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Petrom First Impression 2Q 2010

Arpechim stop-and-go works; upstream not as good as it could be, but refining surprises positively; gas operations were affected by bad debt provisions; cash generation improved significantly, we consider recommendation upgrade.

Upstream not quite as good as expected: E&P profited from a stronger USD and higher oil price, but was impacted by lower production, higher royalties (a consequence of higher crude prices), 15% higher exploration expenses caused by increased activity, and RON – 12 mn hedging result (cap was at USD 75/bbl). Production costs rose by USD 1.30/boe to USD 16.36/boe because the oil used at the production process (own consumption) was excluded from the production rate starting 1Q 10.

R&M a positive surprise: We did not expect the Romanian refineries to perform so well in 2Q 10, especially we assumed that the stop-and-go modus at Arpechim would not have such a big positive impact. Splitting the clean CCS R&M EBIT, Marketing contributed RON 83.6 mn, meaning that the Refining result improved from RON -68 mn a year ago to RON -5.6 mn in 2Q 10. This however led a utilization rate of only 51% and a yoy 21% fall in output. Improving margins may be a singular event, as product supply was restricted due to maintenance shutdowns of several plants in the region. Petrom's CCS effects at RON 40 mn were in line. Marketing suffers from low demand and margins, despite a better non-oil result.

Gas impacted by bad debt provisions: Romanian gas consumption rose by 16% yoy as interruptible domestic customers (that accept delivery cuts in case of gas shortage) attained the right to cover their supply fully from domestic sources. Nevertheless, G&P was the big underperformer due to an unexpected rise of bad debt provisions (municipal companies depend highly on local and state budget).

Upgrade considered: The financial result profited less than we expected from the stronger USD compared to RON, due to higher interest costs. The effective tax rate was as expected at 16%. Net debt stands at RON 2,697 mn, gearing is 15%, 2Q 10 OCF was RON 1,289 mn, up almost 40% qoq and more than triple the 2Q 09 value. The result shows that the management has successfully adopted a strategy focussing on cash generation earlier than expected. We therefore consider upgrading our recommendation.

Sursa: http://www.rciro.ro

Tags: result higher

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