Lotos sees possibility of second crude oil delivery from Middle East in 2006

Lotos could take delivery of a second shipment of crude oil from the Middle East later this year, following its first tanker delivery scheduled for October, Lotos' CEO Pawel Olechnowicz said Tuesday. The next supplies of crude oil may be received already this year or early next year. As part of its policy to diversify oil supplies, Lotos last month signed a deal with Kuwait Petroleum Corporation to take delivery of 1 MMbbl of crude oil.

Our view: As we already mentioned, it is hard to justify Lotos' decision to rush for other crude oil supply sources (besides Urals) now and not in 2-3 years time when additional amount would be needed to the planned capacity expansion. The economic terms of the supply contract remain unrevealed, which fuels up the speculations on the market that the deliveries might be not as profitable as the company wants to present it. Although we believe that market might also overestimate the negative impact of Kuwaiti crude supplies, the end result might still be negative: by replacing Urals type by Kuwaiti crude Lotos might lose 1-2 US$/bbl (higher delivery costs and a somewhat lower sweet-sour differential). Please note that the quality of the crude from Kuwait is similar to that of Urals. Originally the Gdansk refinery was designed to process heavy oils from the Middle East.

Although we do not like these - likely politically motivated - crude oil purchases, our key buy story is unchanged: proper strategy, downstream&upstream expansions and attractive valuation makes Lotos our top pick among CEE oils. We maintain our Buy recommendation with our target price of PLN 60.7.