PKN Orlen: Margin update indicates robust operating environment in March

PKN Orlen has published an update of its model refining and petchem margins containing data for March 2013. According to the statement, the firm's model refining margin increased to US$ 5.4/bbl in March from US$ 4.9/bbl in February while the Brent-Urals differential widened to US$ 2.2/bbl versus US$ 2.0/bbl in the same period. Petchem margins also improved and posted a robust € 752/tonne in March, or 6% higher than in February.

Our view:
This is admittedly a positive surprise as PKN’s improving margin trend runs contrary to the benchmark NWE refining margin, which declined US$ 2.9/bbl in the same period. Although it remains to be seen whether PKN’s margins will react with some delay, the robust margins in March mean PKN is likely to post positive year-on-year earnings momentum in the first quarter despite our expectation for a slight deterioration. Indeed, the combined refining margin (i.e. model refining margin plus the Brent-Urals spread) averaged US$ 6.0/bbl (up 30% y/y) in 1Q13. On top of this, petchem margins stood at € 735/t in 1Q13, or 19% higher than in the same period last year. This lends some support to our short-term (highrisk) overweight call on PKN (see our Monthly Investment Tips for April, published on 26 March 2013). Nevertheless, we reiterate our view that the big year-on-year normalization (i.e. a decline) should come in the second quarter (i.e. April, May, June), which could be particularly painful for PKN as the second quarter normally generates 40% of full-year LIFO EBIT.