CEE Oil & Gas
The bear market rally creates
opportunities; PT changes
Gergely Varkonyi, CFA
Research Analyst
(+36) 1 301-3748
gergely.varkonyi@db.com
We rate MOL a Buy and PKN, PGNiG and Lotos a Sell
We believe the current bear market rally has created attractive investment
opportunities: we recommend to take profits in PKN, PGNiG and Lotos (all rated a
Sell) while we continue to recommend MOL, which has been left out of the rally,
as the only exposure to the CEE oil & gas sector. We like MOL because, unlike its
Polish peers, it trades at a significant valuation discount to EMEA/GEM peers, is
projected to have a resilient financial performance, has upside risk in consensus,
its balance sheet risk is overestimated and has a growth driver from the INA buy.
Deutsche Bank AG/London
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, 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. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
MOL (MOLB.BU),HUF9,300.00 Buy
Companies featured
PKN Orlen (PKNA.WA),PLN21.85 Sell
2008A 2009E 2010E
DB EPS (PLN) -1.70 0.17 2.94
P/E (x) – 127.4 7.4
EV/EBITDA (x) 9.6 6.1 5.4
MOL (MOLB.BU),HUF9,300.00 Buy
2008A 2009E 2010E
DB EPS (HUF) 1,053.05 519.03 1,943.40
P/E (x) 17.4 17.9 4.8
EV/EBITDA (x) 5.9 3.3 2.9
PGNiG (PGNI.WA),PLN3.45 Sell
2008A 2009E 2010E
DB EPS (PLN) 0.16 0.11 0.21
P/E (x) 24.7 32.1 16.5
EV/EBITDA (x) 9.8 9.6 7.4
Grupa Lotos (LTOS.WA),PLN12.20 Sell
2008A 2009E 2010E
DB EPS (PLN) -4.07 -1.94 4.04
P/E (x) – – 3.0
EV/EBITDA (x) 36.4 14.0 8.2
1M performance (US$)
59%
43%
40%
34% 33%
29%
24%
19%
13%
9% 9%
5% 5%
0%
10%
20%
30%
40%
50%
60%
70%
ROSN LKOH PBR GAZP LTS OMV MSCI
PL
MSCI
EMEA
PGN TUPRS PKN MOL NESTE
2009 LIFO EBITDA change (US$)
-31%
-37%
-45%
-58%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
MOL PGNiG PKN Lotos
Global Markets Research Company
Industry headwinds are still blowing
Our CEE oil & gas universe is expected to face significant industry headwinds this
year but against this bearish backdrop, we expect MOL to have the most resilient
financial performance, thanks among others to its diversified, high-quality asset
base. Upstream challenges are straightforward but we note MOL’s resilience
thanks to the high royalty paid and exposure to gas. In refining, diesel cracks have
finally succumbed to soft demand, although this was offset by improving gasoline
and fuel oil cracks. This said, we still expect average cracks to more than half this
year. In petchem, monomer margins have been weak but polymers have been
resilient – we note the slight recovery in March but rising oil prices remain a
challenge. As a combined result of still high gas import prices in US$ and the weak
PLN/US$, PGNiG is expected to post record high import losses in 1H09. We admit
the positive effect of the strong dollar vs. local currencies for MOL, PKN and Lotos
but note that this is hedged to a no small extent through FX debt and capex.
MOL should see the biggest improvement in its balance sheet risk
Balance sheet risk has become an investment consideration more important than
ever. We maintain our view that the perception of MOL’s balance sheet risk is set
to improve and it should comfortably meet its debt covenants, even with INA,
while PKN faces tough negotiations with creditor banks on obtaining a waiver
following the breach of covenants. There is no balance sheet more stretched than
Lotos’ but its funding is not at risk. PGNiG has no leverage at present but this is
set to change with its massive capex plans. Our CEE universe is more levered
than EMEA/GEM peers, which limits investments into growth and dividends.
MOL’s purchase of INA is the most visible and strongest bottom-up driver
Company-specific stock catalysts are few and far between but we highlight MOL’s
purchase of INA, set to close in 2Q09. Although INA is excluded from our current
projections yet, we believe it should contribute meaningfully to MOL’s EBITDA
thanks to efficiency improvement and investments into growth. PKN’s planned
divestments could be significant for the stock but in the current environment we
expect little, if any, tangible progress this year.
Valuation & risks
This report contains changes to price targets and estimates (see Fig 1).
We value our CEE oil & gas universe with the APV method (p9-10), an absolute,
cash flow based valuation. We raised our PT for MOL from HUF13k to HUF17.5k
and for Lotos from PLN7 to PLN9 whilst lowering PKN from PLN19 to PLN18 and
PGNiG from PLN2.70 to PLN2.55. For a detailed disclosure of risks, see p11).