Varo’s IPO provides no pointers

Author Ben Winkley

Does a European downstream IPO, as rare an event as it may be, signal a brand new day for the sector?

Varo Energy’s plan to partially list on the Amsterdam stock exchange is an interesting marker for how far the European refining industry has come in the six years since Swiss refiner Petroplus filed for bankruptcy. But not too much should be read into it.

Varo, which is owned by trading firm Vitol and a brace of private equity groups, took its first steps with the purchase of the 68,000 b/d Cressier plant in Switzerland from the ashes of Petroplus. That firm operated some 600,000 b/d of refining capacity in Europe when it went under in 2012. At the time, many thought Europe’s remaining refiners faced a prolonged, painful and uncertain period of fundamental restructuring.

And for some, it has been just that. Around 2mn b/d of capacity has closed in Europe since Petroplus locked its gates, with Total leading the way by purging its French operations.

Survivors of the cull then prospered when the price of crude dropped in mid-2014. Such was the turn around that by October last year, Varo Energy chief executive Roger Brown was describing refining economics as some of the best he had seen in his more than 30 years in the industry.

Clearly then, this is a cyclical business. How to sell that to potential investors?

Refining is parlous. There are lots of moving parts, lots of ins-and-outs and what-have-yous — not all of which are under a plant operator’s control. Total’s head of downstream, Bernard Pinatel, recently told Argus “a refinery has to run like a Swiss watch”.

“We cannot control feedstock and oil product prices, but we can control our costs, our production capacity and our energy efficiency. If we are good… we end up with assets that withstand cycles, assets that are robust,” Pinatel said.

Varo needs to convince investors that its assets are cycle-proof. As well as Cressier, it has a 45pc stake in the Bayernoil venture that runs the 210,000 b/d Neustadt-Vohburg refinery complex in Germany. These assets are broadly dependent on the vitality of Germany’s industrial engine, and those that drive within it. Importantly, Varo has a bunkering business in the German hinterland and in Hamburg — the International Maritime Organisation’s (IMO) global sulphur cap that comes into force in 2020 is likely to give margins a bit of a boost.

Of note in its note on the initial public offering (IPO), Varo is promoting itself as a yield investment, saying it intends to become a dividend payer and, presumably, attract the sort of investment funds that live for the biannual one-off.

Varo also lays down some medium-term objectives — high single-digit, mostly organic ebitda growth, a return on average capital of more than 15pc, focus on cash flow — but said it has not defined, and does not intend to define, “medium term”.

Whichever way you slice it, a European downstream IPO – as rare an event as it may be – does not signal a brand new day for the sector. The region’s refiners remain cautious and are keen to diversify, with many now looking towards high-margin petrochemical production.

Vitol chairman Ian Taylor told Argus the main driver behind the IPO is its private equity partners’ desire to exit their investment in Varo. This is strictly business as usual.