PKN Orlen has published an update of its model refining and petchem margins containing data for June 2012. According to the statement, the model refining margin increased to US$ 9.1/bbl in June from US$ 4.9/bbl in May. By contrast, the Brent-Urals spread narrowed, averaging US$ 1.5/bbl in June versus US$ 1.9/bbl in May. Petchem margins also turned south month-on-month, posting € 740/tonne in June versus € 819/tonne in May. In sum, the model refining margin averaged US$ 6.8/bbl in 2Q12 versus US$ 3.3/bbl in 1Q12, whereas the Brent-Urals spread stood at US$ 2.1/bbl in 2Q12 versus US$ 1.3/bbl in 1Q12. The model petchem improved materially to € 772/t in 2Q12 from € 618/t in 1Q12.
Our view:
As the company’s management has hinted several times during the past week, PKN enjoyed a superb operating environment in June 2012. Indeed, refining margins averaged US$ 9.1/bbl in June, the highest level since September 2008 (!). Even though the other two KPIs – the Brent-Urals spread and the petchem margin – deteriorated in June versus May, the second quarter should be one of the strongest for PKN in the last three years. Therefore, when it comes to clean CCS EBITDA, we expect PKN to post sector-leading year-on-year earnings momentum in 2Q12 after a couple of quarters of underperformance.
The key question, however, is to what extent can this stunning margin environment be sustained? Brent-Urals has already shown a contraction in the last few weeks and we expect this trend to continue going forward as Urals should be in strong demand due to the displacement of Iranian barrels. Petchem margins are also on a declining trend and only refining margins held up quite nicely. This was precisely the case in 4Q08 when a steep fall in oil prices led to refining profitability: however, as most people know, this positive trend did not last for very long. In other words, whether oil continues to fall or bounce back (and thus put pressure on margins) we see the 2H12 outlook for refining margins as weak.