(Bloomberg) -- Hungarian energy company Mol Nyrt. expects positive cash flow even in a tough environment for European refiners, after adjusting a deal for Russian crude via pipeline through Ukraine.
The company, set to report earnings on Friday, benefits from an integrated refining, logistics and retail model that it will now seek to expand toward southeastern Europe, following acquisitions in Slovenia and Poland, Gyorgy Bacsa, Mol’s Hungary chief operating officer and board member, said in an interview. The Russian supplies are an important part of the equation while Mol strives to diversify its sources of crude.
“It’s in our strategic interest that our own refineries maintain several entry points at the same time, as long as this is legally sustainable,” Bacsa said.
Hungarian Prime Minister Viktor Orban objected to sanctions imposed against Russia by the European Union and, while his government observes the restrictions, the country is still developing ties in sectors that weren’t affected. On energy, the landlocked nation obtained temporary exemptions given its limited access to crude.
Mol has in the meantime been working to process other oil types at its refineries across the region and to diversify its sources, but a full transition would take a few years.
Russian crude supplied via Druzhba to Slovakia and Hungary is about $6 to $7 a barrel cheaper than alternative flows, according to estimates from Viktor Katona, the lead crude analyst at energy analytics firm Kpler.
After Lukoil PJSC was effectively barred from continuing to ship oil via pipeline through Ukraine, Mol agreed to start buying the Russian crude at the Belarus-Ukraine border.
“This seems to be a proper model, which, amid the current EU sanctions and Ukrainian regulations, suits all participants,” Bacsa said. “As a company, we prefer long-term deals versus short-term, temporary ones. This one can be a long-term model.”
While Mol’s cash position is strong, shares have underperformed European energy stocks over the past 12 months, as the burden of a special windfall tax regime brings uncertainty to its financial performance.
“Overall, the quarter was strong, with Mol in its current setup featuring strong cash generation capacity despite declining external fundamentals,” Erste Group Bank AG analyst Tamas Pletser said. “The main issues are oil supply, special taxes and next year’s dividend rate, on which we will have a more detailed picture after Friday’s report.”
Mol shares rose in Budapest alongside regional stocks, gaining as much as 1.5% on Thursday to its highest in a month and paring its decline this year to about 5%.
Bacsa expects the tax burden to ease as the company is not making “extraordinary” profits, a reason that the Hungarian government often cites when imposing levies. He also said Mol features a “resilient” business model and efficient portfolio that helps meet its “conservative” forecasts.
While the company has a heavy presence in its core central and eastern European markets, and sees further growth potential there, “as has been reflected earlier” by acquisitions in Slovenia and Poland, it seeks further expansion in the Balkans.
“We are increasing our activity toward southeast Europe on the trading, wholesale and logistics side and hopefully soon on the retail side,” Bacsa said. “Our aim is to expand toward the east-southeast, in the same way that we have managed to expand northward into Poland.”
(Updates with shares in 11th paragraph. Previous version corrected executive’s title in second deck headline)
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