Orlen counts the cost

Company executives believe the rocketing cost of oil will probably spell lower profits for the oil refiner and distributor PKN Orlen's retail segment this year.

The company's deputy president responsible for retail operations, Wojciech Heydel, said the recent surge in fuel prices triggered by Hurricane Katrina may result in shrinking retail sales volumes.

Orlen's 2005 profit forecast estimates a 14-percent increase in operating profit from zł.2.78 billion in 2004 and an average annual crude oil price slightly below $50 a barrel.

Over the last week PKN Orlen has raised the retail price of gasoline by about three percent, much less than the rise of fuel prices on global markets.

"We were forced to lower retail margins, which puts the whole segment in a difficult situation," Heydel said.

PKN Orlen assumed that retail sales of fuels will rise 4.9 percent from 2004, when the company sold 3.9 billion liters of fuel via its chain of 1,900 gas stations. That target was based on assumptions that gasoline sales in the Polish market would remain flat while sales of diesel would grow 10 percent.

"So far, real trends have been substantially below our assumptions," he said.

Heydel said, however, that the company has managed to stop the falling trend in retail market share at the end of June and now has about a 27 percent share of fuel retail sales.

"Our market share is at a decent level, but it will be hard to achieve growth in volume sales," he said.

Heydel said the company would launch its downmarket retail brand later this year and open some 25 gas stations selling cheaper fuels. He added there was no reason to speed up the process given the recent surge in fuel prices.

"The effect would be marginal and the whole operation should be well prepared," Heydel said.

He added that PKN Orlen had decided not to buy 90 gas stations in Germany from Beckmann Mineraloelhandel but was still considering other options to expand its retail business in Germany.

"We weren't ready to buy assets which didn't guarantee a satisfying rate of return," Heydel said. By the end of the year, PKN Orlen will announce its decision on the loss-making retail business in Germany. Heydel said the company was still weighing up whether to expand its network of 494 gas stations to reach a critical mass or to sell the business. (Dow Jones Newswires)