Equity
Record production, new wells unable to remedy Mol’s biggest headache
Record production volume and new wells were unable to remedy Mol’s biggest headache
Highlights of Mol’s Q1 2019 earnings report:- Clean CCS EBITDA declined nearly 10% yr/yr in HUF terms and nearly 20% in USD terms, partly due to the impact of a weaker forint.
- Operating and net profits contracted by about 20% over the base period.
- Supported by robust production volumes, Upstream earnings (in USD terms) remained flat, output reached a cc. 7-year high, almost reaching 116 mboepd.
- Downstream EBITDA contracted sharply, partly due to the drop of refinery margins to a five-year low, which led to an increase in the weight of the petrochemical segment to around 70%.
- Consumer Services, including the development of the Fresh Corner concept and a significant rise in its profits continued, and the share of non-fuel sales increased further.
- Cash flow generation moderated in annual terms, but remains significant.
- In view of the Q1 results, the management’s 2019 targets continue to appear attainable.
What results did Q1 bring?
Clean CCS EBITDA, a key metric in the oil sector, came in 5% below the consensus estimate and Mol’s after-tax profit undershot the market’s call by 4%, while the group’s operating profit was 2% higher than expected. Key earnings show contraction in annual terms: EBIDTA in HUF terms was down 9%, operating profit shrank 21% and after-tax profit declined 19% yr/yr. In a q/q comparison, which is less relevant due to the cyclical nature of the sector, the contractions were even greater.Examining the contribution of the different segments to group EBITDA we find that while Consumer Services (+7%) and Gas Midstream (+2%) performed better than expected, Upstream (-1%) did largely as expected, while Downstream (-9%) was behind the consensus. In annual terms, Consumer Services grew by over 20% again, while Upstream EBITDA grew by 10%. Refining & Marketing EBITDA, however, decreased by 30% and Gas Midstream EBITDA fell 15% yr/yr. Compared to the fourth quarter of 2018, Gas Midstream (+36%) and Consumer Services (+5%) fared better, while Upstream (-17%) and particularly Downstream (-43%) fared a lot worse.
Exploration & Production
Upstream’s EBITDA in forint terms and calculated without one-offs grew by 10% yr/yr, a feat that was achieved by Mol with Brent at 63.2 USD/barrel, a lot lower than in the base period (66.8 USD/barrel). The improvement was supported by production levels at multi-year levels, a decline in unit costs and a moderate rise in realised hydrocarbon prices. Free cash flow generation in the segment dropped 8% yr/yr to USD 198 mn from USD 215 mn. Forint-denominated earnings were boosted by the USD/HUF exchange rate, whereas USD-based EBITDA dropped 1%.
Refining & Marketing
The segment’s Clean CCS EBITDA seriously undershot both the market’s call and the base period’s print, mainly due to the unfavourable external environment. Group-level refinery margin and the petchem margin were both lower than in the base, the former hit a five-year low. The sale of refined products and petrochemical products increased in annual comparison.
The segment’s efficiency-improvement programme (DS 2022) and the approach of the management’s guidance for 2019 appear to be on track, and Mol’s management projects USD 50 mn EBITDA growth in the Downstream segment.
Petchem
The segment’s Clean CCS EBITDA of HUF 26.2 bn was down 12% yr/yr but up 117% in quarterly terms. Although petchem margins did weaken in Q1, this segment provided nearly 70% of Downstream EBITDA. Polymer production fell 2% yr/yr but grew 8% q/q, and while petchem sales were up 5% yr/yr, it was down 3% q/q.
Refining & Marketing
Clean CCS EBITDA of the segment declined more than 50% yr/yr to HUF 12.4 bn.
Consumer Services (retail sales)
The segment’s Clean CCS EBITDA rose more than 20% yr/yr in HUF terms and nearly 10% in USD terms, considerably beating the consensus estimate. Fuel and non-fuel sales both contributed to the increase. Non-fuel margin was up 9% at USD 56.1 mn, and so its contribution to total margin was almost 28%, up from 26.1% a year earlier. Fuel sales were up 6% at 1,299 bn litres (diesel and gasoline). Capex remained flat in annual terms (USD 20 mn), and was spent mainly on Fresh Corner reconstructions and mobility services. Operating expenses are continuously driven higher by wage pressure sin the region, particularly in Hungary, Slovakia and Romania.
Gas Midstream
Whereas the segment’s HUF 18.4 bn Clean CCS EBITDA was greatly over expectations, it was down 15% over the base period. Unfavourable tariff changes in case of capacity fees (from Q3 2018) and declining annual capacity bookings resulted in significantly lower capacity fee revenues (-13% yr/yr) despite higher demand for short-term capacity products.What about the annual goals?
The annual targets remain attainable despite the unfavourable external environment even in light of the Q1 numbers that are traditionally weaker due to seasonal factors.The cc. USD 2.3 bn Clean CCS EBITDA target is on track with the USD 514 mn Q1 result, and although this is not the case in respect of group Capex, the USD 284 mn Q1 print does not mean that the USD 1.9-2.1 bn goal cannot be reached. We don’t have to be particularly bold to project tha the USD 400-500 mn simplified FCF target can be reached in view of the Q1 performance (USD 231 mn). Oil and gas production is above the annual average, and while gearing has increased it remains within the target.
Mol
Chairman-CEO Zsolt Hernádi commented:
We delivered over USD 500mn EBITDA and positive simplified free cash flows in first quarter, putting us on the right track to meet our 2019 guidance and to fund our transformational investments. Earnings declined from a high base as refinery margins were substantially weaker and this was only partly mitigated by our strong internal performance across all businesses. Consumer Services continued to deliver double-digit EBITDA growth as we celebrated the 700th Fresh Corner opening, while Upstream increased its production to the highest level since 2012.
Is Mol expensive?
As Mol’s profit declined, its earnings per share (excluding special items) also fell to HUF 65.6 in Q1 from HUF 86.4 in the base period.
Cover photo by MTI/ Sándor H. Szabó
