Petroplus Holdings PPHN VX
December 28, 2007 - 5:17pm EST by
rascal997
2007 2008
Price: 87.70 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 5,400 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Petroplus Holdings (PPHN.VX)
Stock Price: Sfr87.7
12 Month Price Target: Sfr130
Shares Outstanding: 69M shares
Market Capitalization: Sfr6.1B (US$5.4B)
Enterprise Value:  Sfr7.6B (US$6.7B)
52 week range: Sfr69-134
 
EBITDA (Sfr)      
FY2007E:      725M
FY2008E:   1,230M (6.2x)
FY2009E:   1,300M (5.8x)*
 
*Incremental FY09 EBITDA is assumed to be achieved via synergies from existing acquisitions.  Earnings estimates are based on the assumption that no additional accretive acquisitions occur in the future (note that it is highly probable that additional accretive acquisitions will occur in the next 12 months).
 
Summary and Conclusion:
Petroplus is the largest pure-play refinery in Western Europe and is led by CEO Tom O'Malley. The strategy that O'Malley is pursuing with Petroplus in Western Europe is identical to the strategy that he successfully undertook with both Tosco and Premcor in the United States. Through a series of acquisitions, Tosco and Premcor were built up and sold, ultimately generating a tremendous amount of shareholder value. In the past year O'Malley has made five highly accretive acquisitions of refinery assets and has grown Petroplus to the point where it has enough scale to be an attractive acquisition candidate. Based on EV/EBITDA multiples paid in recent private market transactions (8x – 8.5x) we believe the stock is worth Sfr130/share, a 50% premium to the current stock price.
 
Business Analysis:
With 864,000 barrels/day of capacity Petroplus is the largest independent refinery in Western Europe.  The company is focused on producing middle distillates (heating oil, diesel fuel and kerosene) and gasoline.  The outlook for the Western European refinery industry is positive as the combination of solid demand growth and limited capacity expansions should keep crack spreads (unit profitability) at robust levels for the foreseeable future. 
 
While we have a favorable view on the industry, our enthusiasm for this investment centers on the company’s management and their strategy.  Tom O’Malley joined Petroplus in May 2006 as the CEO and has since led the company through its November 2006 IPO and the acquisition of five Western Europe based refineries which have increased capacity from 185,000 barrels/day to 864,000 barrels/day.  The strategy that O’Malley is pursuing in Western Europe is the exactly the same strategy that he successfully undertook in the United States.  Through a series of acquisitions O’Malley built Tosco into the largest independent refinery before selling it to Phillips Petroleum in 2001.  Following this he led Premcor through a series of acquisitions before selling it to Valero in 2005.  Through this strategy O’Malley generated a tremendous amount of personal and shareholder wealth.  O’Malley’s conviction that Petroplus represents another great investment opportunity is evidenced by his ownership of over 2M shares and the fact that he bought on the company’s recent equity offering at a price of Sfr100.  Through Petroplus we are investing alongside a proven money maker who has a substantial investment in the company and has bought stock in the recent past at a price 15% higher than where Petroplus currently trades. 
The Western European marketplace is very similar to the United States marketplace in the 1990’s when O’Malley initiated his strategy.  The current owners of the Western European refineries are the supermajors (BP, Shell, Exxon and Total) who view these assets as non-core and have been selling them in order to redeploy that capital into exploration and production as their reserves are declining.  This dynamic has enabled Petroplus to acquire refineries at highly accretive values:  recent acquisitions have been done for less than 4x management’s estimated base case EBITDA (see table below) while Petroplus currently trades for 6x FY08 Proforma EBITDA.
 
Refinery
Acquired
Capacity
Price ($M)
EV/Capacity
 EV/EBITDA
BRC
 5/06
    110,000
           429
3,900 barrels/day
               4.6x
Ingolstadt
 3/07
    110,000
           623
5,700 barrels/day
3.2x
Coryton
 3/07
    242,000
        1,600
6,610 barrels/day
3.1x
Petit Couronne and Reichstett
 2Q08
    239,000
           875
3,660 barrels/day
3.9x
 
The potential for additional accretive acquisition is robust as the supermajors are just beginning to divest refineries.  Currently there is little competition for acquisitions and O’Malley’s connections and reputation as a first class operator give Petroplus the inside track on future opportunities.  We think O’Malley will continue to acquire refinery assets at very attractive values and increase Petroplus’ capacity from the current 864,000 barrels/day to at least 1M barrels/day.  After this point the company will have great enough scale to make it attractive to other industry players who are interested in refinery assets in Western Europe (Valero, Lukoil, OMV and Tata). 
Based on EV/EBITDA multiples paid in private market transactions (MOL acquired IES at 8.1x, Valero acquired Premcor at 8.5x) we believe a buyer of Petroplus would pay 8x – 8.5x EBITDA, or Sfr130-140/share (50-60% above the current stock price).  Note that this target is prior to additional accretive acquisitions and is close to the high that the stock traded at in the public market (Sfr134 in July) before the recent pullback due to seasonal weakness in crack spreads.  Note that crack spreads are now improving and should continue to improve as the business has recently entered into a heavier demand period (current rising demand for home heating oil will be followed by rising demand for gasoline during the warm weather driving season).
 
 
Management:
When a company pursues an aggressive growth via acquisition strategy as Petroplus is, the quality of the management team is critical.  The brief biographies below indicate that this management team has a vast amount of experience and have worked together for years.
Thomas D. O'Malley, CEO
Thomas D. O’Malley has served as the CEO of Petroplus since May 2006. From 2005 to 2006, he served as CEO of Argus Services Corporation. Prior to that, from February 2002 to 2005, he served as the Chairman of Premcor.  Before this, from January 1990 to September 2001, he served as Chairman of Tosco.
Robert J. Lavinia, President
Robert Lavinia joined Petroplus in May of 2007 as a board member and joined the Petroplus executive management as President as of July of 2007. Mr. Lavinia has over 35 years of experience in the oil business. Prior to this position, Mr. Lavinia served as Chairman of the Board of Directors of the Pasadena Refining Company. From 2002 to 2006, Mr. Lavinia served on the Board of Directors of Transcor SA, a Belgium based trading company. He has also worked for a number of large energy companies including Gulf Oil Corporation (1970-1980), Phibro Energy Corporation (1980-1991) and Tosco Corporation (1992-2001).
Karyn F. Ovelmen, CFO
Karyn F. Ovelmen has served as CFO since May 2006. Prior to this position, she served as executive vice president and chief financial officer of Argus Services Corporation from 2005 to 2006. Prior to joining Argus Services Corporation, from November 2003 to September 2005 Ms. Ovelmen served as vice president of financial reporting and investor relations for Premcor, when Premcor was acquired by Valero Energy. Prior to joining Premcor, Ms. Ovelmen spent 12 years with PricewaterhouseCoopers, primarily in the energy industry, including a lead role on PricewaterhouseCoopers’ engagement for Tosco Corporation.
Chester Kuchta, CCO
Chester Kuchta joined Petroplus in June 2006 as the company’s Chief Commercial Officer. Prior to this position, he served as VP of crude oil supply and trading at the Premcor Refining Group Inc. from April 2002 until September 2005, when Premcor was acquired by the Valero Energy. Prior to joining Premcor, Mr. Kuchta served as the crude oil supply manager for Phillips 66 Company’s East Coast and Gulf Coast Systems, following Phillips’ acquisition of Tosco Corp. in 2001. Prior to joining Phillips, Mr. Kuchta served in various commercial and refining positions at Tosco from 1996 to 2001.
Bruce A. Jones, COO
Bruce A. Jones has served as Petroplus’ COO since May 2006. Prior to joining us, he served as SVP of safety, health and environment for Premcor Inc. from August 2002 to September 2005 when Premcor was acquired by Valero Energy. Prior to joining Premcor, Mr. Jones served in various corporate and refining positions at Tosco and Phillips Petroleum from 1993 to 2002.
 
 
Risks:
1.  Weakening Fundamentals
While Petroplus is pursuing an excellent strategy and its management team is first class the business that it operates in is highly volatile.  This volatility was recently demonstrated in the recent 50% decline of crack spreads due to rising input (oil) prices and to weak seasonal demand.  The price of Petroplus’ stock moved in sympathy with crack spreads, declining over 30%.  Our positive long term view on the Western European refinery industry where we predict an ongoing tight balance between supply and demand allows us to get comfortable with this volatility.
 
2.  Acquisition Integration
Any company pursuing a growth through acquisition strategy is at risk of failing to successfully integrate the assets in a timely manner.  The fact that Tom O’Malley has successfully acquired and integrated over 20 refineries helps to mitigate this risk.
 
3.  Acquisition Price Inflation
Although Petroplus’ strategy is widely known to anyone who has been following the company for the last year and for anyone who has been following Tom O’Malley since the early 1990’s no other company is undertaking a similar strategy has emerged.  While there exists the risk that other companies could aggressively pursue a similar acquisition strategy Petroplus’ first mover advantage and O’Malley’s industry contacts and reputation as a operator helps ensure that he will be on the inside track for the higher quality deals.

Catalyst

1. Improved crack spreads from winter heating season
2. New accretive acquisition announced
3. Sale of the company
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