PKN Orlen held a conference call yesterday to discuss its 4Q12 results. The call did not provide any groundbreaking updates. The main points were as follows:
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Underlying earnings to slightly deteriorate going into 1Q13:The first quarter is seasonally the weakest for refiners, thus we expect PKN to report a slight deterioration in clean underlying earnings in 1Q13 versus 4Q12. However, reported earnings should be much better in 1Q13 versus 4Q12, as neither the impairment nor the LIFO impact should torment the reported figures. PKN had a particularly weak 1Q12 and we look for an impressive year-on-year improvement in core earnings.
Indeed, our estimate for LIFO EBIT stands at PLN 345m for 1Q13, up steeply from the tiny PLN 0.8m posted in the same period last year. The main support for this earnings power should come from the petchem segment but refining and retail should also be stronger year-on-year.
(=) Reduced supply from long-term contracts: PKN said it buys roughly 500kt of crude oil per month through long-term contracts as opposed to roughly 1,000kt per month last year. Although buying more on spot does not necessarily mean higher cost – in fact, it increases the latitude the firm has for some trading arbitrage – crude acquisition costs may go up if a big portion of deliveries are to be re-routed via the sea. We estimate there would be additional costs of around US$ 1.0/bbl for handling the crude and shipping it from Gdansk to Plock. This risk, however, may not be that significant as only a small portion of feedstock (<10%) appears to be coming from the sea while the rest remains
transported through the Druzhba pipeline.
(=) PKN is bullish on petchem margin going into 2013: PKN expects the model petchem margin to average around € 740/t (up 8% y/y) in 2013. Although we agree we are in for some positive development in the near term (in line with the pick-up in chemical sentiment indicators), it is difficult to see why oil-based commodity petchem product spreads should widen in 2013. Indeed, we look for a 4.5% y/y decrease despite our expectation for a lower oil price year-on-year. (We expect Brent to average US$ 105/bbl in 2013 versus US$ 112/bbl in 2012.)
(=) PKN did not have any fresh information on whether Poland might start to reduce the burden of maintaining strategic fuel reserves (SFRs) imposed on fuel companies in 2013. According to the latest draft, Poland will buy back 10% of the reserves in 2013 and eventually take over 30% of the reserves by end-2017. The government also aims to charge oil companies a fee of PLN 32.6/t on annual production of liquids to cover the costs associated with holding the reserves.
(=) Despite having completed four wells (three vertical and one horizontal), PKN did not provide any fresh information on drillings (depth, pressure, temperature, flow rates, associated water and CO2 flows). The company said that no major announcement should be expected in 2013 either.