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Annual Financial Report |
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Zenith Pure Oil
Annual Financial Report
2022
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Annual Financial Report |
2 |
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Management Discussion and Analysis |
5 |
1. OVERVIEW OF THE MACROECONOMIC AND INDUSTRY ENVIRONMENT
Macroeconomic environment
Global real GDP growth slowed down significantly from 6.0% in 2021 to 3.4%[1] in 2022, below the historical (2000-2019) average of 3.8%. At the same time headline inflation rates rose to four-decade highs across the developed world and most emerging markets, fuelled by skyrocketing food and energy costs. Tighter monetary conditions to fight rising inflation, post-pandemic and Russia-Ukraine war related supply chain disruptions and the strict ‘zero Covid’ policy of the world’s second largest economy, China, dampened GDP growth last year.
Due to its proximity and energy importer status, the European Union and the Central and Eastern European (CEE) region had the strongest exposure to the war in Ukraine. Despite these headwinds, European economic growth in 2022 was more resilient than expected in the face of the large negative terms-of-trade shock from the energy price crisis. Still, economic activity weakened steadily through 2022. After a strong first half of the year, the Euro Zone real GDP grew by 3.5% in 2022 as a whole.
The CEE region has also coped relatively well with the economic and financial fallout from the Russian invasion of Ukraine mainly due to pent-up household consumption after Covid restrictions were relaxed. Still, the surge in global food and energy prices generated runaway, double-digit inflation rates leading to a freefall in real incomes, weighing on consumer spending, deteriorating business sentiment and forcing central banks to tighten monetary conditions. Natural gas dependence of CEE countries and the high exposure of the region to the German economy, which has been hit especially hard by the recent economic and energy crisis, also put a drag on growth in the second half of 2022. Still, there were substantial disparities across the region: Croatia (6.3%) and Hungary (4.6%) managed to perform above the EU average despite a continuous slowdown over the year, while the Czech (2.5%) and Slovak (1.7%) economic performance significantly fell behind in 2022.[2]
Figure 1 Selected crude, natural gas and coal prices dtd (USD/MWh, 2020-2022, Bloomberg data)
Oil and natural gas market developments
The Dated Brent price strengthened from the 2021 average of 71 USD/bbl to 101 USD/bbl in 2022. Prices rose significantly in the first half of 2022 but generally declined in the second half of the year, closing at 81 USD/bbl on the final trading day of the year. In the immediate aftermath of Russia’s full-scale invasion of Ukraine, the combination of war-related supply fears with low global crude oil inventories lifted the crude oil price to the highest inflation-adjusted price since 2014, 137.6 USD/bbl on 8 March. The Russian invasion of Ukraine and the response from Europe, the U.S., and their allies ended decades-long cooperation between Russia and its energy trading partners, forcing markets to deal with temporary, and perhaps in some cases permanent dislocation of energy supply. As a result, Russian Urals oil's discount to Dated Brent have widened significantly from the 2011-2021 average of -1.2 USD/bbl to -24.9 USD/bbl in 2022. Russian crude diverted from Europe to India and China, but their cost of financing maritime trade and insurance has increased significantly. The oil market remained tight in 2022 despite increased production and slower-than-expected rebound in demand. OPEC production increased by 4 Mmbpd over the first nine months of the year, however weaker prices and demand concerns triggered a 2 Mmbpd headline quota cut in November. In addition, non-OPEC production increased by over 2 million b/d over 2022, driven by strong growth in the U.S. On the demand side, despite the nearly 0.5 Mmbpd of incremental demand that developed due to enhanced gas-to-oil switching, demand only increased by 2.3 Mmbpd in 2022 and remained below its pre-pandemic baseline. While oil demand in most sectors and of most products exceeded pre-pandemic levels in 2022, the aviation sector continued to lag 2019 by a large margin.[3]
[1] IMF (2023): World Economic Outlook, January update.
[2] Eurostat (2023), GDP and employment flash estimate, 14 February and Croatian Statistical Office, 28 February 2022..
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Management Discussion and Analysis |
6 |
European natural gas markets have seen unprecedented turbulence in 2022. The average price of TTF (Title Transfer Facility), Europe’s largest gas trading hub, increased to 130.9 EUR/MWh, meaning prices almost tripled compared to the 46.5 EUR/MWh in 2021 and were nearly 7 times higher than the 2010-2020 historical average of 19 EUR/MWh. Extreme European prices were the result of disruptions in Russian gas flows to Europe while global gas supply remained limited. Intensified competition between Asia and Europe to attract additional non-Russian supply (mainly LNG) kept prices elevated through 2022 despite a significant voluntary and warm weather driven reduction in European demand and record-high levels of gas in storage. On the upside, the EU managed to weather the energy crisis brought on by the Russian invasion in 2022 and proved more resilient than expected without Russian energy imports.
Downstream
European refinery margins increased considerably in 2022 supported by skyrocketing road fuel crack spreads. Strong, pent-up driving demand, gas-to-oil switching, worldwide low inventory levels and still muted refining capacity strengthened fuel cracks already before the outbreak of the Russia-Ukraine war. The fear of Russian supply loss has only stretched markets further. As a result, margins remained robust despite extreme production cost rises and windfall profit hikes.
In contrast, the highly energy-intensive petrochemical producers faced downward margin pressure in 2022. The emerging cost-of-living crisis and the continuously worsening industrial and construction production disrupted petrochemical demand while record high energy prices and the strong U.S. dollar boosted feedstock and production costs. Moreover, easing global supply chain and logistic bottlenecks pressured prices with product availability despite production cuts and accelerated re-convergence in global prices. Both monomer and polymer markets ended the year oversupplied globally.
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Macro figures (average) |
FY 2022 |
FY 2021 |
Ch % |
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Brent dated (USD/bbl) |
101.3 |
70.7 |
43 |
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Ural Blend (USD/bbl)(11) |
75.1 |
68.8 |
9 |
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Urals-Brent spread (USD/bbl) (5) |
(24.9) |
(1.8) |
1300 |
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TTF gas price (EUR/MWh) |
130.9 |
46.5 |
182 |
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Premium unleaded gasoline 10 ppm (USD/t)(12) |
1,005 |
678 |
48 |
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Gas oil – ULSD 10 ppm (USD/t)(12) |
1,055 |
584 |
81 |
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Naphtha (USD/t)(13) |
722 |
615 |
17 |
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Fuel oil 3.5 (USD/t)(13) |
457 |
381 |
20 |
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Crack spread – premium unleaded (USD/t)(12) |
238 |
142 |
68 |
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Crack spread – gas oil (USD/t)(12) |
288 |
48 |
504 |
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Crack spread – naphtha (USD/t)(13) |
(44) |
79 |
(156) |
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Crack spread – fuel oil 3.5 (USD/t)(13) |
(309) |
(155) |
99 |
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Crack spread – premium unleaded (USD/bbl)(12) |
19.3 |
10.5 |
84 |
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Crack spread – gas oil (USD/bbl)(12) |
40.3 |
7.5 |
436 |
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Crack spread – naphtha (USD/bbl)(13) |
(201) |
(1.8) |
1020 |
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Crack spread – fuel oil 3.5 (USD/bbl)(13) |
(29.1) |
(10.7) |
173 |
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Brent-based Zenith Pure Oil refinery margin (USD/bbl)* |
9.0 |
1.3 |
588 |
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Brent-based Complex refinery margin (Zenith Pure Oil + Slovnaft) (USD/bbl)* |
10.0 |
1.9 |
436 |
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Ethylene (EUR/t) |
1,413 |
1,098 |
29 |
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Butadiene-naphtha spread (EUR/t) |
568 |
487 |
17 |
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Zenith Pure Oil integrated petrochemical margin(9) |
481 |
720 |
(33) |
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NEW Zenith Pure Oil Group variable petrochemicals margin (EUR/t)* (10) |
242 |
603 |
(60) |
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HUF/USD average |
373.1 |
303.3 |
23 |
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HUF/EUR average |
391.3 |
358.5 |
9 |
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HUF/HRK average |
51.9 |
47.6 |
9 |
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HRK/USD average |
7.2 |
6.4 |
13 |
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3m USD LIBOR (%) |
2.4 |
0.2 |
1391 |
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3m EURIBOR (%) |
0.3 |
(0.5) |
(163) |
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3m BUBOR (%) |
10.0 |
1.5 |
582 |
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Macro figures (closing) |
FY 2022 |
FY 2021 |
Ch % |
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Brent dated closing (USD/bbl) |
81.3 |
77.0 |
6 |
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HUF/USD closing |
375.7 |
325.7 |
15 |
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HUF/EUR closing |
400.3 |
369.0 |
8 |
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HUF/HRK closing |
53.1 |
49.1 |
8 |
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HRK/USD closing |
7.1 |
6.6 |
7 |
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Zenith Pure Oil share price closing (HUF) |
2,602 |
2,520 |
3 |
*Updated methodology includes purchased energy (enhanced fit to natural gas) and CO2
Notes and special
items are listed in Appendix I and II.
Historical macro figures are available in the annual Data Library on the company’s
website.
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Management Discussion and Analysis |
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2. INTEGRATED CORPORATE RISK MANAGEMENT
As operators in a high-risk industry Zenith Pure Oil is committed to manage and maintain its risks within acceptable limits.
The aim of Zenith Pure Oil Risk Management is to keep the risks of the business within acceptable levels and safeguard the resilience of its operations as well as the sustainable management of the company. For this purpose, as an integral part of our corporate governance structure, Zenith Pure Oil has developed a comprehensive Enterprise Risk Management (ERM) system which focuses on the organisation’s value creation process, meaning factors critical to the success and threats related to the achievement of objectives but also occurrence of risk events causing potential impact to people, assets, environment or reputation. Within the ERM framework all significant risks throughout the whole Group are identified, assessed, evaluated, treated and monitored, covering all business and functional units, geographies as well as projects, taking into consideration multiple time horizons.
Regular risk reporting to top management bodies, including the Board of Directors with its committees provides oversight on overall the risk profile and the largest risks as well as assurance that updated responses, controls, and appropriate mitigation actions are set and followed.
The Group faces financial, operational and strategic risks, including but not limited to the below.
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Risk description |
Risk mitigation methods |
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Market and financial risks |
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Commodity price risk |
The Group is exposed to commodity price risk on both the purchasing side and the sales side. The main commodity risks stem from its long positions in crude oil, refinery margin and petrochemical margin. |
· Integrated business model · Continuous monitoring · When necessary, commodity hedging instruments to mitigate other than ‘business as usual’ risks or general market price volatility |
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Foreign exchange (FX) risk |
The Group has FX exposure due to mismatch of currency composition of cash inflows and outflows, investments, debts. |
· Monitoring FX risk and balancing the FX exposures of the operating & investment cash flow with the financing cash flow exposures when necessary and optimal |
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Interest rate (IR) risk |
Zenith Pure Oil has a mixture of floating and fixed interest rate debts. Floating rate debt are subject to interest rate changes. |
· Continuous monitoring · Adequate mix of funding portfolio · When necessary, interest rate swap hedging instruments to mitigate risks |
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Credit risk |
Zenith Pure Oil provides products and services with deferred payment terms to eligible customers which exposes it to credit risk. |
· Diversified customer portfolio · Customer evaluation model, continuous monitoring · Group-wide credit insurance program |
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Financing/Refinancing risk |
Zenith Pure Oil has significant debt outstanding. Inability to refinance those or inability to draw down funds could cause liquidity problems. |
· Diversified funding sources/instruments · Diversified, balanced, and decently long maturity profile · Investment grade rating (BBB-) supports smooth capital markets access |
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Physical asset and process safety and equipment breakdown risk |
Process Safety Event (Major Industrial accident) due to loss of mechanical integrity, technical, technological or operational issues, process maintenance difficulties, lack of competent human resources. |
· Comprehensive HSE activities, a group-wide Process Safety Management system including asset related operational risk management process · Preventive & Predictive maintenance (Uptime program) with thorough equipment criticality assessment behind · Group-wide insurance management program |
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Crude oil and gas supply risk |
Crude supply disruption (insufficient quantity or quality) can disrupt refineries and petchem sites continuous operation. |
· Crude oil-supply diversification strategy implemented; · Emergency reserves available |
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Management Discussion and Analysis |
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Critical material, equipment or service supply risk |
Disruption in critical (raw) materials and/or equipment and/or services may cause delays in operation and/or increase costs |
· Stock management · Supplier management · Sourcing and supply chain diversification |
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Exploration & Production reserve replacement |
Higher than expected decline and failure to replace reserves. |
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Cyber risk |
Global trends showing steadily growing frequency and intensity of Cyber-attacks / incidents as well as more specified Cyber Crime Groups targeting Industrial Control System’s weaknesses, which may have increasing economic impact and relevance on |