will we see mean-reversion in margins? - bankier.pl · we maintain a neutral rating eps (pln)on pkn...

NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA

(v1.0.8.0)

MARKET UPDATE

Poland | Oil & Gas | 17-April-2015

Polish refiners

Will we see mean-reversion in margins?

The recent drop in crude oil prices has significantly helped the

European refining industry, which still suffers from low and falling

demand for fuel and low capacity utilization rates. Refining margins

have improved materially since 1H14, fuelled mostly by narrowing

negative margins on heavy distillates (HSFO) and relatively good

crack spreads in diesel. Although we believe industry still faces

several challenges in the long term and we take a slightly negative

stance on the refinery sector in general, we think it is important to

wait to see what happens with oil prices, which in our opinion will

have the largest impact in the short and the medium-term.

We maintain a NEUTRAL rating on PKN Orlen and increase our FV

from PLN 45.7 to PLN 62.0 on higher earnings forecasts. We expect

the company to post record-high results this year, but we think this

is mostly priced in.

For Lotos we reduce our BUY rating to SELL and reduce our FV from

PLN 54.1 to PLN 22.9 after incorporating the new shares issue and

new forecasts. The biggest issue we see for Lotos is its still high

leverage (ND/EBITDA 2015E at 3.8x) and the fact that most of the

value is represented by planned investments which will fully yield in

2019, by which time a lot could have changed.

Expected mean-reversion in refining margin

The long-term prospects for European refining remain unchanged in our

opinion. The market needs further closures to make room for utilization

capacity increases by the more efficient players. We do not think the current

high margins are sustainable and sooner or later we expect some

rationalization. In addition, we think developments in the US market will be

crucial for the future earnings of European companies.

Petrochemicals margin seems to be protected from cheap gas due to

lower naphtha prices

The Shale gas revolution put ethane crackers in a better position than naphtha

crackers, which are mainly located in Europe and Asia. However, the drop in

crude oil prices, which also triggered a drop in naphtha prices, has somehow

rebalanced the position of naphtha-based players so we do not expect a

significant drop in the petrochemicals margin in the short term.

Table 1 Summary table

Source: BESI Research for estimates, Reuters

This report officially transfers coverage of PKN PW and LTS PW to Lukasz

Janczak.

PKN Orlen

NEUTRAL 1% downside

Fair Value PLN 62.00

Bloomberg ticker PKN PW

Share Price PLN 62.82

Market Capitalisation PLN 26,868.69m

Free Float 72%

PLN m Y/E 31-Dec 2014A 2015E 2016E 2017E

Revenue 106,832 90,564 93,929 95,676

clean EBITDA LIFO 5,219 6,042 5,487 5,970

clean EBIT LIFO 3,228 3,972 3,248 3,582

Net Income -5,807 2,273 2,699 2,707

Net Debt 6,720 6,215 5,568 4,741

EPS (PLN) -13.58 5.32 6.31 6.33

DPS (PLN) 1.44 1.65 1.73 1.82

Grupa Lotos

SELL 26% downside


Bloomberg ticker LTS PW



Free Float 63%

PLN m Y/E 31-Dec 2014A 2015E 2016E 2017E


clean EBIT LIFO 517 814 782 759

Net Income -1,466 280 563 520

EPS (PLN) -11.29 1.52 3.04 2.81

DPS (PLN) 0.00 0.00 0.00 0.00

Net Debt 5,319 6,447 6,233 5,497

All share price data as at close on 15-Apr-2015

Source: BESI Research, Company Data, Bloomberg

CompanyFV

(PLN)

Old FV

(PLN)Recommendation

Upside /

downside

EV/EBITDA

LIFO ' 15E

PKN Orlen 62.0 45.7 NEUTRAL -1% 5.8

Lotos 22.9 54.1 SELL -26% 7.2

Analysts Lukasz Janczak +48 22 347 4062 [email protected] Banco Espírito Santo de Investimento, S.A. – Warsaw Branch Poland 59 Zlota Street, 00-120 Warsaw

of 36

PKN and Lotos, as diesel-oriented refineries,

should not be so impacted as their gasoline-

oriented peers, however we assume some

deterioration in the refining margin overall

We would expect further capacity closures in

the mid-term in Europe. PKN Orlen and Lotos

should be safe from this

Outlook for European refiners – Is a deluge from the U.S coming?

The outlook for the European refining industry remains gloomy in our opinion

and the current high refining margin environment is just a breather for weaker

players in our view. The long-term drivers for the market are still absent.

Figure 1 Global product demand (mb/d) Figure 2 European product demand (mb/d)

Source: BESI Research, World Oil Outlook 2014 for estimates. Source: BESI Research, World Oil Outlook 2014 for estimates

While according to World Oil Outlook 2014, global product demand is

expected to grow at a steady CAGR of 1% until 2020, Europe is likely to see a

drop in demand by 4% in 2020 vs 2013. Despite the fact that most of this drop

should be caused by other and residual products, we also forecast some

pressure on light distillates. The only bright spot from a demand point of view

is diesel, but only in the mid-term (see Fig 2). Until 2019 it is expected that

Europe will even experience some deficit in middle distillates. Although it

seems this could be easily covered by the surplus from the Middle East, we

would expect some of this surplus to be shifted to the Asia-Pacific region. It is

a much darker picture when we look at the gasoline/naphtha balance. The

internal European surplus of those two distillates will probably have to

contend with likely additional supply from the Middle East (no buffer from

Asia-Pacific) and from US & Canada (surplus driven by engine efficiency

improvements, widespread adoption of diesel fuelled vehicles and supported

by shifts to alternative fuels).

According to World Oil Outlook 2014 the medium-term outlook where refining

capacity additions should be well in excess of the required incremental

refinery output should continue. A combination of: 1) new export-oriented

refineries coming from the Middle East, India and potentially from Brazil; 2) a

rejuvenated US sector with own oil production and low cost natgas; and 3)

Europe desperately looking for a market for gasoline so that it can produce

more diesel by-products points to a period of intensified international

competition. We believe this would likely lead to significant additional closures

of less efficient installations.

If we look at announced additions to capacity from existing projects we see

that over the coming years Asia and the Middle East will be the main

contributors followed by Latin America. In Europe only Turkey plans to

expand its refining capacity. Some potential also exists in Russia according to

the Outlook report.

10.0 10.3 11.0

6.0 6.2 6.6

23.0 23.6 24.6

6.6 6.87.3

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8.07.8

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of 36

Cheap feedstock is a key competitive

advantage for US

Figure 3 Distillation capacity additions from existing projects

(mboe/d) – split by year

Figure 4 Distillation capacity additions from existing projects, 2014–19

(mboe/d) –split by region

Source: BESI Research, World Oil Outlook 2014. Source: BESI Research, World Oil Outlook 2014.

Figure 5 Expected surplus/deficit (mb/d) of incremental product

output from existing refining projects, 2014–2019 Figure 6 Brent/WTI differential

Source: BESI Research, World Oil Outlook 2014 Source: BESI Research, Bloomberg.

The situation in the European refining industry is very different to the US. High

utilization rates, high margins and limited need for capacity closures in the US

contrast with a spate of low utilization, tiny (sometimes negative) margins and a

high risk of capacity closures. We believe this is partly the long-term result of

rising taxes on gasoline in Europe which has led to an increase in diesel demand

and a decline in gasoline usage in the transportation sector (dieselisation of the

economy), but mostly due to falling demand on the continent (European capacity

is able to produce 17-18 mboe/d, while demand is closer to 15 mboe/d – WOO

2014). This coupled with the US’s shift from a net importer to net exporter of

gasoline (due to higher availability of light crude and weaker demand) and new

refining capacity in the Middle East, Asia and Russia has created a ‘nightmare’

environment for European refiners. The latest challenge for Europe is rising

imports of diesel from the US. This is in addition to higher energy and gas prices

and new regulations that will limit sulphur content in marine fuels. In addition, US

refiners still benefit from relatively cheaper crude. After a sharp increase in the

Brent/WTI spread at the beginning of 2011, it remains positive and currently

hovers around USD 10. Although lower oil prices will likely stop several

investments in new production, the US and Canada should still mostly contribute

to incremental oil supply in the coming year and are unlikely to lose their

competitive advantage.

All the abovementioned factors have resulted in closures of more than 2

mb/d, which still seems to be insufficient to balance demand and supply and

enhance margins and utilization in our opinion. Thus we would expect further

shutdowns in Europe.

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2014 2015 2016 2017 2018 2019

US & Canada Latin America Africa Europe

Russia & Caspian Middle East China Other Asia

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of 36

Feedstock advantage benefits U.S. and the

Middle East crackers, but demand should keep

margins at relatively stable levels

Figure 7 US capacity utilization rates (%) Figure 8 U.S. net import of petroleum products (kboe/d)

Source: BESI Research, EIA. Source: BESI Research, EIA.

Figure 9 US gasoline stocks (million barrels) Figure 10 US gasoline demand (million barrels per day)

Source: BESI Research, EIA. Source: BESI Research, EIA.

Outlook for petrochemicals – better than refining, but is it good?

The European petrochemical market is in much better condition than the

refining one, but it also needs to battle with the more competitive US market.

The North America petrochemical market’s key advantage is cheaper

feedstock. The Shale gas revolution substantially decreased the cost of

ethane, which is the main raw material used in 69% of installations, while in

Western Europe 74% of installations use naphtha.

The recent drop in the crude oil price and refining products triggered a

material decrease in the naphtha/Henry Hub gas spread from USD 700 to USD

300, which partially improved the standing of European petrochemical

companies. However it needs to be remembered that heavier feedstock like

naphtha will produce less ethylene than a lighter one like ethane. For example,

to produce one tonne of ethylene 3.2 tonnes of naphtha is required vs only 1.2

tonnes of ethane. Of course there are more by-products from a steam-cracker

using naphtha, but they are usually lower margin than ethylene. Global costs

presented by Lyondell Basell in late 2014 show the clear gap between ethane

crackers in the Middle East and North America and global crackers based on

naphtha in terms of costs of ethylene production.

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of 36

Figure 11 Feedstock mix by region (2014) Figure 12 Global cost of ethylene curve

Source: BESI Research, Lyondell Basell. Source: BESI Research, Lyondell Basell. (December 2014).

Figure 13 Naphtha / Gas in Henry Hub spread (USD / t)

Source: BESI Research, Bloomberg.

Table 2 Macro assumptions

Source: BESI Research for estimates, Bloomberg. Refining margin based on PKN’s products’ slate in 2014.

69% 68%

3%8%

15% 14%

7%

11%10%

84%

74%

5% 8%13% 11%

0%

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Middle East North America Northeast Asia Western Europe

Ethane Propane Naphta Other

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1,000

Macro assumptions 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Crude oil price (USD / bbl) 112 109 100 62 67 70 73 75 77

B/U differential (USD / bbl) 1.3 0.9 1.7 1.5 1.5 1.5 1.5 1.5 1.5

Est. refining margin (USD / bbl) 7.5 5.0 4.3 5.9 5.6 5.4 5.6 5.5 5.4

Cracks 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Gasoline (USD / t) 167 137 138 120 115 115 115 115 115

Naptha (USD / t) 83 84 96 85 85 85 85 85 85

ON (USD / t) 125 106 94 95 95 95 100 100 100

Jet fuel (USD / t) 168 152 141 140 140 140 140 140 140

HSFO (USD / t) -248 -262 -260 -186 -194 -199 -203 -206 -209

Bitumens (USD / t) -173 -201 -204 -70 -83 -91 -99 -104 -109

Polyethylene (EUR / t) 181 191 209 190 190 190 190 190 190

Ethylene (EUR / t) 578 606 589 590 580 570 570 570 570

Prophylene (EUR / t) 456 468 543 550 540 530 520 510 500

Benzene (EUR / t) 321 375 433 400 400 400 400 400 400

Currencies 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

USD/PLN 3.25 3.16 3.15 3.70 3.66 3.58 3.39 3.30 3.30

EUR/PLN 4.18 4.20 4.18 4.10 4.10 4.00 4.00 4.00 4.00

of 36

Appendix

Figure 14 Gasoline crack spread (USD/t) Figure 15 Diesel crack spread (USD/t)

Source: BESI Research, Bloomberg data. Source: BESI Research, Bloomberg data.

Figure 16 Naphtha crack spread (USD/t) Figure 17 Jet fuel crack spread (USD/t)


Figure 18 HSFO crack spread (USD/t) Figure 19 Coke crack spread (USD/t)


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Coke

of 36

Figure 20 Ethylene crack spread (USD/t) over naphtha Figure 21 Propylene crack spread (USD/t) over naphtha


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Propylene


(v1.0.8.0)

MARKET UPDATE

Poland | Oil & Gas | Large Cap | 17-April-2015

PKN Orlen

Nothing lasts forever but it's ok for now

We remain NEUTRAL on PKN but increase our FV from PLN 45.7 to

PLN 62.0. PKN remains moderately leveraged with the ability to pay

solid dividends but we think it lacks specific growth projects that

would justify further material enhancement of EBITDA LIFO from

PLN 6.0bn in 2015E or at least multiple expansion and in fact we

forecast EBITDA to fall to PLN5.5bn in 2016E on a deteriorating

refining margin. We have updated our numbers after the slump in oil

prices and being relatively negative on the long-term outlook for

the European refining industry means we see limited upside

potential for the stock. We believe the company will be able to

finance its investments planned under its 2014-17 strategy easily, to

service its debt and pay dividends. We expect PKN to gradually

increase its DPS from PLN 1.65 this year to PLN 1.82 in 2017E. While

post 2017E its ability to pay dividends should grow substantially

after the CAPEX cycle is done, we believe this is already priced in.

Hence our Neutral rating.

Refining under pressure; petchem more stable but with risks too

We expect PKN’s refining margin to increase to USD 4.6 this year from USD

3.4 in 2014, but going forward we expect it to narrow by 8% to USD 4.3 due to

product exports from the US. While the petrochemical market should be

relatively more stable than the refining one, PKN will also need to battle with

more efficient ethane crackers located in the Middle East and US.

Heavy investment plan to be easily financed

PKN plans PLN 16.3bn of CAPEX under its 2014-17 strategy, of which PLN

10.8bn is for growth projects (mostly focused on downstream – PLN 6.4bn;

PLN 1.2bn for retail and PLN 3.2bn for oil production). Most of them should

contribute fully in 2017-18 (including PE3 installation in Unipetrol (+250kt of

polyethylene), Metathesis (+100kt of propylene), CCGT in Płock (CCGT plant

in Włocławek should start contributing by the end of 2015).

Macro helps beat strategic target of PLN 5.1bn of EBITDA LIFO

The company assumes it will be able to deliver 2014-17 average EBITDA LIFO

of PLN 5.1bn compared to PLN 3.1bn in 2013, of which PLN 0.4bn growth

should be driven by an improvement in the macro environment. Our model

assumes average EBITDA LIFO of PLN 5.68bn in the strategy period although

we think that low oil prices have a higher impact on the company’s

performance than PKN assumes in its strategy.

Valuation – upside looks priced in

PKN trades at a 2015E EV/EBITDA of 5.8x and 6.3x in 2016E vs. since-2010

average of 5.8x based on Bloomberg historical estimates. We do not see

material upside from this level.

This report officially transfers coverage of PKN PW to Lukasz Janczak.

NEUTRAL 1% downside


Bloomberg ticker PKN PW



Free Float 72%

PLN m Y/E 31-Dec 2014A 2015E 2016E 2017E

Revenue 106,832 90,564 93,929 95,676


clean EBIT LIFO 3,228 3,972 3,248 3,582

Net Income -5,807 2,273 2,699 2,707

Net Debt 6,720 6,215 5,568 4,741

EPS (PLN) -13.58 5.32 6.31 6.33

DPS (PLN) 1.44 1.65 1.73 1.82

Y/E 31-Dec 2014A 2015E 2016E 2017E

P/E -4.6 11.8 10.0 9.9

EV / adj EBITDA LIFO 6.7 5.8 6.3 5.7

Dividend yield 2.3% 2.6% 2.8% 2.9%

Net Debt / clean EBITDA LIFO 1.3 1.0 1.0 0.8



80

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120

140

160

Jul 2014 Oct 2014 Jan 2015 Apr 2015

PKN PW vs WIG Index

Share Price Performance


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Valuation Metrics 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

P/E 153.5 -4.6 11.8 10.0 9.9 10.5 14.1 14.8

Rating NEUTRAL P/BV 1.0 1.4 1.3 1.2 1.1 1.0 1.0 1.0

Fair Value: 62.0 EV/clean EBITDA LIFO 10.1 6.7 5.8 6.3 5.7 5.3 5.8 5.7

Dividend yield 2.4% 2.3% 2.6% 2.8% 2.9% 3.0% 3.2% 3.4%

Previous FV 45.7 FCF Yield 10.6% 1.8% 7.6% 3.6% 5.6% 12.8% 9.5% 8.9%

change 36%

Key Ratios 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Share Price (15/04/2015, PLN): 62.8 clean EBITDA LIFO margin 2.9% 4.9% 6.7% 5.8% 6.2% 6.3% 5.5% 5.2%

Upside / Downside potential -1.3% clean EBIT LIFO margin 1.0% 3.0% 4.4% 3.5% 3.7% 3.6% 2.8% 2.6%

Effective tax rate 43.7% 6.7% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%

Bloomberg PKN PW Net profit margin 0.2% -5.4% 2.5% 2.9% 2.8% 2.7% 2.0% 1.9%

Net Debt/Equity 0.2 0.3 0.3 0.2 0.2 0.1 0.0 0.0

Shares (m) 427.71 Net debt / clean EBITDA LIFO 1.4 1.3 1.0 1.0 0.8 0.3 0.1 -0.2

Market Cap (PLN m) 26,869

EV (PLN m) 35,204 Model refining margin (USD/bbl) 3.4 3.4 4.6 4.4 4.3 4.4 4.3 4.3

Book Value (PLN m, as of 4Q14) 18,771 Estimated petchem margin (EUR/t) 598 621 611 603 543 522 519 515

BESI Equity Research Analyst P&L (PLN m, unless stated) 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Lukasz Janczak Revenues 113,685 106,832 90,564 93,929 95,676 94,770 94,523 96,223

+48 22 347 40 62

[email protected] EBITDA LIFO 3,130 -143 6,042 5,487 5,970 5,937 5,183 5,017

clean EBITDA LIFO 3,276 5,219 6,042 5,487 5,970 5,937 5,183 5,017

EBITDA 2,462 -2,716 5,500 6,037 6,181 6,130 5,183 5,017

Depreciation & Amortisation 2,140 1,991 2,070 2,239 2,389 2,565 2,555 2,558

EBIT 990 -2,134 3,972 3,248 3,582 3,372 2,628 2,459

Net Financials -148 -1,535 -358 -150 -135 -115 -50 -10

Pre-Tax Profit 158 -6,242 3,072 3,647 3,658 3,450 2,579 2,449

Income Tax Expense 69 -418 584 693 695 655 490 465

Net Income 175 -5,807 2,273 2,699 2,707 2,553 1,908 1,813

YoY -93% -3418% -139% 19% 0% -6% -25% -5%

EPS (PLN) 0.41 -13.58 5.32 6.31 6.33 5.97 4.46 4.24

DPS (PLN) 1.50 1.44 1.65 1.73 1.82 1.91 2.01 2.11

Cash Flow (PLN m) 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

2015E EBITDA LIFO structure

Net profit 89 -5,828 2,273 2,699 2,707 2,553 1,908 1,813

Depreciation and amortisation 2,125 1,991 2,070 2,239 2,389 2,565 2,555 2,558

Change in working capital 2,809 1,752 453 -106 -46 307 3 -20

Others 532 5,272 439 479 480 465 404 395

Operating Cash Flow 5,555 3,187 5,235 5,311 5,529 5,891 4,870 4,745

Cash Flow from Investment -2,451 -4,020 -3,800 -3,700 -3,700 -2,129 -2,129 -2,129

Change in debt -1,479 2,966 0 0 0 0 0 0

Dividends paid -643 -617 -706 -741 -778 -817 -858 -901

Others -352 -266 -224 -224 -224 -224 -224 -224

Cash Flow from Financing -2,474 2,083 -930 -965 -1 ,002 -1 ,041 -1 ,082 -1 ,124

Cash Flow Total 630 1,250 505 647 827 2,721 1 ,660 1,492

Balance Sheet (PLN m) 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Total Assets 51,352 46,725 47,526 50,120 52,502 54,377 55,580 56,856

Estimated refinery product slate Tangible Fixed Assets 24,904 22,644 24,374 25,835 27,146 26,710 26,283 25,854

Goodwill & Intangibles 823 703 703 703 703 703 703 703

Inventories 13,749 9,829 9,113 9,363 9,485 9,138 9,125 9,218

Cash & Equivalents 2,689 3,937 4,442 5,089 5,916 8,637 10,297 11,789

Other Assets 9,187 9,612 8,894 9,130 9,252 9,189 9,172 9,291

Liabilities 23,801 26,339 25,358 25,738 25,935 25,833 25,805 25,997

Interest Bearing Debt 7,357 10,657 10,657 10,657 10,657 10,657 10,657 10,657

Other Liabilities 16,444 15,682 14,701 15,081 15,278 15,176 15,148 15,340

Total Equity 27,551 20,386 22,169 24,382 26,567 28,544 29,775 30,858

Shareholders' Equity 25,948 18,771 20,339 22,297 24,225 25,961 27,012 27,923

Minority Interests 1,603 1,615 1,830 2,085 2,341 2,583 2,763 2,935

Net Debt 4,668 6,720 6,215 5,568 4,741 2,020 360 -1,132

Source: Company data, Bloomberg, BESI Research for estimates.

PKN ORLEN

Clean EBITDA LIFO (PLN m)

* corporate functions assigned on a pro rata basis

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Gasoline24%

ON44%

LSFO3%

Jet fuel3%

LPG4%

HSFO9%

Bitumen3% Other

10%

Downstream76%

Retail23%

Upstream1%

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Valuation summary

We use a 50/50 DCF and SOTP methodology to value PKN Orlen. We think

this is the most appropriate way to value the stock because it captures both

generated cash flows (in DCF) and relative valuation against international

peers (SOTP). See also description in “Valuation Methodology” section.

Table 1 Fair value summary

Source: BESI Research for estimates

Table 2 Key assumptions

Source: BESI Research.

DCF

Table 3 DCF valuation (PLN m)

Source: BESI Research for estimates, Company data

FV weight

DCF 60.6 50%

SOTP 63.3 50%

Fair value (PLN) 62.0

Cost of equity 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Risk free rate 4.6% 3.6% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Unlevered beta 0.81 0.81 0.81 0.81 0.81 0.81 0.81 0.81

Levered beta 1.4 1.7 1.6 1.5 1.5 1.4 1.4 1.4

CoE 11.5% 11.8% 10.1% 9.8% 9.5% 9.3% 9.2% 9.1%

WACC 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Risk free rate 4.6% 3.6% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

Debt risk premium -0.3% -0.7% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3%

% of debt 21% 34% 32% 30% 29% 27% 26% 26%

WACC 9.8% 8.6% 7.5% 7.4% 7.4% 7.3% 7.3% 7.3%

DCF 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E TV

EBIT 322 -4,707 3,430 3,797 3,792 3,565 2,628 2,459 2,888

tax rate 21.4% 8.9% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%

tax paid -69 418 -652 -722 -721 -677 -499 -467 -549

NOPAT 253 -4,289 2,778 3,076 3,072 2,887 2, 129 1,992 2,339

Depreciation 2,140 1,991 2,070 2,239 2,389 2,565 2,555 2,558 2,129

Change in WC 2,809 1,752 453 -106 -46 307 3 -20 0

CAPEX -2,509 -4,020 -3,800 -3,700 -3,700 -2,129 -2,129 -2,129 -2,129

Adjustments 144 5,048 542 -549 -211 -192 0 0 0

FCF 2,837 482 2,043 960 1,504 3,439 2,558 2,400 2,339

Discount factor 0.93 0.87 0.81 0.75 0.70 0.65

Present value of FCF 1,900 831 1,2 12 2 ,583 1,791 1,566 23,482

g 2%

EV 33,365

Net debt (as of end 2014) 6,720

Minorities 1,615

Month 4

Value of equity 25,929

Number of shares 427.7

Fair Value (PLN) 60.6

upside potential -3.5%

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SOTP

Table 4 SOTP Valuation (PLN m and PLN)

Source: BESI Research for estimates, Company data. * average for 2015-20E.

BESI forecasts vs. consensus

Table 5 BESI forecasts vs. Bloomberg consensus (PLN m and PLN)

Source: BESI Research for estimates, Bloomberg for consensus.

We are above market consensus for this year by 4% on EBITDA and 11% for

2016E and 2017E (however we note that our estimates include a non-cash

positive LIFO effect both in 2016E and 2017E). We are roughly in line when it

comes to DPS next year and 11% below for 2017.

PEER MULTIPLES TABLE

Table 6 Peers valuation

Source: BESI Research estimates for PKN estimates, Bloomberg consensus estimates for other rated and not rated stocks.

We choose this peer group due to its similar geographical exposure

(European market) and business segment diversification as PKN Orlen.

PKN trades at a 3% premium on 2015E PE ratio, and at a 26% premium on

2015E EV/EBITDA vs its selected peer group. However we note that multiples

in the sector vary substantially, so using the median may be inconclusive. We

prefer to use historical data for EV/EBITDA for PKN. Bloomberg data results in

an average of 5.8x (data since 2010).

SOTP EBITDA LIFO* EV/EBITDA EV

Refinery 2,030 5.0 10,148

Petchem 2,419 8.4 20,319

Heat & Power 92 5.2 479

Retail 1,550 5.0 7,752

Upstream 173 5.0 864

Corporate functions and others -658 6.3 -4,153

TOTAL 5,606 6.3 35,409

Net debt 6,720

* average for 2015E-20E minorities 1,615

Equity 27,074

NOSH (m) 428

FV per share 63.3

upside/downside 0.8%

BESI cons diff BESI cons diff BESI cons diff

EBITDA 5,500 5,295 4% 6,037 5,425 11% 6,181 5,588 11%

Net profit 2,273 2,342 -3% 2,699 2,353 15% 2,707 2,621 3%

DPS 1.65 1.65 0% 1.73 1.78 -2% 1.82 2.03 -11%

2015 2016 2017

Price Mcap FV

(LCU) (EUR) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E (LCU)

REP SM Equity REPSOL SA SPAIN 18.5 25,384 17.5 14.7 13.2 6.9 5.3 4.8 5.4% 5.4% 5.5% 23.0 BUY

OMV AV Equity OMV AG AUSTRIA 28.4 9,306 16.7 10.8 8.4 4.8 3.9 3.4 3.9% 4.1% 4.2%

NES1V FH Equity NESTE OIL OYJ FINLAND 24.8 6,351 15.1 13.9 13.2 8.4 8.0 7.8 2.8% 3.0% 3.2%

TUPRS TI Equity TUPRAS-TURKIYE PETROL RAFINE TURKEY 60.1 5,236 11.5 9.9 9.3 8.0 7.3 7.2 5.0% 7.2% 7.9%

MOL HB Equity MOL HUNGARIAN OIL AND GAS PL HUNGARY 14,965 5,233 11.5 10.3 6.7 5.2 4.5 3.8 3.1% 3.2% 3.9%

SRS IM Equity SARAS SPA ITALY 1.8 1,702 11.5 17.7 18.8 3.5 4.3 4.6 2.3% 2.2% 2.3%

ELPE GA Equity HELLENIC PETROLEUM SA GREECE 3.7 1,122 7.2 6.7 5.8 3.9 4.2 4.0 4.9% 7.1% 7.8%

MOH GA Equity MOTOR OIL (HELLAS) SA GREECE 7.2 800 6.7 6.2 5.6 4.8 4.8 4.7 6.6% 8.9% 9.5%

MEDIAN 11.5 10.6 8.9 5.0 4.7 4.7 4.4% 4.8% 4.9%

PKN PW Equity PKN Orlen POLAND 62.82 6,651 11.8 10.0 9.9 6.3 5.7 5.3 2 .6% 2.8% 2.9%

diff 3% -6% 12% 26% 22% 14% -40% -42% -40%

Ticker Name CountryP/E EV/EBITDA Dividend y ie ld

Rating

of 36

Figure 1 PKN Orlen historical 1Y forward EV/EBITDA multiple

Source: BESI Research, Bloomberg for estimates (ratio is calculated as current EV divided by Bloomberg estimate of current year EBITDA).

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PKN: 1Q15 results preview

Table 7 1Q15 results preview (PLN m)

Source: BESI Research for estimates, Company Data

We expect PKN to report a net profit of PLN 70m driven by:

Refinery: is forecast to report EBITDA LIFO of PLN 940m supported

by a 28% higher refining margin and an 8% stronger U.S. dollar with

seasonally lower capacity utilization and sales. On the other hand we

expect PKN to report a negative impact from a mandatory reserves

repurchase of c. PLN 100m.

Petchem: we expect PLN 500m of EBITDA LIFO driven by lower

products margin and a slight increase in volumes. We think that the

PTA segment may show a weaker margin, while a mild winter will

have supported a good performance by the fertilizer division (Anwil).

Retail: we expect seasonally lower EBITDA QoQ of PLN 260m, but an

increase on a YoY basis driven by higher volumes.

Upstream: we expect it to show disappointing results with only PLN

18m of EBITDA on lower oil prices. However due to its immateriality it

should not have significant impact on earnings.

LIFO effect: we assume a c. PLN 700m negative impact as average

prices in 1Q15 were still lower compared to 4Q14.

In financials we expect a net c. PLN 78m of FX-denominated debt (PLN

114m positive from EUR and PLN 36m negative from USD) and some PLN

274m negative FX differences from USD-denominated other liabilities as

well as PLN 56m other financial costs.

We adjusted clean EBITDA LIFO in 1Q15 for the mandatory reserves

repurchase of PLN 100m.

P&L 1Q14 2Q14 3Q14 4Q14 1Q15E QoQ YoY

Revenues 24,119 28,651 29,160 24,902 20,130 -19% -17%

EBITDA LIFO 953 -4, 146 2 , 117 929 1,573 69% 65%

Downstream 821 -4,379 1,766 944 1,440 53% 75%

Refining 274 -4,658 1,181 249 940 278% 243%

Petchem 547 279 585 695 500 -28% -9%

Upstream 31 19 52 -272 18 n/a -42%

Retail 234 357 441 408 260 -36% 11%

Corporate functions -133 -142 -142 -148 -145 -2% 9%

LIFO -177 -147 -656 -1,593 -700

EBITDA 776 -4,293 1,461 -664 873 n/a 13%

Depreciation 522 524 460 485 498 3% -5%

EBIT 254 -4,817 1,001 -1 ,149 375 n/a 48%

Financial income 48 34 132 140 138

Financial expenses 148 947 389 405 372

Pre-tax profit 154 -5,730 744 -1,414 142 n/a -8%

Corporate tax 28 -340 129 -235 27

Minorities 62 -193 77 37 45

Net profit 64 -5,197 538 -1,216 70 n/a 9%

adj EBITDA LIFO 692 853 1,801 1 ,873 1,673 -11% 142%

of 36

Key assumptions

Refinery at its best with results above the mid-cycle average;

petrochemical business more stable

The historical average refining margin (including B/U differential) for 2011-14

of USD 5.1 per barrel translated into an average USD 464m (PLN 1,447m) of

clean EBITDA LIFO in the refining segment. Given that the average refining

margin for the longer 2008-14 period amounted to USD 5.6, we calculate that

the average clean EBITDA LIFO in refinery through the cycle should oscillate

around USD 515m, which at the current USDPLN rate is ca. PLN 1.9bn. We note

that just in 2H14 PKN Orlen generated PLN 1.7bn, which suggests that the

current refining environment is relatively good (1Q15 should also be strong on

our estimates), but this is not sustainable in our opinion. We model lower

refining cracks going forward.

Figure 2 PKN Orlen refining margin with B/U differential (USD/bbl) Figure 3 PKN Orlen petchem margin (EUR/t)

Source: BESI Research, Company Data Source: BESI Research, Company Data

The conclusion from analysis of petchem margins is less pessimistic in our

view. The average petchem margin reached EUR 726 per tonne for 2011-14,

which translated into an average EUR 492m (PLN 2,045m) of clean EBITDA

LIFO. The 2008-14 period gives an average margin slightly below EUR 700,

which results in a mid-cycle EBITDA LIFO of EUR 470m. At the current

EUR/PLN rate ,this is c. PLN 1.9bn of clean EBITDA LIFO vs PLN 2.16bn

reported in 2014. On a ‘like-for-like’ basis we would expect only a minor

deterioration (-3%) in the petchem business EBITDA in the coming years.

However, given two investment projects (PE3 and metathesis), we expect

petrochemicals to deliver materially above PLN 2.0bn of EBITDA after 2016.

Key investment projects

In our model we assume that PKN Orlen will realize few investment projects. In

the petrochemical segment we include the PE3 project, which is expected to

add 250kt of polypropylene in 2017E and metathesis projects which aims to

add 100kt of propylene in 2018E.

In downstream we also modelled in two CCGT blocks in Wloclawek (463 MW)

and Plock (600 MW) with an expected PLN 3.0bn of CAPEX. According to the

company’s strategy, investments in energy should add PLN 0.2bn to EBITDA

per year on average over the 2014-17 period with a target contribution of PLN

400m. We do not know the company’s main assumptions regarding energy

prices, yellow energy certificates CO2 emission allowances or gas prices etc.

but we are far less optimistic about these projects than the company. We are

mostly concerned about the future support for energy produced from CHP

and CCGT. Currently it is based on yellow certificates, which are one of the

sources of revenues (c. 19% of revenues). This form of support expires at the

end of 2018. Secondly we assume a CAGR for energy prices in Poland at 2.6%

for 2015-19E and a slight drop after 2019E. As a result we forecast EBITDA of

c. PLN300m in 2018E, which can only be sustained if support for CHP is

extended and this is not certain in our opinion.

0.0

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FINANCIAL STATEMENTS

Table 8 P&L (PLN m)

Source: BESI Research for estimates, Company Data.

Table 9 Balance sheet (PLN m)


P&L 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Revenues 120,102 113,685 106,832 90,564 93,929 95,676 94,770 94,523 96,223

EBITDA LIFO 4,460 3,130 -143 6,042 5,487 5,970 5,937 5,183 5,017

Downstream 4,089 2,455 -848 5,029 4,448 4,910 4,858 4,093 3,906

Upstream -27 -33 -170 81 122 157 193 222 262

Retail 1,006 1,266 1,440 1,512 1,527 1,542 1,558 1,573 1,589

Corporate functions -607 -556 -565 -580 -609 -639 -671 -705 -740

LIFO -175 -668 -2,573 -542 549 211 192 0 0

EBITDA 4,285 2,462 -2 ,716 5,500 6,037 6,181 6, 130 5,183 5,017

Depreciation 2,261 2,140 1,991 2,070 2,239 2,389 2,565 2,555 2,558

EBIT 2 ,024 322 -4,707 3,430 3,797 3,792 3,565 2,628 2,459

Financial income 1,505 779 354 231 129 144 164 229 269

Financial expenses 904 927 1,889 589 279 279 279 279 279

Pre-tax profit 2 ,624 158 -6,242 3,072 3,647 3,658 3,450 2,579 2,449

Corporate tax 454 69 -418 584 693 695 655 490 465

Minorities -175 -86 -17 215 255 256 241 181 171

Net profit 2 ,345 175 -5,807 2,273 2,699 2,707 2,553 1,908 1,813

clean EBITDA LIFO 4,441 3,276 5,219 6,042 5,487 5,970 5,937 5,183 5,017

Balance sheet (PLN m) 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Non-current assets 26,808 26,907 24,971 26,701 28, 162 29,473 29,037 28,610 28,182

Property, plant and equipment 24,331 24,904 22,644 24,374 25,835 27,146 26,710 26,283 25,854

Intangible assets 1,296 823 703 703 703 703 703 703 703

Other non-current assets 1,181 1,180 1,624 1,624 1,624 1,624 1,624 1,624 1,624

Current assets 25,445 24,445 21,754 20,825 21,958 23,029 25,340 26,970 28,674

Inventories 14,903 13,749 9,829 9,113 9,363 9,485 9,138 9,125 9,218

Trade and other receivables 7,996 7,768 7,057 6,339 6,575 6,697 6,634 6,617 6,736

Cash and cash equivalents 2,029 2,689 3,937 4,442 5,089 5,916 8,637 10,297 11,789

Other current assets 517 239 931 931 931 931 931 931 931

Total assets 52 ,253 51,352 46,725 47,526 50,120 52,502 54,377 55,580 56,856

Total equity 28,307 27 ,551 20,386 22,169 24,382 26,567 28,544 29,775 30,858

Attributable to equity owners of the parent 26,479 25,948 18,771 20,339 22,297 24,225 25,961 27,012 27,923

Non-controlling interest 1,828 1,603 1,615 1,830 2,085 2,341 2,583 2,763 2,935

Non-current l iabil ities 9,035 7 ,846 12 ,305 12 ,305 12 ,305 12 ,305 12 ,305 12 ,305 12 ,305

Loans, borrowings and debt securities 7,523 6,507 9,670 9,670 9,670 9,670 9,670 9,670 9,670

Other non-current liabilities 1,512 1,339 2,635 2,635 2,635 2,635 2,635 2,635 2,635

Current l iabil ities 14,911 15 ,955 14,034 13,053 13,433 13,630 13,528 13,500 13,692

Trade and other liabilities 12,504 14,013 11,215 10,234 10,614 10,811 10,709 10,681 10,873

Loans, borrowings and debt securities 1,233 850 987 987 987 987 987 987 987

Other current liabilities 1,174 1,092 1,832 1,832 1,832 1,832 1,832 1,832 1,832

Total equity and l iabil ities 52 ,253 51,352 46,725 47,526 50,120 52,502 54,377 55,580 56,856

of 36

Table 10 Cash flows (PLN m)


Cash flow 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

CFO 5,555 3,187 5,235 5,311 5,529 5,891 4,870 4,745

Net profit 89 -5,828 2,273 2,699 2,707 2,553 1,908 1,813

Depreciation and amortisation 2,125 1,991 2,070 2,239 2,389 2,565 2,555 2,558

Change in working capital 2,809 1,752 453 -106 -46 307 3 -20

Others 532 5,272 439 479 480 465 404 395

CFI -2 ,451 -4,020 -3,800 -3,700 -3,700 -2 , 129 -2 , 129 -2 , 129

CAPEX -2,393 -3,700 -3,800 -3,700 -3,700 -2,129 -2,129 -2,129

Other -58 -320 0 0 0 0 0 0

CFF -2 ,474 2,083 -930 -965 -1,002 -1,041 -1,082 -1, 124

Change in debt -1,479 2,966 0 0 0 0 0 0

Interest paid -313 -245 -224 -224 -224 -224 -224 -224

Dividends paid -643 -617 -706 -741 -778 -817 -858 -901

Other -39 -21 0 0 0 0 0 0

Cash at beginning of the period 2,211 2 ,689 3,937 4,442 5,089 5,916 8,637 10,297

Net increase in cash 630 1,250 505 647 827 2,721 1,660 1,492

Effect of exchange rate changes -1 -2 0 0 0 0 0 0

Cash and cash equivalents, end of the period 2,689 3,937 4,442 5,089 5,916 8,637 10,297 11,789

of 36

APPENDIX

Figure 4 PKN: Quarterly total oil throughput and utilization rates Figure 5 PKN: Utilization rates per country

Source: BESI Research, Company Data Source: BESI Research, Company Data.

Figure 6 PKN: Overall products sales’ structure (refinery and retail) Figure 7 PKN: Retail stations network (number of stations)


Figure 8 PKN: LIFO effect (PLN m) vs. % change in Brent price

Source: BESI Research, Company Data, Bloomberg.

83% 85%

93%90%

83%80%

95% 96%

89%85%

94%90%

77% 79%

90% 88%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

100

200

300

400

500

600

700

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Oil throughput (kboe/d) Utilization

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Poland the Czech Republic Lithuania

27% 27% 26% 26% 26% 25% 26% 25% 26% 26% 25% 26% 22% 25% 25% 25%

41% 41% 41% 42% 43% 41% 41% 41% 42% 42% 42% 42% 47% 43% 42% 43%

4% 5% 4% 4% 5%5% 5% 5% 5% 5% 4% 5% 4% 4% 4% 4%

8% 9% 10% 9% 8% 10% 10% 10% 9% 10% 10% 10% 8% 9% 10% 10%3% 3% 3% 3% 2% 3% 3% 3% 3% 3% 3% 3% 2% 3% 3% 3%

11% 10% 9% 10% 10% 10% 10% 10% 10% 9% 10% 10% 11% 10% 10% 10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Gasoline ON LSFO Jet fuel LPG HFSO Bitumen Other products

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

500

1,000

1,500

2,000

2,500

3,000

2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

Lithuania the Czech Republic

Germany Poland

% of stations in PL with non-fuel offer

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

LIFO effect change in Brent

of 36

Figure 9 PKN: Adjusted EBITDA LIFO (quarterly) Figure 10 PKN: Clean EBITDA LIFO (yearly)

Source: BESI Research, Company Data Source: BESI Research for estimates, Company Data

Figure 11 PKN: CAPEX (PLN m) Figure 12 PKN: Upstream – daily production (kboe/d)

Source: BESI Research for estimates, Company Data Source: BESI Research, Company Data

Figure 13 Poland: fuel consumption (kt) Figure 14 The Czech Republic: fuel consumption (kt)


-250

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Refinery Petchem Retail Downstream Corporate functions

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Refinery Petchem Energy Retail Downstream Corporate functions

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Production and wholesale Retail Pet-chem Upstream Others

3.8

5.8

9.0

10.4

11.9

13.7

15.1

16.6

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2011 2012 2013 2014

Gasoline ON

0

200

400

600

800

1,000

1,200

1,400

1,600

2011 2012 2013 2014

Gasoline ON

of 36

Figure 15 Lithuania – fuel consumption (kt) Figure 16 Germany – fuel consumption (kt)


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2011 2012 2013 2014

Gasoline ON

0

10,000

20,000

30,000

40,000

50,000

60,000

2011 2012 2013 2014

Gasoline ON

of 36

Table 11 Peers multiples table

Source: BESI Research estimates for PKN estimates, Bloomberg consensus estimates for other rated and not rated stocks.

EU re finers Price Mcap FV

Ticker Name Country (LCU) (EUR) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E (LCU)





MEDIAN 11.5 11 .9 11 .3 6.4 6. 1 6.0 3.9% 5.1% 5.6%

US re finers Price Mcap FV


VLO US Equity VALERO ENERGY CORP UNITED STATES 57.1 27,531 8.6 9.0 9.7 4.4 4.8 4.9 2.8% 2.9% 2.2%

PSX US Equity PHILLIPS 66 UNITED STATES 78.9 40,149 12.0 11.0 9.1 6.7 6.6 5.8 2.7% 3.0% 3.4%

TSO US Equity TESORO CORP UNITED STATES 83.3 9,827 10.7 11.6 11.9 6.2 6.6 6.1 2.1% 2.1% 2.1%

HFC US Equity HOLLYFRONTIER CORP UNITED STATES 37.7 6,893 10.5 11.1 12.8 5.2 5.7 6.0 3.5% 3.6% 3.7%

PBF US Equity PBF ENERGY INC-CLASS A UNITED STATES 28.3 2,417 7.2 7.7 9.1 3.8 4.5 4.6 4.3% 4.4% 4.7%

CVRR US Equity CVR REFINING LP UNITED STATES 20.9 2,886 7.9 8.4 9.6 6.0 6.9 7.2 12.1% 9.9% 8.5%

ALJ US Equity ALON USA ENERGY INC UNITED STATES 15.8 1,031 15.0 20.5 63.0 4.0 4.6 5.6 2.3% 2.3% 2.0%

MEDIAN 10.5 11.0 9.7 5.2 5.7 5.8 2 .8% 3.0% 3.4%

Integrated Price Mcap FV


RDSA NA Equity ROYAL DUTCH SHELL PLC-A SHS NETHERLANDS 28.9 184,121 15.7 11.3 9.5 5.5 4.3 3.7 6.1% 6.2% 6.2%

FP FP Equity TOTAL SA FRANCE 49.7 118,643 16.0 12.2 9.5 6.0 5.0 4.2 5.1% 5.2% 5.2%

BP/ LN Equity BP PLC BRITAIN 475.8 120,729 20.3 13.6 11.1 5.8 4.7 4.3 5.7% 5.7% 5.8%

ENI IM Equity ENI SPA ITALY 17.4 63,344 31.7 18.5 13.5 5.3 4.3 3.7 5.0% 5.1% 5.3%

PETR4 BZ Equity PETROBRAS - PETROLEO BRAS-PR BRAZIL 13.3 54,056 9.5 7.1 5.5 6.0 5.2 4.1 6.7% 6.2% 5.0%

STL NO Equity STATOIL ASA NORWAY 157.2 60,145 24.6 15.3 12.3 3.6 2.9 2.5 4.6% 4.5% 4.7%



MOL HB Equity MOL HUNGARIAN OIL AND GAS PL HUNGARY 14965.0 5,233 11.5 10.3 6.7 5.2 4.5 3.8 3.1% 3.2% 3.9%

MRC US Equity MRC GLOBAL INC UNITED STATES 14.8 1,417 22.7 15.2 8.2 11.6 10.9 8.7 n/a n/a n/a


MEDIAN 16.7 12 .2 9.5 5.5 4.5 4.0 5. 1% 5.3% 5.3%

Chemicals Price Mcap FV


BAS GR Equity BASF SE GERMANY 95.2 87,255 17.3 15.6 14.6 9.5 8.9 8.3 3.1% 3.2% 3.4%

DOW US Equity DOW CHEMICAL CO/THE UNITED STATES 50.1 54,138 17.5 14.0 12.0 9.0 8.1 7.2 3.4% 3.5% 3.9%

LYB US Equity LYONDELLBASELL INDU-CL A UNITED STATES 96.5 43,177 12.3 10.9 10.0 7.8 7.3 7.0 3.0% 3.2% 3.5%

POT US Equity POTASH CORP OF SASKATCHEWAN CANADA 32.9 25,655 16.1 14.9 14.1 9.6 9.1 9.0 4.6% 4.6% 4.8%

YAR NO Equity YARA INTERNATIONAL ASA NORWAY 424.7 14,076 11.2 11.2 11.2 6.6 6.7 6.6 3.5% 3.5% 3.5%

SOLB BB Equity SOLVAY SA BELGIUM 139.8 11,837 17.6 15.1 13.7 6.8 6.3 6.0 2.4% 2.5% 2.6%

EMN US Equity EASTMAN CHEMICAL CO UNITED STATES 75.3 10,523 10.7 9.8 9.1 8.4 7.9 7.6 2.1% 2.0% 2.1%

WLK US Equity WESTLAKE CHEMICAL CORP UNITED STATES 78.6 9,792 16.9 15.3 15.6 8.7 8.3 8.0 0.9% 0.9% 0.8%

HUN US Equity HUNTSMAN CORP UNITED STATES 22.7 5,214 10.2 7.8 6.7 6.8 5.9 5.4 2.2% 2.2% 2.3%

011170 KS Equity LOTTE CHEMICAL CORP SOUTH KOREA 247500.0 6,963 17.0 13.8 12.2 8.5 7.7 7.3 0.5% 0.5% 0.5%

AKE FP Equity ARKEMA FRANCE 73.9 5,380 16.7 13.7 11.5 5.6 5.0 4.6 2.5% 2.7% 2.8%

LXS GR Equity LANXESS AG GERMANY 51.9 4,742 25.2 18.0 13.8 7.3 6.6 5.9 1.1% 1.5% 1.9%

BRKM5 BZ Equity BRASKEM SA-PREF A BRAZIL 12.4 2,598 9.5 7.6 4.9 4.0 3.6 3.4 3.3% 5.4% 5.5%

AXLL US Equity AXIALL CORP UNITED STATES 46.1 3,033 18.0 12.8 10.6 8.0 6.9 6.6 1.0% 1.0% 0.9%

4183 JT Equity MITSUI CHEMICALS INC JAPAN 404.0 3,187 12.2 7.4 6.6 8.4 7.2 6.1 1.6% 2.2% 2.5%

ATT PW Equity GRUPA AZOTY SA POLAND 86.1 2,130 20.3 15.9 18.7 8.5 7.2 6.7 1.2% 1.5% 0.4% 85.6 BUY

PETKM TI Equity PETKIM PETROKIMYA HOLDING AS TURKEY 3.7 1,281 22.7 15.7 11.9 12.4 10.1 9.3 1.8% 1.8% 2.7%

MEDIAN 16.9 13.8 11.9 8.4 7 .2 6.7 2 .2% 2.2% 2.6%

P/E EV/EBITDA Dividened y ie ldRating

RatingP/E EV/EBITDA

Rating

RatingP/E EV/EBITDA

Dividened y ie ld

P/E EV/EBITDA Dividened y ie ld

Dividened y ie ld


(v1.0.8.0)

MARKET UPDATE

Poland | Oil & Gas | Small & Mid Cap | 17-April-2015

Grupa Lotos

Entering new heavy CAPEX cycle

We downgrade Lotos from BUY to SELL and lower our FV from PLN

54.1 to PLN 22.9 after updating our estimates and factoring in the

recent share issue. Lotos enters a new investment cycle with heavy

CAPEX on the horizon, with us estimating some PLN 3.6bn in the

next two years. This is why medium-term FCF generation should be

lacklustre and we rule out any dividend in the medium term. We

believe the current good refining margins will partially help the

company finance these strategic investments and generate enough

cash to survive the forecast drop in the refining crack spreads. We

also believe a gradual increase in crude oil prices should not be as

harmful for Lotos as it should be for PKN Orlen as Lotos has

relatively higher exposure to the upstream segment, which should

benefit from higher oil prices. We reiterate our quite positive long-

term view on Lotos’ investment pipeline, especially the DCU unit,

but highlight that fruits from key investments will not materialise

soon. In addition, the company looks fundamentally expensive to us

on a 2015E EV/EBITDA of 7.2x. Hence our downgrade to SELL.

High indebtedness remains a problem

The last heavy investment cycle coupled with a demanding macro environment

left Lotos with a high level of debt that it is still struggling with. We do not expect

a dividend in the mid-term given the recent PLN 1.0bn share issue.

DCU installation to further improve already best in class refinery in

Gdansk, but only in 2019E

We estimate that Lotos’ flagship investment in DCU installation worth PLN

2.1bn will materially improve the refining margin (we estimate c. 2.8 USD per

barrel) and will act as a buffer for the expected deterioration in refining crack

spreads in Europe. However the first results should only be visible in 2019E in

our base case scenario.

Upstream segment driven by investments in Baltic Sea

Lotos’ exposure to the upstream segment is not great with legacy fields in

Poland and Lithuania and Norwegian fields which should dry up in 3 years.

New investments in the Baltic Sea should improve the picture starting from

2017, but we not see material value added from them.

Looks expensive relative to European peers

Valuation wise Lotos looks expensive on a 2015E EV/EBITDA of 7.2x while

European peers trade at a median of 5.0x. Lotos will also not pay a dividend,

while the median DY for European peers in 2015E is 4.4% on BBG consensus

estimates.

This report officially transfers coverage of LTS PW to Lukasz Janczak.

SELL 26% downside


Bloomberg ticker LTS PW



Free Float 63%

PLN m Y/E 31-Dec 2014A 2015E 2016E 2017E


clean EBIT LIFO 517 814 782 759

Net Income -1,466 280 563 520

EPS (PLN) -11.29 1.52 3.04 2.81

DPS (PLN) 0.00 0.00 0.00 0.00

Net Debt 5,319 6,447 6,233 5,497

Y/E 31-Dec 2014A 2015E 2015E 2016E

P/E -3.9 20.3 10.1 10.9

EV / EBITDA LIFO 8.3 7.2 7.0 6.6

Net Debt / clean EBITDA LIFO 4.0 3.8 3.6 3.3



50

60

70

80

90

100

110

May 2014

Jun 2014

Jul 2014

Aug 2014

Sep 2014

Oct 2014

Nov 2014

Dec 2014

Jan 2015

Feb 2015

Mar 2015

Apr 2015

LTS PW vs WIG Index

Share Price Performance


of 36

Valuation Metrics 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

P/E 8.4 8.8 6.1 144.3 (3.9) 20.3 10.1 10.9 15.6 7.5 8.8

Rating SELL P/BV 0.8 0.7 0.6 0.6 0.7 0.7 0.6 0.6 0.6 0.5 0.5

Fair Value: 22.9 EV/ clean EBITDA LIFO 10.8 15.3 6.0 9.8 8.3 7.2 7.0 6.6 7.1 5.0 4.7

Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Previous FV 54.1

change -58% Key Ratios 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Share Price (15/04/2015, PLN): 30.8 clean EBITDA LIFO margin 5.5% 2.9% 6.0% 4.1% 4.7% 7.7% 7.3% 7.0% 6.3% 8.4% 8.2%

Upside / Downside potential -26% EBITDA margin 7.4% 5.8% 3.0% 2.8% -2.0% 7.7% 7.3% 7.0% 6.3% 8.4% 8.2%

EBIT margin 5.4% 3.7% 0.9% 0.5% -4.9% 3.7% 3.4% 3.1% 2.7% 4.7% 4.5%

Bloomberg LTS PW Effective tax rate 6% -18% -153% 164% 31% -34% 0% 5% 19% 19% 31%

Net profit margin 3.5% 2.2% 2.8% 0.1% -5.1% 1.3% 2.4% 2.2% 1.5% 3.2% 2.7%

Shares (m) 184.87

Market Cap (PLN m) 5,685 Net Debt/Equity 0.8 0.9 0.7 0.6 0.6 0.8 0.7 0.6 0.5 0.4 0.3

Book Value (PLN m, as of 4Q14) 8,259 Net Debt/ adj EBITDA LIFO 5.5 8.6 3.2 4.9 4.0 3.8 3.6 3.3 3.3 2.2 1.8

Net debt 5,319

EV 11 ,003

Cash Flow Summary (PLN m) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Net profit 681 649 928 39 -1,466 280 563 520 364 757 649

BESI Equity Research Analyst Depreciation 390 609 667 656 809 882 927 929 868 868 872

Changes in working capital -613 -750 -548 640 1,173 907 186 201 111 -12 12

Lukasz Janczak Other 424 395 300 101 865 194 199 192 166 148 122

+48 22 347 40 62 Operating Cash Flow 883 902 1,347 1,437 1,381 2,263 1,875 1,841 1 ,509 1,761 1 ,655

[email protected] Cash Flow from Investment -1 ,056 -847 -838 -938 -958 -2,181 -1 ,462 -913 -849 -850 -850

Change in debt 636 1,262 -1,032 -345 452 0 0 0 0 0 0

Interests -58 -146 -198 -193 -168 -194 -199 -192 -166 -148 -122

Dividend 0 0 0 0 0 0 0 0 0 0 0

Share issue 0 0 0 0 0 0 0 0 0 0 0

Other -119 -1,152 346 287 -881 0 0 0 0 0 0

Cash Flow from Financing 459 -36 -883 -251 -597 -194 -199 -192 -166 -148 -122

Cash Flow Total 286 20 -374 247 -175 -112 214 737 494 763 683

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Revenues 19,663 29,260 33,111 28,597 28,502 21,897 23,257 24,113 23,866 23,432 23,866

% change 49% 13% -14% 0% -23% 6% 4% -1% -2% 2%

Clean EBITDA LIFO 1,081 841 1 ,994 1,161 1 ,326 1,695 1,709 1,688 1,503 1,972 1,947

% change -22% 137% -42% 14% 28% 1% -1% -11% 31% -1%

EBITDA 1,451 1 ,694 979 803 -584 1,695 1,709 1,688 1,503 1,972 1,947

% change 17% -42% -18% n/a n/a 1% -1% -11% 31% -1%

Depreciation & Amortisation 390 609 667 656 809 882 927 929 868 868 872

EBIT 1,061 1 ,086 313 146 -1 ,393 814 782 759 635 1,104 1,075

% change 2% -71% -53% n/a n/a -4% -3% -16% 74% -3%

Net Financials -358 -537 54 -208 -706 -605 -217 -210 -184 -166 -140

Pre-Tax Profit -504 1,110 722 551 366 -62 -2,124 209 565 550 452

Income Tax Expense 41 (98) (562) (101) (657) (71) 2 30 87 180 287

Net Income 679 649 928 39 (1,466) 280 563 520 364 757 649

YoY -4% 43% -96% n/a n/a 101% -8% -30% 108% -14%

Reported EPS (PLN) 5.23 5.00 7.14 0.30 (11.29) 1.52 3.04 2.81 1.97 4.10 3.51

DPS (PLN) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

NOSH 129.9 129.9 129.9 129.9 129.9 184.9 184.9 184.9 184.9 184.9 184.9

Balance Sheet (PLN m) 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Cash & Equivalents 383 384 268 504 348 217 430 1,167 1,661 2,424 3,107

Fixed Assets 10,872 11,582 11,510 12,039 11,782 13,081 13,616 13,600 13,582 13,564 13,542

Inventories 4,507 5,856 5,966 5,732 3,917 3,401 3,340 3,217 3,083 3,055 3,083

Other Assets 1,966 2,575 2,283 2,025 2,900 1,597 1,664 1,706 1,694 1,672 1,694

Total Assets 17,727 20,397 20,028 20,300 18,947 18,295 19,050 19,690 20,019 20,715 21,425

Interest Bearing Debt 6,327 7,589 6,557 6,211 6,664 6,664 6,664 6,664 6,664 6,664 6,664

Other Liabilities 3,887 5,026 4,405 4,899 4,025 3,092 3,284 3,405 3,370 3,309 3,370

Liabilities 10,214 12,614 10,961 11 ,110 10,689 9,756 9,948 10,069 10,034 9,973 10,034

Shareholders' Equity 7,499 7,781 9,066 9,189 8,258 8,539 9,101 9,621 9,985 10,742 11,391

Minority Interests 15 1 1 0 0 0 0 0 0 0 0

Total Equity 7,514 7,782 9,066 9,190 8,259 8,539 9,102 9,621 9,985 10,743 11 ,391

Net Debt 5,944 7,205 6,288 5,708 5,319 6,447 6,233 5,497 5,003 4,240 3,557

Source: Company data, Bloomberg, BESI Research for estimates.

LOTOS

Clean EBITDA LIFO

P&L

Upstream production (mboe)

Refinery products' slate evolution

40%46%45%46%44%45%43%44%44%43%43%

51% 51%

19%

20% 18% 15% 15% 16% 15% 15% 15% 15% 15%

15% 15%9%

7% 11% 10% 10% 10% 12% 12% 12% 11% 11%

9%9% 8%

8%6% 5% 4% 4% 4% 4% 4% 3% 3%

23%18% 18% 21% 24%24%26%25%25%26%26%27%27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Diesel Gasoline HSFO Bitumens Petcoke Other

0

500

1,000

1,500

2,000

2,500

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

of 36

1Q15 earnings preview

Lotos is to publish its 1Q15 earnings on 29 April

Table 1 1Q15 preview

P&L 1Q14 2Q14 3Q14 4Q14 1Q15E QoQ YoY

Revenues 7,177 7,199 7,550 6,576 4,892 -26% -32%

EBITDA LIFO 288 -252 336 7 406 6151% 41%

Upstream 157 -430 41 -48 80 n/a -49%

Downstream 138 200 259 50 326 558% 136%

Others 5 4 3 2 1

Consolidation items -12 -26 32 3 0

LIFO effect -56 10 -52 -863 10

EBITDA 232 -242 284 -857 416 n/a 80%

Depreciation 214 173 204 218 189 -13% -12%

EBIT 17 -415 80 -1,075 227 n/a 1214%

Net financial income -38 -91 -175 -402 -439

Share in net profit of joint ventures

0 0 2 -25 0

Pre-tax profit -21 -506 -94 -1,503 -212 -86% 919%

Corporate tax -11 383 59 226 -40

Net profit -32 -123 -35 -1,276 -172 -87% 430%

clean EBITDA LIFO 288 303 401 335 406 21% 41%


We expect 1Q15 clean EBITDA LIFO of PLN 406m and net loss of PLN 172m

driven by:

PLN 80m of EBITDA in the upstream segment with similar production

and lower prices of oil and gas on a quarterly basis by 31% and 14%,

respectively.

PLN 326m of EBITDA LIFO in downstream, driven by lower

throughput and better macro environment however still with some

negative trends observed in 4Q14 where company produced

relatively more heavy distillates in the expense of asphalt.

Positive LIFO effect at PLN 10m, where we expect a clean LIFO effect

of c. PLN 400m to be compensated by a reversal of provisions on

inventories made in 4Q14.

Lower depreciation driven by a decrease in the upstream segment.

Net financial results impacted by negative FX differences due to

strengthening dollar (recalculation of USD-denominated debt).

of 36

Valuation: FV set at PLN 22.9

We value Lotos using three methods with 33.3% each: DCF and two varieties

of the sum of the parts model. We have separate estimates for each segment

so we think this is the best method.

In DCF we use forecast figures for the 2015E-20E period. In the TV we use

forecast EBIT excluding the upstream segment. The terminal value of the

upstream segment is accounted for by adding the discounted value of the

remaining 2P reserves to the discounted FCF.

In SOTP ver. 1 we value two separate segments: upstream and downstream

with other items using DCF models and then we subtract net debt from

calculated EV.

In SOTP ver. 2 we use the average EBITDA LIFO for two different time periods

multiplied by EV/EBITDA multiples from the peers table for 2015E. Then we

subtract net debt from the calculated EV.

Table 2 Valuation summary


Table 3 Cost of equity and WACC calculations


Table 4 DCF model


Method FV (PLN)

DCF 24.9

SOTP ver.1 23.8

SOTP ver.2 19.9

average 22.9

Key data (PLN m) 2014 2015E 2016E 2017E 2018E 2019E 2020E

Assets 18,947 18,295 19,050 19,690 20,019 20,715 21,425

Debt 10,689 9,756 9,948 10,069 10,034 9,973 10,034

Equity 8,259 8,539 9,102 9,621 9,985 10,743 11,391

Financial liabilities 6,664 6,664 6,664 6,664 6,664 6,664 6,664

Cost of equity 2014 2015E 2016E 2017E 2018E 2019E 2020E

Risk free rate 3.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Unlevered beta 1.01 1.01 1.01 1.01 1.01 1.01 1.01

Levered beta 2.1 1.9 1.9 1.9 1.8 1.8 1.7

CoE 13.4% 12 . 1% 11.8% 11.7% 11.5% 11.2% 11.0%

WACC 2014 2015E 2016E 2017E 2018E 2019E 2020E

Risk free rate 3.0% 2.3% 2.3% 2.3% 2.3% 2.3% 2.3%

Debt risk premium 0.2% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8%

% of debt 45% 44% 42% 41% 40% 38% 37%

WACC 8.5% 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%

DCF 2014 2015E 2016E 2017E 2018E 2019E 2020E TV

EBIT -445 814 782 759 635 1,104 1,075 853

tax rate 3% 5% 6% 9% 19% 19% 29% 29%

NOPLAT -431 770 739 689 513 892 762 691

Depreciaiton 809 882 927 929 868 868 872 599

CAPEX -1,002 -2,181 -1,462 -913 -849 -850 -850 -599

Change in working capital -167 -90 186 201 111 -12 12 0

adjustments 948 0 0 0 0 0 0 0

FCF 156 -619 389 907 643 898 796 691

discount factor 0.93 0.86 0.80 0.74 0.68 0.63

PV FCF -574 334 722 474 614 505 6,399

sum of PV FCF until 2020 8,475

net debt 5,319

value of ramaining 2P reserves 583

value of tax asset 663

Equity value 4,402

month 4

NOSH 184.9

FV (PLN) 24.9

of 36

Table 5 SOTP ver. 1 (PLNm and PLN)


Table 6 SOTP ver. 2 (PLNm and PLN)


We chose the following peer group due to its similar geographical exposure

(European market) and business segments diversification as Lotos.

Table 7 Peers multiples table

Source: BESI Research estimates for Lotos estimates, Bloomberg consensus estimates for other rated and not rated stocks.

Upstream 2014 2015E 2016E 2017E 2018E 2019E 2020E TV

EBIT 161 -96 24 173 217 219 230

tax rate -59% 134% -427% -24% 20% 20% 66%

NOPLAT 255 33 124 215 174 176 78

Depreciaiton 344 390 408 369 302 285 273

CAPEX -100 -1,212 -250 -250 0 0 0

FCF 499 -789 282 334 475 461 351

discount factor 0.00 0.93 0.86 0.80 0.74 0.68 0.63

PV FCF 0 -731 243 266 351 315 223

sum of PV FCF until 2020 666

value of ramaining 2P reserves 583

value of tax asset 663

TOTAL EV Upstream 1,912

Downstream and others 2014 2015E 2016E 2017E 2018E 2019E 2020E TV

EBIT 421 910 758 586 419 884 845 853

tax rate 19% 19% 19% 19% 19% 19% 19% 19%

NOPLAT 341 737 614 475 339 716 684 691

Depreciaiton 465 491 519 560 566 583 599 599

CAPEX -858 -969 -1,212 -663 -849 -850 -850 -599

Change in working capital 167 -90 186 201 111 -12 12 0

FCF 115 169 107 573 167 437 445 691

discount factor 0.93 0.86 0.80 0.74 0.68 0.63

PV FCF 157 92 456 123 299 282 6,399

sum of PV FCF until 2020 1,410

terminal value 6,399

TOTAL EV Downstream and others 7 ,809

Lotos valuation

Upstream 1,912

Downstream and others 7,809

EV 9,720

Net debt 5,319

Minorities 0

Equity value 4,402

NOSH 185

FV per share 23.8

2015-18 2019-20 2015-18 2019-20

SOTP

EBITDA

LIFO

EBITDA

LIFO

EV /

EBITDA EV EV

Refinery 1,080 1,316 5.0 5,398 6,579

Retail 102 125 5.0 510 623

Upstream 446 504 5.0 2,232 2,520

Other 15 15 5.0 75 75

TOTAL 1,643 1,959 5.0 8,215 9,796

Net debt 5,319 5,319

minorities 0 0

Equity 2 ,896 4,478

NOSH (m) 185 185

FV per share 15.7 24.2

average FV 19.9

Price Mcap FV

(LCU) (EUR) 2015E 2016E 2017E 2015E 2016E 2017E 2015E 2016E 2017E (LCU)





MOL HB Equity MOL HUNGARIAN OIL AND GAS PL HUNGARY 14,965 5,233 11.5 10.3 6.7 5.2 4.5 3.8 3.1% 3.2% 3.9%




MEDIAN 11.5 10.6 8.9 5.0 4.7 4.7 4.4% 4.8% 4.9%

LTS PW Equity Lotos POLAND 30.75 5,685 20.3 10. 1 10.9 7 .2 7 .0 6.6 0.0% 0.0% 0.0%

diff 76% -4% 24% 43% 50% 42% -100% -100% -100%

RatingTicker Name CountryP/E EV/EBITDA Dividend y ie ld

of 36

Key assumptions

Below we present key projects from the company investment’s pipeline with

assumed CAPEX, projected (BESI) year of kick-off and short description. We

note that in some cases we assume delays vs. what the company assumes to

be the start date. For example we assume the EFRA project to by fully

operational in 2019, while the company informed in the prospectus that it

expects it to be completed in 1Q18. Production from the B8 field is planned at

the end of 2015. We assume production in 2016 will be 50% of the target,

100% in 2017. Production from the B4 B6 field is planned for the turn of 2017-

18. We assume 2018. Assumptions for the HRU project are in line with

company guidance.

Table 8 Lotos’ key investment projects


DCU – flagship investments

DCU (delayed coker unit) is a key company investment under the EFRA

project worth PLN 2.1bn (CAPEX). Its primary aim is to replace heavy

distillates such as HSFO and bitumen which characterize negative refining

cracks with higher margin products, mostly diesel. Production of bitumen is

considered the highest profitability option when processing heavy distillates in

Lotos’ current refinery set up. However demand for bitumen is highly seasonal

and dependent on investment activity in road construction. We expect that

after 2018 demand for bitumen is Poland will drop significantly as a result of

finishing major road investments financed with significant funds from the EU.

What is more, the efficiency of processing heavy distillates may be also

impacted by higher quality norms for oil for ships which are expected to

reduce sulphur content from 4% to 0.5% in 2020.

Figure 1 Annual expenses (PLN bn) on road construction in Poland

Source: BESI Research, Source: Ministry of Infrastructure and Development, November 2014.

DCU installation will effectively replace 1.0m tonnes of HSFO and 0.7m tonnes

of bitumen with 0.8m tonnes of diesel. The main by-product of DCU will be

negative margin pet-coke with expected volume of 0.4m tonnes. We present

details on the expected impact on the product slate in the figure below.

Project Description

B8 1,012 2016E Oil field on the Baltic Sea with expected production of c. 300kt

Hydrogen Recovery Unit 127 2017E processing of waste gases, additional 100kt of LPG, 25kt of gasoline and 9kt of hydrogen

B4 B6 800 2018E Gas field on the Baltic Sea with expected production of c. 500kt

EFRA (inlcuding DCU) 2,343 2019E Processing of heavy distilates into light and medium distillates

CAPEX (PLN m) Start (BESI)

0.0

5.0

10.0

15.0

20.0

25.0

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Investment plan 2014-2023 (PLN bn) Investment plan 2011-2015 (PLN bn)

of 36

Figure 2 Net impact from DCU project Figure 3 Expected change in products slate


Planned CAPEX on DCU is PLN 2.1bn, of which PLN 1.67bn will be directly

spent on DCU installation and PLN 0.4bn for required infrastructure. Most of

the CAPEX will be spent in 2015-2017 with some minor amounts in 1Q18.

Construction works will start in 3Q15 and most of implementation works

should be realized in 2016. In our model we assume that DCU will be fully

operational in 2019 (we assume some delay vs. the scheduled 1H18). Thanks to

DCU, Lotos’ Solomon index will increase from 9.5 to 10.6.

According to management, DCU will have an IRR of 20% and improve Lotos’s

refining margin by USD 2.0-2.2 per barrel. Given 70m barrels of processed

crude it gives an incremental increase of c. USD 150m, i.e. c. 40% of adjusted

EBITDA LIFO in 2014.

We believe the company’s estimates are quite conservative. We use quarterly

historical data to the estimate potential impact from DCU in the past. We

emphasise that the final results are very susceptible to the data used. To

maximize the accuracy of the estimates, we use a mix of data provided by

Lotos and Bloomberg. Our calculations suggest that DCU would have

historically improved the refining margin by USD 2.5-4.0, depending on the

quarter. We note that even in the current macro environment when low oil

prices caused the margin to improve significantly (mostly due to shrinking

negative spreads on heavy distillates) DCU stills add some USD 2.5-3.0 per

barrel. With low crude prices crack spreads on pet-coke improve relatively.

Figure 4 Historical estimated impact of DCU on Lotos’ refining margin (USD/bbl)

Source: BESI Research calculations, Company Data

net change crackdollar

impact

kt USD/t USD m

High-margin 951

ON 851 100 85

LPG 15 -50 -1

CN 85 85 7

Low-margin -1,030

HSFO -1,008 -209 211

Bitumen -700 -147 103

Pet-coke 392 -533 -209

HCB 286

Other products 101

Other 101

By-products 256

Heat 256

Fuel gas 62

TOTAL 278 196

40%46% 45% 46% 44% 45% 43% 44% 44% 44% 44%

53% 53%

19%

20% 18% 15% 15% 16% 15% 15% 15% 15% 15%

16% 16%1% 2% 4% 4% 3% 3% 3% 3% 3%

4% 4%

7%

5%3% 5% 5% 5% 6% 6% 6% 6% 6%

6% 6%

9%7% 11% 10% 10% 10% 11% 11% 11% 11% 11%

2% 2%9%9% 8% 8% 6% 5% 6% 6% 6% 6% 6%

3% 3%

17% 13% 14% 14% 15% 15% 15% 15% 15% 15% 15% 16% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014 2015E2016E 2017E2018E 2019E2020E

Diesel Gasoline Naphtha Jet fuel HFO Bitumens Coke Other

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

1Q15

of 36

In our model we assume that DCU will add some USD 196m incrementally to

EBITDA, what translates into ca. USD 2.8 per barrel. We expect additional

volumes of diesel to add USD 85m, while the impact from LPG and CN will be

immaterial. Removal of HSFO should add c. USD 211m and will be offset by a

negative impact from coke (USD 209m). Removal of bitumen should add c.

USD 103m. We also assume that the net impact from other products and by-

products will be zero.

YME is worth nothing in our model

For the purpose of the valuation we assume that the YME project is worth

zero. The future of YME is still unclear. One considered scenario is the

liquidation of the existing MOPU platform. The company has provisioned

potential costs of liquidation of this infrastructure and according to recent

company comments management feels comfortable with the current value of

provisions made (PLN 94m, i.e. NOK 199m).

Investments in upstream

Lotos’ key investments in upstream are B8 oil field and B4 and B6. Recently

Lotos informed that it is committed to making those investments even given

the current level of oil prices. In order to make the B8 field profitable Lotos

managed to reduce the costs of the investment by PLN 200m thanks to

changing the scope of geological works. As a result, the project will be

profitable at crude oil prices below USD 50 per barrel. However it is important

to mention that today’s savings will likely translate into possibly higher

maintenance costs of the platform in the future thus we do not treat the full

value of savings as additional cash flow. Under our assumptions the B8

investments yields a 13.8% IRR vs the average WACC of 8%. When it comes to

the B4 B6 field we see little or even no value in it. Undiscounted free cash

flows barely cover planned CAPEX.

of 36

FINANCIAL STATEMENTS

Table 9 P&L (PLN m)

Source: BESI Research for estimates, Company Data.

Table 10 Balance sheet (PLN m)


Table 11 Cash flows (PLN m)


2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Revenues 14,321 19,663 29,260 33,111 28,597 28,502 21,897 23,257 24,113 23,866 23,432 23,866

EBITDA LIFO 287 1,033 703 1,034 1, 179 378 1,695 1,709 1,688 1,503 1,972 1,947

Upstream 47 85 142 -537 301 -280 294 431 542 518 504 504

Downstream 259 906 550 1,559 891 647 1,386 1,262 1,131 970 1,452 1,428

Others -18 42 11 12 -13 11 15 15 15 15 15 15

LIFO effect 448 419 991 -55 -377 -962 0 0 0 0 0 0

reported EBITDA 735 1,451 1,694 979 803 -584 1,695 1,709 1,688 1,503 1,972 1,947

Depreciation 285 390 609 667 656 809 882 927 929 868 868 872

EBIT 450 1,061 1,086 313 146 -1,393 814 782 759 635 1,104 1,075

Net financial income 651 -358 -537 54 -208 -706 -605 -217 -210 -184 -166 -140

Others 8 19 3 0 -1 -24 0 0 0 0 0 0

Pre-tax profit 1 , 110 722 551 366 -62 -2 , 124 209 565 550 452 937 935

Corporate tax 198 41 -98 -562 -101 -657 -71 2 30 87 180 287

Minorities 11 2 0 0 0 0 0 0 0 0 0 0

Net profit 901 679 649 928 39 -1,466 280 563 520 364 757 649

clean EBITDA LIFO split 287 1,081 841 1,994 1, 161 1,326 1,695 1,709 1,688 1,503 1,972 1,947

Upstream 47 133 280 444 304 505 294 431 542 518 504 504

Downstream 445 870 870 1,569 794 875 1,386 1,262 1,131 970 1,452 1,428

Others -205 78 -309 -19 63 -54 15 15 15 15 15 15

Balance sheet 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Assets 15,216 17 ,727 20,397 20,028 20,300 18,947 18,295 19,050 19,690 20,019 20,715 21,425

Fixed assets 10,092 10,872 11,582 11,510 12,039 11,782 13,081 13,616 13,600 13,582 13,564 13,542

Inventories 3,023 4,507 5,856 5,966 5,732 3,917 3,401 3,340 3,217 3,083 3,055 3,083

Trade receivables 1,461 1,741 2,071 1,633 1,595 1,407 1,081 1,148 1,190 1,178 1,156 1,178

Cash and cash equivalents 345 383 384 268 504 348 217 430 1,167 1,661 2,424 3,107

Other assets 295 225 504 650 431 1,494 516 516 516 516 516 516

Equity and l iabil ities 15,216 17 ,727 20,397 20,028 20,300 18,947 18,295 19,050 19,690 20,019 20,715 21,425

Total equity 6,846 7,514 7 ,782 9,066 9,190 8,259 8,539 9,102 9,621 9,985 10,743 11,391

Equity attributable to shareholders 6,809 7,499 7,781 9,066 9,189 8,258 8,539 9,101 9,621 9,985 10,742 11,391

Non-controlling interests 37 15 1 1 0 0 0 0 0 0 0 0

Total l iabil ities 8,370 10,214 12 ,614 10,961 11, 110 10,689 9,756 9,948 10,069 10,034 9,973 10,034

Financial debt 5,691 6,327 7,589 6,557 6,211 6,664 6,664 6,664 6,664 6,664 6,664 6,664

Payables 0 0 0 0 2,395 1,963 1,030 1,222 1,343 1,308 1,247 1,308

Other liabilities 2,679 3,887 5,026 4,405 2,503 2,062 2,062 2,062 2,062 2,062 2,062 2,062

Cash flow 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

CFO 695 883 902 1,347 1,437 1,381 2 ,263 1,875 1,841 1,509 1,761 1,655

Net profit 912 681 649 928 39 -1,466 280 563 520 364 757 649

Depreciation 285 390 609 667 656 809 882 927 929 868 868 872

Interest and dividends 37 58 146 198 193 168 194 199 192 166 148 122

Changes in working capital -120 -613 -750 -548 640 1,173 907 186 201 111 -12 12

Other -420 366 249 103 -93 697 0 0 0 0 0 0

CFI -3,334 -1,056 -847 -838 -938 -958 -2 , 181 -1,462 -913 -849 -850 -850

CFF 2,182 459 -36 -883 -251 -597 -194 -199 -192 -166 -148 -122

Change in debt 1,772 636 1,262 -1,032 -345 452 0 0 0 0 0 0

Interests -37 -58 -146 -198 -193 -168 -194 -199 -192 -166 -148 -122

Dividend 0 0 0 0 0 0 0 0 0 0 0 0

Share issue 0 0 0 0 0 0 0 0 0 0 0 0

Other 447 -119 -1,152 346 287 -881 0 0 0 0 0 0

CHANGE IN CASH -457 286 20 -374 247 -175 -112 214 737 494 763 683

of 36

Appendix

Figure 5 LOTOS: Upstream production per quarter (mboe) Figure 6 LOTOS: Upstream production per year (mboe)


Figure 7 LOTOS: Crude mix per quarter Figure 8 LOTOS: Crude mix per year


Figure 9 LOTOS: Refinery product slate per quarter Figure 10 LOTOS: Refinery product slate per quarter


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1Q0

8

2Q

08

3Q

08

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Crude oil production Liquid gas production

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Crude oil production Liquid gas production

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q0

8

2Q

08

3Q

08

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Ural crude Rozewie crude Lithuanian crude Other crude

91% 92%86%

91% 90% 90% 92% 92% 92% 92% 92% 92% 92%

6% 6%12% 7% 8% 7% 5% 5% 5% 5% 5% 5% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Ural crude Rozewie crude Lithuanian crude Other crude

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q0

8

2Q

08

3Q

08

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Diesel Gasoline Naphtha Jet fuel HSFO Bitumens Petcoke Other

40%46% 45% 46% 44% 45% 43% 44% 44% 44% 44%

53% 53%

19%

20% 18% 15% 15% 16%15% 15% 15% 15% 15%

16% 16%1% 2% 4% 4%

3% 3% 3% 3% 3%

3% 3%

7%

5%3% 5% 5% 5% 7% 7% 7% 7% 7%

7% 7%9%

7% 11% 10% 10% 10% 12% 12% 12% 12% 12%3% 3%9%

9% 8% 8% 6% 5% 4% 4% 4% 4% 4%3% 3%

17% 13% 14% 14% 15% 15% 16% 15% 15% 15% 15% 16% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Diesel Gasoline Naphtha Jet fuel HSFO Bitumens Petcoke Other

of 36

Figure 11 LOTOS: Quarterly oil throughput and utilization rates Figure 12 LOTOS: Yearly oil throughput and utilization rates


Figure 13 LOTOS: Retail stations network

Figure 14 LOTOS: EBITDA in retail segment per station (PLN m, 12M

trailing)


Figure 15 LOTOS: Clean EBITDA LIFO (quarterly) Figure 16 LOTOS: Clean EBITDA LIFO (yearly)


103

%

103

%

104

%

102%

97%

98

%

101%

103

%

103

%

81% 8

6%

84

%

86

%

100

%

92%

89

%

87% 92% 99

%

96

%

90

%

84

% 91% 93

%

88

%

91%

91% 94

%

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

1Q0

8

2Q

08

3Q

08

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Oil throughput (kboe/d) Capacity utilisation

103

%

100

%

88

%

92%

93

%

89

%

91%

91%

91%

91%

91%

91%

91%

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Oil throughput (kboe/d) Capacity utilisation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0

50

100

150

200

250

300

350

400

450

500

1Q0

8

2Q

08

3Q

08

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

# of stations (LHS) sales per station (mt, RHS)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

-200

-100

0

100

200

300

400

500

600

700

800

900

1Q0

8

2Q

08

3Q

08

4Q

08

1Q0

9

2Q

09

3Q

09

4Q

09

1Q10

2Q

10

3Q

10

4Q

10

1Q11

2Q

11

3Q

11

4Q

11

1Q12

2Q

12

3Q

12

4Q

12

1Q13

2Q

13

3Q

13

4Q

13

1Q14

2Q

14

3Q

14

4Q

14

Downstream Upstream Others

-500

0

500

1,000

1,500

2,000

2,500

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

Downstream Upstream Others

of 36

Figure 17 LOTOS: CAPEX (PLN m) Figure 18 LOTOS: FCFF (PLN m)

Source: BESI Research for estimates, Company Data Source: BESI Research for estimates, Company Data

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15E

20

16E

20

17E

20

18E

20

19E

20

20

E

of 36

Valuation Methodology

PKN Orlen

Our Fair Value is a 50/50% blend of a DCF and SoTP.

For the DCF we use the following assumptions: risk free rate of 2.3%, equity

risk premium of 5.0% and after tax cost of debt of 2.1%, implying a variable

WACC of 7.3-7.5% .We assume a 2% long-term growth rate.

For the SOTP we use the following assumptions: we calculate the average

EBITDA LIFO for 2015-2020E for particular segments multiplied by an

EV/EBITDA multiple based on Bloomberg data for listed peers. Then we

subtract net debt and minorities as of end 2014.

Lotos

Our valuation is equally weighted by three valuation methods: DCF and two

different varieties of SOTP model. We use the following assumptions: risk free

rate of 2.3%, equity risk premium of 5.0%, cost of equity of 11.0%-12.1%. We

assume a long-term growth rate of 1%.

Risks to Fair Value

PKN Orlen

A change in macroeconomic conditions that would affect global

commodity markets, demand and supply of different feedstock and

products with a particular focus on oil and oil-related commodities.

Fuel consumption, which is a function of macroeconomic conditions

and fuel prices.

Increasing competition in the local retail market, which would likely

lead to a decrease in PKN’s market share.

Fluctuations in the USD/PLN and EUR/PLN FX rates may affect the

company’s operating results (refining margins are calculated in USD;

petchem margins are calculated in EUR) as well as financial results

(77% of funding is denominated in a foreign currency, of which 59pp

is in EUR).

Unsuccessful investments or expensive acquisitions that would

negatively affect generated cash flows and consequently lead to a

lower dividend payment. An upside risk here is an attractive

acquisition price.

Weaker cost control at the operating level and new regulations that

entail additional costs could weaken cash flow generation.

LOTOS

A change in macroeconomic conditions that would affect global

commodity markets, demand and supply of different feedstock and

products with particular focus on oil and oil-related commodities.

NOTE: in our analysis we use the forward curve provide by

Bloomberg for oil price forecasts,

Changes in FX exchange rates, mainly USD/PLN, may affect the

company’s operating and financial results.

NOTE: In our analysis we do not take a tactical view on FX exchange

rates, rather we use forecasts provided by Bloomberg,

Increasing competition in local retail market that would lead to a

decrease in market share.

Unsuccessful investments or expensive acquisitions that would

negatively affect generated cash flows and consequently lead to a

of 36

lower dividend payment. An upside risk here is an attractive

acquisition price.

Weaker cost control at the operating level and new regulations that

would entail additional costs could weaken cash flow generation,

Changes in regulations.

Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.

PKN Orlen PKN PW

Report date Recommendation Fair value Share price

2014 February 24 Neutral PLN 45.72 PLN 43.15

2013 March 7 Neutral PLN 59.29 PLN 55.95

2012 July 23 Sell PLN 31.95 PLN 36.83

Source: Bloomberg, BESI Research

N

N

S

30

35

40

45

50

55

60

65

Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage

Grupa Lotos LTS PW

Report date Recommendation Fair value Share price

2014 February 24 Buy PLN 54.07 PLN 39.30

2013 July 3 Buy PLN 55.70 PLN 37.90

March 7 Buy PLN 56.32 PLN 42.25

Source: Bloomberg, BESI Research

B

B

B

20

25

30

35

40

45

Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15

Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage

http://www.espiritosantoib.co.uk/

of 36

IMPORTANT DISCLOSURES

140415

This report was prepared by BESI Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the financial group controlled by Novo Banco, S.A., a Portuguese bank authorised and regulated by Banco de Portugal (Portuguese Banking Regulator) and Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Authority), which was incorporated on the 3rd of August 2014 in the context of the resolution action taken on the former financial institution Banco Espírito Santo, S.A..

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.

Ratings Distribution

BESI Research hereby provides the distribution of the equity research ratings in relation to the total issuers covered and to the investment banking clients as of end of March 2015.

Explanation of Rating System Ratings Distribution

12-MONTH RATING DEFINITION

BUY Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months

NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months

SELL Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months

As at end March 2015 Total BESI Research

Total Investment Banking Clients (IBC)

Recommendation Count % of Total Count % of IBC % of Total

12 Month Rating:

Buy 186 46.7% 22 75.9% 5.5%

Neutral 139 34.9% 5 17.2% 1.3%

Sell 71 17.8% 0 0.0% 0.0%

Restricted 1 0.3% 1 3.4% 0.3%

Under Review 1 0.3% 1 3.4% 0.3%

TRADING RATING DEFINITION

TRADING BUY Analyst expects a positive short-term movement in the share price (max duration 3 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period

TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 3 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period

Trading Rating:

Trading Buy 0 0.0% 0 0.0% 0.0%

Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 398 100% 29 100% 7.3%

For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com.

Share Prices

Share prices are as at the close of business on the day preceding publication, unless otherwise specified.

Coverage Policy

BESI Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. BESI Research has no specific policy regarding the frequency in which opinions and investment recommendations are released.

Representation to Investors

BESI Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material.

Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries.

All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, BESI Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are BESI Research present opinions only, and are subject to change without prior notice. BESI Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information.

BESI Research has not entered into any agreement with the issuer relating to production of this report. BESI Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents.

This communication has been issued and approved by Execution Noble Limited in the United Kingdom where it is being directed at persons who have professional experience in matters relating to investments. It is not intended for retail customer use.

Ownership and Material Conflicts of Interest

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within BESI Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion.

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates have a qualified shareholding (1% or more) in Oi. Bradesco has a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM.

Pursuant to Polish Ministry of Finance regulations, we inform that neither does Banco Espírito Santo de Investimento, S.A. nor its Affiliates have any qualified shareholding in the Polish Securities Issuers mentioned in this report in excess of 5% of its total share capital.

Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers or market makers for Altri and Bradesco.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in share offerings of 4imprint, Alumetal, EDP, Liberbank, Mota-Engil Africa, NAHL Group, Oi, PGE, Prime Car Management, REN, Skarbiec Holding, SKS Microfinance and Sonae Indústria.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in the bond issues of the following companies: Bematech, Kredyt Inkaso, Mota-Engil and Sonae.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided in the last 12 months investment banking services to the following companies: 4imprint, ACS, Alumetal, Bematech, Brazil Hospitality Group, Burford Capital, Casino Guichard, EDP, EDP Renovaveis, Galp Energia, Inditex, Kcom Group, Kredyt Inkaso, Kruk, Liberbank, Mota-Engil, Mota-Engil Africa, NAHL Group, NOS, Oi, Prime Car Management, REN, Semapa, Skarbiec Holding, SKS Microfinance, Sonae, Sonae Indústria, Sonaecom, Sports Direct and SVG Capital.

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of 36

Affiliates of Banco Espírito Santo de Investimento, S.A. are partners to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil jointly with ES Concessões, S.G.P.S., S.A. (held by an Affiliate of Banco Espírito Santo de Investimento, S.A.) has created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist.

Market Making UK

Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “Execution Noble Limited UK Market Making” on http://www.espiritosantoib-research.com.

Confidentiality

This report cannot be reproduced, in whole or in part, in any form or by any means, without BESI Research’s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A.

Regulatory Authorities

Portugal: Banco Espírito Santo de Investimento, S.A. is regulated by the Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Authority); Spain: the branch in Madrid is regulated by the Comisión Nacional del Mercado de Valores (the Spanish Securities Market Authority); Poland: the branch in Warsaw is regulated by the Komisja Nadzoru Finansowego (the Polish Financial Supervision Authority); Brazil: BES Securities do Brasil, S.A. - Corretora de Câmbio e Valores Mobiliários is regulated by the Comissão de Valores Mobiliários (the Brazilian Securities Market Authority); United Kingdom: Execution Noble Limited is authorised and regulated by the Financial Conduct Authority; India: Espirito Santo Securities India Private Limited is regulated by the Securities and Exchange Board of India.


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will we see mean-reversion in margins? - bankier.pl · we maintain a neutral rating eps (pln)on pkn...

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