As the EEMEA refining sector is going through one of the most challenging macro environments in its history, most headline valuation multiples seem to be of little use given an extremely volatile 2020e margin environment and uncertainties around the pace of recovery. The latter is especially important as consensus, and we, assume some normalisation of crack spreads in 2021e, but the reality may be different (we now assume very modest margin recovery in 2021e).
What could change for the better, and when could it change?
While the crude price differentials seem to be recovering on the back of stronger supply from the Middle East and Russia and sizeable price cuts by Saudi Arabia from September, it’s still not clear how the situation may develop, with what seems to be a sustained oversupply of middle distillates. Clearly, the pace of demand recovery is one of the key variables.
In many EEMEA countries, motor fuel demand has already nearly fully recovered and is even higher y-o-y, as people prefer to drive when the Covid-19 outbreak is still not contained. Jet fuel demand has been much slower to recover, though, and a full recovery may take years. Yet, there may be positive surprises on the supply front, with a number of refineries already permanently shutting down given economic pressures.
How fast the supply response may materialise is not clear either, though
Having said that, we note that the sector trades at very low FX-adjusted price-to-book multiples similar to what we observed in 2009 and 2014-15: in both instances, the sector recovered strongly. We see no reason yet why we shouldn’t expect a similar development this time, despite the energy transition trend so far, which seems to be a bigger issue for coal-fired power generation, and which could take years to alter motor fuel balances in the region meaningfully.
With this note, we update our models with 2Q20 results and weaker crack spread assumptions. Still, we upgrade our ratings for Grupa Lotos, MOL Group and Tupras to Buy (from Hold) on valuation grounds after weak share price performances. We maintain our Buy rating on PKN Orlen. We highlight a likely resilient ‘clean’ EBITDA profile at PKN Orlen and MOL Group and ample room for a DPS recovery at Tupras from 2021e.
HSBC Global Research Report, excerpt
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