Lithuanian PM Mr. Brazauskas announced yesterday that his cabinet decided on exercising its pre-emptive right to buy a majority stake in Mazeikiu refinery from Yukos. It means that PKN Orlen, which admittedly offered the highest price, close to USD 1.5bn, would not become the winner of the tender. Instead, the Lithuanian government would be obliged to pay a price equal to the highest bid, according to tender conditions. As the extra spending would undermine Lithuania’s strategic goal to join Eurozone as soon as possible, the government will likely seek another strategic investor for Mazeikiu refinery. We understand that the Lithuanian government would have to make up the price difference for the new investor. Mr. Brazauskas met yesterday with the CEO of Kazmunaigas, a Kazach oil company, which also participated in the tender.
We view Lithuanian government's decision as negative for PKN Orlen, although the decision to cancel the tender has been in the cards for some time. While expecting a negative market reaction to the news today, we reiterate our Buy rating for the stock with PLN 67.1 fair value estimate. We continue to see upside potential, based on PKN Orlen’s restructuring potential and an expected increase in the profit contribution of the petrochemical segment, becoming more visible in 2006.