PKN: Potential merge with Lotos could save up to US$ 280m

A merger of PKN (58 PLN, -0,43%) Orlen and Lotos (47 PLN, 0,21%) could save up to PLN 800m (some US$ 280m) a year, the CEO of PKN told political daily Rzeczpospolita on Saturday. In a separate interview with the same daily, Lotos head Mr. Olechnowicz said he remained skeptical about the idea seeing no guarantees that such a merger will be a financial and technical success and that it would strengthen the country's energy security.

Our view: US$ 280 million savings are far too much, in our view. Assuming that PKN would close down Lotos headquarter in Gdansk, it can save some US$ 50m per annum at most, in our view. Given no overlap in petchem activities, the remaining US$ 230m would come entirely from the refining and retail businesses, lifting the effective margin by some US$ 1.5-2.0/bbl for each of the Plock and Gdansk refineries. This is a very optimistic assumption, given that that typical effective refining margin of the Gdansk refinery amounts to US$ 4.0-4.5/bbl. The idea of merging the two companies is seemed to be push by PKN's CEO Kownacki, rather than Lotos CEO Mr. Olechnowicz.

Given the current political situation in Poland, especially the likely early elections, we maintain our view that there is a little chance for such a merger in the short run. Moreover, opposition party Civic Platform, leader of polls, declared several times that it is against the merger which they see questionable from competition point of view. While we cannot fully rule out that Civic Platform will change its mind once on the government, their opposition of the merger of the two companies is a clear political risk factor for PKN CEO Mr. Kownacki, who seems to be the major promoter of the idea and was denominated to his position under the current government. We feel the news could be taken as slightly negative and might drive some investors to take their profits after the impressive rally of PKN share price last week.