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Lotos: 4Q05 earnings preview

23.02.2006 10:30
Autor: KBC/Patria

Lotos is due to report 4Q05 results on 1 March (next Wednesday). We expect the second highest uarterly net profit this year, however, a gradual fallback from 3Q05, when significant one-off items helped the result. Our 4Q05 net profit forecast of PLN 116.5m is slightly below the management’s estimate made in November (PLN 121.2m) and also falls short of the consensus (PLN 127.3m, reported by PPA). Note that in the lack of 4Q04 figures, we compare Lotos' performance to 3Q05. Upstream: Brent price fell 7.7% q/q, and had a significant negative impact on Petrobaltic's quarterly operating profit, as we see production volumes broadly unchanged. Lotos’ upstream subsidiary is seen to have produced 60kt of crude oil during the quarter, similar to the previous quarters, and the quarterly portion of its projected annual production of 240kt. As a result, we see Petrobaltic to add PLN 45m to the after-tax profit of Lotos in the period, less than PLN 52m estimated for the previous quarter.

Downstream: While we expect the Gdansk refinery to have run with almost full capacity in 4Q05, refining margin on Ural type crude fell 15% over 3Q05, mainly due to the contracting Brent-Ural price differential (to USD 2.8/bbl in 4Q05 from USD 4.25/bbl in 3Q05). The Polish zloty remained virtually unchanged against the US dollar, having minor impact on profits. As a result of these factors, we arrived at our quarterly effective refining margin (EBIT per barrels of crude oil processed) estimate of 5.1 USD/bbl, down from 5.8 USD/bbl refining margin in 3Q05 (here we have adjusted EBIT for PLN 260m one-offs during the period).

Overall, we see a strong set of results for 4Q05. The full-year IFRS consolidated net profit target of the management is PLN 643.5m, which is slightly above our estimate. However, there are speculations that one-off items (according to our estimate some PLN 20-30m, mostly related to the lack of consolidation of the result of Petrobaltic’s Lithuanian subsidiary) might lower the preliminary result. However, this should later appear in the audited annual figures, boosting the associates line of the P&L.

Since our EBIT estimate (PLN 160.7m) lags 11% behind the consensus (PLN 181.4m) and we see the results coming in lower than guidance, we see potential negative market reaction to the figures next Wednesday. However, once the market realizes that the audited results will slightly exceed management’s net profit guidance, investors will likely calm down and turn attention to the management’s comments on 2006 earnings outlook.

We maintain our buy recommendation on the stock with our target price of PLN 56.0.

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