HELLENiQ ENERGY — Shaping up for the future

HELLENiQ ENERGY’s earnings are going to normalise after the bumper year seen in 2022, when refining margins spiked following the Russian invasion of Ukraine. However, more importantly the group is continuing its restructuring, which has resulted in the simplification of its corporate structure. HELLENiQ is looking to build up its renewable business and decarbonise its operations. This will reshape the group to fit into a world that is becoming increasingly concerned by global warming.

HELLENiQ ENERGY is a leading energy group located in south-east Europe. The company offers a range of products and services from refining and trading of petroleum products, petrochemical manufacture and fuel marketing through to renewable energy. The key operations are currently its three refineries. The company’s core operations are located in Greece although the group has expanded its marketing and renewable energy businesses into neighbouring countries. HELLENiQ ENERGY is the new name of Hellenic Petroleum, which reflects its ambition to become a major provider of new energy (such as renewable energy and sustainable fuels) and an integrated utility provider.

The management of HELLENiQ Energy has started a transformation programme. This has seen a radical overhaul of the corporate structure and identity. The restructuring programme will look to adjust the business to a world that is increasingly focused on a better environmental operating footprint. The key aims of this are to decarbonise the business and build up a renewable energy business. The decarbonising of the business is very much focused on its refining operations, where management is aiming to cut carbon dioxide emissions by 30% by 2030. The group is planning to build its renewable energy business and adjacencies such as biofuels and hydrogen. On the renewable energy business, the group expects to increase from a current level of 0.4GW to 2.0GW in 2030, and this is expected to allow the group to generate c 25% operating profits from this division.

Given the structure of its operations, the main short-term driver of profits will come from refining operations. A US$1 change in refining margins would lead to a €100m change in the group’s EBITDA. On top of this, a 10% change in the refinery utilisation rate would lead to a €70m change in EBITDA. However, with the refineries running at nameplate capacity, this should not prove to be a major issue. With the oil industry being very much US dollar based, the movement in currencies will have an impact on euro-based profits and a 10 cent change in the €/US$ exchange rate would have a €70m impact on EBITDA.

HELLENiQ ENERGY has benefited from the sharp rise in refining margins that were seen in 2022 following the Russian invasion of Ukraine. This saw net income rise from €341m in 2021 to €894m in 2022. We would expect to see refining margins move back to closer to historical levels, which would mean that over the next three years group profits would dip back towards 2021 levels, representing a 67% decline. The group pays a dividend, with management targeting a payout of 35–50% of recurring net income. With net income expected to come down from the levels seen in 2022, this would imply that the group will have to lower its dividend to normalised levels in the coming years. The dividend in 2022 included a €0.4/share special dividend after the sale of DEPA Infrastructure. The group has a high level of debt with gearing (net debt/capital employed) at the end of 2022 of 42%. This does include financing for the RES (Renewable Energy Sources) business that is project financing and non-recourse.

For the valuation of HELLENiQ ENERGY, we have looked at the company relative to a peer group of southern European refining companies (Motor Oil, Saras and Tupras). The group is trading at a 41% discount to this peer group on an FY25e P/E basis, which we believe is unjustified given the similar underlying fundamentals that drive the earnings of these companies. However, its valuation based on an EV/EBITDA multiple is more in line with the peer group. On a DCF basis we achieve a valuation of €9.7/share.

The group has started a transformation programme and has set a target of five areas (pillars) under a plan called Vision 2025. These are: improved corporate governance; fit for purpose corporate structure; new corporate identity; ESG strategy and greenhouse gas (GHG) targets; and business strategy and capital allocation. Three of these pillars have already been completed and management remains on course to achieve the other two by 2025.

The first pillar completed was corporate governance. Here the company has restructured the board of directors to create a board aligned to best practices. This gives the group more independence and moves it away from being perceived as an arm of the Greek government. The new board has 11 members, including four non-executive directors appointed by the Greek state, and no representation from unions and employees. Of the remaining seven directors, there are two executive directors (Andreas Shiamishis (CEO) and Georgios Alexopoulos (deputy CEO)) and four independent non-executive directors. The board is led by the non-executive chairman, Ioannis Papathanasiou, who is appointed by the Greek state. This gives a streamlined structure that can enable a quick and decisive process.

The group has a new business structure. It has formed a holding company (HELLENiQ ENERGY), with the activities legally split into main business units such as HELPE (refining and petrochemicals), EKO (domestic fuels marketing), EKO International (international fuels marketing) and HELLENiQ Renewables. This gives more accountability to each unit, streamlines the decision-making process and should ultimately help improve shareholder returns.

The group has also changed its identity to embrace the action that the company is taking with its move into energy transition. The group is now called HELLENiQ ENERGY, rather than Hellenic Petroleum, to reflect its increased focus on energy transition and renewable energy. However, the Hellenic Petroleum and EKO brands are not affected on the marketing side of the business.

Management is working hard towards achieving the remaining two pillars of its plan, which cover ESG strategy and GHG targets, as well as business strategy and capital allocation. We believe that these are the most important areas of the transformation programme as they will make the group more aligned with the changes in the operating environment, which is increasingly focused on global warming. We will discuss the specifics in the Operating divisions section below, but the main focus covers the decarbonisation of its refining business and building up a significant renewable energy business.

HELLENiQ ENERGY’s historical roots are in its refining and marketing operations within Greece. On the petroleum side, the group’s main activities include refining, the supply and trading of petroleum products, and fuel marketing in Greece and six neighbouring countries. The group is also involved in petrochemicals, power generation and trading, and is building up its renewable energy business. Through its holding in DEPA, it is also involved in the gas supply chain.

HELPE is the old base of HELLENiQ ENERGY and covers the downstream manufacturing operations of the company such as refining, supply and sales of oil products and the manufacture of petrochemicals.

The group owns and operates three refineries (Aspropyrgos, Elefsina and Thessaloniki), which are all located in Greece and have a combined capacity of 344,000bbl/day, which accounts for c 65% of the country’s refining capacity. These have undergone major upgrades over recent years and two of its refineries (Aspropyrgos and Elefsina) are now some of the most complex in southern Europe according to the Nelson Complexity Index (which measures the secondary refining capacity compared to the primary distillation capacity) – the higher the index number, the better the refinery. The Aspropyrgos and Elefsina refineries are linked by pipelines, allowing the group considerable flexibility in supplying markets and taking advantage of the differing configurations and complexity of the refineries. This cluster has a combined Nelson Complexity of 9.4, which, as we mentioned earlier, is one of the best in Europe. The details of the specific refineries are shown in the table below.

In 1999, the group bought the OKTA refinery in the Republic of North Macedonia and this is now linked by pipeline to the Thessaloniki refinery. The importance of this asset is that it can act as a distribution centre for HELLENiQ's international operations, which have been growing in the Balkan states.

The group is looking at improving the performance of its refining business, which will come from the digital transformation of the company, increasing energy efficiency and optimising the procurement. This will lead to more profitable unit operating margins for the group. Management believes that this could provide a €50m boost to underlying EBITDA by 2025, which is c 11% of our forecast refining EBITDA. This could be the main driver of profitability in its refining operations given that, assuming no major changes in refining margins, the other important driver will be volumes, where growth rates will be modest in this mature market.

However, we believe the main focus will be on the reduction of GHG emissions. Management is aiming for a 30% reduction in carbon dioxide emissions at its refining operations. Currently, the average annual emissions are 4.2m tonnes/year. It targets, by 2030, a reduction to 2.9m tonnes. On top of this, the group would expect to receive emission offsets of c 0.9m tonnes/year from the expansion of its renewable energy business from the government. This would allow the group to reduce its effective emissions by 50%.

At present the group has free allowances of c 2.5m tonnes at its refineries, which means it has to buy c 1.7m tonnes of carbon credits. At current levels of c €80/tonne, this implies a cost to the group of €136m/year. The free allowances at its refineries would gradually be reduced, going down to zero in 2034, leaving the group to have to buy increasing levels of carbon credits. The cost of carbon credits has been rising over the last few years and we believe that, with tougher controls on emissions in the future, this trend is unlikely to be tempered. This would lead to a significant cost to the company.

Through to 2025, the group is looking at a raft of measures to reduce its GHG emissions. Two important steps will be to reduce the energy consumption at its refineries as well as potential carbon capture/hydrogen projects. We have looked at the Elefsina refinery, which HELLENiQ wants to become the decarbonisation paradigm of the Mediterranean region. At present, this refinery is emitting c 2.1m tonnes/year of carbon dioxide. The first stage of this decarbonisation will be to incorporate the latest technologies, which will optimise the performance of the refinery. This will help in areas such as a reduction in flaring and greater energy efficiency. Management is also looking to increasingly electrify the operations and reduce consumption of hydrocarbons. HELLENiQ ENERGY could also take advantage of the growing renewable supplies that it wants to put in place. This plan for the refinery is expected to allow a 0.9m tonnes/year reduction in emissions. Management is also looking at building a co-generation unit, which would improve security of energy supply and increase the stability of the operations.

In the longer term, management is implementing other measures. Perhaps the most important is a carbon capture and storage (CCS) project. This would look to move carbon dioxide produced at the refinery to a depleted oil field in the north, where it would be injected into the reservoir and stored. This CCS project would also incorporate the production of blue hydrogen, which is made from splitting natural gas into hydrogen and carbon dioxide. The carbon dioxide produced in this process would also be captured and stored. This is a more environmentally friendly method compared to grey/black hydrogen where the carbon dioxide is emitted to the atmosphere. Hydrogen appears to be one of the more important future transition fuels and is seen as a preferred store of energy and is increasingly used in heavy duty transportation (such as shipping and trucking). We believe that the company is preparing the fiscal and regulatory framework of this project and would expect to hear news on the progress over the coming year. We believe that this CCS project could remove 0.6m tonnes/year of carbon dioxide, which would represent a 14% reduction in the group’s carbon dioxide emissions.

The company also has ambitions to build an on-site 10MW solar energy unit and associated green hydrogen production. Green hydrogen is created by the electrolysis of water and leads to no production of carbon dioxide. HELLENiQ ENERGY is in an ideal position to market any hydrogen produced through its existing trading/retailing operations.

HELLENiQ’s petrochemical business is solely focused on polypropylene. The group uses propane produced at its splitter at the Aspropyrgos refinery, which is transported to the Thessaloniki refinery where it is turned into polypropylene. This supply of propane accounts for 80–85% of the requirements of its plant, which has a current capacity of 235,000 tonnes/year. The remaining supply needed for this facility comes from imports. The company is looking at increasing the potential capacity of its polypropylene plant to 300,000 tonnes/year. This move is now at the final investment decision (FID) stage and a decision is expected on whether to proceed in the next year.

The group also has the ability to produce 25,000 tonnes of biaxially oriented polypropylene (BOPP) from its propylene. BOPP is used in packaging and HELLENiQ ENERGY is the only manufacturer in Greece. The group is also a major exporter of this product to other Mediterranean countries. It is a highly specialised product and commands a high operating margin, adding significant value to its petrochemical business compared to other producers. The company does not breakdown the margins of BOPP compared to polypropylene.

The group’s core market by volume is Greece, although over the last few decades it has expanded into countries to the north (into the Balkan countries) as well as into markets such as Cyprus. Within Greece, the company has 1,682 retail sites as well as selling to other segments of the industry such as bunkering and aviation fuels. HELLENiQ has a domestic market share of c 32% of fuel sold.

Internationally, the group has 317 retail outlets. Although this is a fraction of the number of sites within Greece, the overall profits from these international operations are similar to its domestic business. This is due to the nature of the retail outlets, which tend to be company owned, company operated (COCO) and this gives management more control over the offerings at these sites, and the group is able to benefit from significantly higher unit margins. The sites in Greece, by contrast, tend to be more orientated to dealer owned, dealer operated (DODO), with only c 300 sites being COCO. We believe that this is an area where management would like to see changes, increasing the number of Greek COCO sites at the expense of DODO sites. This could therefore see HELLENiQ ENERGY actually decrease the number of sites but increase profits. The group does not have any specific targets for this process.

Management is also looking at improving the offering at its retail outlets with more services, such as increasing the amount of electric vehicle charging points. In 2022, the group installed 50 fast charging points at its service stations. Although this is modest given the number of sites, we believe that installation will accelerate as demand grows and the company is targeting 250 charging points in the medium term. As the market for electric vehicles grows, HELLENiQ will be better placed than most of its peers to meet the growth in demand. This would also fit with the group’s desire to ramp up its renewable power generation capacity, which it could offer to its customers.

HELLENiQ moved into the upstream segment of the oil and gas industry in 2015 with the formation of HELLENiQ Upstream. This is an early-stage exploration and production (E&P) business, with the company having interests in six offshore exploration licences. The company has recently acquired 2D seismic data, with ExxonMobil, in its blocks around Crete. The company has also acquired 3D seismic data on its three other blocks. It is now processing this data to decide if there are any targets that merit further work ahead of potential drilling in 2024/25.

The focus of the group is offshore gas given that this would help to reduce the reliance of Greece on Russian gas, which has been highlighted by the recent disruption after the Russian invasion of Ukraine. Until management has identified drilling targets, this will be a peripheral business. Even if drilling targets are identified and successfully drilled in the next couple of years, the long lead times involved in upstream operations will not see this business contributing to operating profits over the remainder of the decade. However, as we have seen in the E&P sector, success with the drill bit could provide significant shareholder value and even if the company is not willing to move to development and production, there is still a market for reserves and resources found.

Along with other governments, Greece is looking at imposing dramatic reductions in greenhouse gases. The National Climate Law from May 2022 aims for a 55% reduction in emissions by 2030 and an 80% reduction by 2040. This will come from a reduction in the share of fossil fuels, for example lignite-fired generation will be phased out by 2028. The gap created by the phasing out of fossil fuels will need to be filled by renewable energy, with most of this coming from solar and wind. Greece offers one of the best locations within Europe for solar and wind generation.

HELLENiQ is looking at significantly building up its renewable energy business. At the end of Q2 the group had 356MW of capacity, with 72% of this being solar (photovoltaic, PV) and the remainder being wind. The group has ambitious expansion plans and wants to build this up to 1GW by the end of 2025 and 2GW by 2030, with half of this coming from solar and the remainder from wind and storage. The company expects the business to generate EBITDA of €200m in 2030, which is c 25% of group operating profit. This compares to €29m in 2022. The growth is going to be a mix of organic growth and acquisitions and will be in Greece and neighbouring countries. To help with this expansion, HELLENiQ ENERGY has signed a financial framework agreement for €766m with two Greek banks for projects in Greece.

On the organic growth side, the company has a current portfolio of 3.1GW at various stages of planning and development. There is the potential to increase this portfolio further. For example, the group has reached heads of terms with RWE for a 50/50 joint venture (JV), which will look at the development of offshore wind farms along the coast of Greece. In August, the group won a tender to build up an energy storage business, its first foray into this segment. This involves three units at the Thessaloniki Industrial Facility, which will have a combined power capacity of 100MW and 200MWh of guaranteed storage.

The group is also looking at acquisitions of projects. Recently, HELLENiQ announced the agreement for the acquisition of a portfolio of four PV parks in Romania, expected to have a combined capacity of 211MW. However, the asset market is currently very heated and prices have risen dramatically, which could limit management’s willingness to expand through acquisitions. At present capacity is selling for 11–12x EBITDA, which would allow an internal rate of return (IRR) of a mere 6–7%; in comparison, organic growth is expected to have an IRR in excess of 9%. Investors should be aware that HELLENiQ ENERGY is looking at financing 65% of its RES projects through project financing. The group will also benefit from some synergies in terms of energy management.

The current rising interest rates could put some pressure on margins, which might lead to a better market for acquisitions. There are a considerable number of projects being developed by private equity groups and given their focus on short-term returns (rather than running an underlying business) there could be more projects being sold for more realistic prices. We have seen some weakness in PV recently. This would help with HELLENiQ ENERGY’s ambitions for growth.

HELLENiQ Energy has formed a 50/50 JV, Elpedison, with Edison SPA for power generation in Greece. At present, the JV has two combined cycle gas turbines (CCGTs), in Thisvi and Thessaloniki. Both of these plants have a capacity of 420MW, to give a combined capacity of 840MW. Although the group has historically supplied industry, there is a growing desire to build up its supply base and it currently has a market share of c 6%. The JV is looking at the potential of adding a further 826MW CCGT in Thessaloniki (which is subject to an FID), which would nearly double its capacity.

On the gas side, HELLENiQ ENERGY has a 35% share in DEPA International and DEPA Commercial. DEPA Commercial is the largest supplier of gas within Greece. DEPA International operates gas interconnectors between Greece and its neighbours such as Bulgaria and Cyprus. The group is considering its options for this business. It sold its effective holding in DEPA Infrastructure to Italgas in September and is looking at the other parts of its gas involvement. We believe that further sales are likely.

In the following section we discuss the changes that will affect the profitability of HELLENiQ ENERGY’s business. The main driver in the short term will be the refining margin, which is proving to be volatile after the Russian invasion of Ukraine and allowed the group to benefit from bumper profits in 2022. Going forward, the group will see an increasing contribution from its renewables business and this will provide a more stable source of profits.

Refining margins are the major driver of HELLENiQ ENERGY’s profits. A US$1/bbl shift in refining margins is expected to lead to a c €100m change in EBITDA. The group had a boost in 2022 with the spike in refining margins following product shortages after Russia’s invasion of Ukraine. Over 2022, the group realised a margin of US$21.20/bbl compared to US$8.60/bbl in 2021. This allowed a €949m boost to EBITDA. We believe that refining margins will move back to the historical average seen in previous years. In the first three quarters of 2023, the group realised a refining margin of US$17.80/bbl. However, the system is very fragile given the capacity that has been taken out of the system due to sanctions and so investors could see significant volatility in margins in the short term.

Refinery utilisation could also be important to the profitability, although this pales in comparison to the impact of refining margins. A 10pp increase in refinery utilisation would lead to a €70m boost to our EBITDA forecasts in the year this was achieved. The digitalisation of the business will allow better utilisation, but we believe that this will be relatively immaterial given that in Q123 the refineries were running at 102% of nameplate capacity and so there is not much room to run these refineries at higher levels.

The profitability of the petrochemical market is driven by the polypropylene margin, which we do not expect to change too dramatically and so we expect to see EBITDA of c €50m in subsequent years. The big future driver is the potential profitability that could come from the expansion of its plant from 240,000tpa up to 300,000tpa, representing a 25% increase in capacity. Although the group is looking at making an FID soon, we do not believe that expansion in capacity will be in place in the next three years and so it should not be a factor in medium-term profitability. The other factor involved in an increase in capacity is that the propylene would have to be imported and so the unit margins would not reflect those currently enjoyed from its domestic production. Additionally, there is not expected to be an increase in the group’s BOPP capacity, which is an important boost to margins.

The marketing business profitability is driven by volumes. At present, the profitability is split between its domestic and international outlets. For the domestic operations, we do not expect to see much growth in volumes or EBITDA as this is a relatively mature market and there is little potential of growing market share significantly, with the group the market leader. If anything, we could see the group focus on getting more COCO sites, but these few sites will be more profitable. For the international operations, we expect to see volumes grow by 3% per annum, which would reflect increasing market share and further expansion in some newer markets.

The renewables profits are driven by capacity. At the end of Q323, the group had capacity of c 0.36GW and generated an EBITDA of €29m in 2022. We believe that as the group reaches a capacity target in 2025 of 1GW, this could be generating an EBITDA of c €100m in 2025. We have assumed that this will be linear over the next three years. However, this will depend on the acquisitions and organic growth.

As we mentioned earlier, the E&P business is a nascent business for HELLENiQ ENERGY as the company is still looking at potential drillable targets in its licences. There is no production, so the EBITDA mainly reflects the spend on seismic acquisition costs that is written-off. We believe that this will stay at similar levels over the coming years. This could increase in 2025 if the company decides to start drilling, given that well costs are likely to run into tens of millions of US dollars and this would have to be written off if the well was a failure. We are not factoring this into our forecasts given the unknown outcome of any well drilled.

The group also has its gas and power business. We have assumed that this will carry on as it has historically and that this remains part of the group, since we are uncertain as to when (and if) the gas side of this business will be sold.

The euro/US dollar exchange rate is important to the group, given that the oil industry is very much US dollar denominated. A 10 cent move would lead to a €75m change in EBITDA in our estimates. We are not assuming that there is any change in exchange rates so this should not be an issue with future profitability.

As we mentioned earlier, the board of directors has been streamlined down to 11 directors and now includes a non-executive chairman and two executive directors.

Ioannis Papathanasiou (non-executive chairman): Mr Papathanasiou is the non-executive chairman of the board. He has been a politician since 1990 and held a number of roles in government with his most prominent role being the minister of finance and economy. He has also served as vice chairman of the board of Public Gas Corporation (DEPA) and chaired the board of Hellenic Petroleum.

Andreas Shiamishis (CEO): Mr Shiamishis is the CEO of HELLENiQ ENERGY. He joined Petrola Hellas in 2003 as chief financial and IT officer. Following its merger with Hellenic Petroleum, he assumed the role of CFO of the enlarged group. He then served as deputy CEO before becoming CEO in 2019.

Georgios Alexopoulos (deputy CEO): Mr Alexopoulos is the deputy CEO of HELLENiQ ENERGY. His role is general manager of strategic planning and new business for the group. He has previously been on the board of directors of the European Petroleum Refiners Association.

Vasilis Tsaitas (CFO): Mr Tsaitas is the CFO of HELLENiQ ENERGY. He has been with the group since 2007 and has held a range of roles prior to becoming CFO, including being responsible for international capital markets and head of investor relations.

The oil industry has significant risks given the inherent volatility in the operating environment, as we have seen with refining margins in the last two years.

The biggest risk that we can see is with the toughening stance from global governments on the environment. The world is growing increasingly concerned by climate change and one of the largest perceived contributors to this has been the burning of fossil fuels. We believe that the big risk to oil and gas companies is a significant tightening in regulation. With HELLENiQ ENERGY being a major refiner, this will have an important impact. We have addressed this earlier, but there is a major risk from tighter emission controls and this could lead to further costs to the company. HELLENiQ is aware of this and is putting in place ways to reduce emissions and is building up its renewable energy business.

The upstream side could also see more regulation coming through. This is not so much of an issue for HELLENiQ ENERGY. As we mentioned earlier, this division is an early cycle business and the company has not committed significant capital to this side of the business and so the impact of having stranded upstream assets is at this stage not a major issue.

Price inflation also represents a problem. The group has several major projects that it could start to commit to (such as the potential petrochemical expansion and growing its renewable business). If inflation does start to rise, it could reduce returns and, as such, make the potential expansions less likely.

As we mentioned previously, refining margins are the main driver of earnings. A fall in refining margins could have a significant impact on the cash flows and earnings of the business. The spike in refining margins after the Russian invasion of Ukraine has demonstrated that the refining market is tight and so we believe that this will not create too many risks in the medium term.

Rising interest rates could also have an impact on profits. The group has significant net debt, which mostly has variable rates. Although it would appear the current tightening cycle is getting close to its peak, this could still be a concern for investors.

We have looked at the valuation of HELLENiQ ENERGY through a peer group analysis. The peers have a similar mix of assets and are located in southern Europe where there are similar market conditions. This rules out companies with larger upstream operations and more global operations. For the peer group we have looked at Motor Oil Group (Greece), Saras (Italy) and Tupras (Turkey). These companies derive most of their earnings from the refining and market operations and hence have a similar trajectory in earnings.

As can be seen in the table below, HELLENiQ is trading at a discount on a P/E basis to the other companies. We would consider Tupras to be the closest peer. However, it is based in Turkey and its operations and its share price is in Turkish lira (with the other peers in euros) and so will give investors added currency risk. Investors should also note that the estimates for the peer group are from Refinitiv consensus, while the estimates for HELLENiQ are from Edison Investment Research.

HELLENiQ ENERGY is trading on an FY25e P/E of 6.1x (Edison) compared to its peer group average of 10.4x, a 41% discount. On an EV/EBITDA basis the company is trading in line with the average for the peer group

On a DCF basis we calculate a valuation of €9.70 per share. Our valuation is based on cash flows to 2030 and thereafter we have assumed no change in refining margins. We are using a weighted average cost of capital of 10%. We also incorporate a terminal value, which assumes 1% terminal growth.

As mentioned earlier, 2022 proved to be an exceptional year for HELLENiQ ENERGY as it was able to benefit from a spike in refining margins. 2023 has also been good to date compared to normal years, although operating profits for the first nine months of the year were 35% lower than in the corresponding period in 2022. However, we expect to see refining margins move back towards more historical levels over the last quarter of 2023 and in 2024. This will lead to a decline in earnings. We forecast net income of €640m in 2023, which represents a 29% decline from 2022. We forecast earnings of €467m in 2024 and €389m in 2025, which we believe is the normalised level of profitability. These forecasts are predicated on the refining margins discussed previously. The earnings growth after this will be driven by the growth in the renewables division. As we mentioned earlier, the rate of this growth gives some uncertainty to long-term forecasts. However, if the group can deliver on its targets, the renewables division could be generating EBITDA of c €200m, which would be c 25% of the group total.

The group pays a dividend and management has a target of distributing 35–50% of recurring adjusted net income. Given the movements in the earnings this has led to a very volatile dividend, as shown in the chart below. We are forecasting that the group will pay out a dividend of €0.5/share, which represents an aggregate 36% payout of earnings over the next three years.

In 2022, the group paid out a total dividend of €1.15/share, which reflects the higher earnings and also included a special interim payment of €0.4/share on the back of the sale of DEPA Infrastructure to Italgas.

Although we expect earnings to show a marked decline, we feel that the decline in net cash flows generated should prove to be more muted. 2022 saw net cash generated from operating activities increase to €630m from €262m in 2021. However, this was constrained by large increases in working capital due to oil price moves. The working capital increase in 2022 was a significant €1bn. We are not forecasting any major changes in oil prices; we believe that this working capital movement will become very modest. We saw the group benefit from a reversal of some of this working capital increase giving cash flows a boost of c €0.26bn in the first nine months of the year. After working capital movements, we are forecasting 2023 cash generated from operations of €1.4bn compared to €0.6bn in 2022.

The capital expenditure is at this stage uncertain and we are forecasting that this will remain at a level of €350m, which should allow the group to pay down debt. Of this, underlying organic spend is expected to be c €250m. At the Q3 results, management was expecting maintenance spend on the refining business would be €150–200m with a further spend of €50–60m. There is also a further €20–25m on the digitalisation programme. However, the big uncertainty is over its renewables expansion and whether this comes organically or through acquisition. Management is looking at spending €250–300m on the renewables business, which would take annual spend up towards €600m. The group also has some potential major expansions, such as the enlargement of its petrochemical division, and the timing and costs of this are uncertain.

The group is relatively highly geared. At the end of 2022, it had net debt of €1.94bn, which resulted in gearing (net debt/capital employed) of 42%. However, on a net debt/EBITDA basis the company is standing at a more modest level of 1.1x. The group saw lower debt at the end of Q3 of €1.48bn. We are not forecasting a major reduction in debt levels over the next few years due to the increase in capex. One important issue for investors is that a large portion of its debt is floating and so the company has been hit by the recent rises in interest rates, which has led to higher financing costs. It would appear the recent wave of fiscal tightening is coming to an end. In Q323, management rolled over debt that was due in 2023 through to 2028 with a new €400m revolving credit facility (RCF), which completed the €2.2bn refinancing that was started in 2022.