European Refiners
2009 Refining Outlook: the worst is yet to come; 4Q08
previews
Independent Refiners
Kim FustierAC
(44-20) 7325-1719
kim.a.fustier@jpmorgan.com
Amy Wong
(44-20) 7325-9460
amy.wong@jpmorgan.com
J.P. Morgan Securities Ltd.
See page 30 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
For Specialist Sales advice, please
contact:
Hamish Clegg
(44-20) 7325-0878
hamish.w.clegg@jpmorgan.com
Figure 1: Global refining utilisation vs
global refining margins
$/bbl
80%
82%
84%
86%
88%
92 95 98 01 04 07 10E
2
4
6
8
10
12
14
Source: J.P. Morgan, Bloomberg
• Poor refining outlook in ’09: we think refining margins will weaken
materially in ’09 vs ’08 as global refining capacity utilisation should return to
2002 trough levels. In particular, diesel cracks – which drove the strength in
’08 margins – should drop most y/y, while the outlook for other products
(gasoline, naphtha, fuel oil) is unlikely to improve this year. We think some
simple refineries in Europe will reduce runs if margins do not improve.
• Complexity still matters: in our view, complexity still matters even though
conversion spreads have narrowed and the cost of own energy consumption
has decreased. As refining margins get closer to breakeven levels, we would
avoid refiners with higher margin sensitivity e.g. Petroplus and ERG and
prefer names with more cash flow stability e.g. Neste and Saras (see p11 for
details).
• Key issues for 2009: apart from margins, we think the main themes for ’09
should be balance sheet strength and cash management. We expect the
European refiners to cut capex in ’09 given negative free cash generation
and tight credit conditions, with negative implications on growth targets.
• Margin/cost benchmarking analysis: we have benchmarked the refiners on
realised gross margins, operating costs and steady-state free cash generation.
We conclude that: 1) there is a wide range of FCF/bbl between complex and
less complex refiners (Neste’s FCF/bbl is c.$3.2/bbl while Petroplus’ is only
c.$0.1/bbl); 2) the breakeven margin for a medium-complexity refiner is
c$5.1-5.2/bbl, in line with our new mid-cycle refining margin forecast.
• Estimate changes: in our Jan 12th note we had cut our 09-10E margins by
22% to reflect a more bearish outlook on the supply/demand balance. As a
result we now cut our EPS forecasts by on avg 59% in 09E, putting us 49%
below BBG consensus. Our 10-11E estimates have fallen by 45% on avg.
We have left our DCF and multiples-based PTs unchanged. We are lowering
our Petroplus PT by 21% to CHF 26 (end-09, relative multiples based).
• Top picks/least preferred: we remain more positive on complex, distillatesoriented
refiners Neste (N) and Saras (N) and negative on less complex
names ERG (UW) and Petroplus (UW). Going into 4Q08, we would avoid
ERG and Petroplus as we see large q/q drop in earnings and potential for
disappointment on numbers and guidance.

Table of Contents
Investment summary................................................................3
Key issues for 2009......................................................................................................3
4Q08 at a glance ..........................................................................................................4
Refining outlook update ..........................................................5
Recap of 2008: the last peak in this cycle ....................................................................5
Near-term: rising capacity, weak demand....................................................................6
Longer-tem: greater uncertainty...................................................................................7
Valuation and recommendations ..........................................10
Changes to refining margin forecasts.........................................................................10
EPS estimate changes ................................................................................................11
Sensitivities................................................................................................................11
Comparing the refiners’ profitability .........................................................................13
Recommendations and target prices ..........................................................................15
Valuation summary....................................................................................................16
Neste........................................................................................17
Quarterly preview: reports February 5.......................................................................17
Petroplus.................................................................................20
Quarterly preview: reports February 5.......................................................................20
Saras........................................................................................23
Quarterly preview: reports February 24.....................................................................23
ERG..........................................................................................26
Quarterly preview: reports March 11.........................................................................26
Summary of target prices and risks............................................................................29