Polish Oil & Gas: IMO2020 is coming
We re-initiate coverage of two Polish refining companies with a mixed view on the companies’ prospects: we have a BUY on Grupa Lotos and NEUTRAL on PKN Orlen. We believe that in the short-term HSFO and sky-high diesel margins will support profits in Ural-oriented refineries. From 1H19 on we expect IMO2020 to start setting the tone which to our best knowledge will result in the diesel-HSFO differential widening. Thanks to the EFRA investment programme ramp-up resulting in switching from heavy cuts to middle distillates (+6-7 p.p. of refining slate from 2H19 on), we believe Lotos is best positioned to be the biggest beneficiary of the temporary, yet major, market inefficiencies in the first two years of the Rule coming into force. As for Orlen we do not expect IMO2020 to have a considerable negative impact on refining EBITDA but we do believe the current weakness in gasoline and naphtha pricing may have some structural drivers and that it will take a little longer for the market to adapt. As for Orlen Retail we still see some room for non-fuel margin incremental growth as upgrading stations to the modern format still isn’t over. On the flipside we see risks looming in European petchem but they are very likely to be offset by investment coming online in the years to come. Last but not least, Orlen has just announced a massive investment programme (PLN 8.5bn) in petrochemicals and the planned takeover of Lotos (PLN 9bn assuming cash bid for a 66% stake), which may introduce additional uncertainty. In the next couple of years we believe the European petchem segment will be under considerable pressure from cheap US and Middle East ethane-based capacity. In turn, taking Lotos over when we believe it will start to enjoy extraordinary results thanks to EFRA and IMO2020 may also not be the best time for M&A activities. However it all depends on final transaction parameters and possible, yet undisclosed, synergies.Grupa Lotos is an oil concern which deals with oil extraction and processing and trading of high quality oil products. Co. supplies the market with, unleaded petrol, diesel oil, fuel oil, aviation fuel, industrial oil, asphalt and paraffin, among other things. Co. is engaged in the production and sales of engine oils and bitumen in Poland. Co. maintains oil exploration and production activities in the Baltic, North Sea and Norwegian Sea and operates three refineries in Gdansk, Jaslo and Czechowice, Poland. Co. markets its products in wholesale markets, as well as in retail markets through a network of petrol stations.
Polski Koncern Naftowy Orlen's activities are divided into three main business segments: the Refining Segment that comprises crude oil processing as well as wholesale and retail trade in refinery products. The Petrochemical Segment that encompasses production and sale of petrochemicals and chemicals. The Retail Segment that comprises of sales at petrol stations. Co.'s basic products include gasolines, diesel oils, light heating oil, Jet fuel, liquid gas, polyetylene, polypropylene, benzene, butadiene, acetone, phenol, glycols, toluen, ortoxylene.
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