Eni and PKN eye Shell's stake in Czech Refining Company

By bne IntelliNews May 29, 2007

Nicholas Watson in Prague -

With both Poland's PKN Orlen and Italy's Eni making plain their desire to remain major shareholders in Czech Refining Co. for the long run, attention has now turned to what the third shareholder, Royal Dutch Shell, is planning for its 16.3% stake in the refiner. Analysts reckon it could be a good time for Shell to sell; Shell refuses to say.

The question of what Shell will do with its stake in Czech Refining, or Ceska Rafinerska, comes as Eni last week outbid PKN for ConocoPhillips' 16.3% stake in the refiner for an undisclosed sum, which brought the Italian company's total stake to 32.6%. PKN's Czech subsidiary, Unipetrol, owns 51% of Czech Refining and had publicly stated its desire to buy ConocoPhillips' stake.

The bidding war for the stake was because both companies had pre-emptive rights to purchase the shares in Czech Refining, which was established as a joint venture in 1996 by Unipetrol, Shell, ConocoPhillips and Eni, and operates two Czech refineries with a combined capacity of 165,000 barrels per day (b/d). ConocoPhilips announced six months ago it wanted to sell its stake as part of a general move out of the region's downstream markets, and preferred to sell its stake to Russian partner Lukoil, which has found itself frustrated yet again in its attempts to buy refining assets in Europe.

PKN's Unipetrol was clearly unimpressed with Eni's win in the tender and reflected another misstep in the Polish energy group's often-inept attempts to turn itself into a regional champion.

On April 11, PKN's recently (and politically) appointed CEO Piotr Kownacki was blithely telling reporters that PKN's interests in Czech Refining didn't coincide with the plans of the other two shareholders, Shell and Eni, who, he said, weren't interested in buying ConocoPhillips' stake because they preferred to keep the status quo instead of developing and improving the company's capacity.

He couldn't have been more wrong. Eni was delighted with the increase of its stake in what it described as "the leading refining company in the Czech Republic and one of the most important in Central Europe."

"Eni will almost take its refining capacity in the country to 54,000 b/d, thereby enhancing its integrated marketing and industrial activities," says Matthew Hall of Global Insight. "This acquisition represents a further step in Eni’s strategy of improving the competitive positioning of its downstream activities in Europe."

Eni would clearly like to take this a step further and buy Unipetrol's stake, but PKN made plain Tuesday that such a scenario simply wasn't on the cards.

"[Eni] has not submitted any offer," PKN CEO Kownacki told the Polish daily Parkiet. "There are no talks on this subject and Unipetrol is not interested in getting rid of its shares in this company."

The question for the two competitors is, therefore, what plans Shell, which didn't make any bid for ConocoPhillip's stake and has been deafeningly silent, has for its 16.3% stake. "No comment - that's it," a spokeswoman for the company told bne Tuesday.

Even so, PKN and Eni have grounds for optimism that Shell may decide to divest itself of this stake.

Every firm has its price

On the plus side, Czech Refining has enjoyed a good run lately as the refining business globally recovered. Unipetrol said its first-quarter refinery businesses swung to a CZK490m (€17.3m) profit from a loss in the first quarter of 2006 thanks to strong demand for products, a mild winter and a lack of shutdowns at refineries, which cut into last year's results.

The recovery is part of a global recovery in the refining business. Around the world there was little investment in new refineries since the Asian economic crisis of the late 1990s, which saddled the region with massive overcapacity. European refiners also found themselves with too much unsold petrol in the 1990s, as many countries moved towards cars that run on diesel. However, world economic growth led by China has meant this supply overhang has been eaten away, aided and abetted by the strong import demand from the US, which has had a bad run of shutdowns of its refineries. Like other parts of the energy industry, refining is now also suffering from a shortage of materials and skilled labour.

All this has pushed up refining margins. Yet there is a view that the business has reached a plateau and the next trend move for margins is downwards. If that's true, then Shell may see an opportunity to sell a business at the top. The question is, of course, when.

Analysts feel that while the next move for margins is down, that won't happen next week or even next quarter, so Shell could decide to hold off until it feels the market has definitely peaked.

Likewise, Shell may feel that there's considerably more upside in the value of its stake in Czech Refining given the price that ConocoPhillips got for its stake.

Eni refused to divulge what it paid for ConocoPhillips' stake, with CEO Paolo Scaroni claiming it was much less than the widely reported €500m. However, analysts believe even if the rumoured amount is close to the truth, then it still undervalues the stake. €500m implies a value for Unipetrol's 51% stake in Czech Refining of $2.1bn, which taking into consideration Unipetrol's current market capitalization of $2.3bn, means that the market significantly undervalues other assets of Unipetrol.

"The price Eni is allegedly offering implies a value for Unipetrol's 51% stake in Czech Refining of $2.1bn. If we value Unipetrol's petrochemical business at $1.27bn (based on 2008 estimated EBITDA of $335m and a Price/EBITDA of 3.8x), then on a sum-of-the-parts basis we get a fair value for Unipetrol of $3.4bn or CZK390 per share, an upside of almost 50%," Czech brokerage Wood & Co says.

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