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Electric future sets East Europe refiners after coffee dollars
[PRAGUE] Jiri Havlicek and his wife, perched at a picnic table on Prague's riverbank, arranged a wooden chessboard and settled in for a game with creamy lattes in stylish stemmed glasses, a picture-perfect getaway from Europe's midsummer heatwave. At a fuel station.
The retired couple's outing across the Czech capital to their favorite spot is symbolic of a push into new businesses by refiners in the region, which have sprawling retail networks but lack the financial muscle to compete with industry giants. Hungary's Mol Nyrt., which runs the mini mart the Havliceks go to regularly, has spent US$145 million to upgrade a third of its 2,000 locations in 10 countries. It's also trying to win over customers with food courts and other businesses from bottling water to operating buses.
It's part of a strategy by central Europe's oil companies to diversify their business -- and give customers more than fuel -- as electric vehicles start to gain a larger foothold in the market. As more people start to use electric vehicles and governments tighten air pollution laws, Mol and its regional rivals, such as Poland's PKN Orlen SA and Serbia's NIS AD Novi Sad, are hedging to ensure their survival when longer-term demand growth for diesel and gasoline may be uncertain.
"Retail is a fashionable area of investment for oil companies in central and eastern Europe as consumers are starting to travel more and higher salaries are boosting demand for non-fuel services," said Tamas Pletser, an analyst who covers 12 oil firms in eastern Europe for Erste Group Bank AG. "Larger, global firms are still more focused on exploration and production."
There are amply stocked fuel stations turned convenience stores across Europe, owned by the world's biggest oil companies including BP Plc, Total SA and Royal Dutch Shell Plc. But they're facing increasing competition from smaller rivals who are also offering artisanal coffees, wholewheat wraps and designer bottles of water.
Mol is ahead of other European integrated oil companies in its focus on retail operations, according to Bloomberg Intelligence analyst Salih Yilmaz. Even with a plan to spend US$1.9 billion though 2021 on chemicals and petrochemicals investments as part of its diversification, the company wants consumer-services Ebitda to reach 30 per cent of the total by 2030.
The basis of the strategy is the former Hungarian communist-era monopoly's expansion from the Black Sea to the Adriatic in the past two decades. Recent acquisitions included the 2014 purchase of 125 Agip outlets in the Czech Republic from Eni SpA, which almost doubled Mol's presence, making it the second-biggest operator in the country. It's since rebuilt most of the stations, renovated the shop areas and introduced loyalty programs.
True to Mol's roots, shift is funded by revenue from refining, which accounted for almost half of total pretax profit last year. But it reflects a desire to move on from mixed results in oil production in recent years, with setbacks including write-offs in Syria through its Croatian unit INA Industrija Nafte d.d. due to the war, and unsuccessful drilling in Iraq.
"Ambitions in upstream remain more modest than in the past," Henri Patricot, an analyst at UBS Group AG said by email. The new strategy plays to the company's strengths and addresses some of the long-term threats to the business, he said.
Globally, electric vehicles will represent as much as 8 per cent of total sales within two years, Moody's Investors Service said in a report on Jan. 23. In 22 years, electric cars will make up 54 per cent of total new sales, according to Bloomberg New Energy Finance. Still, sales in eastern Europe is slower than in the more affluent western part of the continent. While Norwegian electric car sales in 2017 was almost 40 per cent of the total, for instance, only 520 electric cars total were registered in Bulgaria by March of this year.
Nevertheless, diversification has accelerated. In July, Mol bought a majority stake in a company that operates public buses in Budapest and Debrecen, and in June it purchased a water bottler. It's also looking to add coffee-roasting capacities to integrate its best-selling non-fuel product. Car- and bike-sharing services in the Hungarian capital are up and running, with plans to expand to Prague and Bratislava.
"We are putting more attention on the customers and how to become a bigger part of their life," Peter Ratatics, Mol's consumer-division chief who took charge of the unit as chief operating officer this year, said in a Budapest interview. "For that, we need new capabilities and are looking at a lot of things that we didn't do in the past."
Mol's biggest non-Russian rival in eastern Europe, Warsaw-based PKN Orlen is hedging its bets for a world ruled by electric vehicles. With more than 2,700 stations in Poland, Germany, the Czech Republic and Lithuania, the company plans to build 150 electric charging stations in Poland, 50 of which by the end of 2019. It's also been cooperating with Tesla, installing five superchargers in Poland, Germany and the Czech Republic.
Like Mol, PKN is also buying into car-sharing by providing operator Traficar with parking spots, fuel and carwashes at its stations. It's working with the Nexbike bike sharing service and is expanding its O!Shop format, the company said.
Belgrade-based NIS, which has more than 400 stations across Serbia, Bosnia-Herzegovina, Bulgaria and Romania, is developing its own brand of chewing gums, energy drinks and other products to sell at its convenient stores. It's also moving into power production, with output seen jumping to more than 2,000 gigawatt-hours in 2025 from 154 gigawatt-hours in 2017.
"It's a very long-term strategy," said BI's Yilmaz. "A lot of the companies are thinking about this and I think their rationale is not off. I think it makes sense."
Not everyone in the region is buying into the non-fuel future. For now, Austrian conglomerate OMV, which competes with Mol and PKN across eastern Europe, is planning on boosting oil output. Its goal is to produce 500,000 barrels a day by next year -- a 20,000 barrel per day rise, Chief Executive Officer Rainer Seele said in a Vienna interview. That's more than four times the output planned by Mol. OMV is planning to spend 5 billion euros ($5.8 billion) on exploration assets.
Back in Prague, the Havliceks are voting for Mol's strategy, even though Jiri said he had no idea the company that spruced up the old Agip station hails from Hungary.
"It's really beautiful here," said Havlicek, a doctor of theology, as a scull zipped past a gaggle of swans bobbing on the Vltava. "It actually beats going to a coffeehouse in the center of the city."