PKN Orlen's first-quarter results stun analysts
Polski Koncern Naftowy Orlen (PKN Orlen) last week blamed its first-quarter net loss of zl. 15.7 million ($3.9 million) on a seasonal drop in domestic demand and the country's sagging economy.
"It's true that PKN Orlen's latest financial results are different from the results recorded last year," said Dariusz Grebosz, the company's head of investment. "The two main reasons for the loss are the seasonal drop in demand for oil products and Poland's economic downturn that began at the end of last year."
PKN Orlen recorded sales of zl. 5.43 billion ($1.36 billion) in the January-March period, down from zl. 6.8 billion ($1.7 billion) during the previous quarter. Net profit sank to just zl. 13 million ($3.25 million), compared to earnings of zl. 176 million ($40 million) on zl. 5.2 billion ($1.18 billion) in turnover a year ago.
"What also had a negative impact on PKN Orlen's financial standing in the first quarter of the year was an increase in the value of amortization, after PKN Orlen wound down some of its investment projects last year," Grebosz added.
The loss stunned analysts. "PKN Orlen's first-quarter financial results are surprising to everybody," said Rafal Jankowski of CDM Pekao brokerage house. "I had expected the company to post a net profit of zl. 50 million ($12.5 million). Even if we know that a first quarter of a year is unprofitable for this company due to a seasonal drop in fuel demand, and if we take into account Poland's difficult economic situation at year's end, which further undermined demand, it still does not explain the scale of PKN Orlen's loss." Jankowski said the loss should be attributed to the revaluation of its inventories. "At the end of 2000 the company had a large inventory of crude oil it purchased when oil prices were on the rise," he said. "Unfortunately, in the first quarter of the year prices of oil-based products showed a significant slump. PKN Orlen is not hedging against changes in oil prices, hence its significant losses."
But now that oil prices are on the rise, PKN Orlen could be in a better position to recoup its losses. "Oil companies' margins have just started to recover across Europe, so I hope PKN Orlen will be able to make up for the loss," said Evgeny Solovyov, an analyst with Societe Generale. "Moreover, the second and third quarters of the year are normally profitable for the company."
As for the future, Jankowski said PKN Orlen needs to come up with an inventory risk-management plan, especially in light of Poland's European Union (EU) aspirations. Presently, the company's inventories are set a month ahead, while the EU requires three months. "If PKN Orlen had three-month strategic inventories, its first-quarter profit could have dropped by even 75%," he added.
The company's complete financial report is due out Tuesday.
