Board of Directors of MOL approved an upgrade program for the Duna refinery yesterday. The program consists of three major elements: 1) increase of distillation capacity from 8.1mtpa to 9.4mtpa, 2) construction of a new 1.5mtpa VGO (vacuum gas oil) hydrocracker, 3) extension of the delayed cokoker from 1.0mtpa to 1.3mtpa. The USD 420 million project is expected to be completed in 2010.
Our view: The project aims to increase diesel output by 1.3mtpa through processing more heavy and sour crude oils such as Ural and Kirkuk. Cost of the project at US$ 420m could seem to be low at first sight, however, given that capacity expansion of the facts that distillation unit is expected to be done by MOL technical staff and that VGO hydrocracker is much cheaper the a residuum hydrocracker (aimed by Tupras and Lotos, for instance). According to MOL, expected return on this project will exceed strategic target of 16% ROACE and financing would be exclusively from own cash. We expect positive market reaction to the news, given that 1) the program helps MOL to somewhat decrease its net cash position, 2) expected ROACE is well above our 2010F ROE estimate of 14%, and 3) enabling the Duna refinery to (at least partly) deal with Kirkuk grade crude and reactivating the Adria pipeline helps MOL to lower dependency on Russian supplies.