PKN Orlen – Cheap Oil vs. Tighter Production
Amid huge volatility across all global markets (energy, currencies), underpinned by economic uncertainty, it is next to impossible under the current circumstances to construct a reliable base-case scenario for PKN Orlen with any degree of confidence. That being said, we have opted to update our view to reflect the developments to date. Below we analyze three scenarios: Best, Base, and Worst, to help better understand the possible risks associated with investing in PKN in the current environment. Our last outlook did already incorporate a fairly conservative macroeconomic view on refining and petrochemical fundamentals, meanwhile as gas and oil prices fall, all other things being equal, this is helping both sectors through a more advantageous Urals/Brent differential and lower feedstock costs, on top of a weaker zloty. We tried to account for the demand shock in the oil market, and the impending global recession, by reducing PKN's expected production volumes by 5% to 15% depending on the segment, and by adjusting downward our retail sales forecast along with service station profit margins. At the same time, we want to point out that PKN might have an opportunity to release PLN 5bn of cash from working capital, and we want to highlight its safe debt levels at just 0.7x EBITDA (even if we include leases in the amount of PLN 4bn). Last but not least, we are counting on PKN's Management Board to reevaluate their initial investment plans and M&A ambitions. With all this in mind, we set our new target price for PKN at PLN 58.61 per share, with an upgraded accumulate recommendation. On our updated estimates (with LIFO EBITDA cut to where it is about 15% below the current consensus forecast), PKN is currently trading at a cyclically-acceptable 4.1x 2020-2021E EV/EBITDA (versus of 5-year average of 5.3x).
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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