OMV Petrom: Special Situation Oil Play Due To Mishandled SPO By A Major Shareholder

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Includes: IPW
by: Jan Martinek

Summary

OMV Petrom is recovering from a mishandled SPO by a major shareholder.

During the last two months the share is up by 30%.

Despite that OMB Petrom still trades at 50% discount to its peers.

(Editor's Note: OMV Petrom has no U.S. exchange-listed or OTC ticker. Investors with access to European markets can trade OMV Petrom in either London or Bucharest.)

Special situation oil play

Introduction to Petrom

OMV Petrom(PETB:LI) is the largest integrated upstream and downstream oil and gas company in Romania and SEE region, accounting for almost 100% of the Romania's oil production and around 50% of its gas production. The company operates the 4.5 mnt Petrobrazi refinery in Romania, with exposure to refining providing Petrom with some protection against lower oil prices. Petrom also operates some 785 filling stations in Romania, Moldova, Bulgaria and Serbia. Petrom entered the power generation industry with the construction of a first 860 MW gas-fired power plant, which started operating in August 2012. Current market capitalization of OMV Petrom is over US$7 billion.

Petrom's operations are mainly located in Romania; it also has small exposure to upstream in Kazakhstan

Geographical location of Petrom's operations, 2015

Source: Goldman Sachs

Petrom remains strongly geared towards the upstream segment with almost 70% of the projected 2017-18e EBIT to be generated by the E&P segment, which makes it an attractive play under a stronger oil price scenario.

Most of the domestic upstream production comes from mature fields. The key exploration opportunity for OMV Petrom is the Neptun Deep project in the Black Sea (a 50% JV with ExxonMobil). Eight exploration wells have been drilled there, with total CAPEX of US$750 million spent in 2012-15 (Petrom's share). The field contains only gas and preliminary estimates for the project's resources are in the range of 42-84 bcm. If everything goes as planned, the start of production is expected in 2022. Raiffeisen estimates that the Neptun should reach a plateau production level of 3.5 bcm by 2025 and stay at this level for approximately 9 years. Under Goldman Sachs estimates, the NPV of Petrom's share in the Neptun block could be around US$350 million (IRR: around 17%), which equals 11% of the company's current market capitalisation.

Petrom's new project pipeline

Source: Goldman Sachs

In 2014 Petrom finalized a modernization program worth EUR 600 million of its Petrobrazi refinery, with an annual refining capacity of 4.5 mtpa, designed to allow for the processing of the whole domestic oil production and increase the yields of middle distillates. Petrom operates some 785 filling stations in Romania, Moldova, Bulgaria, and Serbia with a market share of 33% in 2015. Petrom entered the power generation industry with the construction of a first 860 MW gas-fired power plant, which started operating in August 2012. In February 2012, Petrom announced a potentially significant offshore gas discovery in Romania (42 to 84 bcm). The final investment decision could be taken in around two years. Following the slide in the crude price, Petrom has cut its CAPEX forecasts to EUR 700 million.

In 2010-14, Petrom undertook a revamp and modernization program at the Petrobrazi refinery at a total cost of around EUR 600 million. It led to a material improvement in the refinery's NCI from 7 to 11.3 (one of the highest complexities among CEE refineries). Following its modernization, Petrobrazi's utilization rates stabilized at around 90% and its refining margin improved as a result of better quality of the product slate. Going forward, Goldman Sachs analysts expect Petrom to sustain high utilization rates of around 93%.

The company has a healthy balance sheet with increasing net cash position and zero leverage.

For more information on the company please see the latest investor presentation here.

Major Shareholders

The major shareholders are Austria's largest listed industrial company OMV, and Romanian privatization fund Fondul Proprietatea (managed by Franklin Templeton and the Romanian state).

Source: the company

The shares trade on the Bucharest Stock Exchange and its GDRs are trading on the London Stock Exchange. The current market capitalization of OMV Petrom is over US$7 billion.

The opportunity

As described above, Petrom remains strongly geared towards the upstream segment with almost 70% of the projected 2017-18e EBIT to be generated by the E&P segment. Therefore the OMV Petrom share price performance should be strongly correlated to the oil price. The graph below shows that it was, until mid-2015, when Fondul Proprietatea, the second largest shareholder of Petrom with 19% stake announced that it is looking to sell part of its stake through an SPO. The announcement led to a price collapse in Petrom shares (see the graph below). As the oil price started to collapse, the SPO was put on hold. Despite that, it still had an effect on the share price. Investors knew, that there is a potential share overhang that will at some point hit the market. That disconnected the share price from the oil price. The share price froze.

The share price collapsed together with the collapse of the oil price but failed to recover with the oil price recovery due to the share overhang

Source: Bloomberg

The potential share overhang resulted in OMV Petrom significantly underperforming its peers.

OMV Petrom significantly underperformed its peers over 24 months period

Source: Bloomberg

OMV Petrom significantly underperformed its peers over 12 months period

Source: Bloomberg

The SPO finally happened in mid-October 2016. Fondul Proprietatea sold 6.4% stake in OMV Petrom through an SPO on the local Bucharest Stock Exchange and dual listing London Stock Exchange GDR issue. The sale increased the free float by 40%. Since then the share price has changed its course. Over the last two months, the share price is up by more than 30%.

OMV Petrom share price increased by 30% over the last three months

Source: Bucharest Stock Exchange

The share price growth in the last three months was strong. The two Bloomberg graphs above shows that there is still a long way up for OMV Petrom to catch up with its peers. Raiffeisen Bank analysts estimate that OMV Petrom currently trades at an unjustified discount of 50%.

OMV Petrom still trades at a 50% discount to its peers.

Further upside and downside risks

Downside and upside risk mainly relate to the volatility of oil and gas prices. If the oil price would stabilize around today´s levels, we should see the share price rerating as described above.

Further risks relate to higher than plan capex, and adverse taxation changes.

Romania is currently rated as Frontier Market by MSCI. Last year it had fulfilled all MSCI´s conditions to be included in the MSCI Emerging Market Index. Local brokers believe that the upgrade of Romania to Emerging Market might happen in mid-2017. Such reclassification would have a quite positive effect on the valuation of Romania securities.

Additional catalysts would include an increase in dividends and successful progress in the Neptun opportunity.

Conclusion

Back of the envelope valuation from the first Bloomberg graph above shows that when oil price was 55 USD, Petrom was trading at 0.35 RON per share, which represents 25% upside from the current share price. This is in line with Raiffeisen Bank price target of 0.34 RON per share. An ideal candidate for a quick trade.

Supporting Documents

  1. Petrom_presentation.pdf
  2. Petrom_by_RB.pdf

Disclosure: I am/we are long PETB:LI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I know that the article does not deal with US securities, please consider making an exception as you have done before on my ideas.

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