Orlen May Return to Dividends as Debt Falls, Margins Improve

PKN Orlen SA (PKN), Poland’s largest oil company, is considering resuming dividend payments after its debt declined and refining margins improved.

The refiner, Poland’s biggest company by sales, hasn’t paid dividends since 2008 as the zloty slumped on the global crisis, boosting the value of its foreign-currency denominated loans. In 2008, Orlen exceeded covenants in its bank loans and had to agree to pay higher interest on its debt. Since then the company has reduced its net debt by 44 percent to 7.1 billion zloty ($2.1 billion) at the end of the first quarter.

“There was no room for dividends” in past years as the company focused on cutting debt and completing investments, Chief Financial Officer Slawomir Jedrzejczyk said in an interview in Warsaw on July 10. “But now, we’re now entering a phase when we should have adequate resources” to pay out part of profits to shareholders.

Jedrzejczyk said it’s “premature to declare” whether the state-controlled company will return to dividends next year as Poland’s economy is slowing amid Europe’s sovereign-debt crisis.

The zloty, which weakened by 2 percent against the euro in the second quarter, and falling oil prices that cut the value of the company’s crude inventory depressed earnings by “a few hundred million” zloty in the second quarter, Jedrzejczyk said. The company will report preliminary first-half earnings on July 19.

‘Good’ Quarter

The so-called LIFO-based earnings before interest and taxes, or the profits based on last-in first-out accounting method that excludes the impact of oil prices on mandatory reserves, were “quite good” in the second quarter, the CFO said, as refining margins rose to the highest since 2008. Third- quarter margins will fall as the oil price is in an “upward trend again.”

“It’s difficult to say if the third-quarter LIFO Ebit will rise or fall from the second quarter,” Jedrzejczyk said. “On the one hand, the third quarter is usually the best of the year from the volumes point of view. On the other hand, we expect refining margins to decline.”

Orlen plans to spend from about 500 million zloty to 1.5 billion zloty this year on “growth initiatives,” including “upstream” projects and power plant investments, the CFO said, adding that such spending will increase next year.

The company this quarter will pick the builder of its Wloclawek gas-fired power plant, which it plans to complete in 2015. It’s also speeding up shale gas exploration as it’s seeking to expand into resources production.

‘Huge Pressure’

Orlen, whose foreign operations include neighboring countries of Lithuania, Germany and the Czech Republic, last month decided to close its smallest refinery Paramo, belonging to its Czech unit Unipetrol AS.

“At this stage we don’t make any decisions about other operations but we need to remember that due to the economic slowdown our Czech operations are under huge pressure,” he said.

The company faces “exceptionally costly logistics” of crude delivery from state-owned Mero in the Czech Republic and Transpetrol in Slovakia, Jedrzejczyk said. Orlen is in talks with the companies to lower the rates.

In Poland, Orlen is in “advanced” talks with the government, which could result in cutting its debt. The company has 8.5 billion zloty “frozen” on its balance sheet as it needs to finance the storage of obligatory reserves. The government may take over 30 percent of the stored oil within several years as one of the options, Jedrzejczyk said.

To contact the reporters on this story: Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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