IC Market Espresso 3 Feb 2023

Central Banks Delivered but Markets Think Otherwise

This week we have seen three major central banks lifting their policy rates, but it is obvious that the tightening cycle is slowly coming to an end. Fed’s Powell did not rule out cutting rates in case inflation drops more than Fed expects while ECB set in stone another 50bps hike in March and announced it will then evaluate subsequent path. In this article, we are looking in more detail at the recent central banks’ policies and consequences on the markets.

This week was full of releases with macroeconomic data, a busy earnings season in the US, several monetary policy meetings, and the end NFP that is due today. First, we saw the euro area CPI on Wednesday morning which came at 8.5% YoY which was below expectations, but core CPI in January stood at 5.2%, which is the same level as in December and 10bps higher compared to projections. One should bear in mind that German inflation which constitutes approximately 20% of total EA CPI was estimated by Eurostat as Destatis postponed CPI release due to changes in the CPI calculation. Markets were mainly flat as headline inflation fell significantly while core inflation still stands at highs but also because markets were waiting for the Fed’s decision. In the evening the Fed lifted rates by 25bps as expected and in its statement said that “ongoing increases” would still be required. However, in his Q&A session, Mr. Powell sounded rather dovish, saying that Fed will also be data-dependent and that in case inflation falls faster than Fed currently anticipates, the market could be right in its pricing i.e., that Fed fund rates will reach 5.0% and will be cut at the end of the year. The most interesting part was that Mr. Powell did not negate cutting rates when asked if there is any chance for them to cut rates this year. His Q&A session made bulls blush, with both bonds and equity markets skyrocketing at the same time, giving new investors the flavor of Fed’s printer from the 2010-2021 era.

On the other side of the Atlantic, yesterday BoE increased its rates by 50bps, from 3.50% to 4.0% but the wording of the statement was changed in a way that conditionality was put in the text “if there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.” And after the BoE, ECB also lifted rates by 50bps, set in stone another 50bps in March but did not say much after that. Namely, in the statement, they said that “it will then evaluate the subsequent path of its monetary policy.” Nevertheless, the most important thing was Ms. Lagarde’s Q&A session in which she said some confusing things. First, she said that ECB will be fully data dependent but only after March as it put another 50bps points for March in the statement. However, later in the session, she said that 50bps is not 100% guaranteed but it is a strong intention for the central bank. Furthermore, she said that after March’s meeting, ECB could lift rates by 50 basis points, 25 basis points, or by any step they feel appropriate. There was not much talk on APP reducing besides that the APP portfolio will decline by EUR 15bn a month from March until the end of June and the subsequent pace will be determined over time. Summing the session, I think that many investors feel confused with the message, as ECB still does not know whether it wants to pursue meeting by meeting approach as it did in 2021 and most of 2022 or wants to give markets some forward guidance like it did in December 2022. In any case, markets saw the latest ECB meeting as dovish and EUR rates saw a significant drop. German 10Y paper yield dropped by almost 20bps while Italian paper with the same duration yielded 30bps lower compared to the day before, meaning that the BTPs – Bund spread tightened by some 10bps to 186bps. Schatz yield decreased by 15bps, from 2.65% to 2.50%.

All in all, this week we have seen central banks slowly informing markets they could soon pause with their tightening and markets celebrated strongly although this is still not a pivot moment. As stated before, investors bought both bonds and equities with strong volumes, as the market now expects inflation to come back even faster than it rose, which would force central banks to pause soon and even cut already this year. In case today’s NFP comes below expectations do not be surprised in case both equity and bonds go higher by another extraordinary move.

OMV Petrom Publishes 2022 Preliminary Results

According to the preliminary 2022 results, OMV Petrom achieved a sales revenue growth of 136% YoY in 2022, an EBITDA growth of 141%, and a net income of RON 10.3bn, an increase of 260% YoY.

OMV Petrom has published its preliminary results for 2022, giving us a glimpse into the Company’s business operations for Q4, as well as the entire year. On an FY basis, revenue amounted to RON 61.34bn, an increase of 136% YoY. This growth was driven by higher commodity prices and higher sales volumes of petroleum products and electricity, partly offset by lower gas sales volumes. Refining and Marketing segment represented 51% of the total consolidated sales, while the Gas and Power segment accounted for 49%. Revenue from the Exploration and Production segment accounted for only 0.1% after the divestment of Kazakhstan subsidiaries in Q4 2021, with the revenue in this segment being largely intra-group sales rather than third-party sales.

In Q4 2022, the Company recorded a revenue increase of 91% compared to Q4 2021, again supported by the same aforementioned factors. However, in Q4, we can already see the slowdown in the revenue growth, as compared to the triple-digit 136% YoY, the double-digit 91%, even though it is significant, is still slower overall.

Looking at the operating expenses, the total OPEX increased by 125% YoY and amounted to RON 50.65bn in 2022. The increase was driven primarily by the purchases of inventory (meaning oil&gas), which increased by 187% YoY and amounted to RON 30.38bn. Other categories also experienced growth, with production and op. expenses increasing by 69% YoY and amounting to RON 6.92bn, production, and similar taxes increasing by 173% YoY, amounting to RON 5.44bn. Depreciation also increased, growing by 173% YoY and amounting to RON 5.06bn.

The particularly interesting component here is the tax on OMV Petrom. They note in their report that in the context of the energy crisis in Europe, additional regulatory measures such as subsidy schemes, gas and power price caps, and over-taxation or the EU solidarity contribution are being implemented. In Romania, high taxes and measures such as royalties on energy companies have been present for quite some time now. In 2022, the Government decided to implement an additional tax on companies in the crude petroleum, natural gas, coal, and refining sectors. It is calculated based on the taxable profits of those companies, which are above a 20% increase of the average taxable profits generated in the period 2018-2021. OMV Petrom notes that they expect to be excluded from this Ordinance, as they have less than 75% of revenue in the defined areas, i.e. extraction of crude, extraction of natural gas, extraction of coal, and refining business. Furthermore, they note that in 2022, OMV Petrom already contributed royalties, supplementary taxes, and other industry-specific contributions around RON 7.3bn, in addition to the RON 2.2bn in corporate income tax. This would mean that in total, the industry-specific taxes increased by around 4 times compared to 2021.

Coming back to the results, the Company recorded an EBITDA of RON 17.1bn in 2022, an increase of 141% YoY. This was due to much higher contribution from all business segments, following the rise in prices in the Exploration and Production segment, increased margins on gas from third party transactions, and higher power margin in the Gas and Power segment, as well as higher refining margins in the Refining and Marketing segment. The result is of course also under the influence of increased purchases, both in terms of volumes and prices for all products, and higher industry-specific taxation. In these conditions, the EBITDA margin amounted to 27.9%, an increase of 0.55 p.p. YoY. In Q4 2022, they recorded an EBITDA of RON 3.8bn, an increase of 62% YoY. This would mean that again, even though the growth is present, there has been a slowdown in the last quarter, which is expected as the prices of oil, but especially gas, have somewhat stabilized. This would mean that the Q4 2022 EBITDA margin amounted to 22.2%, a decrease of 4 p.p. YoY.

The net financial result was a slight gain of RON 17m, compared to a loss of RON 311m in 2021, mainly due to higher interest income on bank deposits. As a result of the positive developments, the net profit amounted to RON 10.3bn, representing an increase of 260% YoY, and a net income margin of 16.8%, an increase of 5.78 p.p. YoY. In Q4 2022 however, we can see the full effect of the slowdown in profitability. Even though on a yearly basis we can see massive increases, in Q4 2022 the net profit amounted to RON 1.14bn, representing a decrease of 4% YoY. This would also mean that the net profit margin more than halved, from 13.3% to 6.7%, a decrease of 6.56 p.p. YoY.

OMV Petrom key financials (Preliminary 2022. vs 2021, RONm)

Source: OMV Petrom, InterCapital Research

Moving on to CAPEX, it amounted to RON 3.55bn in 2022, an increase of 26% YoY, mainly directed to Exploration and Production with investments of RON 2.56bn. Refining and Marketing investments amounted to RON 835m, an increase of 9% YoY, while Gas and Power investments amounted to RON 97m, an increase of over 7x YoY.

OMV Petrom also notes several key events for 2022. First of all, the declaration of the commercial discovery regarding the Neptun Deep project was submitted to the National Agency for Mineral Resources, which is an intermediate step towards the final investment decision, which is planned for mid-2023. They also took the final investment decision for a EUR 130m investment into a new unit of aromatic products at the Petrobrazi refinery. Finally, OMV Petrom successfully completed a 10% land share capital increase. Of the RON 567m total capital increase, RON 446m was cash subscription by shareholders.

OMV Petrom Announces 2023 Outlook and Dividend Proposals

In 2023, OMV Petrom expects the average Brent oil price to be above USD 80/bbl. CAPEX is to be increased to around RON 6bn, a 70% increase. They also proposed a dividend of RON 0.0375/share, with a DY of 8% based on yesterday’s closing price. An intention of a special dividend proposal for 2023 was also announced, with the exact amount to be announced in mid-2023.

Starting off with the 2023 outlook, OMV Petrom spoke broadly of their expectations for the market environment, financial highlights, as well as their strategic direction, divided into 3 subcategories.

In terms of the market environment, for FY 2023, OMV Petrom expects the average Brent oil price to be above USD 80/BBL (2022: USD 101/bbl). The refining margin is expected to be above USD 9/bbl (2022: USD 16.6/bbl, based on the Brent oil price). In Romania, demand for oil products in retail, gas, and power is expected to be broadly stable compared to 2022. Legislative measures introduced for the gas and power markets were prolonged until the end of March 2025 with regard to prices, margins, storage, and contributions. Measures applicable in H2 2022 to reduce fuel prices on a voluntary basis were removed from 1 January 2023.

Moving on to financial highlights, CAPEX is anticipated to increase to around RON 6bn, by approximately 70%, with increased investments dedicated mainly to the Neptun Deep project, accelerated low and zero carbon projects, and the Petrobrazi refinery turnaround. Investments require a predictable and stable regulatory and fiscal environment (2022: RON 3.6bn). Due to higher investments, the Company expects marginally positive free cash flow before dividends (2022: RON 8.2bn).

In terms of the strategic direction, the first goal is to “Optimize traditional business”. In the Exploration and Production segment, they expect production to be around 110 kboe/d (kilo barrel of oil equivalent per day) excluding possible divestments (2022: 119 kboe/d). They will continue with portfolio optimization, with a continued focus on the most profitable barrels, through assessing selective fields. Investments are expected at around RON 2.9bn, including Neptun Deep (2022: RON 2.6bn). They also expect to drill 55 new wells and sidetracks and perform around 450 workovers (2022: 55 new wells and sidetracks, 647 workovers).

In the Refining and Marketing segment, the plan is to continue the partnership with Auchuan, with 400 MyAuchuan stores in all Petrom-branded filling stations by YE, one year ahead of the initial plan. The refinery utilization rate is expected to be above 85%, as compared to 95% in 2022. Total refined product sales are forecasted to decline slightly YoY (2022: 5.5m tons), on lower production due to the refinery turnaround, retail fuel sales are expected to be broadly flat YoY.

In the Gas and Power segment, the total gas sales volumes are estimated to be lower YoY (2022: 46 TWh), mainly on lower supply, both from equity and third parties, as well as still low demand. Net electrical output is forecasted to be lower YoY (2022: 46 TWh), mainly on lower supply, both from equity and third parties, as well as still low demand. Net electrical output is forecasted to be lower YoY (2022: 5 TWh).

In the 2nd strategic direction goal, “Grow regional gas”, the Company noted that they are progressing with the Neptun Deep project towards the final investment decision, which is planned for mid-2023. Also, two other projects are noted, the Han Asparuh offshore Bulgaria, which dug one exploration well in 2023-2024, as well as the Georgia Offshore Exploration Block II, where the seismic acquisition remains on hold.

The 3rd strategic goal is the “Transition to low and zero carbon”. In this category, they target to reduce carbon intensity by 30% until 2030 vs 2019 (2022 preliminary is app. 11% lower than 2019). In terms of alternative mobility, they plan to continue to expand the EV charging network with the plan to double the existing number of charging points, at the YE 2022, 120 fast and ultra-fast charging points installed. They also commented on green energy sources in the filling stations, with a plan to have photovoltaic panels installed in app. 50% of their filling station network by 2025. They also plan to continue developing renewable power portfolios via partnerships, as well as to have further developments toward producing sustainable aviation fuel and second-generation bioethanol.

Finally, looking at the dividend proposals, the Executive Board of the Company proposes a base gross dividend of RON 0.0375 per share, which before the announcement, would amount to a DY of 8%. The dividend amount is a 10% increase YoY, at the high end of the 5-10% range stated in the dividend guidance. The Executive Board also announced the intention to propose the distribution of a special dividend in 2023, with the exact amount to be announced in mid-2023. The base dividend proposal is subject to approval at the GSM (to be held in April 2023), while the special dividends proposal is subject to a future GSM meeting.

OMV Petrom dividend per share (RON) and dividend yield (%), (2013 – 2023*)

Source: OMV Petrom, InterCapital Research

*Currently, 2023 only includes the ordinary dividend proposal as no special dividend amount has been disclosed yet

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