Orlen's bumpy road to Lithuania

This is the latest accident at the plant, which PKN Orlen is preparing to take over for zł.7.3 billion in the largest-ever Polish foreign investment.

At the end of May this year the oil giant signed an agreement for the purchase of 53.7 percent of shares in Mazeikiu from the Russian concern Yukos for $1.5 (zł.4.7) billion and 30.5 percent of shares from the Lithuanian government for $852 (zł.2,653) million. By June, Mazeikiu had been cut off from Russian oil. The official reason was a failure in the 'Friendship' pipeline, but political influence may have been a factor. Since then, oil has instead been transported to Mazeikiu on ships.

Then more bad news hit the market, when a fire at the Lithuanian refinery caused damage worth between $22.5-47.5 (zł.69-145) million. This will slash the plant's 2006 net profit to $38 (zł.116.2) million, down from previous estimates of $204.9 (zł.627) million.

Replacing the damaged installation will take from seven to nine months. In the meantime, the refinery will have to use a vacuum pipe-tower distillation column that has been switched off for the past 16 years.

 

The show must go on

In spite of all the negative incidents, Orlen is determined to complete the purchase of the Lithuanian refinery, although the transaction will be postponed and its value could be renegotiated.

"Let's wait for the final assessment of the value of losses and insurance coverage and then we will take a decision as to our further steps. Still, whatever happens, both the Lithuanian side, Yukos International BV [and PKN Orlen are] determined to finalize the deal," Igor Chalupec, Orlen's CEO, told Radio Pin on Friday.

A report from a Lithuanian investigative commission probing into the causes and results of the fire will be ready on December 1. But analysts agree that the purchase of Mazeikiu is a sound investment.

"The takeover makes sense in a longer perspective. Of course it bears more risks than it seemed to earlier, but even if the losses from the fire reach zł.100-120 million, the losses on Orlen's shares are almost zero, considering the size of the oil group," CDM Pekao analyst Maciej Wiewiórski told WBJ.

"One has to look at the transaction strategically. The fire losses will in the majority be covered by insurance and they constitute less than two percent of the refinery's value. Besides, because of the fire we now have to pay more for diesel than petrol and that's actually good for Orlen," says Flawiusz Pawluk, a BZ WBK analyst.

"Even if Orlen has to transport the Russian oil on its own from Butynga, in a two- to three-year perspective, with the diminishing Brent-Ural differential, it really won't matter much," he adds.

On the shopping list

Recently, there have also appeared rumors that PKN Orlen could be interested in the purchase of the Serbian oil monopoly NIS, which is expected to be privatized soon. Piotr Kearney, strategy director for PKN Orlen, told Reuters that PKN was weighting up investment opportunities in southern and eastern Europe, including any fresh developments in the planned NIS privatization.

However, the Serbian scenario seems rather improbable for the analysts. "I doubt they could be interested in the transaction. It's not their zone of influence, more of the Austrian OMV, and the two companies haven't been crossing each other's paths so far. What's more, for the next two to three years Orlen can't afford a big investment like that," CDM Pekao's Wiewiórski comments.

Since the change of government over a year ago, there have been rumors that Igor Chalupec would be replaced by a more Law and Justice-friendly CEO. However, he has kept his position so far, and after last week's supervisory board meeting, a new management board member was appointed - Piotr Kownacki, long-time vice president of the Supreme Chamber of Control (NIK).

PKN Orlen is Poland's leading producer and distributor of oil and petroleum products. It also has a 40-percent share in the retail petrol market. It was formed through a merger of Poland's major fuel retailer CPN and the largest domestic refinery, Petrochemia Płock SA. PKN Orlen group runs more than 2,000 petrol stations, and its operations also include the sale of crude oil, petrol, oil products and engine oils. In 2002, Orlen bought a network of 494 petrol stations in Germany from British Petroleum. In June 2005, the company took over a 63-percent stake in the Czech Unipetrol Group.

PKN Orlen

CEO:   Igor Chalupec

Strengths:

leader on the Polish and Czech markets

spreading its zone of influence to Lithuania

Weaknesses:

lack of own oil fields

dispute with the Czech company Agrofert