PKN: serious explosion at Mazeikiu refinery

A serious explosion hit the Mazeikiu refinery yesterday early afternoon. One of the three vacuum distillation units caught fire and collapsed, after which a series of explosions were heard, Reuters reports. As a result of the explosion the refinery was halted almost fully. PKN Orlen, who aims to complete the acquisition of a majority stake in Mazeikiu Nafta soon, offered technical help. Our view: We consider the news as negative for PKN Orlen as it highlights the poor quality of the Mazeikiu refinery, moreover, it is unclear whether the refinery could be repaired before the coming winter. Although the recovery costs could reach tens of millions of dollars, this should be financed by Mazeikiu Nafta and not by PKN.

Asset write-offs related to the explosion are likely to lower the actual purchase price for PKN Orlen (we firmly believe that the contract considers the changes in Mazeikiu’s equity between the signature and the financial closure as an adjustment factor to the final price). The other question for us is when Mazeikiu can turn back to normal operation. If the refinery is unable to the fix the problem before the coming winter, it will run with a relatively low utilization rate by the spring. This could delay the acquisition process and might induce a debate on the price between Yukos and PKN Orlen. In this environment, it would be better for PKN to step back from the deal and write down all related costs. However, due to the strong influence of politics on the company, we still do not consider this as a likely scenario.

We also believe that Lotos might benefit from the situation slightly. In case of a longer repairs the already small fuel inventories of Mazeikiu Nafta could decrease further and the effective refinery margins in the Eastern Baltic region might increase.