Is it possible to reverse the merger of Orlen and Lotos? (INTERVIEW)

Luc Williams

Recently, a report by the Supreme Audit Office was published, according to which Orlen sold shares in the Gdańsk Refinery to Saudi Aramco at a lower price. Could it have long-term consequences for the Płock concern?

Doubts regarding the sale of refinery assets in Gdańsk are nothing new. Already when the remedial measures for the merger with Lotos were announced, analysts were critical of the price of shares in the refinery. It was a moment when refining assets generated above-average results. Of course, it was not known how long the high level of margins, which translated into high financial results of the refinery, would remain. In hindsight, we see that this period is still ongoing. Arguments that the refining business is in decline are currently unsupported by the surrounding reality. For this reason, the low price of assets still raises a lot of controversy.

Politicians of the ruling coalition openly criticize the merger of Orlen with Lotos. So is it even possible to undo this connection?

This seems very unlikely to me. Lotos as a company ceased to exist – the shares were exchanged, the company’s assets were partially absorbed into Orlen and partially sold. It is difficult to imagine reversing the sale of these assets from individual buyers.

Orlen’s general meeting of shareholders is coming, which will elect a new supervisory board. What does the market expect after this event?

The new management board will take over the concern after significant mergers. The merger with PGNiG had a greater impact on Orlen’s business model and its results. From the shareholders’ point of view, both transactions were carried out in a way that was beneficial to them – Orlen bought assets that generated high profits relatively cheaply. However, this did not have a positive impact on Orlen’s stock exchange price. The task for the new management board will be to convince investors of the value represented by Orlen and that it will bring benefits to shareholders.

Much will depend on the impact politics will have on Orlen. Investors remember how this company took on additional taxes and artificially lowered prices at gas stations in the pre-election period, depriving itself of multi-billion profits. This destroyed the value of the shares. The company’s results were good anyway, but this approach to business did not make us believe that it was worth investing in. Investors buy shares because they know that management is working to increase the value of the shares. Everyone in the market is aware that State Treasury companies operate at the intersection of business and politics, but sometimes this relationship becomes toxic.

The new management board will also have to convince investors that the company’s investments will prove beneficial to them. Take the Olefins III project for example – capital expenditure there has doubled in two years. Therefore, it is difficult to expect that shareholders will be able to make money on it. Building market trust takes years, and if investors believe that investment outlays are preceded by a series of analyses, it will be well received.

Can we expect significant changes in the rate when it comes to investments?

The investment directions themselves are unlikely to change much. Orlen’s strategy does not raise any controversy regarding the directions of development, but the question remains to what extent investment projects in renewable energy, CCS or hydrogen are realistic and whether the Group is able to develop dynamically on “all fronts”. The scale of the planned investments is large and there is a risk that with the probable normalization of profitability, it will be difficult to reconcile these expenditures with the payment of dividends.

A clear vision of the company’s development is needed, which will take into account changes taking place on the market. Before the takeover of Lotos, we had a narrative that the refining business was in decline and that Lotos would not be able to cope. Meanwhile, Orlen is currently investing heavily in the refinery in Mažeikiai, so these investments do not indicate that this segment will shrink in the near future over the next two decades. The question is how the management sees the future of the retail segment. With the development of electromobility, stations will earn less and less from fuel sales. Their operating model will change.

The new management will have to determine in which areas it wants to develop and which segments will become a thing of the past. On the one hand, we have offshore and other renewable energy technologies, and on the other hand, further licenses for oil and gas extraction are being purchased and petrochemicals are being developed. Investors want to get a clear signal about what investment profile they are purchasing.

In your opinion, did the mergers carried out by the current management team produce the expected synergy effect?

On the occasion of the merger, Orlen presented spectacular estimates of the expected synergy effects. However, there was no specific information to verify this. The management board should also have communicated more clearly, e.g. during quarterly conferences, what synergy effects were achieved, in what areas and what benefits it brought. In the case of Lotos, it was a company operating in a similar area and some savings resulting from its market position could be imagined.

In the case of PGNiG, there were relatively few common areas. Areas of synergy should be sought at the stage of optimizing purchasing activities or managing a group that could be “slimmed down” when it comes to central services. On the other hand, the effects of the merger were limited by employment guarantees signed with trade unions. Therefore, the market does not assume that there will be synergy due to the merger. There was also a lack of communication on this matter. Suffice it to mention that members of the management board did not participate in the investor conferences.

Up to what point do you think Orlen should invest in the development of the retail segment? Have recent foreign acquisitions, such as the recent one in Austria, satisfied his appetite?

The retail segment is part of the group’s vertical integration. Where Orlen operates on the wholesale or refining market, it is also developing a network of gas stations. Let us remember, however, that entering a new market is a strategic decision. This is not a simple business. The further we move away from our own refineries, the more difficult it is to operate. Let’s remember how 20 years ago Orlen bought the first stations in Germany and how long it took it to build value on that market. I assume that Orlen plans to make a profit from the purchase of stations in Austria, especially in relation to the price it paid for them. However, purchasing a station in the region should not be an aim in itself. The development potential on the Czech or Slovak market is already limited.


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