PKN Orlen held an analyst conference on Friday afternoon, commenting on the recently released 4Q05 results, the outlook for 1Q05 and other current issues, such as the Mazeikiu refinery tender.
Retail segment: Management expects a breakthrough in its retail operations in 2006, based on the rollout of over 100 “Bliska” economy class stations, which so far achieved a 30-40% increase in throughput, compared with before revamp. PKN Orlen wants to turn more Orlen Deutschland stations into ‘Star’ economy class, which is more successful on the very price sensitive German market. A new system would be put in place to eliminate ‘leaks’ (fraud in fact) in logistics, estimated at close to 1% of selling volumes.
Petrochemical segment: The contribution of the petrochemical segment is expected to increase significantly, as newly launched installations achieve full operational capacity. Moreover, its contribution should be stronger resulting from the absence of over PLN 300m (compared with PLN 150m initial estimate) production and opportunity loss after installation stoppage in 2H05.
Mazeikiu refinery tender: We believe that from PKN Orlen's perspective, a scenario in which the tender for Mazeiku Refinery is postponed, even indefinitely, seems to be only slightly less positive, than winning the tender, as PKN Orlen could expand in north-eastern Poland, taking advantage of the state of limbo at Maziekiu refinery. The deadlock, which emerged following the Lithuanian government veto over PKN Orlen offer cannot be easily resolved because, according to tender conditions, Yukos cannot accept an offer lower to highest, which apparently has been submitted by PKN Orlen, and which is beyond the means of Lithuanian government, as extra spending would undermine its strategic goal to join Eurozone as soon as possible.
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.