PKN Orlen - Summary of the conference call

PKN held a conference call on its 2Q09 results yesterday. The key points included the following:

(-) One-off items in 2Q09: In the end of 2Q09 the company had obligatory reserves worth PLN 5.6bn (more than 50% of total inventory), after it has increased the level by 250 thousand tons (ca. PLN 500m) during the quarter. Due to an arbitration verdict PKN had to pay around PLN 500m to the Czech Agrofert.

(=) Improving debt profile, focus on liquidity: In 2Q09 PKN Orlen improved its net debt position to around PLN 13.3bn from PLN 14.3bn at the end of 1Q09, with a debt structure of 43% in €, 47% in US$, 2% in PLN, 8% in CZK. PKN has an unused credit facility of € 1bn (PLN 4.1bn), what the company keeps undrawn. PKN stated that its focus remains on liquidity management in the current market environment

(+) Divestment of non-core assets: At Anwil the separation of business was already concluded, and the adviser was chosen as well. The information memorandum should be prepared until September thus PKN hopes to receive the first offers in October. Although Anwil’s Czech unit, PVC maker Spolana booked losses in 1H09, Anwil group as a whole should have a reasonably good valuation on the back of its profitable fertilizer business, PKN believes. In the case of Polkomtel the offers can come in December the earliest, the company expects. PKN made it clear that if it can not sell its stake in Polkomtel to a professional investor soon it will offer to financial investors. PKN has several other non-core assets as well with a total fair value of few hundreds of millions Polish zloty. The divestment process of these assets, however, can only start after the sale of Anwil and Polkomtel. PKN firmly denied considering the sale of Unipetrol or Mazeikiu Nafta.

(=) CAPEX spending: PKN has invested roughly PLN 2.0bn in 1H09 and it plans ca PLN 1.5-2.0bn for the remaining of the year.

(-) Business outlook for 3Q09: PKN’s management believes that the petchem cycle might have reached its bottom in 2Q09. In June and July the company experienced an increase in both monomer and polymer margins and somewhat higher demand for petchem products, nonetheless market is still far from normal levels. In refining the sluggish margin environment is expected to weight on results further such as the extremely low level of the Ural-Brent differential (around 1 US$/bbl). The strong PLN also erodes the operating results, however it supports for the financial line. In 3Q09 several shutdowns will negatively impact the profitability at the Plock refinery. At Mazeikiu and Unipetrol no major turnaround is expected. (See the table below for details).

(+) Retail segment to remain strong going forward: PKN managed to improve the profitability of its retail business in 2Q09 both y/y and q/q. The management believes the improving trend is sustainable due to growing throughput of stations, rising non-fuel sales and improved logistics. The fact that 20% of the stations are still not in the premium category, makes room for further improvements.

(=) Update on Mazeikiu Nafta: The restructuring program at Mazeikiu is going on. In 1H09 the company has decreased the total number of employees by 250 workers and cut Opex by 10% y/y. Still, there are several strategic issues which need to be resolved including crude oil supply, product distribution and relation with the Lithuanian Railways. Building a new hydrocracker at Mazeikiu by 2012, as PKN planned originally, is not on the agenda given the current market environment.

Our view:
While the business environment remains though for PKN in the short term, the company makes significant efforts to improve its liquidity situation through divestments. In our view, market focus will remain on these actions in the short term. Overall, we expect a neutral trading reaction to the issues discussed in the call. 

Shutdowns of main units in 3Q09

Source: PKN Orlen