PKN Orlen – It Will Get Better Before It Gets Worse
Our long-held scenario predicting a cyclical slowdown in the refining and petrochemical markets is taking longer than expected to set in, and we are once again prompted to revise our near-term outlook to adjust for the closure of a major refiner in the US, lower-than-anticipated crude prices, better profits achieved by petrochemical installations, and record-low prices of natural gas. Consequently, we feel compelled to upgrade our earnings outlook for PKN Orlen, especially after the Company generated higher-than-expected profit margins in Q2 2019 thanks to an improved refinery slate and cheaper costs of crude inputs. On the updated prospects, we raise our target price for PKN from PLN 80.01 to PLN 92.82 a share, and we upgrade the stock two notches, from sell to hold. There are no negative catalysts looming in PKN's near future looking at high refining margin benchmarks this far into the third quarter, combined with low water levels on the River Rhine, a crucial shipping route for fuels. Furthermore, consumer demand in Poland remains strong, as reflected in the healthy sales margins of fuel retailers, and prices of natural gas keep declining. To top it all, PKN is aiming for higher refinery production in the third quarter. All this makes for a robust near-term outlook for PKN, but in the longer term the picture is more cloudy, however, looking at the scale of planned global refinery expansions and considering PKN's tentative (and therefore not yet factored into our forecasts) plans for a substantial rise in capital expenditures on top of the steep price it is poised to pay for the acquisition of rival Lotos.
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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