8/14/2007

PKN Orlen Q2 profit up on Mazeikiu, inventory effect; Lotos disappoints UPDATE

(Adds PKN CEO comments from conference call paras 13-14, closing share price)

WARSAW (Thomson Financial) - Poland's largest oil group PKN Orlen beat market forecasts with a 28-pct jump in second-quarter net profit as a recovery at its Lithuanian unit drove sales volumes up and the value of its oil stocks rose on surging crude prices, pushing shares up almost 4 pct.

Earnings at local peer Lotos, which refines four times less oil than PKN, declined 16 pct last quarter, below market expectations, after the company reported weaker sales volumes on lower crude oil production and falling demand for heating oil.

However, both companies, the subjects of merger speculation, posted sharply higher results than in the previous quarter after a 19-pct jump in crude prices increased the value of their oil stocks, while refining margins widened.

Market conditions are likely to be less favourable in the last six months of this year, PKN executive in charge of planning and controlling Jerzy Pazura told a news conference.

'The refining margins will fall in the second half, while the Ural/Brent price differential is unlikely to differ much from what we saw in the first half,' Pazura said.

PKN, Poland's largest company by sales, earned 1.11 bln zlotys in the second quarter compared with an average analysts' forecast of 955 mln zlotys. An inventory revaluation added 479 mln zlotys to its bottom line, the company said.

The group has also benefited from the recovery at its recently acquired Lithuanian unit, Mazeikiu, which swung to an operating profit of 79 mln zlotys in the second quarter from a 262 mln loss in the first three months of the year after a fire almost halved its output.

'Mazeikiu has finally started to earn money,' said Ludomir Zalewski, analyst at PKO BP brokerage in Warsaw. 'The group is consequently raising Mazeikiu's production, and additionally the Lithuanian refinery has benefited from a positive macroeconomic environment.'

PKN revenues jumped 20 pct year-on-year to 16.2 bln zlotys as it more than doubled sales at its retail and chemical units as demand rose in a fast-growing economy. It also said positive conditions in its petrochemicals segment, which earned 349 mln zlotys, should continue for the rest of the year.

PKN chief executive Piotr Kownacki said the company could float its Anwil chemical unit on the Warsaw bourse by the end of this year as it seeks funds for its 3.5 bln zloty annual investment budget.

He also said the company could revisit plans to issue up to 1 bln eur in Eurobonds in September, but does not rule out abandoning the sale if market conditions remain volatile.

Kownacki reiterated he was in favour of a merger with Lotos but said it was up to shareholders, including the state treasury, which holds controlling stakes in both companies, to decide.

'It is clear that such an event would be profitable for the whole Polish economy as well as the companies,' he told a conference call with analysts later.

'But it is not up to us to decide. I would not try to guess when it would happen, or if it will happen.'

Kownacki has launched a charm offensive to convince the government to merge both refiners as part of an attempt to fend off competition from foreign oil majors.

Lotos' response has been tepid and its CEO said earlier this month the group must first complete its multimillion dollar investment programme, which would boost its production by three quarters to 10.5 mln tonnes per year of oil by 2012.

Net profit at Lotos declined to 234 mln zlotys in the second quarter versus 253 mln seen by analysts.

Its revenues fell 6 pct to 3.07 bln zlotys as the company cut production at its small upstream Petrobaltic unit and weaker demand for heating oil drove sales volumes 1.7 pct lower.

'Lotos was less successful than PKN in taking advantage of macro environment as it couldn't offset weaker diesel crack spreads with stronger margins on gasoline,' Bram Buring, an analyst at Wood&Co in Prague, said in a note to clients.

Lotos shares lost 1.9 pct to 47.1 zlotys at close compared with a 2.8 pct gain for the blue-chip WIG 20 index. PKN shares added 3.8 pct to 55.00 zlotys.

Source: By Piotr Skolimowski, forbes.com



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