HELLENiQ ENERGY Holdings SA
ATHEX:ELPE
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Earnings Call Analysis
Q3-2023 Analysis
HELLENiQ ENERGY Holdings SA
The company navigated through a quarter marked by significant headwinds. Declines in profitability are attributable to lower refining margins, changes in crude pricing, and a shift in currency strengths. A unique operational challenge arose in the form of switching fuel for hydrogen production due to natural gas price normalizations, which previously benefited from lower oil product prices. These factors collectively imposed a negative impact in excess of EUR 100 million on the company's margins.
In response to these challenges, the firm has taken proactive financial measures, such as refinancing maturing debt with improved terms, signifying strong bank relationships. Through disciplined cash flow management, they were able to reduce net debt to under EUR 1.5 billion, marking the lowest since 2009. The deleveraging of approximately EUR 1 billion over the past year underscores the company's commitment to a sound balance sheet.
Despite the short-term hurdles, there's optimism in the company's move towards renewable energy, boasting 356 megawatts of operating capacity with a confident roadmap to over 1 gigawatt by 2025. Their pipeline stands at 4.2 gigawatts, emphasizing a diversified technology portfolio and geographical presence. It establishes a foundation for the intended milestone of 2 gigawatts by 2030, laying the groundwork for a sustainable revenue model inclusive of corporate PPAs and merchant exposure.
The company is coping with regulatory pressures, notably the profitability cap on marketing, set to be revisited at year-end. This poses a strategic question regarding future actions if the cap persists, potentially shaping the market landscape and competition. Investments in premium product lines and diversification towards digital offerings, e-mobility, and non-fuel revenue are reflective of a strategy tailored to manage regulatory challenges and consumer trends effectively.
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Ladies and gentlemen, thank you for standing by. I am [ Gillie ], your Chorus Call operator. Welcome, and thank you for joining the HELLENiQ ENERGY Holdings conference call and live webcast to present and discuss the third quarter and 9 months 2023 financial results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Andreas Shiamishis, CEO; Mr. Georgios Alexopoulos, Deputy CEO, General Manager, Group Strategic Planning and New Activities; Mr. Vasileios Tsaitas, Group CFO; Mr. Konstantinos Panas, General Manager Oil Supply and Sales; and Mr. Nikos Katsenos, Head of Investor Relations.Gentlemen, you may now proceed.
Thank you very much. Good afternoon to everyone. Thank you for joining us this afternoon with the aim of trying to understand a little bit more about our quarter and year-to-date results. So without further ado, I would ask that we go to Page 4, where we have the highlights of this presentation. Overall, a very strong quarter, a very good quarter on all fronts. Markets helped in that direction with a relatively higher than mid-cycle, definitely benchmark refining margin at $12 per barrel on a system basis. A relatively stable domestic market demand with other fuels exhibiting a small increase as well. And despite having the -- despite not having the opportunities of last year with respect to switching from natgas to hydrocarbons, [indiscernible] for the refineries as well as crude pricing opportunities, we still have a very positive backdrop for our company.Operations, we have high availability, which means higher production, high exports at around 50% of the total production and a strong over-performance even though a much lower number than last year's respective quarter for the reasons I mentioned, the natgas and the lack of alternative crude price at more advantaged levels, but still a very strong production. And of course, our newest addition to the portfolio, the renewables portfolio, which is growing in line with the growth in capacity.From a financial point of view, just shy of EUR 1 billion for the 9 months for clean EBITDA, which is definitely a very good performance, maybe not as good as last year, but I don't think a lot of people expect to see a repetition of last year anytime soon. So a very strong performance with very good cash flows leading to a stronger balance sheet, EUR 1.5 billion of net debt, and that includes significant investments in renewables as well, so to be refinanced by product finance. And that allows us to propose and the Board approved earlier today an interim dividend of EUR 0.30 per share, which is 20% up on last year's interim dividend. So good market backdrop, solid operations and a very good set of numbers.What about strategy? What are we doing in that respect? We have a continuation of the Vision 2025 strategy on a number of fronts. We've completed successfully most of our targets, if not all of them that we set back in 2021, growing very fast on the new energy side of the renewables business with new operating assets and a very strong pipeline. And of course, we have a number of decarbonization projects underway, which will take time to mature. There's no question about it. This is not a quarterly case. We're not going to get hydrogen up and running or biofuels on the first quarter of 2024, that's for sure, but we are moving in that direction. So in a nutshell, this is effectively our performance for the quarter and the 9 months.We're trying to spend a couple of minutes going to the next 3 pages, which shows the progress on strategy. We have the Vision 2025 progress to date. I'm not going to spend too much time on that because effectively, it's visualizing and putting in order what we already said, strong performance and delivery of our strategy.And I'll focus more on the next 2 pages, which is sharing with you how we see the environment shaping up. And with that in mind, why we believe that our strategy is adopted from Vision 2025 is the right way to go. So we have 3 trends which affect our business. And this has to do with the downstream sector where we see a continued relevance of liquid hydrocarbons. In fact, even if we project 20 or 25 years into the future, we still see that the absolute level of hydrocarbons needed—liquid hydrocarbons that is needed for the energy demand, which is growing is very close to today's levels.So even if we had a magic wand, even if we said that there will be no more hydrocarbon demand coming up for the next 20 years, our existing system should be at levels similar to where we are today. It means that we should be concerned and working on maintaining our refineries and making them compatible for the future.However, one cannot ignore a decarbonization strategy, which clearly covers our core business, but also our new investments, which is why since a couple of years ago, we've committed to investing the biggest chunk of our new capital into renewables. And we have seen a massive increase in the interest and the amount of energy provided by renewables. And this is the combined effect of moving into electrification and within electrification moving into green [ electrons ].Last but not least, working in our direction is the fact that Greece has formally been upgraded. And we have most of the macro KPIs working in a positive way, which means that over the next 2 to 3 years, we expect the already very strong Greek economic growth to become even stronger. And that is something which we believe justifies the strategy that we have in a simplistic diagram on Page 8, which says that our pillars going forward have to do with the strengthening of decarbonization of the downstream business. So we have to make this more relevant for future needs. We have to take advantage of the strong position and grow into what we call adjacencies, which is hydrogen economy, biofuel, synthetic fuels, e-mobility, and we have to take advantage of a very strong position that we already have and at the same time, grow the second pillar, which is the green energy. And all of these have to be carried out with a consistent, not identical, but a consistent governance structure and of course, an operational excellence mindset.So with that, I will stop there and ask Dinos Panas to walk us through the environment pages. Thank you.
Thank you, Andreas. Good afternoon, everybody. First slides on the international industry environment as a domestic one. On Page #10, you can see that we had a quarter-over-quarter increase in the crude prices, where the foreign exchange remains flat. Natural gas and electricity prices remained close to the previous quarter, but definitely much lower than a year ago. And EUAs at EUR 85 per ton. We've seen them trading in October below EUR 80 per ton.Now on Page 11, we've seen some Product Cracks for ULSD, gasoline and HSFO during the third quarter of the year and Naphtha remained weak. We're still seeing quite strong cracks in USLD, but gasoline, of course, is a little bit lower as expected after the driving season. One of the biggest benchmark margins in the history of $12.6 per barrel. And finally, on domestic market, we have seen similar levels in all markets, domestic aviation and bunkers with the previous year. Gasoline is 4% higher, diesel is 2% lower. We've seen a strong increase in our sales in October, both in gasoline, but also higher in diesel.And so with this, I will pass you to Vasileios Tsaitas, our CFO, for the analysis on group performance, Vasileios.
Thank you, Dinos. Good afternoon to all attending our call today and many thanks. So moving on to Page 14, effectively, we're looking at an overview of our results. So refining sales are flat for both refining and marketing business. Sales turnover has been driven mostly by lower commodity prices, especially more so in [indiscernible] is still low. Adjusted EBITDA, as I mentioned before, we have that EUR 400 million, driven primarily by financial planning and trading and the refining economics environment, which was one of the strongest we've seen, but certainly not as strong as the record high of Q3 '22. In terms of our associate business, again, the comparable for both our Elpedison JV as well as our participation in DEPA Commercial was affected by an exceptional environment last year versus normalization and normalization of the environment in electricity and natural gas in the third quarter of '23.Our finance cost, on the one side, they're certainly negatively affected by much higher benchmark rates with Euribor at around 4% versus almost 0 at the same time last year, it was that getting positive. On the other side, we mitigated to a significant extent, the negative impact of the investment rates through reducing our gross debt target of very strong cash flow profitability as well as tightening the spreads on our debt.Nothing special. I mean you have the comparison of last year with a solidarity contribution that affected our taxes for '22. In terms of net debt at EUR 1.5 billion among the lowest in the last several years and a gearing ratio of net debt capital employed of 33%, the lowest for more than [indiscernible].Moving on to Page 15, effectively from a very strong comparable of EUR 500 million, which had a positive impact from refining margin around EUR 132 million However, benchmark does consider running at the field natural gas for our hydrogen unit as well as oil consumption. Last year, let me remind you that the relative pricing of gas versus oil products prompted a full switch to oil products for own use and for hydrogen [indiscernible]. This is something that we are one of the few refiners who have this kind of flexibility.So as natgas prices normalize, that kind of a positive impact that we took advantage of last year was not in play anymore. And that has an impact of around EUR 100 million, just over EUR 100 million on our gross margin. Similarly, crude differentials, especially for high sulfur and heavier crudes pricing has increased significantly versus Brent, which is the base.And the crude environment overall has deteriorated. That was another EUR 90 million that negatively affected our profitability. The dollar is still strong, however, not at the [indiscernible] level that we had last year, an impact of EUR 40 million, more or less. And in terms of operations, we had the impact of [indiscernible] at our [ Aspropyrgos ] refinery over the—most of September, a better overall performance in our refining business with increased export premium, increased contribution for marketing as well as renewables capacity is ramping up and leading us to the EUR 400 million adjusted EBITDA.Moving on to Page 16. We signed recently the refinancing of the last maturity of '23. We rolled this over for EUR 400 million facility RCF, with a big bank, that we rolled over for 5 years. Effectively, that completes a financing around of EUR 2.2 billion of bank debt that we started last year with improvement on commercial credit, on commercial terms, lower spreads as well as changes in a number of terms of conditions to better reflect the new group structure and the growth in renewables. Overall, a very healthy balance sheet. You're looking at deleveraging of close to EUR 1 billion over the last year or so from peak to trough, it's actually even more. The lowest gross debt since 2009 and the significant headroom that does not include the project finance facility that we announced last July.Moving on to Page 17. Looking at an overview of our cash flow, effectively on the left-hand side, you have our EBITDA profitability for the 9 months. The usual cash outflows that you would expect like the same business CapEx for our refineries, the turnaround required, emission reduction, maintenance, safety projects, solidification of catalysts and all those things that we have to undertake to make sure that our refineries are up and running properly. Our interest cost across our debt providers, whether it's the capital markets for bank debt. The taxation, the payment of taxes started in the third quarter or last year earnings, that's not usual debt contribution is that [indiscernible] and other cash flow items that gets you to a, let's call it, normal cash flow from operation of EUR 650 million.Considering working capital growth of just over EUR 200 million, that mainly relates to the normalization of the commodity price environment versus '22. So the high [indiscernible] during '22 unwinded in '23 and on better world capital market obviously as well as EUR 100 million of payment for the usual solidarity contribution of the additional taxation on '22 earnings. So overall, let's call it, reported cash flow from operation is just under EUR 800 million that allows us to sustaining our dividend policy. We distributed EUR 230 million so far. That includes the interim dividend and final dividend for '22 results as well as investing in growth opportunities at our renewable business and a number of projects in refining. With EUR 464 million of excess cash flow following all these items that -- it means a significant deleverage versus last year, net debt under EUR 1.5 billion, excluding leases.Now moving on to the individual business performance starting from refining, supply and trading. As I mentioned before, higher production at Thessaloniki refinery was fully available this quarter. Sales volume almost flat versus last year. CapEx represents mostly maintenance of our refinery mostly [indiscernible] during the quarter and a strongly aligned margin comparable to last year.On the next page, on Page 21, effectively on the top graph, you see a visualization of full availability of Thessaloniki refinery that has undertaken a full turnaround in September last year. So production of Thessaloniki in the third quarter at a normal of around 1 million tonnes, so utilization at Elefsina and Aspropyrgos was slightly lower due to the pitstop of some of the conversion units in September.On the bottom left, effectively, our feedstock sourcing is driven by a tighter crude market on the heavy high-sulfur side. That has affected the pricing, as I mentioned before. That was partially mitigated by the flexibility of our refining system to use larger [indiscernible] where available we took advantage of opportunities either in the vicinity or in other areas outside in traditional North Africa and Black Sea markets. Product yield is more less last year, no material change.And moving on to our sales on Page 22. Our domestic deliveries represent a flattish market overall that we discussed before, a very strong export performance with very good returns export aspects for premium during the period were very good. And that was one of the contributors on Page 23 on a very strong local performance versus benchmark. So despite the tighter crude market and the normalization of natural gas prices that we mentioned before, still we're able to yield an over performing addition margin of around [indiscernible] per barrel versus the benchmarks.Now moving on to Petrochemicals, effectively, over the last year or so, we have entered a cycle of weaker margins. Driven by global and regional supply demand balances. So the result for this year is likely to be -- is shaping to be lower than the midsize that we've seen in the previous several years in our petrochemicals business. That said, polypropylene sales are still strong, higher in last year. Last year, we had a shutdown also of Thessaloniki for lower production in [indiscernible] for power plants. So this year, higher availability means higher sales.In our fuels margin business on Page 27, looking at the reported numbers on the EBITDA effectively you have the unwinding of the negative impact of pricing on inventory effects. So in the third quarter, we had [indiscernible] versus expected period of last year. If we strip out the impact of pricing on the [ commodity ] valuation of our retail business as well as the pricing formula for our region sales, which is a global convention, our comparable, let's say, numbers without any pricing impact as still higher than last year by 15%. Same goes for the 9-month period with comparable EBITDA just over the expected period of last year.In the international marketing business, volume performance was strong. Profitability in most of the markets that we operate was similar or even slightly better than last year with the exception of Bulgaria where weaker margins drove our adjusted EBITDA of EUR 23 million for the quarter.On this point, I'm going to pass you on to George that will discuss our renewables and gas part.
Thank you, Vasilis. Good afternoon, everybody. Another good quarter on renewables, reflecting our increased installed capacity, EUR 34 million EBITDA for 9 months, EUR 13 million for the quarter. If we go to the next page to give you an update on the progress of our growth strategy.We are now at 356 megawatts operating, consisting of wind and solar. And we have secured a clear path to over 1 gigawatt of installed capacity by 2025 with projects that are either under construction or ready to build or at a pretty advanced stage of licensing. So we feel quite confident about reaching our near-term goal. And through our pipeline, which currently stands at 4.2 gigawatts, we believe that we can get sufficient capacity to reach a medium-term target of 2 gigawatts by 2030.We have a diversified pipeline across technology and geography. We are already present in 3 countries, Greece, being our main market with Romania becoming a second important pillar. And we're transitioning our revenue model from support schemes to a mixture of corporate PPAs and merchant exposure.We have a well-balanced pipeline across the various development stages, as you can see at the bottom right with almost 20% in advanced stages from which we will get the capacity to get to our near-term goal and significant projects in all other different development stages, also diversified by technology with a leading position in storage, where we secured 100 megawatts in the recent auction by ARI and also with a pipeline of close to 1 gigawatt in storage projects.This picture does not include offshore wind because this is a segment where the development is just starting. So we currently do not report any projects on our pipeline. The win that you see is all onshore wind. If we move on to power generation with a 50% stake in Elpedison. As Vasilis said, this is a quarter which is more normal, if you will, versus an exceptionally good quarter last year. In comparison, we had a reduced share of natural gas in the generation mix and also a lot of opportunities in international trading, which led to a lower EBITDA of EUR 17 million for the quarter.Moving on to DEPA, where we have a 35% participation in DEPA Commercial and DEPA International projects, DEPA Commercial being the main unit, a challenging quarter for DEPA weak margins, lower domestic demand and also contract pricing -- supply contract pricing, which was not particularly competitive in the market context this quarter. Together with increased costs related to security of supply type costs like network fees and LNG terminal slots led to a weak quarter for DEPA. I think this concludes the presentation, and we can move to the Q&A section of this call.
[Operator Instructions] The first question is from the line of Nikos Athanasoulias with Eurobank Equities.
Congratulations on the great set of results. I have 3 questions, if I may. The first one relates to your renewables pipeline and recent M&A activities. Given that your pipeline exceeds by far your 2030 target, will you continue your M&A activity in South Eastern Europe or will you focus on developing? And maybe will you upgrade your target for 2030? The second question is, do you have an update regarding the profitability cap on marketing and whether and when will this be lifted given that all of the regulatory amendments -- the temporary regulatory amendments in the energy space are being lifted at the end of the year. And third, this has to do also with the regulatory amendments and for Elpedison, if you know that we read in some press reports today that the full amount of the [ claw back ] will be EUR 300 million to be paid by electricity suppliers. Have you estimated? Do you know what Elpedison will pay off that?
Niko, I will take the first question. I mean, your observation is correct. We do have a pipeline today, which currently exceeds by quite a bit our target. Having said that, we cannot expect that the entire pipeline will be converted to install capacity and the timeframe is also uncertain. So yes, it is likely that most of the capacity will come from the development of our own pipeline, but we do not exclude selected acquisitions or projects, which do not necessarily have to be operating. They can also be a project under development at different stages. But indeed, with the pipeline we have, we believe that most of our capacity can come from our own development.
Okay. On the retail part, you're absolutely right. We know that the capital margin is maintained until the end of the year. Whether it's just if it or not, I'm not sure I can support that position. We expect that this will not be continued. We hope it will not be continued because comparing with the free market is no way to run the industry. And having an artificially low price also leads to other reactions by some members of the market, which is clearly the last thing we want. So maintaining an artificially lower price is not an answer to something which is better with so high taxes. On Elpedison, you would want to.
On Elpedison, I'm afraid we do not have an estimate to share with you at this point.
[Operator Instructions] The next question is from the line of George Grigoriou with Pantelakis Securities.
Given the liability or volatility on a quarterly basis regarding your associate income, both from the Elpedison and DEPA. Is there any way you could actually help us out in trying to model what to expect for the fourth quarter at least? That's my first question. The other question is on is, I know it's probably going to be a long shot, but have you been approached for the ongoing or planned, I don't know exactly sale of Lukoil Refinery in Bulgaria as well. Well, let me put it other way, would you be interested?
Yes. Well, George, I mean -- they are both very good questions. And it's the things that we also discuss and debate amongst us. Let me start with the associates. It's a very valid observation. On Elpedison, I would say that the current year is more representative of what one would expect. Within 80%, I think this is what the run rate of the 2 CCGTs and a retailer with under 10% or thereabouts of market share should be reporting. Having said that, I caution you because we do have a problem at one of the Elpedison plants, which has to do with the recent [ spare part ] weather. There's a spare part which was damaged and that may take the unit off the system for a few months. But having said that, I think it is fair to say that this year's performance is reflective of what we expect it to be as a baseline. On DEPA, it's a totally different ball game. DEPA has been reporting results which are highly volatile, and they are a factor of 3 things. The first one has to do with the energy crisis and the engagement of DEPA 65% shareholder, which is the state as the last results in terms of NatGas, which means that there is -- this safety has a cost. And that cost, to some extent, has been borne by DEPA and that creates some volatility.The second has to do with the contracts that DEPA has in place. As you may know, LNG spot is much lower price today than it was a few months ago, and that is creating a mis-margin in arbitrage between TTF price contracts and LNG.So, I would say that neither last year nor this year is reflective of DEPA performance. It could be that if you average the 2, you can have a reasonable projection going forward. But those 2 are extremes for the wrong reasons. It's like saying we averaged the COVID year in 2022 for the refineries. But if you want a guidance—as a number, I would say that the average of the 2 should not be far away.Now on the Lukoil Refinery in Burgas, it is a case which has been brought to our attention. As you know, we have a material operation. It's not a market leader, but it is a material player with more than EUR 100 million of investment in Bulgaria and a very good supply chain coming up from Tessalonik. So we are monitoring the situation. This is driven by politics rather than industry and business rationale.As you know, our Vision 2025 is suggesting that we do not commit significant capital in refining assets. And I would see us having a lot of challenges if we were to invest in such an asset. But given the proximity, we are monitoring the situation there, and we'll see how it goes. But it has been as a rumor. It has been in the market for the last 1.5 years, almost definitely a year, to be honest.
Okay. And if I may, 2 follow-up questions. One, regarding Elpedison. The new power plant in Tessalonik, have you shelved the idea of building a new one? Or are you still considering it? And my last question is regarding marketing, the retail operations here in Greece, how suppose that the cap-on margins remains for next year as well, given that this government seems to be very much interested in trying to tame inflation. How do you see the industry, the market, if you like, evolving next year in terms of both of growth? Obviously, it's linked to tourism. And in terms of the competition as well?
Well, the answer on Elpedison is straightforward. We haven't shelved it. We have maintained the optionality of actually progressing with the FID in due course. But it is something that we need to be careful about. There is a lot of volatility. There is a lot of noise in the gas market. If you look at the latest national energy and climate plan sake it's actually suggesting that gas is no longer part of the strategy. So we have to be a bit careful when committing hundreds of millions of euros, which is an investment close to EUR 0.5 billion. So not to be -- not to be carried away by temporary arbitrage opportunities in the market. So the answer is it's still a live project, but it's not post FID phase.On retail, it is a challenge and unfortunately, there are 2 sets of companies that operate in Greece. There are companies which will always find a way of making money irrespective of where the price level is. And there are companies which have a priority on service delivery and quality and quantity of fuel. But we happen to be in the second category and that means that we help when the market is not behaving properly.On the other hand, EKO and BP are 30% to 35% depending on the type of product you look into of the market. And that's a big route to market for a downstream players such as us. So I'm not saying that we run the business not for profit on the contrary. But one has to look at the big picture, and we will continue to be placing focus on quality. The right quantity of fuels delivered, premiumization. Today, we're talking about almost 30% of our products being sold at the premium level about nonfuel revenue and about gradually shifting into a more digital and different types of offerings like e-mobility and NFR. It's not an easy one, but I don't think it's going to move the needle at group level.
[Operator Instructions] There are no further audio questions at this time. I will now pass the floor to Mr. Katsenos to accommodate any written questions from the webcast participants. Mr. Katsenos, please proceed.
Thank you, operator. We do have a question from Mr. [indiscernible] from [indiscernible] Bank, who's asking how is the refining environment so far in the fourth quarter? And can you provide us with an updated EBITDA guidance for 2023?
Effectively, on the refining environment, the refining is still very good. You have a seasonal weakening of casual link cracks, which is expected at the end of the driving season for the North Hemisphere and the wish to win the grade. The rest of the products sustain very good cracks. So—so versus the third quarter margins are a little bit lower driven by gasoline. So anywhere between $7 to $8 per barrel on average for at least the first month of the quarter that we have run already. In terms of guidance, as you know, we don't provide guidance for our full year at. So with adjusted EBITDA already at close to the EUR 1 billion and a refining environment still very good, not as strong perhaps as the third quarter, we should be looking at a very good overall performance, certainly shy of last year, but more probably in the second store.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments.
Thank you very much for your attendance and your patience. Definitely, another pleasant quarter for us. I mean, it's much more pleasant to sit here and explain why we had such a good performance. The good thing is that we expect this performance to continue as Vasileios just mentioned. Clearly, we have a favorable backdrop, extending into '24 and maybe 35% will see the second legislation coming into play in the Med, which might lead to another spike or in any case another sort of upset to the diesel market in the math. So we expect to see a good performance in the next year to sort of 18 months as well. In terms of Greece, we have all of the positive signs clearly, the sort of international increase in financing cost is not helping expansion into renewables, which are capital-intensive projects. So it links the opportunity for enhancing returns with financial structure. But nevertheless, it is something which is delivering value to the shareholders.Finally, our internal transformation program is progressing very well. I have to say that I am—I'm very pleased with the way that all of the organization has embraced all of the initiatives, which are not easy initiatives. We are one of the biggest organizations in Greece in terms of numbers of people in terms of procedures, in terms of systems and changing these organizations is not an easy thing to do.So the fact that we have been able to grow profitably. We have been switching direction. We've changed the compass and we're still moving into greener energy. And at the same time, we're making our company fitter and leaner and better managed. I think it is something which, clearly, we all feel proud of as a management team and not only all of the employees are on the same page.Once again, thank you for your time, and we hope to be able to repeat another good quarter in a few months' time. Thank you.