3 September 2018 | 10:24PM MSK
CEEMEA Refining Bright outlook for CEEMEA Refining; Buy MOL, Tupras, Motor Oil
We expect CEEMEA refiners’ margins to increase in coming years as: the global S/D Geydar Mamedov +7(495)645-4041 | balance in the oil products market remains tight, driving global utilization rates [email protected] OOO Goldman Sachs Bank higher, pushing cracks up; and their high complexity will allow the CEEMEA refiners Georgii Gorbatov to benefit from expansion of light-dark product spreads and heavy-light crude +7(495)645-4222 | [email protected] spreads as IMO 2020 approaches. OOO Goldman Sachs Bank
1. High complexity (NCI of c.10) allows CEEMEA refineries to process heavier crudes. This is an advantage as we expect light/heavy crude spreads to expand with IMO 2020 as heavy crude has a higher sulphur content. 2. Product mix: high diesel yields and low fuel oil yields. Three of the five refiners we cover have a fuel oil yield <10% and most have a diesel yield >50%. With IMO 2020 approaching, we expect diesel cracks to expand, and HSFO cracks to collapse bringing parity between fuel oil and coal prices. Overall, we expect the price of CEEMEA refiners’ products basket to increase between now and 2020. 3. High FCF and dividend yields (2017-20E sector dividend CAGR of c.15%): CEEMEA refiners trade at average 2018-20E FCF/dividend yields of 10%/5% vs. US refiners on 7%/3% and Asian refiners on 5%/3%.
Key investment ideas: Among the CEEMEA refiners we prefer MOL, Tupras and Motor Oil as: (1) their FCF and dividend yields are the highest in the sector on our estimates; (2) they trade at a discount to historical average valuations; (3) our 2018 EBITDA estimates are c.10% above Bloomberg consensus on average; and (4) we For the exclusive use of [email protected] forecast the highest positive margin impact from expansion of light-dark oil product spreads in coming years.
MOL (Buy, CEEMEA Focus List) trades on yields of c.16% (FCF) and c.6% (DY) in 2018-20E on average. We forecast a 2018-20E EBITDA CAGR of 7% and see scope for a special dividend this year. We expect Tupras (Buy) and Motor Oil (Buy) to be the main beneficiaries of expansion in light/heavy crude spreads given the high share of heavier Middle Eastern crude in their feedstock mix. We expect average 2018-20E FCF yields for Tupras and Motor Oil of c.17% and DY of c.17% & c.8% (c.9% if buyback added). We initiate coverage of Neste Oil and PKN with Neutral ratings.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html . Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Goldman Sachs CEEMEA Refining Table of Contents
CEEMEA refining in 12 charts 3
PM Summary 5
Macro snapshot: Oil demand growth & IMO 2020 to push utilization rates higher 6
What does it mean for product cracks? 8
What does it mean for light-heavy crude spreads? 9
High complexity refiners able to process heavier crudes with low fuel oil yield and higher diesel output are best positioned 10
What about petrochemical exposure? 13
Attractive on FCF and DY vs. global peers; Tupras, MOL and Motor Oil stand out 16
MOL: Strong FCF generation to provide financial capacity to increase dividends; Buy (CEEMEA Focus List) 18
Tupras: Industry-leading dividend yield, supported by strong FCF generation; Buy 25
Motor Oil: Strong FCF generation and growing dividends; Buy 31
PKN: Flattish FCF generation outlook, no near-term dividend growth; Neutral 36
Neste: Renewables capex growth to put pressure on FCF generation, dividend increase is priced in; Neutral 42
Valuation 48
Disclosure Appendix 49 For the exclusive use of [email protected]
3 September 2018 2 Goldman Sachs CEEMEA Refining CEEMEA refining in 12 charts
Exhibit 1: We expect global refining S/D to remain tight in the Exhibit 2: IMO 2020 likely to further increase global diesel demand mid-term Marine fuel mix, mbpd Global refining S/D (mbpd) and utilization rate (%)
2.0 85.0% 1.8 84.0% 1.6 1.4 83.0%
1.2
d 82.0%
p % b 1.0 m 0.8 81.0% 0.6 80.0% 0.4 79.0% 0.2 0.0 78.0% 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Refining demand Supply from new refinery Utilization rate
Source: IEA, Goldman Sachs Global Investment Research Source: IEA, Goldman Sachs Global Investment Research
Exhibit 3: Higher diesel production will require (1) switching Exhibit 4: Given the scale of demand shift for HSFO we estimate it against gasoline, (2) higher coker runs and (3) higher refining will have to compete with coal in the power sector to clear the utilization rates market Diesel SD bridge, mbpd HSFO destruction 2020, mbpd
Source: IEA, Goldman Sachs Global Investment Research Source: IEA, Goldman Sachs Global Investment Research For the exclusive use of [email protected]
Exhibit 5: We expect light-dark spread to widen into 2020E Exhibit 6: We expect heavy crude spreads to widen into 2020E NWE diesel and fuel oil cracks and light-dark spread, US$/bbl Heavy-light crude spreads, US$/bbl
80.0 10.0
l 9.0 b
60.0 b / 8.0 $ S
U 7.0
40.0 , s
d 6.0 a
e l r
b 20.0 5.0 p b s /
$ y 4.0 v S
0.0 a U e 3.0 h
2017 2018E 2019E 2020E 2021E 2022E - t
h 2.0
-20.0 g i L 1.0 -40.0 0.0 2015 2016 2017 2018E 2019E 2020E 2021E 2022E -60.0 Iran light-heavy spread Basrah light-heavy spread Diesel crack Fuel oil crack Clean-dirty spread Arab light-heavy spread Brent-Urals spread
Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
3 September 2018 3 Goldman Sachs CEEMEA Refining
Exhibit 7: CEEMEA refiners have high complexity allowing them to Exhibit 8: ...and relatively low fuel oil yield process heavier crudes... CEEMEA refiners 2017/20E fuel oil yields, % CEEMEA refiners NCI (Nelson Complexity Index)
16.0 NEGATIVE Exposure to IMO regulation POSITIVE 14.0 11.5 11.4 12.0 25% 10.1 9.9 10.0 9.5
I
C 8.0 %
N 20%
6.0 , d l
4.0 e i 15% y
2.0 l i o
0.0 23% l ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) c c y y y y y y a d e d a d a 10% i i e i i i r r l l t e e e c e t n n n n a a b b k k k k a a e a a u a l r r r l r a l g g u u o e o 16% u o u u u n n u r n r n r p p F i i h T u T T T u P e e C C F G F t ( ( ( ( ( i ( ( ( ( (
H H
R R
12% 12%
L (
(
t r
( i i o k n i e k l a
h h l h 5%
c o t a k a a c a c a a m m t v u o n 8% s v e i e n z e i l k z r m i j n I r I t i k z z a k u o P i l i a S o a
r 5%
R 5% 5% C s C e i P D a
i 4% 4% ( ( C B t z
K N a a v y r o p 0% M B n u i l v a t r i Motor Oil PKN Tupras Neste MOL K L Motor Neste MOL Tupras PKN 2017 2020E Oil
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Exhibit 9: CEEMEA refiners have higher FCF yields vs. Asian and US Exhibit 10: ...as well as higher dividend yields peers... 2018-20E average dividend yield, % 2018-20E average FCF yield, %
12.0% 6.0% 5.2% 10.0% 9.5% 5.0%
% %
, , d d l l
e 8.0% 4.0% e i i y y 6.9%
F v i C d F
6.0% g 3.0% 2.7% g v
v 2.5%
4.9% a a
E E 0 0 2 2 -
- 4.0% 2.0% 8 8 1 1 0 0 2 2 2.0% 1.0%
0.0% 0.0% CEEMEA refiners US refiners Asian refiners CEEMEA refiners Asian refiners US refiners
Source: Goldman Sachs Global Investment Research, FactSet Source: Goldman Sachs Global Investment Research, FactSet
Exhibit 11: Among CEEMEA refiners Tupras, MOL and Motor Oil Exhibit 12: ...and dividend yield; Tupras, Motor OIl and MOL trade at For the exclusive use of [email protected] stand out both on FCF yield... a discount vs. history 2018-20E average FCF yield, % 2018-20E average dividend yield, %
2018-2020E average FCF yield, % Mid-cycle historical average 2018-2020E average dividend yield Mid-cycle historical average
20.0% 18.0% 16.6% 17.4% 18.0% 16.6% 16.3% 16.0% 16.0% 14.0% 14.0% %
12.0% , % d
l
, 12.0% e i d
l 10.0% y
e 8.4% i
10.0% d
y 8.6%
n 8.0% F e d C 8.0% i F v 5.5% i 6.0%
5.2% D 6.0% 3.9% 4.0% 4.0% 3.0% 2.0% 2.0% 0.0% 0.0% TUPRAS MOTOR OIL MOL PKN NESTE TUPRAS MOTOR OIL MOL PKN NESTE
Source: Goldman Sachs Global Investment Research, FactSet Source: Goldman Sachs Global Investment Research, FactSet
3 September 2018 4 Goldman Sachs CEEMEA Refining PM Summary
Global macro environment is supportive for the refining industry. Strong global oil demand growth kept refining supply demand tight and pushed refining utilization rates higher throughout 2017. Given a favourable outlook for the global economy and global GDP growth, we expect oil demand to continue growing, driving refining utilization rates higher in 2018/19.
IMO 2020 (new regulation which lowers the sulphur limit for marine fuels from 3.5% to 0.5%) will have a significant impact on refining sector profitability. In the near term, we expect diesel to replace HSFO as the main marine fuel. On our estimates, higher diesel demand will require a combination of 1% higher global refinery runs and an increase in diesel yields, which will tighten the diesel S/D balance and drive diesel cracks up. In the longer term however, low HSFO prices are likely to incentivize the shipping industry to install scrubbers (devices that strip out sulphur as HSFO is burned thereby reducing emissions). See The IMO 2020: Global Shipping’s Blue Sky Moment.
As a result we expect light-dark oil product spreads to widen from now to 2020E, mainly driven by an increase in disesel cracks and a sharp fall in HSFO cracks. As the industry is bidding against sulphur we also expect heavy-light crude spreads to widen (given the higher sulphur content of heavier crudes).
In this macro environment we expect the winners to be (1) complex refiners, which are able to process heavier crudes, and have (2) low fuel oil yields and (3) higher diesel yields.
CEEMEA refiners are relatively well positioned in this context: three of five refiners have a fuel oil yield <10% and most have a diesel yield >50%. They have high complexity (NCI of c.10) allowing them to process heavier crudes and benefit from widening heavy crude spreads, especially the Mediterranean refiners (Tupras, Motor Oil) which have access to Middle Eastern heavy crude. For the exclusive use of [email protected] We forecast average 2018-20 yields for the CEEMEA refiners of 9% (FCF) and 5% (DY), and a 2018-20E dividend CAGR of 20%. We forecast a c.10% 2018-20E EBITDA CAGR, largely driven by margin expansion.
Among the CEEMEA refiners our Buys are MOL (CEEMEA Focus List), Motor Oil and Tupras. On our estimates, MOL trades on yields of c.16% (FCF) and c.6% (DY) in 2018-20E on average. We forecast a 2018-20E EBITDA CAGR of 7% and see scope for a special dividend this year. We expect Tupras and Motor Oil to be the main beneficiaries of expansion in light/heavy crude spreads given the high share of heavier Middle Eastern crude in their feedstock mix. We expect Tupras and Motor Oil to generate a c.17% FCF yield in 2018-20E on average; we forecast a 17% average 2018-20E dividend yield for Tupras and 8% for Motor Oil (c.9% total yield if buyback added).
Given the weighting towards refiners in our CEEMEA Energy ex-Russia coverage group, we move our coverage view to Attractive (from Neutral).
3 September 2018 Goldman Sachs CEEMEA Refining Macro snapshot: Oil demand growth & IMO 2020 to push utilization rates higher
Oil demand growth remained robust throughout 2017; moderation in gasoline demand was more than offset by strong demand growth for diesel as the global economy and industrial production continued to improve. Our Commodities team forecasts 2018 global oil demand growth of c.1.9 mb/d based on our Economists’ 4.1% real global GDP forecast. We expect the strong oil demand growth to continue, which should result in increasing utilization rates through 2020.
Exhibit 13: We expect global oil demand growth to remain robust... Exhibit 14: ...leading to increasing utilization rates into 2020E Incremental refining demand and supply, mbpd Global refining utilization rates, %
2.0 Base case (partial compliance) No IMO 1.8 85.0% 1.6 84.0% 1.4 83.0%
1.2 d
p 82.0%
b 1.0 m 0.8 81.0%
0.6 80.0% 0.4 79.0% 0.2 78.0% 0.0 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 77.0%
Refining demand Supply from new refinery
Source: IEA, Goldman Sachs Global Investment Research Source: BP, Goldman Sachs Global Investment Research
Upcoming IMO 2020 regulation will also boost utilization rates in our view. In 2008, the International Maritime Organization (IMO) (a United Nations body responsible for the safety and security of shipping and the prevention of marine and atmospheric pollution by ships) decided to lower the sulphur limit for marine fuels from 3.5% to 0.5% effective January 1, 2020, which it later confirmed in October 2016. Expectations regarding degree of compliance with the regulation remain a key discussion point
For the exclusive use of [email protected] among investors, as the IMO does not enforce the sulphur cap regulation, nor does it set any fines for non-compliance; signatories to IMO (flag/port/coastal states) are responsible for compliance with the regulation. While we do not take a view on the enforcement mechanisms of IMO 2020, for the purpose of our analysis we assume partial compliance with the new regulation (c.1 mbpd of marine fuel oil demand will be non-compliant).
The shipping industry has several options for compliance with the regulations: (1) switch from HSFO to marine diesel, (2) install scrubbers (devices that strip out sulphur as HSFO is burned and reduce emissions), and (3) switch to LNG. The economics of forward product prices favour installing scrubbers (and continuing to burn HSFO), and as such we expect scrubber penetration to rise from 1% of ships currently to 4% by 2020 and 18% by 2025. However, in the near term we expect diesel to replace HSFO given insufficient scrubber capacity.
3 September 2018 Goldman Sachs CEEMEA Refining
Exhibit 15: Assuming partial compliance, we expect diesel to replace HSFO in the near term while share of scrubbers will gradually rise Marine fuel mix, 201-30E, mbpd
Source: IEA, Goldman Sachs Global Investment Research
This implies that the refining industry may need to convert 2.1 mbpd of HSFO (our estimate) into compliant low sulphur products in 2020. We estimate that global refinery runs need to increase by 1% and that a similar increase in diesel yields is required to meet the increase in demand from the marine fuel industry.
While we expect more secondary refining capacity to come online before the IMO 2020 launch in order to convert HSFO into light products, predominantly diesel, we believe these refining capacity upgrades will not be sufficient to reduce HSFO output to the extent of our estimated demand decline. Hence, product and crude prices will need to move in such a way that refineries are incentivized to take the additional steps required to eliminate surplus HSFO. For the exclusive use of [email protected] Exhibit 16: Higher diesel production will require (1) switching Exhibit 17: Given the scale of demand shift for HSFO we estimate it against gasoline, (2) higher coker runs, and (3) higher refining will have to compete with coal in the power sector to clear the utilization rates market Diesel SD bridge, mbpd HSFO destruction 2020, mbpd
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
3 September 2018 7 Goldman Sachs CEEMEA Refining What does it mean for product cracks?
1. Margins for light products (e.g. diesel) will rise: As refiners solve for the compliant product mix in 2020 we see three key drivers which will push margins for light oil products higher:
o Diesel versus HSFO differential (light-dark spread) will expand to further incentivize destruction of HSFO. For the European market we expect light-dark spreads to widen by US$18/bbl (NWE) and US$13/bbl (MED) from 2018 to 2020.
o Diesel to buy demand from gasoline pool: A sharp demand increase for diesel may require refiners to increase the diesel yield over gasoline. Similar to 2007, this will require diesel margins to be higher than gasoline margins. On our estimates, the diesel premium to gasoline in the European market will rise to >US$6/bbl (both NWE and MED) in 2020E and can potentially expand further.
o All product cracks ex HSFO need to rise to sustain refining runs: Given the need for global refining runs to rise in our base case, margins for all low sulphur products would need to rise to compensate for the sharp decline in HSFO prices to ensure continuing operation of simple refiners. 2. HSFO cracks are likely to fall sharply: We believe refiners will not be able to fully eliminate the excess HSFO in the refining system. Thus, HSFO may still need to be utilized in the power/industrial sector. We believe this will decide the floor for HSFO prices, driven by parity with coal prices. We expect European HSFO cracks to fall by c.US$25/bbl (both NWE and MED) from 2018 to 2020.
Exhibit 18: We expect the light-dark spread to widen from 2018 to 2020 and HSFO cracks to fall sharply NWE and MED refining cracks, US$/bbl
2013-2014: beginning of bull cycle 2016: oil demand growth 2017-18: oil 2020: IMO 2021-2022: FO cracks to in refining margins driven by lower accelerates, supporting demand growth regulation recover as more feedstock prices margins remains robust introduction scrubbers are installed For the exclusive use of [email protected]
Product crack spreads, US$/bbl 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E NWE Gasoline 8.5 11.7 17.3 14.6 13.7 11.4 12.3 14.3 13.0 12.7 Naphtha -8.2 -5.3 -0.2 0.0 0.2 -3.0 -1.0 0.0 0.0 0.0 Jet kerosene 16.1 15.9 14.7 10.6 12.6 14.8 14.5 17.6 16.8 15.6 Diesel 17.5 17.0 16.4 10.9 12.9 16.3 17.1 20.6 19.7 18.4 Fuel oil -16.3 -14.3 -11.9 -10.2 -7.1 -14.1 -17.8 -38.9 -28.3 -23.1 MED Gasoline 7.8 8.8 14.0 12.2 11.4 9.3 10.2 12.1 10.8 10.5 Naphtha -10.2 -7.7 -3.6 -2.4 -1.7 -4.5 -2.0 0.0 0.0 0.0 Jet kerosene 14.0 13.3 11.1 8.0 10.7 12.4 12.1 14.9 14.2 13.1 Diesel 16.4 15.3 14.0 9.3 11.8 14.7 15.4 18.5 17.8 16.6 Fuel oil -15.1 -12.3 -11.0 -9.9 -6.3 -10.2 -12.7 -26.8 -19.7 -16.2
Source: Goldman Sachs Global Investment Research, Datastream
3 September 2018 8 Goldman Sachs CEEMEA Refining What does it mean for light-heavy crude spreads?
The global crude slate has been getting lighter owing to increases in light sweet production from the US. However changes have been modest at best and clearly not enough to reduce the sulphur content of HSFO on a global basis. On an absolute basis, we find that heavy crude supply is still growing while demand for HSFO has been coming down.
Heavy crudes generally have a high concentration of sulphur and yield a higher proportion of HSFO when refined. As such heavy oils trade at a discount to light oil. As the industry bids against sulphur, we expect the heavy oils’ discount vs. light oil to widen. Further, we have seen high correlation between light-dark spreads and light-heavy differentials. We expect the light-dark differential to widen as the marine industry switches from high sulphur fuel to cleaner fuels. This dynamic will consequently drive a wider light-heavy differential, in our view.
Among crudes that CEEMEA refiners are using as a feedstock we highlight Iraqi and Arabian heavy crudes for which we expect heavy-light spreads to widen the most. Motor Oil and Tupras have the highest proportion of heavy crudes in their feedstock mix, hence they will benefit most from expansion of light-heavy spreads.
Exhibit 19: Heavy crudes have historically traded at a discount to Exhibit 20: As the industry is bidding against sulphur we expect light oil heavy-light spreads to widen Historical 3Y average spread of various crude types vs. Brent, US$/bbl Light-heavy crude spread dynamics, US$/bbl
Urals 10.0 (Russia) Arab light Iran light Kirkuk Basrah light Iran heavy Arab heavy
l 9.0
0.0 b b
/ , 8.0 t $ n S
e -1.0 U r 7.0
, B
s s d 6.0 v a
-2.0 e
d -1.8 r
a 5.0 p e s
r
l -3.0 p y b 4.0 s v b
/ a g $ e
v 3.0 S -4.0 h a -
t U -3.8 -3.9 Y h 2.0 3 g -4.3 -4.3 i l -5.0 L a
c 1.0 i r o
t -6.0 0.0
For the exclusive use of [email protected] -5.6 s i 2015 2016 2017 2018E 2019E 2020E 2021E 2022E H
H -7.0 -7.0 Iran light-heavy spread Basrah light-heavy spread -8.0 Arab light-heavy spread Brent-Urals spread
Source: Datastream, Goldman Sachs Global Investment Research Source: Datastream, Goldman Sachs Global Investment Research
3 September 2018 Goldman Sachs CEEMEA Refining High complexity refiners able to process heavier crudes with low fuel oil yield and higher diesel output are best positioned
Key beneficiaries of emerging industry trends will be refiners, which have:
1. High complexity allowing them to process heavier crudes and, hence, gain feedstock advantage from widening heavy crude spreads; 2. Low fuel oil yield and high diesel yield, which makes refiners best-positioned for the expected changes in light-dark spreads.
CEEMEA refiners have high average complexity: the least complex refiner – PKN – has a weighted average Nelson complexity index of 9.5, which is relatively high in a global context. Hence, we believe that all CEEMEA refiners could potentially benefit from cheaper heavier crudes.
Exhibit 21: CEEMEA refiners have high complexity allowing them to process heavier crudes CEEMEA refiners NCI
16.0
14.0 11.5 11.4 12.0 10.1 9.9 10.0 9.5
I
C 8.0 N
6.0
4.0
2.0
0.0 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) y y c c y y y y e a d a d d a i i i i i r r l l e c e t t e e n n n n a a b b k k k k e a a a a a r l l r r l a r g g u u o o e u u u n n o u u r n r r n p p i i h T T T u T u P e e C C G F F t ( ( ( ( ( i ( ( ( ( (
H H
R
R
L For the exclusive use of [email protected]
(
(
t r
i (
o i n i k e k l a
h h h l
t o c a k a a c c a a m a m t v u n o s e i v n l e z i e k r z i m j n I r I t i k z z a k u o P i i l a S o a r R C C e s i P D a i ( ( C B t z
K N a a y v r p o M B u n l i v a t r i K L Motor Oil Neste MOL Tupras PKN
Source: Company data, Goldman Sachs Global Investment Research
However, we note that Mediterranean refiners (Tupras and Motor Oil) will benefit most within our CEEMEA refiners coverage as they have easier access to ME crude (Iraq, Iran and Saudi) and already have a greater portion of heavier crudes in their feedstock mix. Refineries in North Western Europe process mainly Russian oil, which is less heavy than crude from the Middle Eastern.
3 September 2018 10 Goldman Sachs CEEMEA Refining
Exhibit 22: Mediterranean refiners have higher incremental feedstock advantage, US$/bbl over Brent, from 2017 to 2020E as they have easier access to Middle Eastern crude GS calculated CEEMEA refiners feedstock advantage 2013-20E dynamics, US$/bbl Feedstock benefit, 2013 2014 2015 2016 2017 2018E 2019E 2020E US$/bbl 2.9 3.9 4.7 5.1 3.7 4.4 5.0 6.3 2.6 3.5 4.1 4.5 3.5 4.0 4.8 5.8 Motor Oil 1.0 1.6 1.7 2.3 1.3 1.3 1.9 2.3 Tupras 0.9 1.5 1.7 2.2 1.3 1.4 1.8 2.3 MOL 1.2 1.7 1.8 1.7 1.1 1.2 1.5 1.7 PKN Source: Goldman Sachs Global Investment Research Neste On the product slate side, three of the five CEEMEA refiners had fuel oil yield below 10% in 2017: Tupras, Neste and MOL. The same three have the highest diesel (incl. jet fuel) yields of >50%. This makes them the best-positioned to benefit from the expected changes in light-dark spreads.
It is worth highlighting Motor Oil here, which screens as a laggard in terms of fuel oil and diesel yield among peers, despite having the highest NCI. This is because Motor Oil has a number of secondary processing units, which allow the company to process middle distillates into premium products (e.g., lubes) and effectively increase the NCI, but it does not use fuel oil as a feedstock (so effectively the fuel oil yield remains unchanged). However, we expect Motor Oil to decrease its fuel oil yield (and respectively increase the diesel yield) before IMO 2020 implementation from 23% in 2017 to c.16% in 2020E.
Exhibit 23: Tupras, MOL and Neste are the best-positioned in the Exhibit 24: ...and highest diesel yield context of low fuel oil yield... CEEMEA refiners diesel yields in 2017 and 2020E, % CEEMEA refiners fuel oil yields in 2017 and 2020E, %
NEGATIVE Exposure to IMO regulation POSITIVE NEGATIVE Exposure to IMO regulation POSITIVE 60%
25% %
,
d 50% l
% 20%
e , i y d
l l 40% e e i
15% u y f
l t i 30% e o j
23% 53% 53% 53% 54% 54% l 51% 51% 50% For the exclusive use of [email protected] 10% + e 47%
l
u 20%
16% e 39% F s
12% 12% e 5% i
8% 8% 8% D 10% 5% 4% 4% 0% 0% Motor Oil PKN Tupras Neste MOL Motor Oil PKN Tupras Neste MOL 2017 2020E 2017 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
We expect Tupras, MOL and Neste to benefit most from changes in light-dark spreads from now to 2020E. We also note that Motor Oil, despite having the highest fuel oil yield among CEEMEA peers, will increase its refining margin (ex-feedstock benefit) owing to a material decrease in fuel oil yield (and respective increase in diesel yield) from 2017 to 2020E.
3 September 2018 11 Goldman Sachs CEEMEA Refining
Exhibit 25: We expect Tupras, MOL and Neste to have the highest incremental refining margin (ex-feedstock benefit) from 2017 to 2020E GS calculated CEEMEA refiners Brent-based margins dynamics, US$/bbl Refining margin (ex-feedstock 2013 2014 2015 2016 2017 2018E 2019E 2020E benefit), US$/bbl 0.6 2.8 7.8 5.1 5.6 4.6 6.2 8.4 2.2 3.2 6.4 3.7 4.5 4.3 5.1 6.8 MOL 2.8 3.3 6.9 3.7 4.9 4.9 4.3 5.6 Neste 0.6 1.6 4.4 2.2 3.3 2.4 2.9 3.8 Tupras 0.7 2.3 7.9 5.3 5.6 3.9 4.4 4.2 Motor Oil Source: Goldman Sachs Global Investment Research PKN Overall, we expect to see an increase in refining margins for all CEEMEA refiners except PKN; it has one of the highest fuel oil yields, which we do not expect to decline by 2020E, and processes Russian oil mainly (i.e., it will not have a feedstock advantage from expansion of light-heavy crude differentials similar to Med refineries that process Middle Eastern oils). Among other refiners we highlight MOL, which should have the highest refining margins increase, in our view, owing to its high quality product basket.
Exhibit 26: We expect to see the refining margins increase for all CEEMEA refiners, except PKN GS calculated CEEMEA refiners refining margin dynamics, US$/bbl Refining margins, 2013 2014 2015 2016 2017 2018E 2019E 2020E US$/bbl 1.6 4.4 9.6 7.4 6.9 6.0 8.0 10.8 5.4 6.7 11.0 8.2 8.3 8.8 9.0 11.4 MOL 3.5 5.5 9.0 7.2 7.0 6.8 7.9 10.1 Tupras 3.3 4.9 8.1 5.4 5.7 5.5 6.5 8.5 Motor Oil 1.5 3.8 9.6 7.5 6.9 5.3 6.2 6.4 Neste Source: Goldman Sachs Global Investment Research PKN For the exclusive use of [email protected]
3 September 2018 12 Goldman Sachs CEEMEA Refining What about petrochemical exposure?
Over the last several years we have seen a decent pick-up in non-refinery oil demand, i.e., from the petrochemical industry. We expect the petrochemicals sector to be one of the largest drivers of global demand growth through 2030. Areas set to experience population and GDP growth, and access to low cost feedstock such as NGLs should be the main drivers of demand growth as a result of increased demand for chemicals products such as plastics, electronics, and clothing, among others.
Exhibit 27: Non-refining oil demand has been growing over the last Exhibit 28: ...and we expect the petrochemical sector to be one of several years... the key drivers of overall oil demand growth going forward Refinery and non-refinery demand growth, mbpd -year growth in oil demand by sector, mbpd
Refinery Non-refinery
2.5
2.0
1.5
1.0
0.5
0.0 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
Source: IEA, Goldman Sachs Global Investment Research Source: IEA, Goldman Sachs Global Investment Research
We are constructive on the overall outlook for key petrochemical products: we expect global capacity growth to remain below historical levels for key products, while demand growth is robust. This supports our positive outlook for operating rates for most key basic chemical products.
Exhibit 29: We expect global capacity growth to remain below Exhibit 30: Positive operating rate outlook for most key basic historical levels for key products chemical products Global capacity CAGR (2007-1, 201-20E) Demand vs. supply CAGR (201-20E); Operating rates (201, 2020E) For the exclusive use of [email protected]
Source: IHS, Datastream, Goldman Sachs Global Investment Research Source: IHS, Datastream, Goldman Sachs Global Investment Research
CEEMEA refiners are exposed to the petrochemical industry via production of mainly ethylene, propylene and their derivatives. In our view, ethylene and propylene S/D will remain largely balanced in the mid term, owing to strong demand growth and limited new capacity additions. This should translate into robust operating rates for ethylene and
3 September 2018 13 Goldman Sachs CEEMEA Refining
propylene, and relatively stable spreads vs. naphtha (which is used as a feedstock by CEEMEA refiners).
Exhibit 31: We expect operating rates to remain robust in the mid Exhibit 32: ...and for propylene term both for ethylene... Propylene supply and demand, operating rates (%) Ethylene supply and demand, operating rates (%)
Source: IHS, Datastream, Goldman Sachs Global Investment Research Source: IHS , Datastream, Goldman Sachs Global Investment Research
Exhibit 33: Balanced S/D of ethylene and propylene should translate into relatively stable key petrochemical products spreads Petrochemical products spreads vs naphtha, US$/ton
Ethylene - naphtha Propylene - naphtha HDPE - naphtha PP - naphtha 800
700
600
t /
$ 500 S U
, d
a 400 e r p S 300
200 For the exclusive use of [email protected] 100
0 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Source: Datastream, Goldman Sachs Global Investment Research
Among CEEMEA refiners only MOL and PKN have exposure to the petrochemical business. We estimate the petrochemical business will account for 27% of PKN group EBITDA and 17% of MOL group EBITDA on average (2017-20E). However, we note that MOL is planning to increase its footprint in the petrochemical segment by investing in the polyol project. On our estimates this should bring the share of petrochemicals in MOL’s EBITDA to 21% in 2022E and to 25% by the time of full project ramp-up.
3 September 2018 14 Goldman Sachs CEEMEA Refining
Exhibit 34: MOL and PKN have exposure to the petrochemical business; MOL’s exposure is set to increase further by 2022E CEEMEA refiners petrochemical business EBITDA as % of group, 2017-20E average
30% 27% Polyol project impact 25%
21% %
, l 20% a t o t
17% n i
A
D 15% T I B E
m e h
c 10% t e P
f o
e r a 5% h S
0% 0% 0% 0% Motor Oil Tupras Neste MOL MOL (2022E) PKN
Source: Goldman Sachs Global Investment Research For the exclusive use of [email protected]
3 September 2018 1 Goldman Sachs CEEMEA Refining Attractive on FCF and DY vs. global peers; Tupras, MOL and Motor Oil stand out
CEEMEA refiners screen attractively vs. global peers on key valuation metrics. On our estimates, they provide the highest average 2018-20E FCF yield of c.10% and the highest average 2018-20E dividend yield of c.5%.
Exhibit 35: CEEMEA refiners have the highest FCF yield among Exhibit 36: ...and the highest dividend yield global peers... 2018-20E average dividend yield, % 2018-20E average FCF yield, %
12.0% 6.0% 5.2% 9.9% 10.0% 5.0%
% %
, , d d l l
e 8.0% 4.0% e i i y y 6.9%
F v i C d F
6.0% g 3.0% 2.7% g v
v 2.5%
4.9% a a
E E 0 0 2 2 -
- 4.0% 2.0% 8 8 1 1 0 0 2 2 2.0% 1.0%
0.0% 0.0% CEEMEA refiners US refiners Asian refiners CEEMEA refiners Asian refiners US refiners
Source: Goldman Sachs Global Investment Research, FactSet Source: Goldman Sachs Global Investment Research, FactSet
At the company level MOL, Motor Oil and Tupras stand out as having the highest FCF and dividend yields in the CEEMEA refiners universe and all three trade at a discount vs. history; Neste is a laggard in terms of FCF and dividend yields.
Exhibit 37: MOL, Tupras and Motor Oil stand out for highest FCF Exhibit 38: ...and the highest dividend yield in the CEEMEA refiners yield... universe 2018-20E average FCF yield, % 2018-20E average dividend yield, %
2018-2020E average FCF yield, % Mid-cycle historical average 2018-2020E average dividend yield Mid-cycle historical average
20.0% 18.0% 16.6%
For the exclusive use of [email protected] 17.4% 18.0% 16.6% 16.3% 16.0% 16.0% 14.0% 14.0% %
12.0% , % d
l
, 12.0% e i d
l 10.0% y
e 8.4% i
10.0% d
y 8.6%
n 8.0% F e d C 8.0% i F v 5.5% i 6.0%
5.2% D 6.0% 3.9% 4.0% 4.0% 3.0% 2.0% 2.0% 0.0% 0.0% TUPRAS MOTOR OIL MOL PKN NESTE TUPRAS MOTOR OIL MOL PKN NESTE
Source: Goldman Sachs Global Investment Research, FactSet Source: Goldman Sachs Global Investment Research, FactSet
On an EV/EBITDA and P/E basis CEEMEA refiners as a group trade at a discount vs. Asian and US peers. At the company level, MOL, Tupras and Motor Oil are the cheapest.
3 September 2018 1 Goldman Sachs CEEMEA Refining
Exhibit 39: CEEMEA refiners trade at a discount vs. Asian and US Exhibit 40: ...and P/E peers on EV/EBITDA... 201E P/E, x 201E EV/EBITDA, x
12.0x 18.0x 16.9x 10.7x 16.0x 16.0x 10.0x 14.0x 13.4x
8.3x x
, 11.4x
A 8.0x 7.4x 12.0x 7.2x D x
, T I E
B 10.0x P
E 8.3x / 6.0x E V 4.9x 4.8x 9 E 8.0x 1
0 6.4x E 2 9 5.5x 1 4.0x 3.6x 3.4x 6.0x 5.3x 0 2 4.0x 2.0x 2.0x
0.0x 0.0x NESTE Asian US CEEMEA PKN TUPRAS MOTOR MOL NESTE US Asian CEEMEA PKN MOTOR MOL TUPRAS refineries refineries refineries OIL refineries refineries refineries OIL
Source: Goldman Sachs Global Investment Research, FactSet Source: Goldman Sachs Global Investment Research, FactSet
Regarding leverage, CEEMEA refiners have a much lower debt burden compared to Asian and US peers. At the company level Tupras has the highest 2018E net debt/EBITDA ratio of 1.0x (which is still relatively comfortable), while the others have 2018E net debt/EBITDA of below 0.5x (Neste has a net cash position).
Exhibit 41: CEEMEA refiners have low leverage Exhibit 42: Tupras has the highest leverage, which is nevertheless 2018E net debt/EBITDA, x relatively comfortable 2018E net debt/EBITDA, x
2.0x 1.2x 1.8x 1.0x 1.0x
x x
, 1.5x ,
A A 0.8x D D
T 1.2x T I I B B
E E 0.6x / / t t b b
e 1.0x e d d
t t 0.4x e e 0.3x
N N 0.3x
E E 0.2x 8 8
1 1 0.2x 0 0.5x 0 2 2 0.3x 0.0x -0.1x For the exclusive use of [email protected] 0.0x -0.2x Asian refiners US refiners CEEMEA refiners TUPRAS PKN MOL MOTOR OIL NESTE
Source: Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
3 September 2018 17 Goldman Sachs CEEMEA Refining MOL: Strong FCF generation to provide financial capacity to increase dividends; Buy (CEEMEA Focus List)
Investment thesis n Industry leading FCF yield: 2018-20E FCF yield of 16% vs. CEEMEA refiners average of 10%.
n Well positioned to benefit from IMO 2020: MOL has a 54% diesel yield and 4% HSFO yield; we forecast MOL’s refining margin to expand by 55% from 2017 to 2020.
n 2018-20E EBITDA CAGR of 7%, driven by its high quality product mix in the refining segment (high diesel output, low HSFO).
n We think MOL’s strong cash flow generation profile provides enough financial capacity for the company to deliver a 10% 2017-20E DPS CAGR (incl. special).
Business overview MOL is an integrated oil & gas company, with assets largely concentrated in Hungary/Croatia (Croatian unit is operated by MOL’s subsidiary, INA, of which MOL owns 49%, but consolidates as it effectively exercises control). Upstream, refining and petrochemicals businesses make up c.70% of the company’s 2018 EBITDA, on our estimates. MOL also operates c.1,700 filling stations under eight brands in 11 CEE countries.
MOL’s upstream business predominantly consists of the production assets in Hungary (38% of total 2018E hydrocarbons production) and Croatia (32%). The company also has producing assets in Kurdistan, several fields in the North Sea, and has a small E&P presence in Russia, Kazakhstan, Pakistan, Egypt, Cameroon and Angola. As of end 2017 MOL had c.356 mn boe of 2P reserves (c.10 years reserve life), of which c.51% was crude oil reserves. In 2017 the company produced (incl. JVs) c.107 kbpd of hydrocarbons For the exclusive use of [email protected] and we forecast that production in 2018/19E will increase to 110 kbpd (in line with company guidance), on the back of the ramp-up of the Catcher field in the North Sea. From 2019 we expect to see some levelling off of production.
3 September 2018 18 Goldman Sachs CEEMEA Refining
Exhibit 43: MOL operates a diversified business in various regions Map of MOL operations
Source: Company data
Exhibit 44: As of end 2017 MOL had c.356 mn boe of 2P reserves Exhibit 45: We expect MOL’s production to hit 110 kbpd in 2018/19E MOL 2P reserves structure, 2017 and to decline after 2019 MOL production profile, kboepd
Gas condensate, 120.0 112.3 109.9 107.2 108.9 105.9 8% 102.1 8.1 8.6 98.6 8.6 8.6 8.4 100.0 7.5 7.0 8.3 7.1 6.7 6.3 8.1 6.0
d 5.7 p
e 80.0 o b k
55.6 53.2 , 53.9 52.2 50.9 For the exclusive use of [email protected] As of end Crude oil, 51% n 60.0 48.7 46.6 o 2017 MOL i t
had 355.7 mn c u
boe of 2P d
o 40.0
reserves r P Natural gas, 41% 20.0 40.9 37.6 41.1 41.4 40.3 39.2 38.2
0.0 2016 2017 2018E 2019E 2020E 2021E 2022E
Crude oil Natural gas Gas condensate JVs
Source: Company data Source: Company data, Goldman Sachs Global Investment Research
MOL’s downstream business consists of two complex refineries (Duna in Hungary, with NCI of 10.6, and Bratislava in Slovakia, with NCI of 11.5). Its Croatian subsidiary, INA, also has two refineries in Croatia – Rijeka and Sisak – which have c.7 mnt combined capacity. MOL has one of the best quality product baskets with only c.4% fuel oil yield in 2017. We expect the fuel oil yield to remain at least the same into 2020E and potentially be lower if MOL makes an FID for construction of a coker at Rijeka refinery in Croatia. We expect to see the highest increase in margins for MOL from 2017 to 2020E
3 September 2018 1 Goldman Sachs CEEMEA Refining
among CEEMEA peers of c.55% (including feedstock advantage) on the back of expansion in light-dark spreads.
Exhibit 46: MOL has the best quality product basket among Exhibit 47: ...which should translate into the highest refining CEEMEA refiners with just c.4% fuel oil yield... margin increase of c.55% MOL products basket, 2017 MOL refining margin (US$/bbl) and refining EBITDA (HUF bn) 2017-20E dynamics
12.0 350
Gasoline, 19%
Other (incl. loss), l 300 10.0 n b 2.3 b 23% b / F $
250 U S
8.0 H U
, , A
n 1.9
i 200 D g
1.3 T r
6.0 I a 1.3 B
m 150 E
Fuel oil, 4% g 8.4 g n
4.0 n i i n
100 n i i
f 6.2 5.6 f e 4.6 e R 2.0 50 R
0.0 0 Diesel (incl. jet), 2017 2018E 2019E 2020E 54% Brent-based refining margin Feedstock advantage Refining EBITDA
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
MOL continues to advance in the petrochemical value chain. It currently has c.2.3 mnt of petrochemical production capacity in Slovakia and Hungary with key products being olefins and polymers. It aims to increase its exposure to petrochemicals (2018E share in EBITDA is c.15%). The cornerstone for these plans is the polyol project, which MOL plans to launch in 2021. Polyol is the derivative product of propylene and is used in the furniture & interiors, construction and automotive industries. On company estimates, the current size of the European polyol market is c.260 kt pa and it is currently undersupplied by c.80 kt with the amount of deficit set to increase to c.150 kt by 2025. The estimated investment into this project is c.US$1 bn and MOL expects it to bring incremental EBITDA of US$140 mn by 2022 and c.US$170-200 mn after full ramp-up. MOL expects an IRR for this project of c.15%.
Exhibit 48: Polyol project would be the key driver of MOL’s Exhibit 49: MOL is aiming to take advantage of the undersupplied
For the exclusive use of [email protected] expansion into petrochemicals by 2022 European polyol market Key parameters of Polyol project Polyol S/D balance in Europe, kt
Key parameters of Polyol project CAPEX, US$ bn 1.0 +c.3% CAGR Incremental EBITDA uplift by 2022, US$ mn 140 Incremental EBITDA uplift after full ramp-up, US$ mn 170-180 c.150 kt Expected IRR c.15% c.80 kt deficit FID 2018E deficit
Current 2025E
Supply Demand
Source: Company data Source: Company data, Goldman Sachs Global Investment Research
Owing to the integrated structure of MOL’s business, the company is less sensitive to rapid changes in oil prices/refining margins vs. peers. In 2017 the share of downstream
3 September 2018 20 Goldman Sachs CEEMEA Refining
in group EBITDA was 63% on our estimates. We expect this share to increase to c.69% by 2020E given a favourable margin outlook for MOL. Overall we expect to see group EBITDA growth of c.20% from 2017 to 2020E.
Exhibit 50: We expect c.20% EBITDA growth from 2017 to 2020E driven mainly by the downstream segment MOL 2013-20E group EBITDA decomposition, HUF bn
900 806 778 800 710 692 700 673 605
600 n
b 516
510 F
U 500 H
, A
D 400 T I B E 300
200
100
0 2013 2014 2015 2016 2017 2018E 2019E 2020E
E&P Refining Petrochemicals Retail Other
Source: Company data, Goldman Sachs Global Investment Research
On the capex side, given the company’s large petrochemical expansion plans, we expect a material uplift in MOL’s investments: we estimate that capex will increase by c.34% from 2017 to 2020E. Despite this significant increase we still see room for decent FCF generation which should drive dividend growth. We see MOL generating an average 2018-20E FCF yield of 16%, which one of the highest yields among CEEMEA refiners.
Exhibit 51: We expect a 34% capex increase from 2017 to 2020E led Exhibit 52: Despite a significant capex increase we see MOL by the downstream segment generating a 16% average 2018-20E FCF yield MOL 2017-20E capex decomposition, HUF bn MOL FCF (HUF bn) and FCF yield (%) in 2017-20E For the exclusive use of [email protected]
450 141 400 20.0% 17.4% 17.4% 400 350 18.0% 35 15 14.2% 16.0% 350 10 300
52
14.0% n 11.9% n % b 300 b , 250 12.0% d F F
25 l U U 250 e i H 200 10.0% H
y
,
, 368 369
X 87 F 200 F E 8.0%
150 C
C 301 P 274 F F A 150 309 6.0% C 100 4.0% 100 169 50 2.0% 50 0 0.0% 0 2017 2018E 2019E 2020E 2017 capex Upstream Downstream Other 2020E capex FCF FCF yield Downstream Upstream Other
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research, FactSet
MOL does not have a fomalized dividend policy in terms of payout level, but management stated that it targets a sustainable annual increase in dividends. Last year MOL surprisingly announced a special dividend of HUF42.5 per share (c.1.5% of share
3 September 2018 21 Goldman Sachs CEEMEA Refining
price on pre-announcement day close), which combined with the regular dividend implied c.67% yoy growth in cash return to shareholders. We believe that MOL has scope to pay a special dividend for 2018 as well given strong CF generation, which is enough to cover (1) the capex programme; (2) dividends (including special); and (3) deleveraging. We expect MOL to increase the total dividend by 10% pa on average (2017-20E), which should result in an average 2018-20E yield of c.6%. On the leverage side, MOL already has a relatively comfortable level of debt: as of end 2017 net/EBITDA was 0.7x; and given strong FCF generation, we expect MOL to delever further even with a special dividend remaining in place, reaching a net cash position by end-2019E.
Exhibit 53: We expect MOL to keep paying a special dividend and Exhibit 54: FCF would be enough to cover dividends and providing c.6% average DY (2018-20E) deleveraging MOL DPS and special dividend per share (HUF) and total dividend yield MOL net debt (HUF bn) and net debt/EBITDA (x) (%) in 201-20E
180 7.0% 1,000 1.6x 6.1% 160 1.4x 5.5% 6.0% 800
140 5.0% 57 1.2x % 4.6%
5.0% 51 x ,
1.0x
n 600 ,
120 d l b F 47 A 3.7% e U i F 43 4.0% 0.8x D
100 y H T U
I
, 400 H d B 0.6x S , n t 80 E
3.0% / P e b t d
D 0.4x e b i 200 d 60 e v 113 i t 2.0% d 103 0.2x e D 85 94 t e 40 78 N
0 0.0x N 20 1.0% -0.2x 0 0.0% -200 -0.4x 2016 2017 2018E 2019E 2020E -400 -0.6x DPS Special dividend Dividend yield Net debt Net debt/EBITDA
Source: Company data, Goldman Sachs Global Investment Research, FactSet Source: Company data, Goldman Sachs Global Investment Research
Valuation The stock currently trades on 3.8x 12m fwd EV/EBITDA and a 5% 12m fwd dividend yield vs. mid-cycle historical average levels of 4.5x and 4%, respectively, which implies c.15% and c.25% discounts. The stock trades on a 17% 12m fwd FCF yield, vs. a 5Y historical average level of 11%. We believe the market under-estimates the potential of For the exclusive use of [email protected] MOL’s strong FCF generation and capacity to increase dividends (including special) and keep deleveraging despite the beginning of a new investment cycle in the petrochemical business. We initiate coverage of MOL with a Buy rating and add the stock to our CEEMEA Focus List.
3 September 2018 22 Goldman Sachs CEEMEA Refining
Exhibit 55: MOL trades at a discount to its historical average Exhibit 56: ...and on dividend yield valuation on EV/EBITDA... MOL 12m fwd dividend yield, % MOL 12m fwd EV/EBITDA, x
7.0x 6.0%
6.0x 5.0% 5.0%
A 5.0x
D Historical average of 4.5x
T 4.0% d I l B e i
E 4.0x
y Historical average of c.4% /
3.8x V d E n 3.0% e d d
3.0x i w f v
i d m
2 d 2.0% 1 2.0x w f
m 2 1.0x 1 1.0%
0.0x Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 0.0% Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
Source: Company data, Goldman Sachs Global Investment Research, FactSet Source: Company data, Goldman Sachs Global Investment Research, FactSet
We value the stock using a 50/50 blend of 4.5x 2019E EV/DACF and a 4% target 2019E dividend yield (both target EV/DACF and dividend yield are based on MOL’s 5y mid-cycle historical average). Our 12 month target price is HUF3940 which implies 36% upside potential, compared with 25% for our CEEMEA Energy (ex-Russia) coverage on average.
Risks Key downside risks to our estimates and price target include:
n Lower production. Potential acceleration of MOL’s production decline rates might result in an upstream EBITDA decline and weaker FCF generation, which represents a risk for dividend growth.
n Weaker refining margins. Lower-than-expected expansion of light-dark products spreads might result in a lower increase in MOL’s refining EBITDA and, hence, weaker FCF generation.
n Lower-than-expected EBITDA contribution from petrochemical business
For the exclusive use of [email protected] expansion, which might translate into overall pressure on FCF (given the significant amount of capex planned to be spent).
n Lower dividends, a key downside risk, might materialize owing to weaker-than-expected FCF generation.
3 September 2018 23 Goldman Sachs CEEMEA Refining
Key financials
Exhibit 57: MOL summary financials
1.0 0.8 0.8 0.8 196,193.0 288,839.3 283,556.6 262,453.1 4.6 4.0 3.4 3.0 538,985.8 538,985.8 538,985.8 538,985.8 Ratios and Valuation 12/17 12/18E 12/19E 12/20E Balance sheet (HUF mn) 12/17 12/18E 12/19E 12/20E EV/sales (X) 4.6 4.0 3.4 3.0 Cash & cash equivalents 436,572.4 436,572.4 436,572.4 436,572.4 EV/EBITDAR (X) 8.2 7.4 5.8 5.0 Accounts receivable 168,369.3 168,369.3 168,369.3 168,369.3 EV/EBITDA (X) 6.3 6.7 5.4 4.9 Inventory 1,340,120.6 1,432,766.8 1,427,484.2 1,406,380.6 EV/EBIT (X) 4.5% 4.9% 5.4% 5.9% Other current assets 2,261,165.5 2,216,369.5 2,311,092.6 2,365,698.8 P/E (X) 9.4% 9.0% 9.3% 9.2% Total current assets 181,450.6 181,450.6 181,450.6 181,450.6 Dividend yield (%) 13.1% 13.2% 15.5% 15.9% Net PP&E 206,373.8 224,317.3 242,260.9 260,204.4 CROCI (%) 8.7% 8.4% 9.8% 10.1% Net intangibles 242,588.2 242,588.2 242,588.2 242,588.2 ROIC (%) 49.9 46.9 47.8 51.7 Total investments 4,231,698.6 4,297,492.4 4,404,876.4 4,456,322.7 ROA (%) 1.3 1.5 1.5 1.3 Other long-term assets 958,071.7 958,071.7 958,071.7 958,071.7 Days inventory outst, sales 22.7% 8.3% -0.2% -8.9% Total assets 171,561.0 124,394.1 71,675.7 Asset turnover (X) 24.6 35.4 65.9 174.9 Accounts payable 40,149.0 40,149.0 40,149.0 40,149.0 Net debt/equity (%) 96.6% 86.2% 129.8% 117.0% Short-term debt 1,169,781.7 1,122,614.8 1,069,896.4 998,220.7 EBITDA interest cover (X) 6.9 6.3 6.3 6.0 Other current liabilities 491,701.3 356,518.8 205,425.7 Capex/D&A (%) 3.0 4.0 2.9 3.1 Total current liabilities 514,444.8 514,444.8 514,444.8 514,444.8 Cash flow cover of div. (X) Long-term debt 1,006,146.1 870,963.7 719,870.5 514,444.8 FCF cover of dividends (X) Other long-term liabilities 2,175,927.8 1,993,578.5 1,789,766.9 1,512,665.6 17.6% 13.2% -1.8% -7.7% Total long-term liabilities 11.1% 5.6% 9.5% 3.6% Total liabilities 1,740,953.4 1,960,009.2 2,245,670.8 2,558,595.1 Growth & Margins ( % ) 12/17 12/18E 12/19E 12/20E Total revenue growth 23.1% 2.3% 19.3% 5.3% Preferred shares 314,817.4 343,904.8 369,438.6 385,062.1 EBITDA growth 16.5% 1.8% 24.3% 9.7% Total common equity 4,231,698.6 4,297,492.4 4,404,876.4 4,456,322.7 EBIT growth NA -5.2% 24.3% 9.7% Minority interest Net inc. growth NA 10.0% 10.0% 10.0% Total liabilities & equity 2,719,033.1 2,784,826.9 2,892,210.9 2,943,657.1 EPS growth Capitalised leases DPS growth Capital employed 3,002,304.0 3,399,099.1 3,336,931.9 3,080,211.6 Adj for unfunded pensions & GW Profit model (HUF mn)(2,329,601.8) 12/17 (2,688,683.9) 12/18E (2,558,754.3) 12/19E (2,273,950.2) 12/20E Total revenue 0.0 0.0 0.0 0.0 329,604.1 312,528.3 388,481.4 426,025.9 Total operating expenses 295,683.2 324,751.0 318,076.9 321,793.8 Cash flow (HUF mn) 12/17 12/18E 12/19E 12/20E R&D 672,702.3 710,415.2 778,177.6 806,261.5 Net income 9,457.8 29,087.4 25,533.9 15,623.4 Other operating inc./(exp.) (295,683.2) (324,751.0) (318,076.9) (321,793.8) D&A add-back (84,099.3) EBITDA 377,019.1 385,664.2 460,100.7 484,467.7 Minority interest add-back 9,051.9 (17,943.5) (17,943.5) (17,943.5) Depreciation & amortisation (27,351.2) (20,075.5) (11,810.4) (4,611.1) Net (inc)/dec working capital 559,697.6 648,423.1 714,148.6 745,499.6 EBIT 17,943.5 17,943.5 17,943.5 17,943.5 Other operating cash flow (285,531.6) (279,955.0) (412,800.0) (376,400.0) Net interest inc./(exp.) Cash flow from operations Income/(loss) from associates 20,678.5 6,693.0 6,693.0 6,693.0 Capital expenditures Profit/(loss) on disposals 388,290.0 390,225.3 472,926.9 504,493.1 Acquisitions 30,311.4 Total other net (49,228.2) (48,609.7) (58,911.6) (62,843.8) Divestitures (255,220.2) (279,955.0) (412,800.0) (376,400.0) Pre-tax profit (9,457.8) (29,087.4) (25,533.9) (15,623.4) Others (56,447.0) (93,472.5) (102,819.7) (113,101.7) Provision for taxes Cash flow from investing (263,709.3) (182,349.3) (203,811.5) (277,101.4) Minority interest 329,604.1 312,528.3 388,481.4 426,025.9 Dividends paid (common & pref) (22.7) 0.0 0.0 0.0 Preferred dividends (22,651.1) Inc/(dec) in debt (320,179.1) (275,821.8) (306,631.3) (390,203.1) Net inc. (pre-exceptionals) 306,952.9 312,528.3 388,481.4 426,025.9 Other financing cash flows (20,734.8) 92,646.3 (5,282.7) (21,103.5) Post-tax exceptionals 449.59 426.30 529.90 581.12 Cash flow from financing 44.4% 43.2% 57.8% 50.5% Net inc. (post-exceptionals) 418.70 426.30 529.90 581.12 Total cash flow EPS (basic, pre-except) () 733.1 733.1 733.1 733.1 Reinvestment rate (%) EPS (basic, post-except) () Wtd avg shares out. (basic) () 12.7% 12.5% 12.5% 12.5% Lease payments 93,472.5 102,819.7 113,101.7 124,411.9 For the exclusive use of [email protected] Tax rate (%) 127.50 140.25 154.28 169.70 Common dividends declared DPS () Source: Goldman Sachs Global Investment Research, FactSet, Company data
3 September 2018 24 Goldman Sachs CEEMEA Refining Tupras: Industry-leading dividend yield, supported by strong FCF generation; Buy
Investment thesis n Industry leading dividend yield: 2018-20E dividend yield of 17% vs. CEEMEA refiners average of 5%.
n Strong FCF generation, fully covering dividends: 2018-20E FCF yield of 17% vs. CEEMEA refiners average of 10%.
n Well positioned to benefit from IMO 2020: We believe Tupras has one of the best quality product baskets among CEEMEA refiners (HSFO yield of 8% and diesel yield of 53% vs. CEEMEA refining averages of c.10% and c.50%, respectively) and that it has enough complexity to process heavier Middle-East crudes.
n 2017-20E EBITDA CAGR of c.26%, driven by the company’s high quality product mix in its refining segment (high diesel output, low HSFO) and increasing feedstock advantage.
Business overview Tupras operates four refineries in Turkey with total nameplate capacity of c.28 mnt pa and a weighted average Nelson Complexity Index of 9.9. Tupras is effectively a monopoly in Turkey’s oil refining, as the country does not have any other refineries. SOCAR (State Oil Company of Azerbaijan Republic) is building 10 mnt STAR refinery in Izmir, which it expects to be launched in October 2018. Apart from the refining business Tupras holds 40% in fuel retailer Opet, which operates c.1,500 filling stations in Turkey.
Exhibit 58: Tupras operates four refineries in Turkey with c.28 mnt pa capacity and a weighted-average NCI of 9.9 Map of Tupras operations For the exclusive use of [email protected]
Source: Company data
3 September 2018 2 Goldman Sachs CEEMEA Refining
After realization of the Residium Upgrade Programe (RUP) at its Izmit refinery from 2011-15 Tupras’ weighted average NCI increased from 7.2 to 9.9 and fuel oil yield decreased from 15% in 2010-11 to 8% in 2017, which is one of the lowest fuel oil yields among CEEMEA refiners. Other dark products (e.g., asphalts) account for c.15% of its total output, however these products’ cracks will not be affected by IMO 2020 in our view (as they are not used as a marine bunker fuel, which is subject to the IMO regulation). We expect the current product slate to be relatively stable from now to 2020E.
On the crude supply side, due to the high complexity of its refineries Tupras is able to process heavy Middle-East crudes (Iran and Iraq crudes accounted for 65% of Tupras feedstock in 2017, on our estimates). We believe that from 2017 to 2020 Tupras feedstock advantage will increase as we expect heavy-light crude spreads to widen.
Exhibit 59: Tupras has one of the lowest fuel oil yields and one of Exhibit 60: Tupras is able to process heavier crudes from Iran and the highest diesel yields among CEEMEA refiners Iraq which should translate into a US$2.3/bbl feedstock advantage Tupras 2017-20E products slate, % increase from 2017 to 2020 Tupras crude basket in 2017, %
Other, 15% Gasoline, 20% Other, 28%
Fuel Oil, 8% Iran, 40%
Naphtha, 3%
Urals, 7%
Diesel (incl. jet), 53% Iraq, 25%
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research, EPDK
We are positive on Tupras’ EBITDA growth outlook given its high-quality product basket and ability to process heavy crudes: we expect EBITDA to increase by 83% from 2018
For the exclusive use of [email protected] to 2020. On the capex side, post RUP completion, the company is not planning any large investments in the mid-term, so we expect capex to be relatively flattish. This should translate into strong and growing FCF: we expect FCF to increase by 2x from 2018 to 2020, which implies an average 2018-20E FCF yield of 17%.
3 September 2018 2 Goldman Sachs CEEMEA Refining
Exhibit 61: We expect Tupras’ EBITDA to increase by 83% from 2018 Exhibit 62: ...translating into strong FCF generation to 2020... Tupras FCF (TRY mn) and FCF yield (%) 2018-20E dynamics Tupras 2017-20E EBITDA dynamics, TRY mn
8,000 30.0% 12,000 2017 FCF was negatively 7,000 affected by cash outflow from 24.1% +83% 25.0% 10,000 n
m 6,000
Y
R
20.0%
T 8,000 n % 5,000 , 16.4% , m A
d l Y D e T R i I 4,000 15.0% T
6,000 y
B
, 11.8% 7,400 E F F
10,140 C C S
F 3,000 F C
C 4,000 10.0% 7.3% 5,026
n 7,306
a 2,000 e l 5,075 5,543 3,625 C 2,000 5.0% 1,000 1,887
0 0 0.0% 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
The company’s stated dividend policy implies a payout of up to 90% of statutory net income (the difference vs. IFRS net income is due to accounting for depreciation and deferred taxes). We expect net income to grow 33% pa on average from 2017 to 2020 on the back of increasing EBITDA, which should result in an increase of dividends. On the current share price, this implies an average 2018-20E dividend yield of 17%.
Exhibit 63: We see Tupras’ statutory net income growing by 33% pa Exhibit 64: ...translating into dividend growth and an average on average from 2017 to 2020... 2018-20E dividend yield of 17% Tupras statutory net income dynamics in 2017-20E, TRY mn Tupras’ 2017-20E DPS (TRY) and dividend yield (%) dynamics
9,000 30.0 25.0% +33% p.a. 22.4% 8,000
25.0 n
20.0% %
m , 7,000 d Y l R 15.8% e i T
20.0
6,000 y ,
e d
Y 15.0% m n R o 5,000 e T 11.7% c
d
, 11.2% 15.0 i n i S v
i
t 27.5 4,000 8,093 P e D D
n 10.0%
y r 3,000 10.0 19.4 o 5,706 t u t 4,227 14.4 a 2,000 t 3,715 11.6 5.0% S For the exclusive use of [email protected] 5.0 1,000
0 0.0 0.0% 2017 2018E 2019E 2020E 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
On the leverage side, debt increased materially during the RUP realization (net debt increased to TRY6.9 bn in 2015 from a net cash position of TRY3.0 bn in 2010). Since the completion of the programme it has started to decline and we expect it to decline further as FCF is strong enough to cover both dividends and deleveraging, on our estimates. We see net debt declining from TRY6.2 bn in 2017 to TRY1.5 bn by 2020E.
3 September 2018 27 Goldman Sachs CEEMEA Refining
Exhibit 65: We expect Tupras leverage to decline gradually from Exhibit 66: We see Tupras reaching 0.2x net debt/EBITDA by 2020E 2017 to 2020 Tupras net debt/EBITDA 2010-20E dynamics, x Tupras net debt dynamics 2010-20E, TRY bn
8.0 4.0x 3.5x 6.9 6.1 6.2 3.0x 3.0x 6.0 5.5 2.2x 1.8x 4.1 2.0x
3.9 x
, n 4.0
b 1.2x A 2.9 1.0x D Y 0.8x T
R 0.7x I 1.0x 0.6x T B
,
1.5 E t 2.0 / 0.2x t b 1.1 1.0 b e
e 0.0x d
d t
t e e
N 0.0 N -1.0x
-2.0 -2.0x
-3.0 -4.0 -3.0x -2.6x 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Despite recent Lira volatility and economic uncertainty in Turkey, we conservatively assume an average exchange rate of TRY6.0/US$ for 2018-20. All things being equal, further depreciation of Lira would result in higher EBITDA, FCF and dividends for Tupras (in Lira terms) as oil product prices are effectively driven by netbacks from international prices, which are in USD. Below we provide a sensitivity table for Tupras’ 2019E key financials to different Lira exchange rates (assuming domestic prices follow international netbacks).
Exhibit 67: Tupras could benefit from a weaker Lira exchange rate 201E Tupras key financials sensitivity to Lira exchange rate
TRY/US$ exchange rate TRY mn, 2019E 5.0 5.5 6.0 6.5 7.0 EBITDA 6,088 6,697 7,306 7,915 8,524 FCF 4,187 4,607 5,026 5,446 5,865 FCF yield (%) 13.6% 15.0% 16.4% 17.7% 19.1% DPS, TRY 15.7 17.5 19.4 21.3 23.1 Dividend yield (%) 12.8% 14.3% 15.8% 17.3% 18.8%
Source: Goldman Sachs Global Investment Research For the exclusive use of [email protected]
Valuation The stock is currently trading at 4.8x 12m forward EV/EBITDA and a 16.3% 12m forward dividend yield vs. historical mid-cycle average levels of 6x and 12%, which implies 20%-25% discounts. On the FCF yield side, the stock trades at a 14.2% 12m forward FCF yield vs. its historical mid-cycle average level of 10%. We believe that the market underestimates Tupras’ potential for strong FCF generation and increasing dividends on the back of earnings growth. We initiate coverage of Tupras with Buy rating.
3 September 2018 28 Goldman Sachs CEEMEA Refining
Exhibit 68: Tupras trades at a 20%-25% discount to its historical Exhibit 69: ...and to its 5-year historical average dividend yield mid-cycle average EV/EBITDA... Tupras 12m forward dividend yield dynamics, % Tupras 12m forward EV/EBITDA dynamics, x
9.0x 20.0%
8.0x 18.0%
16.0% 7.0x 16.3% Historical average of 6x A 14.0% D
6.0x T d I l B e
i 12.0% E y / 5.0x
V 4.8x d Historical average of 12% E n 10.0% e d 4.0x d i w f v
i 8.0% d m 3.0x 2 d 1
w 6.0% f 2.0x m
2 4.0% 1 1.0x 2.0% 0.0x Aug-16 Feb-17 Aug-17 Feb-18 0.0% Aug-16 Feb-17 Aug-17 Feb-18
Source: FactSet, Company data, Goldman Sachs Global Investment Research Source: FactSet, Company data, Goldman Sachs Global Investment Research
We value the stock using a 50/50 blend of 6x 2019E EV/EBITDA and 12% target 2019E dividend yield (both target EV/EBITDA and dividend yield are based on Tupras 2y historical mid-cycle average to reflect recent macroeconomic uncertainty in Turkey). Our 12-month target price is TRY164.0, which implies 33% upside potential compared with 25% for our CEEMEA Energy (ex-Russia) coverage on average.
Risks Key downside risks to our estimates, view and price target include:
n Weaker refining margins. Lower-than-expected expansion of light-dark product spreads might result in a lower increase in Tupras EBITDA and, hence, weaker FCF generation.
n Lower feedstock benefit. If expansion of heavy-light crude oil spreads is lower-than-expected, it might potentially result in a lower feedstock benefit for Tupras and, hence, lower EBITDA and FCF.
For the exclusive use of [email protected] n Lower dividends , a key downside risk, might materialize owing to negative surprises on the earnings side and weaker FCF generation.
n Changes in Turkey macro environment. Potential regulation of diesel and gasoline prices in Turkey might negatively impact Tupras realized prices in the domestic market. This, in turn, would likely lead to lower earnings and FCF.
3 September 2018 2 Goldman Sachs CEEMEA Refining
Key financials
Exhibit 70: Tupras summary financials
0.6 0.4 0.3 0.4 8,802.1 5,401.1 6,334.2 5,429.3 6.4 6.6 4.8 3.2 5,027.0 5,027.0 5,027.0 5,027.0 Ratios and Valuation 12/17 12/18E 12/19E 12/20E Balance sheet (TRY mn) 12/17 12/18E 12/19E 12/20E EV/sales (X) 6.4 6.6 4.8 3.2 Cash & cash equivalents 5,291.1 5,291.1 5,291.1 5,291.1 EV/EBITDAR (X) 7.2 7.4 5.2 3.4 Accounts receivable 1,245.8 1,245.8 1,245.8 1,245.8 EV/EBITDA (X) 6.4 7.0 5.3 3.7 Inventory 20,366.0 16,965.1 17,898.1 16,993.3 EV/EBIT (X) 11.2% 11.7% 15.8% 22.4% Other current assets 12,303.4 12,813.1 13,297.1 13,757.5 P/E (X) 30.6% 24.3% 29.4% 37.6% Total current assets 65.2 65.2 65.2 65.2 Dividend yield (%) 35.6% 33.5% 43.5% 59.5% Net PP&E 1,143.4 1,424.7 1,784.6 2,157.5 CROCI (%) 12.2% 12.1% 16.4% 22.2% Net intangibles 4,285.0 4,135.0 3,985.0 3,835.0 ROIC (%) 30.1 21.5 18.3 21.3 Total investments 38,163.0 35,403.0 37,030.1 36,808.4 ROA (%) 4.5 7.2 8.1 6.7 Other long-term assets 8,213.2 8,213.2 8,213.2 8,213.2 Days inventory outst, sales 59.6% 46.5% 29.2% 8.9% Total assets 5,273.7 3,824.8 3,649.6 2,439.3 Asset turnover (X) 30.9 116.0 109.0 (171.0) Accounts payable 4,188.8 4,188.8 4,188.8 4,188.8 Net debt/equity (%) 191.7% 184.8% 177.3% 170.9% Short-term debt 17,675.7 16,226.7 16,051.6 14,841.3 EBITDA interest cover (X) 1.8 1.3 1.3 1.2 Other current liabilities 9,777.3 7,091.0 6,766.3 4,522.4 Capex/D&A (%) 0.6 1.0 1.0 1.1 Total current liabilities 232.4 232.4 232.4 232.4 Cash flow cover of div. (X) Long-term debt 10,009.6 7,323.4 6,998.6 4,754.8 FCF cover of dividends (X) Other long-term liabilities 27,685.3 23,550.1 23,050.2 19,596.0 54.8% 66.9% 17.3% -14.3% Total long-term liabilities 87.7% 9.2% 31.8% 38.8% Total liabilities 10,373.3 11,719.6 13,817.5 17,021.1 Growth & Margins ( % ) 12/17 12/18E 12/19E 12/20E Total revenue growth 108.1% 9.8% 35.2% 42.1% Preferred shares 104.3 133.3 162.3 191.3 EBITDA growth 112.5% 11.2% 34.3% 41.5% Total common equity 38,163.0 35,403.0 37,030.1 36,808.4 EBIT growth 124.5% 7.6% 33.1% 40.4% Minority interest Net inc. growth 86.0% 24.3% 35.0% 41.8% Total liabilities & equity 25,528.6 22,768.7 24,395.8 24,174.1 EPS growth Capitalised leases DPS growth Capital employed 53,948.1 90,018.3 105,569.7 90,488.4 Adj for unfunded pensions & GW Profit model (TRY mn)(48,872.9) 12/17 (84,475.6) 12/18E (98,263.8) 12/19E (80,348.0) 12/20E Total revenue 0.0 0.0 0.0 0.0 4,078.1 4,387.4 5,841.3 8,203.9 Total operating expenses 573.6 601.1 626.0 649.6 Cash flow (TRY mn) 12/17 12/18E 12/19E 12/20E R&D 5,075.2 5,542.7 7,305.9 10,140.4 Net income 29.0 29.0 29.0 29.0 Other operating inc./(exp.) (573.6) (601.1) (626.0) (649.6) D&A add-back (2,152.1) EBITDA 4,501.6 4,941.6 6,679.9 9,490.7 Minority interest add-back 388.8 (351.3) (430.0) (442.9) Depreciation & amortisation (164.0) (47.8) (67.0) 59.3 Net (inc)/dec working capital 2,917.5 4,666.2 6,066.3 8,439.7 EBIT 244.6 351.3 430.0 442.9 Other operating cash flow (1,100.0) (1,110.8) (1,110.0) (1,110.0) Net interest inc./(exp.) Cash flow from operations Income/(loss) from associates (10.2) Capital expenditures Profit/(loss) on disposals 4,572.0 5,245.2 7,042.9 9,992.9 Acquisitions 69.8 70.0 70.0 70.0 Total other net (464.9) (828.8) (1,172.6) (1,760.0) Divestitures (1,030.1) (1,040.8) (1,040.0) (1,040.0) Pre-tax profit (29.0) (29.0) (29.0) (29.0) Others (1,557.1) (2,891.1) (3,593.4) (4,850.4) Provision for taxes Cash flow from investing 1,779.0 (4,135.2) (499.9) (3,454.2) Minority interest 4,078.1 4,387.4 5,841.3 8,203.9 Dividends paid (common & pref) 0.0 0.0 0.0 0.0 Preferred dividends (266.6) (150.0) (150.0) (150.0) Inc/(dec) in debt 221.9 (7,026.4) (4,093.2) (8,304.5) Net inc. (pre-exceptionals) 3,811.5 4,237.4 5,691.3 8,053.9 Other financing cash flows 2,751.3 (3,401.0) 933.1 (904.9) Post-tax exceptionals 16.31 17.55 23.36 32.81 Cash flow from financing 21.7% 23.8% 18.3% 13.2% Net inc. (post-exceptionals) 15.24 16.95 22.76 32.21 Total cash flow EPS (basic, pre-except) () 250.0 250.0 250.0 250.0 Reinvestment rate (%) EPS (basic, post-except) () Wtd avg shares out. (basic) () 10.2% 15.8% 16.6% 17.6% Lease payments 2,891.1 3,593.4 4,850.4 6,878.7 For the exclusive use of [email protected] Tax rate (%) 11.56 14.37 19.40 27.51 Common dividends declared DPS () Source: Goldman Sachs Global Investment Research, FactSet, Company data
3 September 2018 30 Goldman Sachs CEEMEA Refining Motor Oil: Strong FCF generation and growing dividends; Buy
Investment thesis n High dividend yield and dividend growth: We forecast a 2017-20 DPS CAGR of 13%, and a 2018-20 dividend yield of c.8% vs. CEEMEA refiners average of 5%.
n Strong FCF generation, supporting dividend growth: 2018-20E FCF yield of 17% vs. CEEMEA refiners average of 10%.
n Sales basket improvement into IMO 2020: We expect Motor Oil to reduce HSFO from 23% in 2017 to 16% in 2020 on the back of optimization of the product slate (i.e., reduce output of fuel oil and increase light products).
n Access to cheaper feedstock: Motor Oil has a greater share of heavier Brent Middle-East crudes in its total feedstock mix and given our view that light-heavy crude spreads will expand, Motor oil should benefit.
n 2018-20E EBITDA CAGR of 15%, driven by improvements in product mix and increasing feedstock advantage.
Business overview Motor Oil operates one refinery at Corinth, Greece with nameplate primary distillation capacity of 9 mnt pa and NCI of 11.5. However the company’s product output is higher (c.13.5 mnt in 2017) as it processes feedstock other than crude (fuel oil and low quality gasoil), which it imports from 3rd parties. Company also operates around 1,400 filling stations in Greece and has c.28% market share of the Greek retail fuel market (as of 2017).
Exhibit 71: Motor Oil operates one refinery at Corinth, Greece Map of Motor Oil operations For the exclusive use of [email protected]
Source: Company data
3 September 2018 31 Goldman Sachs CEEMEA Refining
Despite high complexity in 2017, Motor Oil had a 23% fuel oil yield, which is high compared with other CEEMEA refiners, but we expect fuel oil yield to reduce into 2020. This would be realized via ceasing fuel oil imports for further processing and substituting these volumes with its own fuel oil, and, potentially, some internal optimization of product flows. On the mid/light-distillates side, Motor Oil yielded 39% of diesel (incl. jet kerosene) and 20% of gasoline in 2017.
In addition, the high complexity of the Corinth refinery allows it to process heavier crudes (mainly from Iraq). As we expect light-heavy crude spreads to widen into 2020, we see Motor Oil’s feedstock discount to Brent oil increasing by US$2.5/bbl from 2017 to 2020E.
Exhibit 72: We expect fuel oil yields to decline from 23% in 2017 to Exhibit 73: High complexity allows Motor Oil to process heavier 16% in 2020 with a respective increase in diesel yields crudes from Iraq which could bring US$2.5/bbl of incremental Motor Oil products basket in 2017 (inner circle) and in 2020E (outer feedstock advantage from 2017 to 2020E circle), % Motor Oil crude slate in 2017, %
Other, 12% 13% 20% 13% 20% Urals, 6%
16% 23% Saudi Arabia, 15% 5% 5% 39% Iraq, 67% 47%
Gasoline Diesel (incl. jet) Naphtha Fuel Oil Other
Source: Company data, Goldman Sachs Global Investment Research Source: Company data
While we expect to see some decline in Motor Oil’s EBITDA in 2018 vs. 2017 on the back of lower fuel oil cracks yoy, we believe the company will deliver 32% EBITDA growth from 2018 to 2020 on the back of the following: (1) in our base case scenario we assume fuel oil yields decline (and diesel yields, in turn, increase) and (2) we expect its
For the exclusive use of [email protected] feedstock basket discount to Brent oil to increase into 2020.
On the capex side, as the company is not planning any new major investments into new capacity/old capacity modernization, we expect capex to be flattish from 2017 to 2020 at c.€100 mn. EBITDA growth and flat capex should translate into growing FCF: we expect Motor Oil’s FCF to increase by c.56% from 2018 to 2020, which implies an average 2018-20E FCF yield of 17%.
3 September 2018 32 Goldman Sachs CEEMEA Refining
Exhibit 74: We expect Motor Oil EBITDA to increase 32% from 2018 Exhibit 75: ...translating into a material FCF increase to 2020... Motor Oil 2017-20E FCF (€ mn) and FCF yield (%) dynamics Motor Oil 2017-20E EBITDA dynamics, € mn
+32% 500 25.0% 800 2017 FCF was negatively 727 affected by cash outflow from 450 700 working capital and higher 20.0% 633 80 n 608 400 20.0% m 600 73 549 R 77
U 350 15.9%
E
75
, 500 n 13.9% %
d
300 ,
m 15.0% e
t d l R s 400 e u U i j 250 E y d
10.3%
, a 647 447 F
300 F A
560 200 C 531 C 10.0% D F 474 F 355 T I 200 150 311 B E 100 100 200 5.0%
0 50 2017 2018E 2019E 2020E 0 0.0% Refining EBITDA Retail EBITDA 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research, FactSet
Over the course of the last couple of years Motor Oil managed to reduce debt materially – net debt/EBITDA declined from 2.9x in 2014 to 0.4x in 2017. Given strong FCF generation we expect leverage to decline further and see Motor Oil reaching a net cash position by 2019E. Strong FCF generation and low leverage should also allow Motor Oil to continue increasing dividends. We expect Motor Oil’s dividend to grow by 13% pa on average from 2017 to 2020 and see an average 2018-20E dividend yield of 8% (c.9% if adding buyback).
Exhibit 76: Motor Oil’s leverage is low and set to decline further... Exhibit 77: ...which should allow the company to continue Motor Oil 2010-20E net debt/EBITDA dynamics, x increasing dividends Motor Oil DPS (€) and dividend yield (%) 2010-20E dynamics
5.0x 2.0 9.4% 10.0% 8.7% 8.4% 4.2x 1.8 9.0% 3.9x 7.6% 4.0x 3.7x 1.6 7.4% 7.4% 8.0% 6.6% 6.8% %
3.2x 1.4 7.0% ,
5.9% d
x 2.9x l
R
, 1.2 6.0% 3.0x e U i A y E
D , 1.0 5.0% T d I S 1.9 n P B 1.7 0.8 e E 2.0x D 4.0% / 1.5 d t i b 2.5% 1.3 v 0.6 i e 3.0% For the exclusive use of [email protected] D d 1.1x
t 0.4 0.9 e 1.0x 0.7x 2.0%
N 0.7 0.4x 0.2 0.5 0.5 0.4 1.0% 0.2x 0.2 0.0x 0.0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E -0.1x -0.5x -1.0x 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E DPS, EUR Dividend yield, %
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research, FactSet
Valuation The stock currently trades at 3.5x 12m forward EV/EBITDA, which is broadly in line with the company’s historical valuation, but a c.30% discount to the mid-cycle historical industry average of of 5x. Motor Oil is trading at an 8.8% 12m forward dividend yield, which implies c.15% discounts to its/industry historical mid-cycle average level of 7.5%. We think that the discount to CEEMEA peers is unjustified given Motor Oil’s EBITDA growth, strong FCF generation, low leverage and increasing dividends. We initiate coverage of Motor Oil with Buy rating.
3 September 2018 33 Goldman Sachs CEEMEA Refining
Exhibit 78: Motor Oil is trading at a discount to its mid-cycle Exhibit 79: ...as well as on dividend yield historical average valuation based on EV/EBITDA... Motor Oil 12m fwd dividend yield dynamics, % Motor Oil 12m forward EV/EBITDA dynamics, x
7.0x 14.0%
6.0x 12.0% Industry historical average of c.5x
A 5.0x 10.0% D
T d I l 8.8% B e i
E 4.0x y / Company historical average of c.3.7x 8.0%
V d E n
3.5x e d Company and industry d
3.0x i w
f 6.0% v
i d m
2 d
1 2.0x w
f 4.0%
m 2
1.0x 1 2.0%
0.0x Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 0.0% Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
Source: FactSet, Company data, Goldman Sachs Global Investment Research Source: FactSet, Company data, Goldman Sachs Global Investment Research
We value the stock using a 50/50 blend of 5x 2019E EV/EBITDA and an 7.5% target 2019E dividend yield (both target EV/EBITDA and dividend yield are based on the 5y historical mid-cycle industry average as we think that the high dividend yield and product slate improvements are not priced in in Motor Oil’s historical valuation). Our 12-month target price is €26.0, which implies 29% upside potential compared with 25% for our CEEMEA Energy (ex-Russia) coverage on average.
Risks Key downside risks to our estimates, view and price target include:
n Lower dividends, a key downside risk, might materialize owing to weaker-than-expected FCF generation and, hence, limited financial capacity to sustain dividend growth.
n Weaker refining margins. Lower-than-expected expansion of light-dark product spreads might result in a lower increase in Motor Oil’s EBITDA and, hence, weaker
For the exclusive use of [email protected] FCF generation.
n Lower feedstock benefit. If expansion of heavy-light crude oil spreads is lower-than-expected, it might potentially result in a lower feedstock benefit for Motor Oil and, hence, lower EBITDA and FCF.
n Higher capex. A potential increase in Motor Oil’s investment program could put pressure on the company’s FCF generation and, potentially, on its financial capacity to increase dividends.
3 September 2018 34 Goldman Sachs CEEMEA Refining
Motor Oil key financials
Exhibit 80: Motor Oil summary financials
%DODQFHVKHHW ½PQ 0.3 0.2 0.2 0.3 714.0 777.9 560.7 344.1 3.5 4.3 3.6 2.6 397.4 397.4 397.4 397.4 Ratios and Valuation 12/17 12/18E 12/19E 12/20E 12/17 12/18E 12/19E 12/20E EV/sales (X) 3.5 4.3 3.6 2.6 Cash & cash equivalents 635.5 635.5 635.5 635.5 EV/EBITDAR (X) 4.2 5.3 4.3 3.1 Accounts receivable EV/EBITDA (X) 6.0 7.3 6.4 5.1 Inventory 1,746.9 1,810.8 1,593.6 1,377.0 EV/EBIT (X) 7.4% 7.4% 8.4% 9.4% Other current assets 1,023.0 1,016.2 1,008.1 998.9 P/E (X) 16.2% 16.3% 17.3% 19.6% Total current assets 22.0 22.0 22.0 22.0 Dividend yield (%) 28.7% 23.1% 26.3% 32.7% Net PP&E 0.0 0.0 0.0 0.0 CROCI (%) 13.2% 11.0% 12.8% 17.1% Net intangibles 103.2 103.2 103.2 103.2 ROIC (%) 27.8 22.7 25.3 31.0 Total investments 2,895.1 2,952.2 2,726.9 2,501.0 ROA (%) 7.7 10.0 9.1 7.4 Other long-term assets 694.6 694.6 694.6 694.6 Days inventory outst, sales 27.5% 9.5% -5.6% -20.8% Total assets 188.4 178.1 96.8 1.7 Asset turnover (X) 8.3 22.1 27.3 60.1 Accounts payable 21.2 21.2 21.2 21.2 Net debt/equity (%) 95.7% 93.6% 92.5% 91.5% Short-term debt 904.3 893.9 812.7 717.5 EBITDA interest cover (X) 2.4 2.5 2.4 2.6 Other current liabilities 805.6 712.4 387.3 6.8 Capex/D&A (%) 1.4 1.9 1.9 2.1 Total current liabilities 166.4 166.4 166.4 166.4 Cash flow cover of div. (X) Long-term debt 972.0 878.8 553.7 173.1 FCF cover of dividends (X) Other long-term liabilities 1,876.3 1,772.7 1,366.3 890.7 23.4% 30.4% -10.2% -18.6% Total long-term liabilities 16.6% -13.1% 10.7% 19.6% Total liabilities 1,011.9 1,173.5 1,355.5 1,606.3 Growth & Margins ( % ) 12/17 12/18E 12/19E 12/20E Total revenue growth 18.8% -16.1% 13.0% 23.6% Preferred shares 7.0 6.0 5.0 4.0 EBITDA growth 5.7% -3.0% 13.9% 26.1% Total common equity 2,895.1 2,952.2 2,726.9 2,501.0 EBIT growth 38.0% -6.6% 13.9% 26.1% Minority interest Net inc. growth 44.4% 15.4% 13.3% 11.8% Total liabilities & equity 2,012.9 2,070.0 1,844.7 1,618.8 EPS growth Capitalised leases DPS3URILWPRGHO ½PQ growth Capital employed 7,843.5 10,230.4 9,185.9 7,473.9 Adj for unfunded pensions & GW (7,210.9)12/17 (9,681.0) 12/18E (8,577.8) 12/19E (6,746.7) 12/20E &DVKIORZ ½PQ Total revenue 0.0 0.0 0.0 0.0 327.2 305.6 348.2 439.1 Total operating expenses 105.0 106.8 108.1 109.3 12/17 12/18E 12/19E 12/20E R&D 632.5 549.4 608.1 727.2 Net income (1.6) (1.0) (1.0) (1.0) Other operating inc./(exp.) (105.0) (106.8) (108.1) (109.3) D&A add-back (44.8) EBITDA 527.5 442.6 500.0 617.9 Minority interest add-back (84.8) Depreciation & amortisation (76.5) (24.9) (22.3) (12.1) Net (inc)/dec working capital 301.0 411.4 455.3 547.4 EBIT Other operating cash flow (100.5) (100.0) (100.0) (100.0) Net interest inc./(exp.) Cash flow from operations Income/(loss) from associates 11.3 11.3 11.3 11.3 Capital expenditures Profit/(loss) on disposals 462.3 429.1 489.0 617.1 Acquisitions 3.2 Total other net (136.7) (124.4) (141.8) (179.0) Divestitures (97.3) (100.0) (100.0) (100.0) Pre-tax profit 1.6 1.0 1.0 1.0 Others (110.9) (144.0) (166.2) (188.3) Provision for taxes Cash flow from investing (179.0) (103.6) (406.4) (475.7) Minority interest 327.2 305.6 348.2 439.1 Dividends paid (common & pref) (0.0) 0.0 0.0 0.0 Preferred dividends (12.0) Inc/(dec) in debt (290.0) (247.6) (572.5) (664.0) Net inc. (pre-exceptionals) 315.2 305.6 348.2 439.1 Other financing cash flows (86.3) 63.8 (217.2) (216.6) Post-tax exceptionals 2.95 2.76 3.14 3.96 Cash flow from financing 29.1% 24.3% 22.0% 18.3% Net inc. (post-exceptionals) 2.85 2.76 3.14 3.96 Total cash flow EPS (basic, pre-except) () 110.8 110.8 110.8 110.8 Reinvestment rate (%) EPS (basic, post-except) () Wtd avg shares out. (basic) () 29.6% 29.0% 29.0% 29.0% Lease payments 144.0 166.2 188.3 210.5 For the exclusive use of [email protected] Tax rate (%) 1.30 1.50 1.70 1.90 Common dividends declared DPS () Source: Goldman Sachs Global Investment Research, FactSet, Company data
3 September 2018 3 Goldman Sachs CEEMEA Refining PKN: Flattish FCF generation outlook, no near-term dividend growth; Neutral
Investment thesis n Relatively weaker quality product basket vs. CEEMEA peers: PKN had c.12% HSFO yield in 2017 vs. the CEEMEA refining average of c.10%.
n We expect a relatively lower 2018-20 EBITDA CAGR (3%) vs. CEEMEA peers.
n Single digit FCF yield vs. double digits for our Buy-rated stocks: 2018-20E FCF yield of 8% vs. average of 17% for Buy-rated stocks.
n Dividend yield of 4% vs. Buy-rated names average of 8%.
n Valuation: on key valuation metrics (EV/EBITDA, dividend yield, FCF yield) the stock is trading in line with its historical mid-cycle average.
Business overview PKN operates six refineries with total crude processing capacity of c.35 mnt across three countries (Poland, Czech Republic and Lithuania). In Poland (Plock) and Czech Republick (Litvinov), the company operates petrochemical assets which are integrated with refineries. The petrochemical business mainly produces polymers and monomers. As part of its downstream segment PKN also operates two CCGT plants in Wloclawek and Plock with capacity of more than 1 GW. On the retail business side, PKN operates c.2,800 service stations across Poland, Czech Republic, Lithuania and Germany.
After a series of acquisitions of small scale E&P companies over the last five years, PKN now has exposure to upstream businesses in Poland and Canada. Currently, it has over 150 mn boe of 2P reserves and annual production of c.16 kboepd, with most of its reserves and production located in Canada. However, the contribution of the upstream segment to group EBITDA is very small and we do not see it increasing materially in the
For the exclusive use of [email protected] mid-term.
3 September 2018 3 Goldman Sachs CEEMEA Refining
Exhibit 81: PKN refinery and retail business spread across four countries PKN map of operations
25 581
Refining capacity in mn ton
Plock refinery 16.3 Refinery in Lithuania 10.2 Refineries in CR 8.0 Trzebinia and Jedlicze 0.5 ¶
405
Source: Company data
Refining business is the core segment in terms of EBITDA generation for PKN: we estimate that as of 2018 it will account for c.50% of total group EBITDA and expect this share to be relatively stable going into 2020.
Exhibit 82: Refining segment to contribute c.50% of PKN group EBITDA in 2018 and we expect this share to be relatively stable PKN 2018-20E EBITDA breakdown, PLN mn
50% 52% 53%
12,000 9,899 10,057 9,458 405 347 10,000 459 2,116 2,140 2,093
n 8,000 350 350 m
220 N L
P 2,547
2,522 ,
For the exclusive use of [email protected] 6,000 A 2,614 D T I B E
S 4,000 C C
n a
e 5,132 5,305 l 4,692 C 2,000
0 -620 -626 -633
-2,000 2018E 2019E 2020E
Refining Petrochemicals Energy Retail Upstream Other x% Share of refining in group EBITDA, %
Source: Goldman Sachs Global Investment Research
PKN refineries have a weighted-average NCI of 9.5 and a relatively lower quality product slate than other CEEMEA refiners. In 2017 it had 12% fuel oil and 51% diesel (incl. jet) yields and we expect these yields to be stable into 2020. Given that the crude mix is also rather stable (the company processes c.90% of Urals, rest is Brent), we only
3 September 2018 37 Goldman Sachs CEEMEA Refining
expect PKN’s refining margins to increase by c.US$1.0/bbl from 2018 to 2020 vs. an average of c.US$3.0/bbl for CEEMEA refiners, as other names in the space benefit to a greater extent from light-dark product spreads and light-heavy crude oil spread expansion.
Exhibit 83: PKN has 12% fuel oil yield which we expect to be Exhibit 84: We expect PKN refining margins to increase stable through 2020 c.US$1.0/bbl from 2018 to 2020 PKN 2017-20E refining product basket, % PKN GS calculated margins (US$/bbl) and refining clean CCS EBIT (PLN mn) 2017-20E dynamics
Other & loss, 8.0 6,000 n
10% m 7.0
N Light distillates, l 5,000 L b b
1.1 P / 27% 6.0 , $ A S 4,000 U Heavy fractions D 5.0 1.5 1.7 , T I n
(fuel oil), 12% i 1.2 B g r
4.0 3,000 E
a S m
C
g 3.0 C
n 5.6
i 2,000 n n i 4.4 a f 2.0 3.9 4.2 e e l R 1,000 c
1.0 g n i n 0.0 0 i f
2017 2018E 2019E 2020E e R Mid distillates Refining margin (based on Brent) Feedstock advantage (diesel), 51% Refining clean CCS EBITDA
Source: Company data, Goldman Sachs Global Investment Research Source: Goldman Sachs Global Investment Research
Elsewhere in the downstream segment, we expect PKN’s petrochemical and retail EBITDA to be relatively stable from now to 2020, however we expect some uplift in energy EBITDA driven by the launch of the Plock CCGT block in 2018. We estimate that the energy segment will add c.PLN350 mn from 2017 to 2020.
On the capex side, we expect PKN’s investments to be relatively stable at c.PLN4.6-4.7 bn pa on average. While we expect some acceleration of investments into the refining and petrochemical businesses, this should be offset by the decrease of retail and energy capex post Plock CCGT block launch. As a result, we expect company’s FCF to be relatively flattish from now to 2020, translating into a 8% average 2018-20E FCF yield. For the exclusive use of [email protected] Exhibit 85: We expect flattish capex from now to 2020... Exhibit 86: ...and flattish FCF in 2018-20E, resulting in a 8% average PKN 2017-20E capex decomposition, PLN mn FCF yield PKN FCF (PLN mn) and FCF yield (%) 2017-20E dynamics
6,000 4,500 9.2% 10.0% 273 8.7% 5,000 285 12 8.6% 128 22 4,000 9.0% 222 312 234 7.9% n 800 8.0% m 4,000 3,500
778
N 220 L 532 7.0%
P 550
3,000 3,000 , n %
X 678
,
m 6.0% E
d P 1,600 2,500 l 2,000 N A e L 1,327 5.0% i C P y
, 2,000 4,011 F 1,000 F 3,884 C 3,666 4.0% C
1,350 F 3,348 F 1,065 1,500 0 3.0% 1,000 2.0% 500 1.0%
0 0.0% Refining Petrochemicals Retail Energy Upstream Other 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research, FactSet
3 September 2018 38 Goldman Sachs CEEMEA Refining
With regard to dividends, we expect the company to keep DPS flat yoy in 2018 at PLN3.0/share as its financial capacity to increase dividends will be limited, in our view: we estimate that PKN will have negative FCF post acquisitions (during the year PKN plans to buy out minorities of Unipetrol (Czech subsidiary) for PLN4.2 bn in total). Going forward, due to our flattish FCF outlook, we estimate that PKN will only grow dividends moderately, which should translate into a 4% average 2018-20 dividend yield, on our estimates. On the leverage side, PKN had low leverage of c.0.1x at the end 2017, however, we expect it to increase in 2018 due to negative FCF post acquisitions and dividends. Still, it should remain at a comfortable level of 0.3x as of end-2018 and we see PKN reaching a net cash position by 2020E.
Exhibit 87: We see PKN trading at a c.4% average 2018-20E Exhibit 88: PKN has a comfortable level of leverage with net dividend yield debt/EBITDA <0.5x PKN DPS (PLN) and dividend yield (%) 2017-20E dynamics PKN net debt/EBITDA 2010-20E dynamics, x
5.0 4.6% 5.0% 2.5x 4.5 4.1% 4.5% 1.9x 4.0 4.0% 2.0x
1.8x %
3.5 3.5%
3.0% ,
x d
2.7% l N 3.0 3.0% , 1.5x 1.4x e L
i 1.3x A 1.3x P y D
,
2.5 2.5% T d I S n
4.5 B P e E
D 2.0 4.0 2.0% 1.0x / d t i b v 0.7x i 1.5 3.0 3.0 1.5% e d D
t 0.4x 1.0 1.0% e 0.5x
N 0.3x 0.5 0.5% 0.1x 0.0x 0.0 0.0% 0.0x 2017 2018E 2019E 2020E -0.2x -0.5x DPS Dividend yield 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research, FactSet Source: Company data, Goldman Sachs Global Investment Research
Valuation The stock is currently trading at 4.7x 12m forward EV/EBITDA and a 3.8% 12m forward dividend yield, which is broadly in line with historical mid-cycle average levels of 5.0x and 3.5%, respectively. We initiate coverage of PKN with a Neutral rating. For the exclusive use of [email protected] Exhibit 89: PKN is trading in line with its historical mid-cycle Exhibit 90: ...and on dividend yield metrics average on EV/EBITDA... PKN 12m forward dividend yield dynamics, % PKN 12m forward EV/EBITDA, x
7.0x 6.0%
6.0x 5.0% Historical average of 5x
A 5.0x D
T 4.0% d I 4.7x l 3.8% B e i
E 4.0x y /
V d E n 3.0% e
d Historical average of 3.5% d
3.0x i w f v
i d m
2 d 2.0% 1 2.0x w f
m 2 1.0x 1 1.0%
0.0x Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 0.0% Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18
Source: Company data, Goldman Sachs Global Investment Research, FactSet Source: Company data, Goldman Sachs Global Investment Research, FactSet
3 September 2018 3 Goldman Sachs CEEMEA Refining
We value the stock using a 50/50 blend of 5.0x 2019E EV/EBITDA and 3.5% target 2019E dividend yield (both target EV/EBITDA and dividend yield are based on PKN’s 5y historical mid-cycle average). Our 12-month target price is PLN111.0, which implies 12% upside potential compared with 25% for our CEEMEA Energy (ex-Russia) coverage on average.
Risks Key downside/upside risks to our estimates, view and price target include:
n Significant changes in the refining/petrochemical margins. Potential movements in refining cracks and petrochemical spreads (other than we expect) might result in higher/lower downstream EBITDA for PKN. This, in turn, might lead to stronger/weaker FCF generation.
n Higher/lower dividend payments. Potential positive/negative surprises on the FCF generation side are likely to lead to higher/lower financial capacity to increase dividend payments.
n Lower/higher capex would likely translate into higher/lower FCF. This, in turn, might lead the company to decide to return more/less cash to shareholders in the form of dividends. For the exclusive use of [email protected]
3 September 2018 40 Goldman Sachs CEEMEA Refining
Key financials
Exhibit 91: PKN summary financials
0.5 0.4 0.4 0.5 6,244.0 8,100.1 7,148.6 6,127.3 5.2 5.1 4.7 4.4 9,598.0 9,598.0 9,598.0 9,598.0 Ratios and Valuation 12/17 12/18E 12/19E 12/20E Balance sheet (PLN mn) 12/17 12/18E 12/19E 12/20E EV/sales (X) 5.2 5.1 4.7 4.4 Cash & cash equivalents 12,440.0 12,440.0 12,440.0 12,440.0 EV/EBITDAR (X) 6.9 7.1 6.6 6.3 Accounts receivable 642.0 642.0 642.0 642.0 EV/EBITDA (X) 8.8 8.5 8.3 8.2 Inventory 28,924.0 30,780.1 29,828.6 28,807.3 EV/EBIT (X) 2.7% 3.0% 4.1% 4.6% Other current assets 29,071.0 31,187.5 33,092.4 34,887.3 P/E (X) 12.5% 9.5% 9.5% 9.2% Total current assets 1,272.0 1,272.0 1,272.0 1,272.0 Dividend yield (%) 17.3% 14.7% 14.5% 13.8% Net PP&E 0.0 0.0 0.0 0.0 CROCI (%) 10.4% 8.7% 8.5% 8.4% Net intangibles 1,397.0 5,483.0 5,369.0 5,255.0 ROIC (%) 45.2 36.7 41.6 48.5 Total investments 60,664.0 68,722.6 69,561.9 70,221.6 ROA (%) 3.4 4.1 3.4 2.8 Other long-term assets 14,469.0 14,469.0 14,469.0 14,469.0 Days inventory outst, sales 2.2% 7.1% 0.7% -4.2% Total assets 317.0 492.4 336.4 186.7 Asset turnover (X) 35.7 39.6 25.7 40.4 Accounts payable 2,404.0 2,404.0 2,404.0 2,404.0 Net debt/equity (%) 166.8% 180.2% 168.0% 160.7% Short-term debt 17,190.0 17,365.4 17,209.4 17,059.7 EBITDA interest cover (X) 7.8 6.3 4.9 4.5 Other current liabilities 6,688.0 10,389.5 7,096.7 3,938.2 Capex/D&A (%) 3.4 2.9 2.4 2.2 Total current liabilities 1,575.0 1,575.0 1,575.0 1,575.0 Cash flow cover of div. (X) Long-term debt 8,263.0 11,964.5 8,671.7 5,513.2 FCF cover of dividends (X) Other long-term liabilities 25,453.0 29,329.9 25,881.0 22,572.8 19.9% 29.7% -11.7% -14.3% Total long-term liabilities 28.8% -3.4% 4.7% 1.6% Total liabilities 32,197.0 35,878.7 39,666.9 43,134.8 Growth & Margins ( % ) 12/17 12/18E 12/19E 12/20E Total revenue growth 34.2% -7.5% 4.1% 0.0% Preferred shares 3,014.0 3,514.0 4,014.0 4,514.0 EBITDA growth 26.5% -25.4% 2.1% 2.1% Total common equity 60,664.0 68,722.6 69,561.9 70,221.6 EBIT growth 31.9% -6.1% 2.1% 2.1% Minority interest Net inc. growth 0.0% 0.0% 33.3% 12.5% Total liabilities & equity 42,216.0 50,274.6 51,113.9 51,773.6 EPS growth Capitalised leases DPS growth Capital employed 95,364.0 123,712.1 109,179.2 93,582.2 Adj for unfunded pensions & GW Profit model (PLN mn)(85,569.0) 12/17 (114,254.5) 12/18E (99,280.6) 12/19E (83,525.6) 12/20E Total revenue 0.0 0.0 0.0 0.0 5,286.0 4,964.8 5,071.3 5,178.8 Total operating expenses 2,421.0 2,637.7 2,799.3 2,959.3 Cash flow (PLN mn) 12/17 12/18E 12/19E 12/20E R&D 9,795.0 9,457.6 9,898.6 10,056.5 Net income 518.0 500.0 500.0 500.0 Other operating inc./(exp.) (2,421.0) (2,637.7) (2,799.3) (2,959.3) D&A add-back (1,967.0) EBITDA 7,374.0 6,819.9 7,099.3 7,097.2 Minority interest add-back 1,792.0 Depreciation & amortisation (274.0) (238.8) (385.1) (248.8) Net (inc)/dec working capital 8,050.0 8,102.5 8,370.6 8,638.0 EBIT 248.0 250.0 250.0 250.0 Other operating cash flow (4,039.0) (4,754.2) (4,704.2) (4,754.2) Net interest inc./(exp.) Cash flow from operations Income/(loss) from associates Capital expenditures Profit/(loss) on disposals 7,348.0 6,831.1 6,964.1 7,098.5 Acquisitions 114.0 (4,086.0) 114.0 114.0 Total other net (1,544.0) (1,366.2) (1,392.8) (1,419.7) Divestitures (3,925.0) (8,840.2) (4,590.2) (4,640.2) Pre-tax profit (518.0) (500.0) (500.0) (500.0) Others (1,384.0) (1,283.1) (1,283.1) (1,710.8) Provision for taxes Cash flow from investing (1,182.0) 3,876.9 (3,448.9) (3,308.2) Minority interest 5,286.0 4,964.8 5,071.3 5,178.8 Dividends paid (common & pref) (387.0) 0.0 0.0 0.0 Preferred dividends 1,369.0 Inc/(dec) in debt (2,953.0) 2,593.8 (4,732.0) (5,019.1) Net inc. (pre-exceptionals) 6,655.0 4,964.8 5,071.3 5,178.8 Other financing cash flows 1,172.0 1,856.1 (951.5) (1,021.2) Post-tax exceptionals 12.36 11.61 11.86 12.11 Cash flow from financing 40.3% 58.7% 56.2% 55.0% Net inc. (post-exceptionals) 15.56 11.61 11.86 12.11 Total cash flow EPS (basic, pre-except) () 427.7 427.7 427.7 427.7 Reinvestment rate (%) EPS (basic, post-except) () Wtd avg shares out. (basic) () 21.0% 20.0% 20.0% 20.0% Lease payments 1,283.1 1,283.1 1,710.8 1,924.7 For the exclusive use of [email protected] Tax rate (%) 3.00 3.00 4.00 4.50 Common dividends declared DPS () Source: Goldman Sachs Global Investment Research, FactSet, Company data
3 September 2018 41 Goldman Sachs CEEMEA Refining Neste: Renewables capex growth to put pressure on FCF generation, dividend increase is priced in; Neutral
Investment thesis n 2017-20E EBITDA CAGR of 15% driven by both the refining segment (due to high quality product basket) and renewables business expansion.
n Weak FCF generation outlook on the back of 46% 2018-20E capex growth: 2018-20E FCF yield of 5% vs. CEEMEA refiners average of 10%.
n Dividend yield is below CEEMEA peers: 2018-20E dividend yield of 3% vs. CEEMEA refiners average of 5%.
n Valuation: On key valuation metrics (EV/EBITDA, dividend yield, FCF yield) the stock is trading in line with its historical mid-cycle average.
Business overview Neste was initially a traditional crude oil refiner, operating c.16 mnt of refining capacity in Finland (weighted-average NCI of c.11). Over the past decade, though, the company has built a large renewable fuels business, starting from a small capacity in Finland and later adding large-scale renewables production facilities in Singapore and Rotterdam. The total renewables diesel production capacity of Neste is currently 2.7 mnt pa, which makes company the largest renewables diesel producer globally. The company also operates c.1,000 filling stations in five countries (mainly in Baltic region).
Exhibit 92: Neste operates c.16 mnt pa refining capacity in Finland and 2.7 mnt pa of renewables capacity in Singapore, Rotterdam and Finland Neste map of operations For the exclusive use of [email protected]
Source: Company data
Since the start of the renewables business expansion in 2010, the share of this segment in group EBIT increased to c.50% by 2017 and we expect it to continue growing into
3 September 2018 42 Goldman Sachs CEEMEA Refining
2020. We estimate that by 2020 c.65% of Neste’s EBIT will be generated by the renewables business.
Exhibit 93: We expect the share of renewables in group EBIT to increase to 65% by 2020E Neste EBIT decomposition in 2013, 2017 and 2020E, € mn
45% 51% 65%
1,800 1,667 43 1,600
1,400
n m 1,200
R 1,100 U E
44 1,089 , T
I 1,000 B E
e l 800 b 561 a r
a 604 p
m 600 51 o C 400 273
495 535 200 280
0 2013 2017 2020E
Refining Renewables Retail & other x% Share of renewables, %
Source: Company data, Goldman Sachs Global Investment Research
Favourable regulatory environment in the US is one of the key drivers of success in the renewables business A favourable regulatory environment, particularly in the US, has been a major contributor to the success of Neste’s renewables business in previous years. Neste started sales to the US in 2012, with California becoming the main market for its products. Given the supportive regulatory environment (e.g., the federal Renewable Fuel Standard (RFS) and California’s Low Carbon Fuel Standard (LCFS) programs facilitating
For the exclusive use of [email protected] renewables demand growth; the Blender’s Tax Credit (BTC) subsidy for biodiesel blending), the US market has proved to be more profitable for Neste than Europe. For instance, in 2018 BTC contributed c.€140 mn to Neste’s EBIT in 1Q, which is c.17% of the segment’s EBIT for the full year 2018, on our estimates. While it remains uncertain if the BTC will be reinstated in the coming years (we assume a 50% probability in our model), it represents a material contribution to renewables business EBIT.
We expect Neste to continue the expansion into renewables: we believe that company will meet its guidance and increase renewables production capacity to 4 mnt pa by 2022 from 2.7 mnt pa as of end 2017. According to management, 0.3 mnt of capacity would be added by de-bottlenecking existing assets, while another 1 mnt of capacity would be newly built by 2022. The FID for this investment is targeted to be made by end 2018.
Overall we expect the renewables business expansion to translate into c.80% EBIT growth for the segment from 2017 to 2020E and increase 3x from 2017 to 2022E when
3 September 2018 43 Goldman Sachs CEEMEA Refining
the additional 1 mnt of production capacity comes on stream (excluding BTC impact). Assuming BTC re-introduction in 2019-22, growth would be even higher.
Exhibit 94: We expect Neste renewables production capacity to Exhibit 95: ...which will drive a significant increase in the reach 4 mnt by 2022E... segment’s EBIT Neste renewables production capacity, kt Neste renewables sales (kton) and EBIT (€ mn) 2011-20E dynamics
Singapore turnaround 4,500 new 1 mnt 3,000 impact 1,200 capacity addition 4,000 by 2022E capacity 1,000
2,500 t debottlenecking to 2.8
k 3,500 capacity n mnt post Singapore 800 n , capacity y debottlenecking m o
t turnaround in 2018E
2,000 i debottlenecking to 2.6 mnt t
c 600
3,000 k R
a to 2.4 mnt completed in , U p
Singapore 800 ths completed in 2016 s a 1,500 400 E e
c 2,500 2015
tons pa plant launched l
, a n
in 2010, Rotterdam in T I
o 200 S i 2011
t 1,000 2,000 B c E
u 0 d
o 1,500 500 r -200 p
s 1,000 e
l 0 -400 b a 500 w e n
e 0 R 2010 2011 2012 2013 2014 2015 2016 2017 2018E2019E2020E2021E2022E Sales in Europe Sales in NA Renewables EBIT
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
On the oil products side Neste’s business is relatively stable: company has a high-quality products basket with an 8% fuel oil yield as of 2017 and we expect this yield to decline further to c.5% by 2020. Given >50% diesel yield we believe that company is well positioned for upcoming IMO 2020 regulation: we expect refining EBIT to increase by 34% from 2018E to 2020E.
Exhibit 96: Neste has a high-quality basket of products with a low Exhibit 97: We expect Neste’s refining EBIT to increase by 34% fuel oil yield and high diesel output from 2018E to 2020E Neste product basket in 2017 and 2020E, % Neste refining comparable EBIT 2017-20E dynamics, € mn
11% 600 +34% 5% 11% 30% 500 1% n m
8% 30% R
1% U 400 E
, T I B
E 300
For the exclusive use of [email protected] e l 535 b 495 491 a r
a 200 401 p
50% m o C 53% 100
0 Gasoline Diesel (incl. jet) Naphtha Fuel Oil Other 2017 2018E 2019E 2020E
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
On the capex side, given the ongoing expansion of renewables business, we expect a material uplift in investments from 2017 to 2020 with 46% capex growth over this period. In our view, this will partially offset the increase in EBIT and keep FCF relatively flattish in 2018-19E. We see the company generating a 5% average FCF yield in 2018-20E.
3 September 2018 44 Goldman Sachs CEEMEA Refining
Exhibit 98: Investments into renewables business to drive a 46% Exhibit 99: ...which will translate into a c.5% FCF yield in 2018-20E capex increase from 2017 to 2020E... on average Neste 2018-2020E capex decomposition, € mn Neste 2017-20E FCF (€ mn) and FCF yield (%) dynamics
700 +46% 1,200 7.0% 6.3% 6.1% 600 0
1,000 6.0%
n 106 m 500 190 2017 FCF was 4.9%
R 4.7% negatively affected 5.0% U by cash outflow
E
800 0 ,
400 n
from WC % X
,
250 m E
106
4.0% d l P R e A U 300 600 i C E 60 1,168 y
, F
F 3.0% C 200 C 937 912 F F 400 250 250 2.0% 100 619 200 0 1.0% 2018E capex Refining Renewables Retail & other 2020E capex 0 0.0% Refining Renewables Retail and other 2017 2018E 2019E 2020E
Source: Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research, FactSet
Last year the company adopted a new dividend policy which sets the minimum dividend payout at 50% of comparable net income. We believe that a 50% dividend payout (as it was last year) will be sustainable going forward and, given stable earnings growth on the back of EBIT increases, should translate into dividend growth. We expect a 2017-20E comparable net income CAGR of c.18%, which should translate into a 3% average 2018-20E dividend yield.
Exhibit 100: We expect a c.18% comparable net income CAGR from Exhibit 101: ...which should translate into dividend growth and a 2017 to 2020E... 3% average 2018-20E dividend yield Neste comparable net income 2017-20E dynamics, EUR mn Neste DPS (EUR) and dividend yield (%) 2010-20E dynamics
3.0 6.0% 1,600 +18% p.a. 5.1% 1,384 2.5 5.0% 4.4%
n 1,400 4.2% 4.2% m %
4.0%
, R
1,138 2.0 3.6% 4.0% d U 1,200 l 3.4% e E R
i , y U e 972 3.0% 3.0% E d 1,000 m , 1.5 3.0%
2.5% n o
851 S e c 2.7 P n d i i D 800 t 2.2 v i e 1.0 2.0% D n 1.9 1.7 e
l 600
b 1.3 a For the exclusive use of [email protected] r 0.5 1.0 1.0% a 400 p 0.7 0.7
m 0.4 0.4 0.4 o
C 200 0.0 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 0 2017 2018E 2019E 2020E DPS, EUR Dividend yield, %
Source: Company data, Goldman Sachs Global Investment Research Source: Company data, Goldman Sachs Global Investment Research
Valuation The stock is currently trading at 10.6x 12m forward EV/EBITDA vs. the 2-year average of 8x, which we think is justified post the announcement of retroactive reinstatement of BTC for 2017. On the FCF and dividend yield side, Neste is trading at a 5% 12m forward FCF yield and 3.5% 12m forward dividend yield, broadly in line with 2-year average levels of c.6% and c.4%, respectively. We initiate coverage of Neste with a Neutral rating.
3 September 2018 4 Goldman Sachs CEEMEA Refining
Exhibit 102: We believe the valuation premium vs. history on Exhibit 103: Neste trades in line with history on a dividend yield EV/EBITDA is justified given the reinstatement of BTC for 2017 basis Neste 12m forward EV/EBITDA dynamics, x Neste 12m forward dividend yield dynamics, %
12.0x 7.0%
10.6x 10.0x 6.0%
Historical average of c.8x A 5.0% D
8.0x T d I l B e i E y / 4.0%
V d
E 6.0x n Historical average of 4% e d
d 3.5% i w
f 3.0% v
i d m 4.0x 2 d 1 w
f 2.0%
m
2.0x 2 1 1.0%
0.0x Aug-16 Feb-17 Aug-17 Feb-18 0.0% Aug-16 Feb-17 Aug-17 Feb-18
Source: FactSet, Company data, Goldman Sachs Global Investment Research Source: FactSet, Company data, Goldman Sachs Global Investment Research
We value the stock using a 50/50 blend of 8x 2021E EV/EBITDA and a 4% target 2021E dividend yield (both target EV/EBITDA and dividend yield are based on Neste’s 2y historical mid-cycle average; we use 2021 and 2y historical multiple to reflect expansion of the renewables business). Our 12-month target price is €83.0, which implies 11% upside potential compared with 25% for our CEEMEA Energy (ex-Russia) coverage on average.
Risks Key downside/upside risks to our estimates and price target include:
n Changes in regulatory environment for renewables (e.g., reintroduction/full cancellation of the BTC, announcement of increasing/decreasing RFS mandates etc.). As government subsidies have a material impact on the EBIT of Neste’s renewables business, potential changes in regulatory framework might result in higher/lower EBIT for this segment and, effectively, higher/lower group EBIT. For the exclusive use of [email protected]
n Significant changes in the macro environment. Potential movements in refining and renewables margins might impact Neste’s earnings.
n Higher/lower dividend payments. Potential positive/negative surprises on the comparable net income side might result in higher/lower dividend payments (Neste is paying out 50% of comparable net income as dividend).
n Lower/higher capex could translate into higher/lower FCF. This, in turn, might lead the company to decide to distribute the excess cash to shareholders in the form of a special dividend (upside risk) or increase leverage to fund the dividend payments if its own resources are insufficient to cover cash distributions to shareholders (downside risk).
3 September 2018 4 Goldman Sachs CEEMEA Refining
Key financials
Exhibit 104: Neste summary financials
%DODQFHVKHHW ½PQ 0.8 1.3 1.3 1.5 783.0 895.2 884.1 1,114.7 7.0 12.0 10.5 8.8 1,097.0 1,097.0 1,097.0 1,097.0 Ratios and Valuation 12/17 12/18E 12/19E 12/20E 12/17 12/18E 12/19E 12/20E EV/sales (X) 7.0 12.0 10.5 8.8 Cash & cash equivalents 1,563.0 1,563.0 1,563.0 1,563.0 EV/EBITDAR (X) 9.3 15.7 13.4 10.9 Accounts receivable 86.0 86.0 86.0 86.0 EV/EBITDA (X) 11.7 19.8 16.9 13.9 Inventory 3,529.0 3,641.2 3,630.1 3,860.7 EV/EBIT (X) 4.4% 2.5% 3.0% 3.6% Other current assets 3,855.0 3,893.0 4,121.2 4,340.6 P/E (X) 13.5% 14.2% 14.9% 16.3% Total current assets 100.0 100.0 100.0 100.0 Dividend yield (%) 18.6% 19.8% 22.1% 25.2% Net PP&E 268.0 268.0 268.0 268.0 CROCI (%) 11.9% 13.1% 14.6% 16.8% Net intangibles 5.0 5.0 5.0 5.0 ROIC (%) 41.1 37.8 38.2 46.6 Total investments 7,757.0 7,907.1 8,124.2 8,574.3 ROA (%) 3.5 3.9 3.7 2.9 Other long-term assets 1,679.0 1,679.0 1,679.0 1,679.0 Days inventory outst, sales 9.5% -1.8% -9.3% -17.6% Total assets 163.0 110.0 50.3 Asset turnover (X) 19.6 26.6 45.8 134.2 Accounts payable 108.0 108.0 108.0 108.0 Net debt/equity (%) 128.0% 110.0% 160.4% 156.8% Short-term debt 1,950.0 1,897.0 1,837.3 1,787.0 EBITDA interest cover (X) 2.7 2.8 2.7 2.6 Other current liabilities 1,032.0 696.3 318.3 Capex/D&A (%) 1.4 1.9 1.6 1.7 Total current liabilities 437.0 437.0 437.0 437.0 Cash flow cover of div. (X) Long-term debt 1,469.0 1,133.3 755.3 437.0 FCF cover of dividends (X) Other long-term liabilities 3,419.0 3,030.3 2,592.6 2,224.0 13.1% 14.3% -1.2% -17.9% Total long-term liabilities 9.1% 8.7% 11.0% 15.7% Total liabilities 4,338.0 4,873.8 5,525.6 6,341.3 Growth & Margins ( % ) 12/17 12/18E 12/19E 12/20E Total revenue growth 11.9% 11.0% 14.4% 19.4% Preferred shares 3.06.09.0 EBITDA growth -2.8% 6.7% 17.1% 21.7% Total common equity 7,757.0 7,907.1 8,124.2 8,574.3 EBIT growth 9.7% 15.7% 17.1% 21.7% Minority interest Net inc. growth 30.8% 11.5% 17.1% 21.7% Total liabilities & equity 5,533.0 5,683.1 5,900.2 6,350.3 EPS growth Capitalised leases DPS3URILWPRGHO ½PQ growth Capital employed 13,216.0 15,109.0 14,921.7 12,250.9 Adj for unfunded pensions & GW (11,745.0)12/17 (13,510.4) 12/18E (13,147.2) 12/19E (10,197.2) 12/20E &DVKIORZ ½PQ Total revenue 0.0 0.0 0.0 0.0 840.0 971.7 1,137.7 1,384.5 Total operating expenses 371.0 378.0 377.8 386.6 12/17 12/18E 12/19E 12/20E R&D 1,471.0 1,598.6 1,774.5 2,053.6 Net income 3.0 3.0 3.0 3.0 Other operating inc./(exp.) (371.0) (378.0) (377.8) (386.6) D&A add-back (104.0) EBITDA 1,100.0 1,220.6 1,396.7 1,667.1 Minority interest add-back (16.0) Depreciation & amortisation (75.0) (60.2) (38.8) (15.3) Net (inc)/dec working capital 1,094.0 1,352.8 1,518.4 1,774.1 EBIT Other operating cash flow (475.0) (416.0) (606.0) (606.0) Net interest inc./(exp.) Cash flow from operations Income/(loss) from associates (2.0) Capital expenditures Profit/(loss) on disposals 1,023.0 1,160.4 1,357.9 1,651.8 Acquisitions 9.0 Total other net (180.0) (185.7) (217.3) (264.3) Divestitures (466.0) (416.0) (606.0) (606.0) Pre-tax profit (3.0) (3.0) (3.0) (3.0) Others (347.0) (435.9) (485.9) (568.8) Provision for taxes Cash flow from investing (283.0) (388.7) (437.7) (368.6) Minority interest 840.0 971.7 1,137.7 1,384.5 Dividends paid (common & pref) 0.0 0.0 0.0 0.0 Preferred dividends 71.0 Inc/(dec) in debt (630.0) (824.6) (923.5) (937.4) Net inc. (pre-exceptionals) 911.0 971.7 1,137.7 1,384.5 Other financing cash flows (5.0) 112.2 (11.1) 230.6 Post-tax exceptionals 3.28 3.79 4.44 5.40 Cash flow from financing 39.6% 30.8% 39.9% 34.2% Net inc. (post-exceptionals) 3.55 3.79 4.44 5.40 Total cash flow EPS (basic, pre-except) () 256.4 256.4 256.4 256.4 Reinvestment rate (%) EPS (basic, post-except) () Wtd avg shares out. (basic) () 17.6% 16.0% 16.0% 16.0% Lease payments 435.9 485.9 568.8 692.2 For the exclusive use of [email protected] Tax rate (%) 1.70 1.89 2.22 2.70 Common dividends declared DPS () Source: Goldman Sachs Global Investment Research, FactSet, Company data
3 September 2018 47 Goldman Sachs CEEMEA Refining Valuation
Exhibit 105: Global refining comps All prices are as of August 30 close
Stock SharePriceRatingPrice MktEV/EBITDA P/E Dividend Yield FCF Yield Price Currency Target Cap[1] 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E
European Refiners Tupras 122.9 TRY Buy 164.0 4,780 6.6x 4.8x 3.2x 7.0x 5.3x 3.7x 11.7% 15.8% 22.4% 11.5% 16.0% 23.7% PKN 98.7 PLN Neutral 111.0 11,456 5.1x 4.9x 4.4x 8.5x 8.3x 8.2x 3.0% 4.1% 4.6% 7.3% 7.9% 8.3% Neste OYJ 75.0 EUR Neutral 83.0 22,412 12.0x 10.7x 8.8x 19.8x 16.9x 13.9x 2.5% 3.0% 3.6% 4.9% 4.7% 6.1% MOL* 2894.0 HUF Buy 3940.0 7,572 4.0x 3.4x 3.0x 6.8x 5.5x 5.0x 5.0% 5.5% 6.1% 14.9% 12.1% 14.7% Motor Oil 20.2 EUR Buy 26.0 2,609 4.3x 3.6x 2.6x 7.3x 6.4x 5.1x 7.4% 8.4% 9.4% 13.9% 15.8% 20.0% Asian Refiners India Indian Oil Corp. 155.7 INR Neutral 185.0 21,211 6.4x 6.3x 5.3x 9.2x 8.6x 7.4x 4.7% 6.1% 6.1% 7.5% 14.1% 13.7% Bharat Petroleum 362.2 INR Buy 470.0 10,097 10.1x 6.5x 5.3x 12.0x 7.7x 6.6x 4.4% 3.9% 4.6% 5.9% 13.1% 13.4% Reliance Industries 1241.0 INR Buy 1405.0 117,753 11.1x 11.2x 8.2x 14.8x 18.0x 13.7x 0.7% 0.5% 0.5% 1.6% 5.5% 7.0% Hindustan Petroleum 254.1 INR Buy 345.0 5,455 7.6x 6.8x 6.4x 9.6x 8.0x 7.3x 4.2% 3.7% 4.1% 1.7% -0.3% 4.0% Taiwan Formosa Petrochemical Corp. 126.0 TWD Neutral 119.0 38,816 11.3x 12.6x 10.4x 17.2x 18.5x 15.8x 4.7% 4.3% 5.1% 4.9% 5.6% 9.0% Australia Caltex Australia Ltd. 30.2 AUD Neutral 34.4 5,702 7.5x 7.4x 7.0x 12.8x 13.5x 13.1x 4.0% 3.7% 3.8% 3.6% 6.2% 7.0% Korea GS Holdings 53100.0 KRW Neutral 62000.0 4,560 6.3x 6.7x 6.4x 5.5x 5.9x 5.4x 3.4% 3.4% 3.4% -1.6% -9.9% -8.1% S-Oil Corp. 119500.0 KRW Sell 88000.0 12,653 11.9x 8.8x 7.2x 16.3x 11.3x 9.4x 3.7% 5.3% 6.4% -11.2% 7.7% 11.0% SK Innovation 193000.0 KRW Buy 250000.0 15,238 5.1x 4.8x 3.8x 9.9x 8.1x 6.5x 4.1% 4.9% 6.2% 5.6% 6.9% 12.5% Thailand Thai Oil 84.3 THB Sell 80.0 5,209 6.7x 6.8x 5.4x 11.6x 12.9x 10.4x 4.3% 3.5% 4.3% -5.4% 12.2% 13.6% Bangchak Corp PCL 36.0 THB Neutral 34.0 1,526 7.1x 6.9x 6.5x 10.0x 10.0x 8.6x 4.0% 4.0% 4.7% 4.6% 1.5% 1.6% IRPC PCL 7.0 THB Sell 5.5 4,352 7.5x 7.2x 6.4x 10.7x 10.7x 9.7x 4.7% 4.6% 5.2% 14.9% 10.1% 11.6% American refineries Marathon Petroleum Corp. 83.1 USD Not Rated 42,225 7.6x 6.6x 5.6x 13.5x 13.3x 9.9x 2.2% 2.5% 2.7% 6.2% 8.0% 10.7% Phillips 66 119.6 USD Buy 139.0 61,132 9.8x 8.3x 7.0x 14.5x 12.4x 10.0x 2.6% 2.9% 3.3% 5.8% 7.1% 8.8% Valero Energy Corp. 119.1 USD Neutral 122.0 51,311 8.7x 6.6x 5.0x 20.0x 13.2x 9.7x 2.7% 3.0% 3.3% 2.3% 6.8% 10.2% CVR Energy Inc. 38.2 USD Neutral 42.0 3,314 7.2x 5.5x 5.6x 14.0x 8.4x 8.9x 6.5% 7.9% 7.9% 10.3% 12.1% 11.5% Delek US Holdings 54.7 USD Buy 67.0 4,502 6.2x 4.5x 6.2x 9.1x 7.0x 12.3x 1.7% 2.0% 2.2% 2.2% 13.7% 8.6% PBF Energy Inc. 52.1 USD Sell 49.0 5,666 6.2x 6.7x 5.2x 17.0x 13.7x 9.4x 2.3% 2.3% 2.3% -1.5% 4.5% 7.8% HollyFrontier Corp. 74.7 USD Neutral 79.0 13,179 7.6x 5.4x 5.4x 14.0x 9.2x 9.6x 1.8% 1.8% 1.8% 7.5% 10.4% 9.8%
[1] Market Cap in USD millions * denotes CEEMEA Focus List membership; all price target timeframes are 12 months except American refineries (6 months)
Source: Goldman Sachs Global Investment Research, FactSet For the exclusive use of [email protected]
3 September 2018 48 Goldman Sachs CEEMEA Refining Disclosure Appendix
Reg AC
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For the exclusive use of [email protected] Geydar Mamedov: CEEMEA Energy ex-Russia, Russian Integrated Oils. CEEMEA Energy ex-Russia: MOL, Motor Oil, Neste OYJ, OMV Petrom SA, PKN, Romgaz, Tupras. Russian Integrated Oils: Gazprom, Gazprom Neft, Lukoil, Novatek, Rosneft, Surgutneftegaz, Surgutneftegaz, Tatneft, Tatneft. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, “Goldman Sachs”) and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for investment banking services in the past 12 months: MOL (HUF2,870.00), Motor Oil (€20.30), Neste OYJ (€74.80) and PKN (PLN98.24) Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: MOL (HUF2,870.00), Motor Oil (€20.30), Neste OYJ (€74.80) and Tupras (TRY118.00) Goldman Sachs had an investment banking services client relationship during the past 12 months with: MOL (HUF2,870.00), Motor Oil (€20.30), Neste OYJ (€74.80) and PKN (PLN98.24) Goldman Sachs had a non-securities services client relationship during the past 12 months with: MOL (HUF2,870.00), Motor Oil (€20.30), Neste OYJ (€74.80), PKN (PLN98.24) and Tupras (TRY118.00) Goldman Sachs holds a position greater than U.S. $15 million (or equivalent) in the debt or debt instruments of: Neste OYJ (€74.80) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe
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Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 35% 53% 12% 63% 56% 51%
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