Goldman Sachs: Europe is re-opening, but refining margins and equities are lagging

The re-opening of Europe is gathering pace with the average activity level now at
c.50% below the pre-Covid-19 baseline vs. -65% as of end February 2021. However,
despite the ongoing re-opening, the performance of European refining margins and
CEEMEA refining stocks is lagging behind the performance of EU O&G/M&M stocks
as well as the travel and airline stocks.

We believe however that with the acceleration of the oil products demand recovery, which we expect to see in 2H21-22, refining margins and CEEMEA refining equities should catch up.

We continue to expect European refining margins to recover to mid-cycle levels
by 2022. Oil products demand recovery in 2H21-22, coupled with potential refining
capacity closures, should push the oil products cracks to their mid-cycle levels by
2022. This, coupled with the widening of the light-heavy crude spreads on the back
of rising OPEC+ production, should result in a meaningful increase in refining
margins for CEEMEA refiners in 2H21-22 vs. 2020.

We prefer pure-play refiners to capture the refining margins recovery. We
believe the pure-play refiners will be the key beneficiaries of the refining margins
recovery that we expect in 2H21/2022. Our top picks in the space are Tupras (which
we add to the CEEMEA Focus List) and Motor Oil (which we upgrade to Buy from
Neutral) – two Mediterranean complex pure-play refiners – which provide the highest
average 2021/22E dividend yields in the space of c.12% and c.8%, respectively.

We are also Buy-rated on Petrom and Romgaz, which continue to have a robust FCF and
dividend outlook. We upgrade MOL to Neutral from Sell as we now see less pressure on its FCF, which will allow MOL to sustain dividend growth.

We remain Sell on PKN, where we expect the pressure on FCF to persist on the back of the
ongoing investment cycle. Finally, we initiate coverage of Hellenic Petroleum with a Neutral rating. We expect the company to deliver meaningful earnings/FCF growth in
the mid-term owing to the recovery in refining margins, however, on our numbers,
this is largely priced in by the market.