Lotos reported a mixed set of 2Q12 results this morning, with headline figures falling way below the consensus but clean earnings coming in line.
Reported EBIT came in at a loss of PLN 861m (the worst ever!), double the consensus forecast but only 18% higher than our estimate. The main culprit behind the whopping miss was the PLN 963m (pre-tax, PLN 285m post-tax) impairment taken on Yme (see more on this below): analysts calculated with only PLN 400m on average compared to our estimate of PLN 825m. Not surprisingly, net income also missed consensus, although the massive tax reversal (PLN 678m) on Yme lent strong support to the bottom line. Stripping out the nasties (impairment, LIFO impact, FX losses on oil liabilities), EBIT came in at PLN 397m (up fourfold y/y) in 2Q12, broadly in line with the consensus and our estimate. The main drivers of this impressive earnings uptick included the robust upstream performance, healthy refining margin environment as well as the first signs of optimization at the company’s retail arm. Also, the result clearly reflects Lotos’ extremely high operational leverage to the external macro.
In terms of segments, refining surprised on the downside, while the upstream and retail divisions recorded upbeat figures. Qualitatively, we see the results as decent and broadly in line with what the operating environment implies. However, we are looking forward to hearing more on the divisional split. Despite the relatively healthy operating performance, the result will unlikely to receive a warm reception from investors due to the whopping impairment on Yme.
Upstream: The division posted a clean operating profit of PLN 127m in 2Q12, only marginally down q/q despite lower production (down 22% q/q, driven by reduced activity at the B8 field), lower sales volumes (down 8% q/q) and the 6% q/q decrease in oil prices (in PLN terms). While this is clearly a positive surprise (we expected only PLN 65m), the market will likely be horrified by the impairment charge Lotos took on Yme (PLN 963m). Although this is not far from our estimate of PLN 825m and in the range where we had expected it to be (PLN 650m-1,000m), the median expectation was only PLN 400m (according to Reuters). Together with the PLN 217m (pre-tax) impairment taken on Yme in 4Q11, Lotos impaired around 77% of the carrying value of the asset. It seems analysts were far less conservative with their estimates despite Talisman impairing 60% of the carrying value of the assets on 1 May 2012, after which we have received only further negative newsflow.
Refining: Surprisingly, the segment posted an operating loss of PLN 57m versus our expectation for a profit of PLN 42m. Although this was mainly due to the negative LIFO impact (PLN 205m) as well the FX losses suffered on oil liabilities (PLN 91m), we are downbeat on the segment’s clean underlying performance. EBIT after nasties came in at PLN 238m, falling 28% short of our estimate, despite Lotos posting pretty strong production and sales volumes. Indeed, production (2,415kt) and sales volumes (2,591kt) came ahead of our forecast by 3% and 7%, respectively. We are looking forward to hearing more at the conference call about why Lotos could not fully benefit from the superb margin environment despite its sector-leading asset quality and coastal infrastructure.
Retail: Thanks to the optimization of the company’s retail arm (i.e. expansion of OPTIMA economy service stations) the segment generated an operating profit of PLN 2.7m versus our expectation for a loss of PLN 5.0m in 2Q12. This was the first segmental operating profit since 3Q10.