Citigroup’s Recommendation for MOL Shares: Sell

Citigroup today confirmed the target price and sell recommendation for the shares of the Hungarian oil and gas company MOL, assuming there are no changes in the existing ownership structure of the Croatian INA, in which MOL holds a 49.1% stake, Hungarian media report.

– MOL’s shares are lagging behind those of similar companies in the oil and gas sector by nine percent this year, and we expect this trend to continue – emphasized Citigroup analyst Mukhtar Garadaghi in a note today, as reported by the Hungarian financial portal Portfolio.hu.

Garadaghi maintained the target price for MOL shares at 15,100 Hungarian forints, provided there are no changes in the existing ownership structure of Croatian INA. The last time the target price for MOL shares was changed was on August 14, when it was lowered from the previous 18,332 forints.

MOL announced that it is reviewing its strategic portfolio in the Croatian oil and gas company INA, which represents the latest chapter in the conflict between MOL and the Croatian government over control of INA.

 - INA is an important business for MOL; it generates about 20 percent of MOL’s operational cash flow and is a crucial support for future growth. We believe that the current period is marked by significant uncertainty in preserving that value – added Garadaghi.

INA produces 40,000 barrels of oil equivalent per day, which currently accounts for about 40 percent of MOL’s consolidated production.

– In the refining and sales segment, we consider Sisak and Rijeka to be marginal assets in the current refining environment that will remain at a positive zero level (or below), as margins in the region will remain under pressure in 2014 – notes the Citigroup analyst.

– The 20 percent stake of combined INA in MOL’s cash flow on a net basis is crucial, and the current situation generates uncertainty regarding that – he adds.

– We believe that the most likely scenario is an agreement in the ongoing negotiations between MOL and the Croatian government regarding the future of INA. We are skeptical about the possibility of the Croatian government taking full control of INA as well as the ability of either MOL or the government to find a buyer for their stakes, given INA’s significant exposure to the struggling European exploration and production segment – estimates Garadaghi.

– According to the stock price at yesterday’s market close, INA’s market capitalization is approximately 7.5 billion dollars, which means that the value of MOL’s stake in the company amounts to 3.8 billion dollars – he adds.

Among the risks, Garadaghi highlighted the macroeconomic situation in Hungary, legal, political, and commercial risks in the Iraqi part of Kurdistan, a generally risky portfolio in the exploration and production segment, and fluctuations in exchange rates.