Changes in the Polish oil industry – why they happen and what may be behind them?

Most probably, during tomorrow’s meeting of the PKN Orlen’s supervisory board, some of the directors of the company will be fired. This may include the president of the management board, Mr. Chalupec and/or at least one of the VPs – Mr. Smorszczewski. Both of them have been deeply involved in the recent acquisition of the Lituanian oil company Mazeikiu Nafta. It won’t be easy to find fast some other managers who could continue the recently started integration process. Also, it may be difficult to exchange them with somebody who could seamlessly continue the international expansion strategy pursued by Orlen since the acquisition of the Czech Unipetrol in 2004.

There are some interesting acquisition targets for Orlen still available in the region – for example in Serbia and in Romania. Even though, another purchases might have temporarily weaken the financial situation of the Polish company, they should be beneficial for it and hence its shareholders in the mid term (3-5 years). Exchanging management at this critical moment – when 1) the post-acquisition integration processes are still at early stages and require constant attention, and at the same time 2) there are some interesting opportunities the company should swiftly evaluate and act on – would be a rather risky move. Unless of course the new management board is better for those tasks than the current one. We will see that on Thursday.

Acquisitions of Mazeikiu Nafta, and earlier – of Unipetrol, have significantly changed the position of the Polish oil company. From a purly local player, it tranformed into the regional major, comparable to Austian OMV and Hungarian MOL. It has also successfuly faced much larger Russian energy companies in the competition for Mazeikiu Nafta. Now it needs to get access to the hydrocarbon reserves.

That’s probably the most important issue that has not been clearly addressed by the current management of the Polish company. It’s upstream strategy was not presented in detail so far. However, the company was trying to get access to the foreign E&P projects, among others in Kazakhstan. Also, it signed the cooperation agreements with other Polish energy companies – Grupa Lotos and PGNiG (Polish Gas Company). However those agreements remain ineffective.

Since the Polish governement, which has the decisive voice in the personal decisions at all the major Polish energy companies, has supposedly decided to change the management of Grupa Lotos as well, it is possible (although not very likely) that the new people at both Orlen and Lotos will finaly start to cooperate on upstream projects. In such a case, PGNiG would most probably join them in their efforts.

The management changes at Orlen and Lotos may also be a step toward the merger of those two oil companies. There are many people wondering why Poland needs two independent oil companies focusing on refining and marketing. The potential merger might also be justified by the need of strenghtening the country’s energy security by combining its energy resources. The joined Orlen-Lotos may be presented as better positioned for the competition in the region and on the EU market. As the result of the merger, the government’s stake in the company would be higher than the one in Orlen alone – some 34% at the current market capitalizations of the companies. The merged company would have valuation of some $8,7 billion – still less than MOL: $11,5 billion and OMV: $15,3 billion, though. Is the kissoff of the directors necessary for the merger?

The Polish government is the key shareholder of the two largest Polish oil companies – PKN Orlen (27,5%) and Grupa Lotos (nearly 59%). It is also the majority shareholder of the Polish gas company – PGNiG (84,7%).

ReAKKT

Changes in the Polish oil industry – why they happen and what may be behind them?

Comment: