Lotos is going to sign an oil supply contract with state-owned Kuwait Petroleum Corporation, Puls Biznesu reported. For the time being, neither the value of the contract nor the quantity of oil involved is known. However, unlike the situation with Kazakhstan, Lotos will not be able to buy oil fields in Kuwait, as such transactions are banned by the country's constitution.
Our view: Due to the massive future capacity upgrades the company is searching for additional supplies also trying to diversify them. The decision to take additional oil from Kuwait has positive and negative side. It would definitely be more expensive than the Russian one, therefore would negatively affect the margins.
From other side, diversification of crude oil supplies could be justified from security point of view. Also Kuwaiti oil due to its better quality will enable Lotos to enhance its product slate. However it is hard to justify Lotos decision to change for other crude oil supply sources now and not in 2-3 years time when additional amount would be needed to to the planned capacity expansion. Therefore, we expect a slightly negative market reaction. Our general positive stance on the company is unchanged: we recommend it to Buy with a price target of PLN 60.7.