Hellenic Petroleum SA (AT:HEPr) demonstrated exceptionally strong margin over-performance ($7.3/bbl) versus the benchmark in Q318, with group adjusted EBITDA at €237m beating Reuters consensus by 11%. Key drivers included high availability, normalised operations and advantageous crude selection. We see several moving parts affecting benchmark margins in 2019, including highly anticipated changes to marine fuel standards (IMO 2020), crude price volatility, Iranian crude sanctions and associated waivers, as well as c 2mmbd of new global refining capacity additions. ELPE’s bias towards middle-distillate yield ensures that it is well placed to take advantage of increased demand for low sulphur shipping fuels and to remain competitive versus emerging competition. Our blended P/E, EV/EBITDA and DCF based valuation moves from €9.0/share to €8.9/share, with FY19e adjusted EBITDA reduced by 6% combined with a sector de-rating. ELPE’s forecast FY19 dividend yield (6.0%) remains supportive, with the potential for a one-off cash return on receipt of DESFA sales proceeds in Q418.
2019 margins – numerous moving parts
2019 margins will be driven by a number of moving parts, which we believe are geared to favour complex, low-cost refiners that can take advantage of a shift in shipping sector demand from high sulphur fuel oil (HSFO) to low sulphur alternatives including diesel. ELPE appears to be well placed given its refining complexity and high middle-distillate yield. Competition remains robust with more than 2mmbd of new refining capacity ramping up from Q418, potentially putting a cap on margins and driving down Middle Eastern crude differentials.
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