Lotos: New strategy is on the way

In an interview for Puls Biznesu, Pawel Olechnowicz, the CEO of Grupa Lotos, announced that the firm's plan for 2008-2011 was to double its current capitalisation, which amounts to PLN 6.5bn. The source of this appetite is oil extraction activity in the North Sea and Norwegian Sea bed, compounded by soaring oil prices. The strategy is presently being prepared, and is to be ready in June 2008. At the moment, the company is holding talks over its presence in these areas by acquiring a dozen-or-so-percent stake in an extraction company or participating in a joint venture. These growth plans may have to be adjusted, however, if the recent idea of a merger with the market's number-one player, the state-owned PKN Orlen, is enforced. Olechnowicz has agreed to consider the deal.

Our view: After receiving an investors perception regarding its refining capacity extension program, Lotos wants also to go on with upstream expansion, which is currently on hold. We believe that the size of upstream investments will be largely defined by the progress of PKRT project as well as macro environment. In term of possible merger with PKN Orlen, Lotos will be forced to follow the government decision, therefore the CEO does not have any choice but to “consider the deal”. Although we see an economic rational behind the potential merge of PKN and Lotos, we also believe that unstable government and monopoly concerns make this very unlikely in the short-term.