Refiners are expected to continue to face significant uncertainties, mainly due to the energy transition, with refining margins intensifying their volatile trajectory in the coming years. The Greek motor oil and lubricant refiners’ “defence” against the energy transition is to exploit their cash flows when they are in the higher part of the cycle as efficiently as possible, increasing renewables in their investment portfolio.
The truth is that the Russia-Ukraine war and Western sanctions on both oil and refined products have not only sent oil prices soaring, but also sent refining margins skyrocketing. Compared to crude oil, export products are generally more difficult to market, either due to a lack of buyers or fewer available tankers. As a result, an increasing volume of Russian exports are actually stored in trading centers or at sea, thus keeping refining margins high.
In the past two years or so there has been a change in Chinese policy on refined export quotas. This forms part of China’s longer-term policy to reduce export emissions from running imported crude oil through less efficient refining processes in China, leading to maintaining high profit margins in the medium term.
At the same time, the difficulty of implementing the refinery is considered one of the strongest factors that can keep refining margins at satisfactory levels. Such a possibility cannot be seen in the coming years either in Greece or in the entire Mediterranean region. It is clear that the supply chain issues that have arisen post Covid-19 have so far been a disincentive to upgrade old units and set up a new refinery.
On the other hand, the biggest fear, not only for refiners, but also for oil companies, is a possible recession in the US and global economy in general. The bogeyman that seems to exist in the markets is the biggest threat to the industry. We all witnessed what happened in March 2020 in the oil sector, which is not expected to happen again, but the recession will certainly put pressure on refining margins and beyond.
Motor Oil: Strong dividend yield and good valuation
Motor Oil first reported Q2/1H 2023 financial results that fell short of market estimates, foreshadowing what’s to come in the refiner’s other results. Thus, not only sales volume declined, but also sales volume declined, indicating shrinking refining margins.
However, despite the shrinking business, active management saw adjusted EBITDA margin improve by 132 basis points, narrowing the EBITDA margin to just 13.8%. Among the positives should be included the reduction of net borrowing by 12%, but also the most dynamic program towards the energy transition in relation to the ELPE, with the development of 772 MW of renewable energy sources!
The EV to EBITDA ratio is set at 3.7 times (2023E), compared to 2.6 times adjusted EBITDA for 2022. It is worth noting that the valuation for 2022 is a record high (at least 10 years) for motor oils, while for similar ones listed On foreign exchanges (outside the USA) the valuation constitutes a very small discount.
Finally, Motor Oil’s consistently high dividend yield is one of its strengths. In particular, a conservative estimate based on the current market value is estimated to be at least 6%. It should be noted that the dividend yield over the last twenty years reached 6.5%, noting that the company only distributed dividends in 2014 and 2020!
Hellenic Petroleum: Focus is on profits and development of renewable energy sources
Regarding Hellenic Petroleum’s financial results for the second quarter, the numbers were below market estimates mainly due to inventories. However, as confirmed by the management of both refineries, a significant improvement in volumes is expected in the third quarter, and is expected to continue into the final quarter of the year.
To understand the improvement in refining margins from the pandemic onwards, it is useful to see that with sales volumes equal in the first half of 2019 and 2023, the comparable operating margin increased by 65% (!), while essentially remaining at the level of the first half of 2022, which It was also a record six-month period for Hellenic Petroleum Group! In terms of renewable energy sources, as of June 30, 2023, the group had developed 356 MW!
The EV to EBITDA ratio is set at 3.7 times (2023E), versus 2.8 times adjusted EBITDA for 2022. Valuation for 2022 is a record high (at least 10 years) for ELPE as well, while with respect to comparable equivalents listed on foreign (non-US) exchanges United) The rating gives a very small discount.
Finally, ELPE’s dividend yield is high, expected to reach 6%. It is clearly much lower than last year, as there were exceptional factors (sale of infrastructure to Depa) that pushed profits to 14%! Finally, low free variance deprives the stock from entering the standard MSCI index!
Earnings estimates for 2023 and 2024 were revised upward
For Q2 2023 (more than 99% of reported financial results), 79% of S&P 500 companies beat market estimates on earnings per share, while 64% of S&P 500 companies performed better than estimates on revenue. Despite all this, earnings per share for the second quarter ended with a decline of 4.1%, for the third quarter in a row!
For the third quarter of 2023, 73 S&P 500 company management lowered their EPS estimates, while only 42 companies raised their earnings estimates.
However, market estimates for the third quarter are improving after initial estimates at the beginning of the quarter. Specifically, Q3 EPS estimates improved by +0.4% ($56.10 from $55.86) in the June 30 to August 31 period. Therefore, Q3 EPS is expected to increase by +0.8% compared to Q3 2022.
Meanwhile, by +0.6% (to $58.07 from $57.72) Q4 2023 EPS estimates were revised from June 30 to August 31, resulting in an upward revision to 2023 annual earnings by +0.9% (to $222.45 from $220.42) from June 30 to August 31. In line with 2024 earnings estimates, which rose +0.9% (to $248.54 from $246.16) from June 30 to August 31.
Obviously, the changes may seem small, but the trend is an important indicator to take into consideration for the coming period.
Finally, on the valuation side, the S&P 500’s trailing 12-month price-to-earnings ratio is 18.8, which is higher than the five-year average of 18.7 and the 10-year average of 17.5.
Agenda (12/9 – 9/17/2023)
All eyes are on Moody’s decision on the country’s creditworthiness
The exercise of the preferential right to participate in Foodlink’s AMK ends today, Tuesday. On Wednesday, EYDAP shares will trade without the right to a 2022 dividend of €0.02 per share, while Ble Kedros AEEAP shares will trade without the right to a capital return of €0.10 per share. On Thursday, Elvalhalcor, General Trade and Industry and Alpha Trust Andromeda SA are expected to announce financial results for the first half of 2023, while Real Consulting shares will trade without the right to a dividend of 0.03 euros per share. Alumil and Mouzakis are expected to announce financial results for the first half of the year on Friday, and Revoil has called an extraordinary general meeting. With the main issue being the purchase of private equity, Lamda Development has called an extraordinary general meeting, while at 14.00 the SME and SME share rights and rights to the FTSE/ATHEX Large Cap Index expire. Finally, the week will conclude with the country’s scheduled rating announcement by Moody’s late Friday night. It is noteworthy that Moody’s has rated the country at “Ba3”, which is three notches away from investment grade. The next scheduled rating is scheduled to be issued on October 20 from Standard & Poor’s, which maintains a “BB+” rating, just one notch below investment grade.
Focus on the European Central Bank meeting and inflation in the United States
Abroad, today, Tuesday, the economic climate index from the ZEW Institute will be announced in Germany based on September data, while shortly after the publication of the monthly OPEC report. On Wednesday, the change in GDP for July will be announced in Great Britain, while in the US inflation for August will be published at 15.30. Thursday will be dominated by the European Central Bank’s announcement of interest rates on the euro, as well as the following press conference by the ECB President, adding to the volatility in the markets. Just 15 minutes after the ECB interest rate announcement, US retail sales and producer price index will be released based on August data. The week concludes on Friday with the announcement of consumption and inflation forecasts from the University of Michigan, both in the short and long term.
* Demosthenes Tringas is a certified stock and market analyst at Beta Exchange – [email protected]
** Copied from Kivalio newspaper
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