Wood: Impressive prospects for the Greek oil and gas market – ‘Tavros’ for Motor Oil and ELPE

Her Eleftherias Kourtali

The Greek oil and gas market is impressively good, Wood points out in a new report, where it “raises” the target prices for Motor Oil and ELPE, maintaining the buy recommendation.

It is difficult to imagine a better business environment for companies in the oil and gas sector in Greece than what we see today, where refining margins are breaking records and demand continues to recover after the pandemic, as noted by Wood. Strong cash flows, according to the house, will allow Motor Oil and Hellenic Petroleum to invest significantly in “cleaner” companies, continuing to distribute dividends and keep leverage under control.

“With their refined business models, the $ 20 / barrel refining margins have a huge impact on the profitability of these companies,” he said. “Add to that a Greek market that we expect to return to normal this summer, with a very strong tourist season, and fewer products to be sold in the most competitive export markets,” Wood said.

Motor Oil, as it notes, plans to use the best connections to develop gas activities, while the renewable energy companies of both Greek companies are priorities for investment, as the regulatory environment and new infrastructure remove carbon and oil. “We expect strong cash flow to generate high capital investment combined with generous dividends, without burdening balance sheets. Both companies trade below their average P / E terms and close to the EV average. “We maintain the buy offers in both companies, as the house emphasizes”.

In this context, Wood updates the target prices it gives, increasing them significantly and thus estimates that for Motor Oil it is at 21.3 euros from 17.8 euros before and for ELPE at 8.29 euros from 6.90 euros before, which corresponds to growth margins of 24% and 21% respectively from their current prices on the board of Athens Avenue.

As he emphasizes, the launch of refining margins strengthens the core companies, while the recovery of the Greek market adds to the reasons for optimism. Better cash flows are expected to help finance large investments in renewable energy sources, while regulatory changes and infrastructure investments enhance the outlook for the industry. “We see the continuation in dividend flows, despite the high capital expenditures, as another reason for us to like these two Greek listed companies”, Wood emphasizes.

Specifically, he notes that despite the ambitious investment goals, he expects both companies to continue to pay attractive dividends. It estimates average dividend yields of 7.0% for Motor Oil and 9.7% for ELPE over the next three years. In terms of valuations, Motor Oil’s P / E ratio stands at 5.2x for both 2022 and 2023E, compared to 5.7x for both years for companies in the industry. The P / E of ELPE is 2.8x for 2022 and 5.0x for 2023, compared to 6.2x and 5.7x for the companies in the sector.

In terms of refining margins, Wood says it expected a steady recovery and instead, its benchmark reached $ 25 / barrel in May 2022, an all-time high, with its full-year forecast is now at $ 13.1 / barrel.

Oil demand in Greece in 2021 was 14% lower than in 2019, as the recovery was delayed due to the weak tourist season. Wood expects a full recovery in 2022, however, with higher domestic sales for both companies.

Regarding the impact of the war on Ukraine, Wood notes that Greece is largely isolated from its first effects, but Greek refineries were buyers of Russian crude oil and semi-finished products and therefore needed to change their supply base.

Regarding the new infrastructure, Wood notes that they are integrating into the Greek energy and gas market and building better connections with its neighbors. This improves the opportunities and reduces the risks for investing in these areas.

At the same time, investing in renewable energy sources is an additional “trump card”. The ambitious national goal of “net zero” by 2050 increases the need for investment in renewable energy, at a time when both companies are investing heavily in low carbon energy.

In terms of energy costs, although high gas prices affect actual refining margins, the result is insignificant compared to current margins. Once the margins are normalized, this could become a more important issue, Wood concludes.