Financial and credit analyst Mario Kurtović provided an analytical overview of Petrol’s operations in the first nine months of 2022 to determine the effects of fuel margin restrictions on their business.
Given that this is a trade in a competitive market, Petrol’s operating margins are low. Thus, the Group’s EBITDA margin over the last two years has been 4.5-5.5 percent, and the FOCF margin has been 2.0-3.2 percent. Free Operating Cash Flow (FOCF), Kurtović emphasizes, is equal to operating cash flow minus capital expenditures (CAPEX).
In the first nine months of 2022, the EBITDA margin of the Petrol Group fell to 1.3 percent, and the FOCF margin was negative at -0.5 percent.
– If we look at the results of the Fuels and fuel products segment, the effects of margin restrictions are even more clearly visible. Despite a revenue increase of 141 percent compared to the same period last year (+1.8 billion euros, mainly from the acquisition of Crodux), the gross margin fell from 17.7 percent to 5.4 percent (-59 million euros), and the EBITDA margin fell from 7.8 percent to negative -0.8 percent – says Kurtović.
Although our politicians mention an EBITDA of one hundred million euros in the media, which is, according to Kurtović, true, it refers to the result of the entire Petrol Group.
– Although this initially sounds like a large absolute amount (after adjustments, the real amount is actually 90 million euros), it has been used in a completely misguided context. Namely, EBITDA means earnings before interest, taxes, and depreciation, which means that interest, taxes, capital expenditures, and working capital investments must be paid from it. Petrol achieved an EBITDA margin of 4.7 percent in 2021, when there were no interventions.
If we extrapolated that same margin to the first nine months of 2022, we would get an EBITDA of 330 million euros, not the achieved 90 million euros. Thus, the difference is a staggering 240 million euros. Otherwise, Petrol achieved an EBITDA margin of only 1.3 percent in the first nine months of 2022 – says Kurtović, adding that with such a margin, Petrol’s business would not be sustainable in the long term.
Business Unsustainable Under These Conditions
After subtracting interest and taxes, which are essential expenses, from EBITDA, Petrol was left with a margin of 1.1 percent from which investments in working capital (inventories, receivables…) and capital expenditures must be covered. In a specific example, Petrol had to pay a higher price for fuel inventories and other costs and cover that increase from the fixed margin.
After settling interest, taxes, and working capital investments, Petrol was left with only 33 million euros or a margin of 0.5 percent, from which capital investments to maintain asset value (e.g., investments in gas stations) must be financed. This cost Petrol 67 million euros, meaning that FOCF (Free Operating Cash Flow) was negative (-34 million euros).
This is the amount that, according to the analysis, remains available for dividend payments, loan repayments, and discretionary decisions such as acquisitions. Petrol, as a listed company whose co-owners include our pension funds, paid a dividend of 62 million euros, meaning that this gap of 96 million euros had to be financed somehow. 43 million euros were covered from its own liquidity reserves, five million euros from asset sales, and 48 million euros from loans.
From the previous analysis, it is clear that the effect of the fuel margin fixing measure was very unfavorable for the Petrol Group and that business under such conditions cannot be sustainable in the long term, concludes Kurtović.
