PKN Orlen – CAPEX Push Despite Bearish Oil Outlook
In the last update on PKN Orlen last November, we flagged alarmingly-low crack spreads as potential signs of an impending cyclical downturn in the refining business cycle. Today, we are forced to once again revise our already-muted oil outlook as we see most of the key benchmarks hit bottom. With the earnings prospects of PKN Orlen adjusted accordingly to assume 7% lower EBITDA and higher maintenance CAPEX (with additional spend of PLN 1bn announced in 2020), after factoring in reduced peer valuations, we lower our target price for PKN to PLN 68.03, and we downgrade the stock to back to reduce. Looking at the Company's worse-than-expected 2019 Q4 results, with targets missed across all business segments, this would imply that the current 2020 LIFO EBITDA consensus for PKN is overestimated by at least 15%. Nevertheless, against a backdrop of shrinking profits, PKN has just announced a multi-year CAPEX ramp-up of no less than PLN 2bn per year in a move set to put additional downward strain on its valuation. On top of that, PKN is pressing on with potentially harmful acquisitions which include the overpriced local rival refiner Lotos, and the power utility Energa with its inherent discount vis-à-vis the power sector reflecting over-reliance on coal. Last but not least, PKN will have to take on much more debt to fund the planned investment.
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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