Polish Oil & Gas: Holding out for a Hero (PKN Orlen stays BUY, PGNiG and Lotos stay HOLD)
The Polish government has decided that bigger is better, and merging its energy companies will create a national champion, capable of taking on the biggest investments. Against a backdrop of record-low refining margins, European gas prices at hitherto unseen lows, sub-USD 40/bbl oil prices and Europe’s most coal-reliant economy, will a problem shared be a problem halved, or are we witnessing the birth of the three-headed Cerberus? With nearly a billion boe of 2P reserves, close to a million bpd of refining capacity, and major power and heat assets, the combined entity will be substantial. Even if the result is munificent however, the path taken has many pitfalls. The acquiescence of three sets of shareholders on terms and conditions unknown could lead to winners and losers, depending on the preponderance of minorities needing sweeteners. Ultimately, in this game, we view the role of predator as preferable to prey; hence, we maintain our BUY recommendation on PKN Orlen (price target (PT) PLN 70.2, 50.6% upside), and our HOLDs on PGNiG (PT PLN 4.88, 6.5% upside) and Lotos (PT PLN 38.3, 6.0% upside).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.
Polskie Gornictwo Naftowe I Gazownictwo SA Polish Oil & Gas Co (PGNiG) is an integrated natural gas company based in Poland. Co.'s core activity covers exploration and production of natural gas and crude oil as well as import, storage, trade and distribution of gas and liquid fuels. Co.'s scope of activity includes gas trading and commercial support, as well as operation, maintenance and expansion of its distribution system. Co.'s distribution networks comprises over 100 thousand kilometers of gas pipelines (high, upper-medium, medium and low pressure), which cover primarily industrialized and urbanized areas of the country.
WOOD & Company is the leading investment bank in Emerging Europe. Founded in 1991 and head-quartered in Prague, our footprint spans the region and touches investors around the globe.
A pioneer in Emerging Europe, WOOD executed many of the first CEE equity trades and landmark investment banking transactions. Our electronic trading platform was the first in the region, and remains the best. We are continually expanding our relevance and reach in these ever-evolving markets.
Our equity market share reflects our stature: 7% in Warsaw, 20% in Bucharest, 16% in Hungary, 40% in Prague and 5% in Vienna. Our distribution is unparalleled, with the largest salesforce in the region, servicing a uniquely diverse investor base.
We couple local expertise with a truly international perspective. With offices on the ground in the region, and in key financial hubs such as London and Milano, we are never far from our clients and we remain at the forefront of what’s afoot in the CEE emerging and frontier landscape.
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