PKN Orlen is due to report 4Q05 results on 28 February (next Tuesday). We expect a significant fallback of EBIT from 3Q05, due to the falling refinery margins, a contracting Brent-Ural price differential, and the booking of PLN 420m of one-off costs. However, our 4Q05 net profit forecast of PLN 538m is still 4.6% above the consensus estimate (PLN 514.5m, reported by PPA). The company will hold a conferecne call for analysts on February, 28, 16.30 CET (15:30 GMT). Dial in number is +44 (0) 20 7162 0025.
Downstream: While key refineries of the PKN Orlen group are expected to run at close to full capacity in 4Q05, thus providing similar refined volume to 3Q05, the effective refining margin fell 15% over 3Q05, according to our calculation. A contraction was seen in both the Brent-Ural price differential (to $3.6/bbl in 4Q05 from $4.5/bbl in 3Q05) and Western European refinery margin (to $5.2/bbl in 4Q05 from $6.1/bbl in 3Q05). Switching to the LIFO inventory valuation method from the old average price method could have lowered the result by an additional PLN -150m, according to our estimate. Moreover, a big part of the indicated PLN 150m non-recurring general restructuring could hit downstream EBIT further.
Retail margins are likely to recover from 3Q05, as fuel retailers have tried to keep prices high in 4Q05, when wholesale prices were falling substantially. In our view, this might have resulted in a positive EBIT of the segment, despite PLN 120m provisioning at Orlen Deutschland.
Petchem EBIT will probably show a sharp rebound from 3Q05. The integrated petchem margin for the polyethylene business hit EUR 459 per tonne in 4Q05, up from EUR 330 per tonne in 3Q05. This indicates a fairly strong performance at Unipetrol’s Chemopetrol. Unfortunately for Anwil and Spolana, the PVC-ethylene spread fell to EUR 80 per tonne in 4Q05 from EUR 100 per tonne in 3Q05. Despite healthy caustic prices, this indicates a relatively weak quarterly result from the PVC segment. Factoring into our estimate that PKN is expected to create some PLN 50m provisioning on future layoffs in its petrochemical business segment in 4Q05, we have arrived at our segmental EBIT estimate of PLN 260m. Without this item, petchem EBIT would have almost doubled from 3Q05, we believe.
The Polish zloty slightly strengthened against the US dollar q/q, having a minor positive impact on the financial performance of PKN, given that roughly half of its PLN 4bn debt is denominated in USD. According to our calculation, this has compensated for interest payments and revaluation losses on trade receivables, leaving the overall financial result at a slight plus.
Despite expecting a net result 5% above the consensus, we do not think that figures will result in a positive market reaction. While we believe that without the huge provisioning, the 4Q05 result would come close to the level of the previous quarter (as petchem margin improvement should almost entirely compensate for falling refinery margins), this should have only moderate impact on market sentiment. At this point, we believe that investors are much more interested in management's comments on the 2006 earnings outlook, seeing the very volatile margin environment in Jan-Feb this year.
We maintain our buy recommendation on the stock with our target price of PLN 69.0.