PKN Orlen's big plans
Domestic oil giant PKN Orlen has announced major plans to merge its operations with a number of central European energy companies. Karol Chlipalski reports on the challenges and opportunities the company faces.
PKN Orlen has announced its intention to become the market leader among fuel companies in central Europe. Analysts consider Orlen's plans to be ambitious but feasible, though they remain skeptical about Orlen playing an independent role in the European market.
Zbigniew Wróbel, Orlen's president, says that the consolidation process necessary to make the company the central European market leader will take two to three years.
Analysts unanimously agree that if Orlen does not begin consolidating the market, someone else will. The company wants to get involved in capital transactions worth an estimated $1.25 billion (zł. 4.7 billion), but stated that it is too soon to evaluate the real amount of financial involvement.
PKN Orlen could afford to pay at least half of the sum in cash, thanks to a recent sell-off of its non-core business assets. The company recently sold its 35-percent stake in NOM, an independent telecommunications company, to Polish Power Grid (PSE) for €25.5 million (zł. 111.5 million). It is also expected the company will soon sell its 19.6-percent share of Polkomtel, operator of the GSM Plus mobile telephone network, worth approximately €500 million-€600 million (zł. 2.2 billion-zł. 2.7 billion), according to the company's estimates.
Orlen's plans for international expansion tie in with its offer to purchase Lotos Group, the newly-formed company that includes Rafineria Gdańska (the Gdańsk Refinery). If successful, the purchase would result in an increase of the refinery's production potential.
Płock-based PKN Orlen has already been involved for a year in an as-yet-unresolved tender for the Lotos Group, in which PKN is participating together with British company Rotch Energy.
"PKN is waiting for a decision from the Polish government concerning the resolution of the tender," said Marcin Kaszuba. "We believe we'll be successful, and if not, we obviously have a plan B," he added. The estimated value of the Lotos Group stake up for grapbs is $250-$300 million (zł. 930 million-zł. 1.1 billion).
Wróbel announced last week that the company was interested in taking part in the privatization of Hungarian fuel company MOL. Currently the strategic investor in MOL is Austrian fuel concern OMV. The Hungarian government intends to sell 23 percent of the shares of the concern. The value of the Hungarian government's 23-percent share in MOL amounts to about $600-$650 million (zł. 2.2 billion-zł. 2.4 billion).
At the end of May, PKN Orlen also signed a letter of intent with Prague-based Agrofert Holding. The letter concerned a possible consortium that could take part in the privatization of Unipetrol, a Czech chemical group that owns two refineries and a chain of gas stations. A 63-percent stake in Unipetrol would cost the consortium $350 million (zł. 1.3 billion), according to estimates.
As Marcin Kaszuba, Orlen spokesman, told the Business Journal, consolidation with OMV would be the next step in the future. If it is completed, the European market share of the new company would reach 10 percent, according to the company's own projections.
"The logic of the business and growing competition are forcing PKN to make ambitious plans," said Rafał Jankowski, an analyst at CDM Pekao. In his opinion PKN Orlen has grown too big for it to limit itself only to activities on the Polish market.
Jankowski mentions that in 2001, when Orlen resigned from bidding for Slovakian state-owned fuel company Slovnaft, all analysts agreed with its decision.
"Time has proven that everybody was wrong. Now Slovnaft is slowly entering the Polish market, building gas stations in the south of the country," said Rodryg Łobodda, an analyst at BRE Bank.
In Łobodda's opinion, PKN Orlen's ambitions are well-founded. The company is the largest oil concern in the region, when measured by refining capacity, and it has good prospects for the future even though it is far from being the most profitable.
"The Polish fuel market is more or less as big as the combined markets of Austria, the Czech Republic, Hungary and Slovakia," says Łobodda.
In 2002 Orlen's net profit amounted to €97.6 million (zł. 431 million). MOL and OMV operate on smaller markets but have access to oilfields, which has served to make their respective profits almost twice and three times as large as Orlen's.
"The success of Orlen's plans depends on many factors," said Łobodda. "This is a (best-case scenario) plan. I doubt it will get completed." But in his opinion the Polish oil concern should try to achieve as much of the plan as possible.
Nevertheless, experts have expressed doubt about the future independent role of PKN Orlen as a player on the European market. In their opinion, sooner or later Russian giants like Lukoil or Yukos will succeed in taking over central European fuel groups. Those companies have cash reserves greater than the market capitalization of PKN Orlen, said Jankowski.
In his opinion, a takeover by one of the Russian giants is inevitable and will happen soon.
"The best thing which PKN can do is to guarantee to the State Treasury (which owns part of PKN) the most value from the consolidations," says Jankowski.
