Last close As at 05/08/2026
EUR13.09
▲ 0.05 (0.38%)
Market capitalisation
EUR3,986m
Research: Energy & Resources
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.
Written by
Hellenic Petroleum |
Support from Q3 refinery margin rise and IMO 2020 |
H119 results |
Oil & gas |
10 October 2019 |
Share price performance
Business description
Next events
Analyst
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 |
Adjusted |
Net debt |
P/E |
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 |
Research: Industrials
Leclanché’s H119 performance was adversely affected by delays in completing financing for the St Kitts project. Management had expected construction to start in Q219 but it has been pushed back to Q419. Given the scale of this project, which is the largest the company has undertaken to date, our estimates remain under review until there is greater visibility on when different phases of the project are scheduled to complete. We note that this project pushes the order book above CHF100m, with an additional CHF166m qualified pipeline projects for delivery between 2020 and 2023, including lithium-ion battery systems for Bombardier trains. Management is seeking CHF70m funding to realise this potential.