Hungary MOL reports mixed figures for the first quarter

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The Q1 earnings report published by MOL today paint a mixed picture of the company. Clean CCS-based EBITDA beat the consensus forecast by 6% and the overperformance of clean CCS-based EBIT was 15%. Yet, the clean net profit came in much lower than expected.

As regards the performance of the different segments, large-weight E&P met expectations, whereas Refining & Marketing and Gas Midstream disappointed. The profit has practically halved at the former and - causing a huge surprise - the latter posted losses at operating level.

Impacts on the different divisions

Exploration & Production: as a consequence of the large impairments booked over the past few years, it is clean CCS-based EBITDA that most accurately reflects the performance of this segment. This shows a 25% yr/yr decline for Q1 2014. The segment was affected most negatively by the following factors:

• drop in average hydrocarbon prices (down by 7%), mainly attributable to a decline in natural gas prices in Hungary and Croatia - while on the other hand;
• shrinking natural gas production in the CEE region;
• MOL divested its Russian ZMB production field in August 2013, excluding that effect MOL’s production declined by 4% yr/yr
• Q1 2013 was increased by HUF 8 bn non-recurring revenue related to an inventory transfer to the Croatian Sisak refinery.

Reported EBITDA was down by less, 12% yr/yr, as the sale of Russian Baitex LLC’s 49% resulted in HUF 12.7bn one-off gain.

In Q1 2014, Upstream CAPEX amounted to HUF 130 bn, sixfold of the base period’s print, out of which the biggest element was the acquisition in North Sea area (74%). Beyond that, 34% of MOL’s organic investments went to Kurdistan Region of Iraq, 24% to Croatia, 12% to Russia and 11% to Hungary.

Refining & Marketing: EBITDA of the segment, adjusted for one-offs, dipped by more than 40% yr/yr, but due to the inventory revaluation it is best to examine the change in the clean EBITA here. This figure practically halved, due to the following factors::

• massively shrinking gasoline and gasoil cracks
• a 0.4 USD/bbl tighter Brent-Ural spread
• sales down 7% as sales in Italy dropped by 38% due to commencement of the Mantova conversion. Excluding the IES impact, the decline is 2%, mainly on “other markets", as a result of unfavourable changes in macro conditions.
• The negative factors above were partially offset by energy cost reduction.

We should briefly note that demand on key regional markets increased, as a result of which retail sales volume rose 5% yr/yr.

As in the previous quarters, INA’s performance makes a dent on group Downstream performance. Without this item, EBITDA after value adjustments on inventories would have come in some HUF 13 bn higher.
Gas Midstream: EBITDA, excluding special items, decreased by HUF 21 bn to HUF -5.8 bn compared to the base period which is mainly attributable to forced sale of Croatian Prirodni Plin’s gas inventory, the effect of which is already booked in Q1 as value adjustment on its inventories (HUF 15.1 bn).

Furthermore, Hungarian storage business, MMBF, was divested in 2013. Finally, domestic gas transmission business was adversely impacted by further cuts in regulated returns in November 2013 as well as by mild weather conditions in the quarter just passed.

The decline in EBITA stemmed from:

• major drop in the operating profit of FGSZ (no specific figures were revealed) over the unfavourable regulatory and economical environment.
• Prirodni Plin (PP), INA’s gas trading company, reported a HUF 21bn loss of EBIT in Q1 2014 mainly as a consequence of the forced sale of Prirodni Plin’s gas inventory (HUF 15.1bn effect), the effect of which is already booked in Q1 as value adjustment on its inventories. Moreover, performance was negatively affected by regulated household prices as well.
• Divestment of MMBF

One-off items

There was only special item affecting Q1 EBITDA and operating profit, namely the divestment of a 49% stake in Russian Baitex LLC which resulted in a gain of HUF 12.7 bn.


Profit

MOL’s reported operating profit dipped by 31% yr/yr in Q1, which was further eroded by worsened financial results. (Note that fair valuation loss on the conversion option embedded in the capital security issued in the monetization of treasury shares by Magnolia Finance Ltd. amounted to HUF 1.6 bn, and the exchange rate loss on borrowings boosted financial expenses by about HUF 8 bn.)

As a consequence MOL’s 12-month trailing EPS dropped further and reached a nearly four-year low.

Gearing

Following a considerable decrease in Q413, MOL’s gearing (net debt divided by net debt plus shareholders’ equity including non-controlling interests) was 18.4%, above the level as at the end of 2013 (16%), mainly due to the fact that cash stock dropped to less than its half. The slight increase in gearing is mainly attributable to the closing and payment of the Wintershall transaction related to the North Sea portfolio in March 2014. Gearing, however, remains well within MOL’s comfort zone.

Management comment

Zsolt Hernádi, MOL Chairman-CEO, has commented:

““Both regulatory and macro environment made tough the first quarter of the year. However I’m confident that we will overcome the challenges and 2014 will be a successful year for MOL.

“Last year we provided the basis through personal and structural changes to return to the growth path in Upstream production by the end of 2014. For this, the contribution of the Kurdistan Region of Iraq will be crucial and we already booked the first visible barrels from the region this quarter. However, the majority of the tasks are still ahead of us. We are now ready to accelerate the work program in line with the recently submitted Akri-Bijeel block Field Development Plan. We also finished up the North Sea transaction and are ready to start our work on our new portfolio, which will contribute to Group results by the second quarter.

“Going forward down this road, we are still looking for attractive M & A opportunities to achieve a step change in Upstream in 2014.

“In Downstream, refining macro conditions remained tough. However, demand recovery in our core markets is quite encouraging. From this perspective, it is especially satisfactory that we managed to strengthen our positions and captive markets across the CEE region even further. Eni assets, acquired in the Czech Republic, Slovakia and Romania, fit very well into our current portfolio and significantly reinforce our retail positions in these countries."

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