Orlen Posts Record Net Loss of $1.7 Billion on Writedowns

PKN Orlen SA, Poland’s biggest oil company, posted a record quarterly loss after writing down the value of its refiners in Lithuania and the Czech Republic.

Its second-quarter net loss widened to 5.2 billion zloty ($1.7 billion) from 207 million zloty a year earlier after the Plock, Poland-based company wrote down 4.2 billion zloty from the value of its unprofitable Lietuva unit and cut the value of its Czech Unipetrol AS subsidiary by 711 million zloty, it said in a regulatory statement. The average estimate in a Bloomberg survey of 10 analysts was for a 367.5 million-zloty profit.

“I’m surprised that the management has kept the value of Lietuva at such a high level for so long and only now decided to write it down,” Tamas Pletser, an analyst at Erste Group Bank AG, said by phone from Budapest today. “It’s a cash burning asset with negative Ebitda.”

The Lithuanian unit, which Orlen bought for $2.8 billion in 2006, posted losses after refining margins fell to a 10-year low in 2013 and sales to the U.S., its main market, slumped on a shale boom in North America. The Lietuva refinery, also known as Mazeikiu, exports more than 50 percent of its output by sea.

‘New Reality’

Orlen shares slumped 5.8 percent to close at 40.58 zloty in Warsaw, posting the steepest drop in more than four months and valuing the company at 17.4 billion zloty. Unipetrol, whose second-quarter loss was 3.5 billion koruna ($172 million), fell 3 percent to 126.15 koruna in Prague trading.

“Following the noise around Mazeikiu, the write-offs are probably less of a surprise, but the size of the impairments did come as a surprise,” Robert Rethy, an analyst at Prague-based Wood & Co., said in a research note today.

Orlen cut its forecast for average annual earnings before interest, taxes, depreciation and amortization based on the last-in, first-out accounting standard to 5.1 billion zloty in 2014-2017 from 6.3 billion zloty, it said in a separate filing.

“Given the present market situation, we believe the recent developments in our industry are becoming the new reality,” Chief Executive Officer Jacek Krawiec said in the statement. “We have decided to revise our strategic assumptions and bring them in line with market conditions.”

Temporary Shutdown

Lietuva faces a temporary shutdown in late 2014 or early 2015 and the length of the shutdown will depend on refining margins, the Polish company said. Orlen estimates the cost of Lietuva’s shutdown and restart at less than $20 million, Chief Financial Officer Slawomir Jedrzejczyk said on a conference call with analysts. The company would also incur costs of about $5 million a month during the shutdown.

“If the macroeconomic situation is worsening, the next move will be a full shutdown,” Jedrzejczyk said. “It’s very rare that a refinery is completely closed. It’s very often converted to a storage or logistics facility.”

State-controlled Orlen has no buyers for Lietuva and will speak to the Lithuanian government about the country’s buying its refinery, CEO Krawiec said at a news conference.

European refining margins “are likely to remain weak for at least the next one to two years due to overcapacity, demand and supply imbalances and competition from overseas,” Fitch Ratings said on July 8. Since 2008 oil refineries with total capacity of 1.8 million barrels per day have been closed in Europe, the Paris-based International Energy Agency said in May.

Dividend Plans

Orlen’s total writedowns of Lietuva, with capacity of 200,800 barrels per day, has reached 6.4 billion zloty, cutting the value of the assets to 500 million zloty. The writedowns won’t affect Orlen’s debt covenants, it said in a presentation.

In its updated strategy today, the refiner kept its dividend policy of paying out as much as 5 percent of its average market capitalization in a previous year.

“The dividend was roughly at 1.5 zloty a share from profits of 2012 and 2013 and you have a commitment from the management that we would like to improve this,” Jedrzejczyk said, adding the company may pay dividend from retained profits.

The company also plans to raise about 1 billion zloty by 2017 from selling its “non-core” assets.

The refiner, which bought two Canadian oil-producing companies this and last year, plans to invest about 1.7 billion zloty in Canada to double the production to about 16,000 barrels of oil equivalent a day by 2017, according to the CFO.

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