investing activities (CFIA)

 

 

(116)

(185)

138

(143)

(180)

(211)

Net proceeds from issue of shares

 

 

0

0

(1)

0

0

0

Dividends paid in period

 

 

(3)

(107)

(151)

(308)

(229)

(229)

Movements in debt

 

 

(393)

(35)

(97)

(343)

(400)

(450)

Other financing activities

 

 

(192)

(149)

4

(134)

(123)

(109)

Cash from financing activities (CFF)

 

 

(589)

(300)

(244)

(784)

(752)

(788)

Increase/(decrease) in cash and equivalents

 

 

(1,039)

(42)

397

(191)

(136)

(388)

Currency translation differences and other

 

 

10

(9)

5

1

0

0

Cash and equivalents at end of period

 

 

924

873

1,275

1,086

950

562

Net (debt)/cash

 

 

(1,761)

(1,802)

(1,460)

(1,308)

(1,043)

(981)

Free cash flow (pre dividends)

 

 

(450)

258

641

614

617

400

Source: Company data, Edison Investment Research

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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.

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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.

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New Zealand

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United Kingdom

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United States

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