Coronavirus and the oil crisis hit Mol hard, but the company’s profile is crisis-resistant

English2020. ápr 8.Növekedés.hu

At first glance Mol is one of the biggest losers of the coronavirus pandemic. The price of oil has collapsed, transport has almost stopped, and even the factories that buy petrochemical products from Mol are performing poorly. However, the crisis revealed such strengths of the company like the excellent refinery performance, a smart product and activity portfolio and the so-called Ural-Brent margin. With the lower turnover, the Hungarian state loses a lot of revenue, as well.

The shares of Mol fell by approximately HUF 700: they are now trading at around HUF 2,000, compared to the 2,700 price before the crisis. It seems like a massive fall, but it may not be terribly damaging after all.

The company also announced that it has taken several steps regarding health and safety, as well as operational and financial measures in order to respond to the pandemic and the current economic situation.

The main goal of these measures is so that the company can maintain its liquidity, which is why it has withdrawn its 2020 EBIDTA target, will reduce its investment costs by at least 25 percent to less than 1.5 billion dollars in 2020, and will postpone non-essential investments.

In the name of cash reserves, the company is also reviewing operations, as the payment of the huge ACG transaction in Azerbaijan did not come at the best of times. It is reassuring, however, that the company still has 2-2.5 billion dollars at its disposal.

Until the situation returns to normal, the company will withhold the full after-tax profit from 2019 for the time being, i.e. no dividend will be paid now, though it may partly or fully be paid later.

The company is aiming to optimize its expenses so that the portfolio can be profitable even at an oil price of around 25 dollars per barrel.

Mols basic business model

What are the reasons for this, as several North American oil companies have lost well over half of their share price?

Mol’s business model is very interesting: it is built up in such a way that under “normal” conditions it is not affected by the price of oil. This is the result of an interesting product portfolio. To put it very simply, it means that the company’s oil production (upstream) business will do better if the oil sells at a higher price, but the company’s refinery activity (downstream) will bring more profit if the oil price is low.

The downstream volume is three times that of the upstream, and this formula guarantees almost completely stable profitability.

The crisis we see immediately

Although the model described above can protect against a lot of fluctuation in the “normal” market, it is impossible to prepare sufficiently for something like the coronavirus pandemic. Aviation has almost completely stopped, road and shipping traffic have halved, and industries that use other petrochemical products of Mol (e.g. car and furniture industry) are reduced to about 20 percent of their capacity.

This low turnover is accompanied by substantially lower sales prices due to the plummeting oil prices (although in the days before the publication of this article there seemed to be a turnaround).

Hungarian filling stations

Filling stations give a direct picture about Mol's activities. The good news is that petrol stations are operating without interruption, using stricter hygiene standards, people keep refuelling, and truck traffic has also been maintained.

But it is clearly visible that urban traffic has become very low, though there is more ‘life on the motorways due to truck traffic, but without the usual peak periods.

The total car traffic in the EU (and also shipping traffic) has shrunk to just 50%, which is likely to lead to a similar change also in the traffic of petrol stations.

Surprisingly, however, the loss of traffic has not been so significant so far, probably because the population eager to stockpile food feels safer if they have their car filled up (i.e. many people have refuelled recently), while others have used the shops at petrol stations to buy food and stockpile chocolate, soft drinks or wine.

No chance to go against the virus

In spite of the factors that temporarily boost demand, there is no way to go against the virus in the long run. When everyone stays at home, less petrol will be sold. Oil prices will not quickly return to normal either, even if oil quotations rose in the first few days of April, and it was not only the virus but also the supply shock that greatly contributed to the collapse in oil prices. That is, the Russians and the Saudis lifted their quantitative restrictions at the worst possible time.

What does this situation look like for Mol?

Coronavirus will surely and fundamentally change the 2020 business year and will make hydrocarbon production projects seem much less favourable. Mol’s giant purchase last year in the Azeri project, and the recently announced good news that the company has found oil in the North Sea, are two examples to this. These announcements are excellent news with oil prices at USD 50, but unfortunately not so much when they are at USD 25.

The average price

The most important thing is, however, that even a terrible year will not destroy these projects. It is very interesting to observe the biggest oil companies in the world. Even when oil costs 100 dollars, they only start projects which are worthwhile when the price is 40 dollars, and a project that is already profitable when the price is 40 dollars is considered worthwhile when the price is only 20.

This is because companies calculate with long-term average prices using complex formulas, as they know that following some extreme fluctuations, the price will, after all, return to normal.

Unique characteristics of Mol

When everything collapses, it sounds like cold comfort, but there are a few aspects that now make Mol perform better than its big competitors.

One of them is the Ural-Brent margin. Mol is one of the few companies that is capable of refining products from Russian raw materials and meeting Western quality standards at the same time. In this model, the best moment is when Russian oil is cheap (Ural-type price) but the Brent-type price is high (as that is what Mol must compete with in the finished product market). Now the situation is such.

In addition, the refinery margin has now considerably opened compared to the first two months of the year, which would also be very positive if demand finally returned.

In the first phase of the virus, companies focus primarily on human lives, the safety of their own employees, offerings, and their own survival.

Although Mol is not in an easy situation at all, it has acted successfully in this regard: it turned one of its factories into a disinfection producer plant, helped civilians and even found oil, while retaining its business stability at the same time.

At the moment, it is hard to report anything encouraging about the business of an oil company, but once life gets back to normal, it will be interesting to see which companies strengthened and which companies collapsed in the difficult days.

This is not yet visible in Europe, but it is in North America, where companies investing in intensive and expensive projects to extract shale oil at a cost of 40-50 dollars using a lot of external sources (loans), collapsed. If shares of a company trade on the stock exchange 80 percent cheaper than those of several other American companies, it means that the share prices already reflect the possibility of bankruptcy.

In this respect, we are living in such extraordinary times that even a fall of about 25 percent in the price of Mol shares might give grounds for optimism.

And the state?

Finally, something about the Hungarian state. For the Hungarian state budget, excise tax means more than one thousand billion forints (most of it comes from fuel, a smaller part from tobacco and alcohol). The revenue of the Hungarian state is even higher from petrol, as VAT is also a significant item. In one litre of petrol, almost two-thirds of the price is tax (excise tax, VAT, inventory fee). The formula is complex, it is dependent on the price of oil, but with low oil prices the tax content is proportionally even higher.

Now the state is obliged to help in many ways, so it will have a lot of expenses while its revenues are melting. The 4 billion litres of fuel consumption in Hungary last year will fall in 2020, and average prices are also likely to be lower. Both of these effects will lead to decreasing tax revenues.