PKN ORLEN announced the Value Creation Program for Mazeikiu Nafta. The targeted EBITDA of MN, under a variable macro scenario, in 2012 amounts to USD 700 million, (compared to USD 727 million under a constant macro scenario). Capex planned for MN in the years 2007-2012 amounts to USD 1.6 million.
The VCP will be realized through the following three phases:
1. Restoring of the production capacity of MN, following the fire (that happened at MN on 12 October 2006) and the crude supply disruption via pipeline (that started on 29 July 2006). This phase towards restoring of the production capacity will be realised through restoring the vacuum column and the Visbreaking Unit, damaged after the fire. Also company plans to start the deliveries of VGO (vaccum gas oil) for the full utilization of FCC (fluid catalytic cracker) and restoring the Vacuum Distillation Unit by the end of 2007;
2. Operational Efficiency Improvement across all MN business segments
3. Value growth through a modernization and New Investment Program. Preparation for the New Investment Program has started and during 2007, is expected to involve detailed front-end engineering and planning. The implementation will be continued in 2008 with the majority of works completed by the end of 2011. The New Investment Program will be realised mainly through increasing the MN refinery conversion ratio Hydrocracker, Vacuum flasher, Propylene splitter) and investments to comply with European Union regulations.
Our view: After PKN revealed its estimates on efficiency gains, it became obvious for us that the Polish company seriously overpaid Mazeikiu Nafta. After the investments program PKN total purchase price could reach US$ 4.86bn on the EV level (US$ 2.8bn for the 100% of MN equity, taking over US$ 460m debt and planning US$ 1.6bn investment) while company sees EBITDA at US$ 700m. This implies 2012F EV/EBITDA of 6.9x, versus CEE oil sector average of 4.8x. In general we see the assumptions of PKN Orlen as fair. EBITDA of MN is seen at US$ 120m only this year due to negative one-offs, however, it can easily reach US$ 300-320m next year, some 20% below the 2004-05 level. (In the lack of the restored crude oil supply through the Druzba pipeline, EBITDA is unlikely to reach its 2004-05 level very soon). However, we are a bit surprised to hear that the company is going to spend as much as US$ 300m this year to restore production capacity of MN, which indicates for us that the damages after fire accidend were higher than expected. PKN decided to earmark US$ 550m to save annual US$ 250m after efficiency program is completed – this is broadly in line with our assumptions on potential savings (US$ 200-300m). In general we value the programm as neutral and expect the neutral trading impact.