WOOD Flash – Lotos: strategy update

Lotos has presented its five-year strategic plan to the market. The plan sets out very challenging targets, in our view, including the doubling of EBITDA by 2022E, as well as the key capital expenditure plans for upstream, refining and retail, split into ongoing and committed projects and potential areas of investment. We like the projects for which the details are known, and we believe that the announced investments in upstream are likely to prove cost effective. We also believe that the company has a number of interesting options for further investments. The increased appetite for investments is a risk, given Lotos’ leverage, so evidence of discipline will be critical here, in our view. The existing projects will require PLN 6bn over the period in question, and an additional PLN 3.3bn investment budget is planned for new projects. How this will be spent should be revealed in 2017E, and how well this money is utilised and whether cash flows will support this plus a return of dividends will determine the success of the strategy. There was a strong statement of the need to manage, so as to generate free cash flow for distribution, but we are disappointed that this was not taken to its logical conclusion, which would have been the announcement of a new dividend policy.