Equilor Company note_MOL Group

Equilor Investment Ltd. Tel: (36 1) 430 3980 [email protected] Member of the Budapest, Warsaw 1037 Budapest, Montevideo 2/C Fax: (36 1) 430 3981 www.equilor.hu http://equilor.blog.hu and Prague Stock Exchanges 2

EQUILOR RESEARCH MOL Group

01/09/2016

MOL GROUP – COMPANY NOTE

Management reported they expect the company to hit upper region of end-of-the-year expectations

Promising financial performance can be observed despite low oil prices. Free cash flow generation stays in focus for the future. Further 2P reserve additions are essential to support long-term growth, however the company

to taking a defensive approach for now. Downstream improvements expected to save time in the wait for appreciating oil price. Due to the falling oil prices companies in the sector are in growing need of steep changes in operational strategies. MOL Group, which orients itself towards downstream operations (as you can see on the segment EBITDA figure) copes with the challenges relatively well. In their last quarterly report they beat analysts’ expectations and their yearly targets were left intact. Beside financial data it is important to pay attention to production targets, and the capability of the company to achieve those results. This report aims to analyse the company’s prospects for 2016, and to introduce different solutions for the stagnating production forecasts.

Source: MOL

Monika Kiss Head of research (+36) 1 808 9212 [email protected] David Farkas Analyst Intern [email protected] Shifting strategies

-100.00.0

100.0200.0300.0400.0500.0600.0700.0800.0

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015

Segment CCS EBITDA

Corporate and OtherDownstreamUpstreamInter Segment TransfersGas Midstream


The upstream segment, as it was stressed during the last report, sees reduced capex numbers, as the company shifts gears and starts to focus on free cash flow generation. Last three quarters the company has exceeded 105-110 MBOE daily output levels (as seen on the graph below), and its rolling semi-annual rate, was also over the target. As it can be seen from the figure, the last quarter brought a minor setback, which was mainly caused by the decrease of the North Sea and offshore Croatian output. The increase in performance to near maximum levels of current infrastructure in the Shaikan block already offsets this drawback.

Source: MOL company reports Looking at the downstream segment, refinery production rates of the company are on track to meet 2016F expectations. The company owns four refineries, which are running higher hours after the numerous development investments. As a result, the Hungarian Danube, and the Slovakian Bratislava refinery is doing relatively well, but INA’s two refineries have significantly lower NCI indices, showing lower operational efficiency. This is also reflected in the refinery margins of these facilities.

MOL Group refinery capacity, Nelson Complexity index Refinery mt/y mboe/d NCI Danube 8,1 161 10,6

Bratislava 6,1 122 11,5 Rijeka 4,5 90 9,1 Sisak 2,2 44 6,1

MOL Total 20,9 417 10,1 NCI – index representing value creaion of refinery, US average: 9,5, European average: 6,5. Source: MOL

Upstream operations Downstream operations

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16MBOE/nap 110 107 101 97 99 92 95 103 103 104 101 108 112 111

9095

100105110115

Quarterly production (MMBOEPD)2016forecast


In addition to the cash-flow generation, a cost reducing program was put in place to ensure the stability of operations even under $35-50 per barrel oil price scenario. This process is expected to peak in 2018F, however the question still stands if the disturbed balance of the production mix was sustainable on the long run. As of today, facts are proving MOL right. Their reserves of 514 MMBOE last for 13.5 years under 2015 production rates, and using only this reserve the company would be able to deliver the 110-115 MBOED 2018F target. Beside CEE production the firm will also be able to gain cash flow from its North Sea operations, so one may want to think through the possible ways of using that money:

• Dividend payments • Further M&A activities if oil prices have negative outlooks • Upstream developments in case of appreciating oil prices • Further 2P (at least 50% chance of extraction) reserve explorations, in order to

avoid a long-term stagnating production rate

Source: MOL reports In order to sustain long term growth in the daily production rates the company will need an expansion of its 2P reserves. The Kurdish Akri-Bijeel block boosted production targets before its reserves were officially measured, but as soon as the reality was unveiled the optimism was faded and growth was nearly fully removed from the forecasts. The Akri-Bijeel and Shaikan fields are co-owned with Gulf keystone Petroleum in 80-20% 20-80% split respectively. Unfortunately the official 2P reserve report for Akri-Bijeel, the block MOL is owner in 80% of, was not available at the moment of the deal, and later it significantly missed expectations, so the company was forced to do write-downs, reduce its investments in the area and revise its annual targets. Beginning of this year the company announced that all operations in the Akri-Bijeel block are finished. The missing expected output may be replaced from the 1220 MMBOE exploration potential of the company, although a part of these is not fitting in to the current operational cost targets. The best options can be identified in the further development of Pakistani interests of the company. Within the current business environment of MOL we can confidently state that 2016F targets will be easily reached. The executive board of the company has also reassured this fact, stating that daily production is expected to be in the upper region of their expectations. However, as it was already discussed above in order to maintain long term growth the company will need to expand its 2P reserves. We believe that this is the main reason behind the cash accumulation outlined for the coming years. Downstream developments are thought to be used to win time for finding the fields that are the best fit for the company’s portfolio. During this time oil prices may recover providing a much wider range of choice of affordable potential exploration sites.

Fighting low oil prices Replacing the lost potential of Akri-Bijeel field is key Summary


Research: Monika Kiss Head of Research Direct: (+36 1) 808 9212 [email protected] Balint Kovacs Analyst Direct: (+36 1) 430 3452 [email protected] Zoltan Varga Analyst Direct:(+36 1) 436 7015 [email protected]

Institutional sales Marton Csintalan Sales Trader Direct: (+36 1) 436 70 14 [email protected] Attila Jozsef Szabo Sales Trader Direct: (+36 1) 808 92 00 [email protected]

Equities Department Zsolt Vavrek Equities Department Director Direct: (+36 1) 430 3991 [email protected] Private Banking Bertalan Nagy Private Banking Director Direct: (+36 1) 436 7019 [email protected]

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Equilor Company note_MOL Group