MOL has signed a set of agreements with the owners of Bohemia Realty Company and Pap Oil Cerpaci Stanice, which own and operate a countrywide filling station network under the Pap Oil brand in the Czech Republic, regarding the acquisition of the two companies. The acquisition will include 124 fuel stations. After the acquisition, which is subject to regulatory approval, MOL will own 149 fuel stations in the Czech Republic, equivalent to roughly 5% market share, the company said. MOL said it targets a 10% share of the Czech fuel retail market in the medium term.
Our view:
From a strategic point of view, we would rather see MOL pursue sensibly priced upstream assets. Indeed, given the steeper-than-expected decline rates of Hungarian and Croatian production, MOL could take advantage of the steep fall in crude oil price to reinforce its resource base. Also, fuel demand dynamics on the Czech market leave a lot to be desired: similar to Hungary, domestic fuel consumption has been on a negative trend, although the extent is admittedly less severe than in Hungary.
Despite all these “negatives” we see the news as neutral for two reasons. First, the size of the acquisition is insignificant: applying the average price paid per filling station (around US$ 1.3m per station) in Europe over 2005-2011 puts the value of the acquired stations at US$ 165m (roughly 8-10% of annual capital expenditures). However, average throughput per site in the Czech Republic (around 1.5 million litres per site according to MOL) is likely to be significantly below the average of our compilation from past deals (3.5 million litres per site). If we apply throughput-adjusted EV per
station (US$ 0.45 per tonne per station), we calculate the deal size at US$ 75m (roughly 4% of annual capital expenditures). Given the less rosy fuel demand outlook in the region, this latter estimate seems more reasonable to us.
Second, profits in the marketing business tend to be much less volatile than those of refining activities and as such lend stability to the financial performance of an oil company’s downstream operations.
Hence, expanding the company’s retail network is generally considered to be a safe investment which generates stable returns. (This of course does not mean that all retail network investments pay-off. OMV’s acquisition of Petrol Ofisi provides a textbook example).
According to our estimates, the normalized earnings contribution of the new Czech units will be marginal at the EBITDA line (some US$ 20m or HUF 4.0bn).