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SECTOR REPORT
EQUITY RESEARCH
24 November 2010
Europe
115.18 Energy
95.18
75.18

55.18
nov -07 av r-09 août-10
DJ St oxx Ener gy Playing global imbalances in downstream oil
Rel. DJ St ox x

Source: Natixis Against the backdrop of a conference we are organising in Paris, in this report we
consider the impacts of the crisis on the refining industry and the growth
differentials between developed and developing countries.
Analyst(s)
After four years of strong business in the refining industry (a ‘golden age’),
Julien Laurent (33 1) 58 55 05 38
2009 showed a clear downturn with a utilisation rate down 3.5 points worldwide to [e-mail]
81.1%. The restructuring in Europe is underway: the closure of the Teeside, Anne Pumir (33 1) 58 55 05 20
[e-mail] Dunkirk and Reichstett refineries and the reduction in capacity at Gonfreville are a
Hager Bouali (33 1) 58 55 05 29 start but many installations are up for sale. In addition, the market is weakened by:
[e-mail] declining American demand, which hitherto absorbed the European surplus, the
targets for biofuel usage, the reinforcement of product standards, and the application
of CO2 quotas of in an industry where competition is global.

We identify two underlying trends for the future: 1/ increased need for

logistical capacities (terminals and storage) to respond to a rise in inter-regional
flows and local demand specificities (diesel production under-capacities in Europe
for example); 2/ an investment need to bring the refining base up to new
production standards notably in environmental terms and in particular the cracking
of bunker fuel residues.

These trends correspond to investment themes for Rubis (Buy;
target price €105, up from €88) and Heurtey Petrochem (Buy; target price €30).
Rubis, via its Terminaling business, is a key player in oil logistics, as highlighted by
the strikes at French refineries in the last few weeks. Heurtey Petrochem,
specialised in the engineering -construction of refinery furnaces, accompanies
capacity growth in developing countries and the necessary adaptation of existing
installations in developed countries.
Equity Markets equity.natixis.com Company Rating Price Target P/E (x) EV/EBIT (x) EV/Turnover (x)
Bloomberg access NXSE
2010 2011 2010 2011 2010 2011

Heurtey Petrochem Buy €23.00 €30.00 13.0 9.8 3.9 2.5 0.2 0.1 Distribution of this report in the United States. See
important disclosures at the end of this report. Rubis Buy €87.75 €105.00 18.0 16.4 14.1 12.7 1.1 0.9
Median 15.5 13.1 9.0 7.6 0.6 0.5


EQUITY MARKETS

CORPORATE & INVESTMENT BANKING / INVESTMENT SOLUTIONS / SPECIALIZED FINANCIAL SERVICES SECTOR REPORT
Contents

1. World slowdown creates disequilibria for the refining industry 3
Falling global demand 3
World supply dragging on utilisation rates 4
2. Europe: the weakest link 6
Sluggish demand 6
US fuel demand dries up: the end of an outlet 6
Increasing environmental constraints 7
3. Adaptation underway 12
The majors are restructuring 12
New entrants finding their feet 13
4. Players well positioned for new needs 15
Investment needed to upgrade capacity 15
Tailoring logistics to shifting flow trends 16
Rubis and Heurtey Petrochem: well positioned 17
5. Appendix 18
6. Company profile 19
Heurtey Petrochem 21
The appeal of emerging countries 21
The technology required to adapt refining 23
IFP: more than just a shareholder, a partner 25
Earnings growth: the fruit of better execution 26
Target price of €30 28
Rubis 33
A dynamic player in a mature market 33
Positioned on profitable niches downstream 35
Growth opportunities in the offing 40
Target price of €105 42

2Energy I
SECTOR REPORT
1. World slowdown creates disequilibria
for the refining industry
The economic crisis has taken the wind out of the refining sector, which was beginning to show
signs of recovery over 2005/2008. Some observers then spoke of a golden age. The decline in end
demand for products distilled in 2009 has combined with the arrival of new capacities upsetting
market equilibrium. Capacity utilisation rates are down sharply and overcapacities will last in OECD
countries, while developing countries will remain importers given surging consumption.
Falling global demand
Between 1987 and 2007, world oil consumption rose 1.6% per year. 2008 showed a break in trend
with a fall in crude consumption of 0.7%, which amplified in 2009 to reach -1.3%. With the gradual
economic recovery, the International Energies Agency (IEA) slates a rise of 2.5% in 2010 and
1.5% in 2011 but this growth is focused outside the OECD.
Consumption in Over the last 20 years, oil consumption in OECD countries rose 0.5% per year on average, while
countries outside
that for countries outside the OECD rose 4.5%. According to the IEA, this demand growth is likely to the OECD beating
the developed continue over the next fie years, with a slight decline in OECD countries (-0,29%/year in North
countries in 2013 America and -0.56% in Europe) while non OECD demand is likely to rise from 39.3m b/d in 2009 to
48.2m b/d in 2015, i.e. an average increase of 3.5%/year. Hence, demand in countries outside
the OECD will excedd that in the OECD as of 2013.
Chart 1: Oil product demand growth revision
Sources: Natixis after IEA
China: 45% of Note the dominance of China, where consumption is expected to rise an annual 5.5% on average
expected global
over the next 5 years: alone, China thus represents almost 45% of the expected growth in world demand growth
demand.
3Energy I
SECTOR REPORT
World supply dragging on utilisation rates
World refining capacity rose by 2m b/d in 2009, i.e. 2.2%, and the US refiner Valero believes it will
rise a further 1.7m b/d in 2010 and 1.6m b/d in 2011. The IEA estimates that it will probably climb by
9m b/d out to 2015, i.e. a CAGR of 1.6%, to which China contributes for over a third.
After 4 years of sustained business after 2004 (utilisation rates of over 85% worldwide versus 82.7%
in the fifteen preceding years), refinery utilisation rates clearly slowed in 2009. We note in particular
the 5 point slide in utilisation rates in the European Union to 82.1%. Overall, world refining capacity
utilisation rates fell 3.5 points to 81.1% in 2009.
Chart 2: Refinery utilisation rates since 1980
100
90
80
70
60
50
North America South America European Union
Middle East Africa China
Rest of Asia Former Soviet Union Total world
Sources: BP, Natixis
Refining utilisation capacities in former soviet countries is still very weak. These installations being
old and conversion capacities not necessarily equating to the standards for European products.
However, major modernisation projects are scheduled.
6,8m b/d of According to data in the BP Statistical Review, surplus refining capacity could be worth 6.8m b/d in
refining over-
2009 versus 3.5m b/d in 2008 and 2.3m b/d in 2007. Given the scale of fixed costs and heavy capacity in 2009
maintenance on the sites, we think that the theoretical utilisation rate for a refinery, to ensure
its profitability in optimal technical conditions, is between 85% and 95%. The IEA estimates
that world utilisation rates will fall further to 78% in 2015.
Total’s forecasts still point to surplus capacities in North America and in Europe in 2015 while China
and the ex-USSR will still show under-capacity.
4Energy I

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2009SECTOR REPORT
Chart 3: Surplus refining capacities
Source: Total
Capacity surpluses are now similar to those between 1999 and 2002. They stem from a deterioration
in the two market equilibrium components:
− Declining demand in western countries (-4.1% in North America in 2009 and
-4.2% in Europe) only partly offset by the rise in consumption in China (+6.7%) and India
(+3.7%).
− An increase in world refining capacities of 6.4% in 2009, notably underpinned by rises of 10.5%
in China and 19.5% in India (in particular, with the entry into operation of the Jamnagar refinery in
H2 09 for which capacities of 580m b/d are mainly geared to export).

5Energy I
SECTOR REPORT
2. Europe: the weakest link
Fuel demand In Europe is in structural decline. Diesel is being increasingly used in installations and
the US is not as important an outlet as before for European fuel surpluses. Moreover, the growing
use of biofuels further limits demand for conventional fuel. European operators have relatively
slender financial means, while environmental demands on products are being reinforced.
Sluggish demand
Europe: Demand in EU member countries has risen by an annual average of 0.12% over the last 20 years,
consumption on a
but fallen 0.22% over the last decade. It fell 5.8% in 2