Hellenic Petroleum — A flexible refiner in a challenging time

Hellenic Petroleum operates three refineries in Greece with a total capacity of 344kbd and 65% of the Greek refinery output. It also has sizeable marketing (domestic and international) and petrochemicals divisions. Two of the refineries (Aspropyrgos and Εlefsina) are complex, integrated and provide significant flexibility of feedstocks/throughput. The third, Thessaloniki, is small and simple but houses Hellenic’s petrochemicals units, which have significant Greek and Mediterranean sales and complement Hellenic’s refining system. Hellenic has a large storage capacity (41.8mmbbl) that allowed it to benefit from trading opportunities in H220 (contango trades).

Despite COVID-19, Hellenic’s operations were uninterrupted in 2020. When some refiners in the region curtailed production or terminated activities due to lower demand, Hellenic sourced new customers, including outside Greece, and its exports increased 11% y-o-y in 2020 (+14% in Q420). The company also benefited from the flexibility of the refineries and switched production away from jet fuel (Greek demand for jet fuel dropped 67% y-o-y in 2020 due to the decline in tourism and air traffic) towards other mid-distillate grades. This allowed the refineries to continue operating at a high level and deliver outperformance relative to benchmark margins.

In November, Hellenic successfully completed the full (five-year) maintenance turnaround and upgrade programme for the Aspropyrgos refinery, despite significant challenges due to the pandemic restrictions. It was the largest turnaround project in Hellenic’s history, at a cost of over €130m. In addition to the maintenance work and financial performance uplift, the refinery will also benefit from improved energy efficiencies and a reduction in PM emissions by 50%, reflecting the company’s investment of over €35m in environmental projects.

The company’s increasing commitment to sustainability and environmental improvement projects is seen in its capital investments, with 20% of total capex in FY20 spent in this area and a plan for a corresponding share for FY21 exceeding 35%. This is driving the gradual transition to cleaner forms of energy and improving the environmental footprint of the company’s core business. Hellenic is targeting a 50% reduction in its carbon footprint in the current decade.

The acquisition of a 204MW photovoltaic (PV) project in Kozani, completed in Q420, was a milestone for the implementation of Hellenic’s strategy in Renewable Energy Sources (RES). Hellenic has a target of an overall 600MW installed capacity by 2025, supported by organic growth and acquisitions. The company holds a diversified project portfolio amounting to 1.3GW (PV, wind energy, biomass), in various stages of development (projects and permits).

The construction of the Kozani PV project began in November 2020, with a budget of €130m (€24m deployed in FY20, a further €80–100m in FY21), financed with a €99.9m Eurobond issued in October 2020 (the European Bank for Reconstruction and Development participated at 75% of the issue). The project is expected to be fully operational in Q122 and to generate c 350m kWh of electricity per year. Management expects a stable annual EBITDA of c €17m from 2022 as the previous owner, Juwi, had already secured the purchase price of electricity produced at the facility at 5.73 eurocents per kWh (for 20 years). We include the Kozani project in our valuation model for the first time.

Apart from the Kozani PV project, Hellenic has capacity of 26MW, which is already operational through seven PV parks with a total capacity of 19MW and a wind farm with capacity of 7MW in Pylos in Messinia.

In Q420, Hellenic reported adjusted EBITDA of €77m versus €66m in Q320 and €118m in Q419. FY20 adjusted EBITDA was €333m, down 42% from €572m in FY19. As can be seen in Exhibit 1, the main downturn was in refinery and benchmark margins, followed by the effect of COVID-19 on markets. These combined to a negative impact of €350m. There was also the negative effect of the full turnaround at Aspropyrgos, completed in November.

Crude oil prices averaged c US$44/bbl in Q420, significantly lower than the Q419 average of c US$63/bbl. This nevertheless represents a recovery from the multi-year lows recorded in Q220, following the OPEC+ countries’ agreement for the control of crude oil production and exports. In Q420 and in early Q121, refining margins recorded a small recovery as inventory started to clear.

Demand for refinery products in the Greek domestic market was affected mainly by reduced economic activity due to the lockdown in Q420. Demand for transport fuel sharply declined in Q420, affected by the second lockdown (-16% y-o-y). Hellenic still saw a recovery in demand compared to Q220 lows, but it remained materially below 2019 levels, especially in the aviation and bunkering subsectors.

Currently, the refining sector remains affected by low demand from the lockdown measures; however, the macroeconomic environment should improve in 2021 supported by the vaccine rollout programme. Hellenic should also benefit from Greece reopening to tourists relatively quickly, likely in May, as pandemic restrictions are lifted. This should drive the increase in domestic demand both for jet and road fuel in the region.

Hellenic improved its capital structure in FY20, drawing on additional liquidity and reporting end December net debt of €1.7bn compared to €2.1bn at end Q320 and €1.5bn at end FY19. It completed refinancing of €900m credit facilities maturing in Q420/H121, leading to further finance cost reductions of €104m in FY20, down 10% y-oy. Operating cash flow of €450m (€486m in FY19) covered a high level of capital expenditure of €295m in FY20 (€246m in FY19) and dividend payments of €154m. The elevated capex included costs of the Aspropyrgos turnaround, the digital transformation project and the Kozani PV project. We expect a similar level of capex in FY21, which will include €90m investment in the Kozani PV project.

Key changes to our financial estimates and market expectations include: weaker global demand for oil products caused by the ongoing COVID-19 pandemic; we have reduced our Q121 refining margin estimate; the adverse impact of a weaker US dollar versus the euro (-4% versus previous forecasts); updated forecast oil prices; and the impact of the Kozani PV project, which we now include in our model for the first time. We have lowered our refining margin estimates for Q121 as most countries have maintained pandemic-related lockdown measures. We expect margins to remain under pressure for at least three to six months, with subsequent improvements starting in the summer tourist season and a gradual recovery of the global economy. Our oil price assumptions, based on the most recent US Energy Information Administration’s forecasts for FY21, are up 29% compared to our November estimates.

All in all, our FY21 total adjusted EBITDA estimate is 8% lower compared to our previous estimate on account of ongoing weakness in the benchmark margins and weaker US dollar (mainly affecting the refining segment), partially offset by higher oil prices (affecting the petrochemicals segment, as oil price drives changes in polypropylene price). Our FY22 total EBITDA includes €18m from RES with the 204MW Kozani PV project expected to be operational in Q122.

We value Hellenic using a blend of DCF, leveraged and unleveraged FY21e EV/EBITDA and FY21e P/E multiples, arriving at a valuation of €6.55/share, unchanged versus our last published estimate. Changes to our forecasts are shown in Exhibit 6 above.

Hellenic trades on FY21e multiples of 12.1x P/E and 7.3x EV/EBITDA compared to the European group averages of 9.7x and 5.6x, respectively. Its free cash flow (FCF) yield is broadly in line with the peer group average at 10.5% in FY21e and its EV per complexity-adjusted barrel is higher than European peers at $1,471/bod. At the same time, the company trades at a discount to US peers on the majority of valuation metrics.

Our DCF valuation is based on discounted cash flows to 2025, using a 7% cost of capital. We incorporate a terminal value, which assumes the unwinding of working capital and 1% terminal growth. This results in a DCF valuation of €7.00/share versus our previous estimate of €7.13/share. The DCF valuation was positively affected by the addition of the Kozani PV project (€0.10/share) and an increase in oil price assumptions (€0.13/share); however, this was more than offset by the adverse impact of the weaker US dollar versus the euro (-€0.33/share) and a lower refining margins assumption for Q121 (-€0.02/share).

In 2020, the market caps of Hellenic and its peers decreased by an average of c 35%, hitting low points in March and November. Concerns about lower global demand for oil and petrochemicals had a negative impact on global refining systems. Nonetheless, compared to its European peers, Hellenic benefits from a flexible refining system with large storage capacity. Since November, its share price has increased 39%, albeit lagging peers (weighted by bigger companies with operations in the United States), as the market responded favourably to the vaccination programme and higher forecast oil prices.