INTERVIEW: More bumps on road ahead for Czech refiner Unipetrol

By bne IntelliNews April 7, 2008

Beth Potter in Prague -

Francois Vleugels, head of the Czech-based refiner Unipetrol, might just turn out to be the right man in the right place at the right time. But that depends on some careful planning for upgrading the facilities, a bet that crude prices won't go much higher, and the current management shake-up at the refiner's Polish owner won't impact on his job.

Despite hiccups in the third and fourth quarters of 2007 that led to a drop in net profit of 22% for 2007 to €48.9m, the Belgian Vleugels expects a "smooth" 2008. A fire in a new hydrocracker unit installed on October 17 put the Litvinov plant out of commission for six weeks, a mistake that cost the company up to €11m in losses. But Vleugels is pressing on with a plan for more upgrades to make Unipetrol's plants more efficient, especially to make more petrochemical products and diesel fuel. "All in all, on the operational side of the house, we are running well," Vleugels says. "In practical terms, we were able to be creative and get ethylene and propylene output up."

The company spent an estimated €118m in 2007 on expanding capacity, mainly in its propylene and ethylene units. Plastics are driving the vision. With Central Europe's appetite for plastics expected to grow by 8-10% per year in the next few years, there's plenty of profit to be made. The petrochemicals used to make the plastics are also a less cyclical market than oil and gas, which will smooth out revenue streams and keep investors happy, Vleugels says. "On the one hand, we're producing more commodities to make the plant more efficient and generate more revenues," Vleugels says. "On the other hand, ... it does not happen overnight."

Benzene is the next commodity slated for an upgrade - Vleugels plans another two-week shutdown of the ethylene unit some time in the next six to 12 months to increase output.

Polish masters

Unipetrol is 63% owned by Poland's PKN Orlen after a contentious privatization process that was completed in 2005. After a three-year restructuring, operations are more streamlined, non-core assets have been sold off and several legal disputes have been settled. The company employs about 4,000 people.

"The credibility of Mr. Vleugels in the chemical (oil and gas) sector is pretty sound in my view," says Robert Keller, an analyst at Patria Finance in Prague. "The overall image of Unipetrol improved after he was appointed to the office."

In many ways, high crude prices are the wild card in all the planning. Margins are getting tighter as oil prices rise and imports from dollar-based countries are worth less against the strengthening Czech crown and euro, factors outside of Vleugels' control.

Sales prices have reached a ceiling, he says, with customers unwilling to accept higher prices. "Anybody who can predict what crude oil is going to do in the future will be a rich person, so I will not speculate," Vleugels says. "No doubt, if the high crude oil prices continue, it will be a tough time for petrochemicals."

Despite the upgrade issues, analysts and investors are bullish on Vleugels' work to turn the company around. "He is clearly focused on creating shareholders value," Keller says. "Although Unipetrol is going through a tough period with operational problems, this is something which is not caused by the management."

On the plus side of things, the new hydrocracker unit at Česká rafinérská oil refinery has now increased capacity by up to 20%, which helps Unipetrol increase its stake in the diesel fuel market. Diesel fuel returns are better than gasoline returns, and European consumers own more vehicles that use this fuel, Vleugels says. "Our financial position is very good," Vleugels says. "The only wrinkle in the strategy is the crude oil price, so we will also try to figure out how to maximize the output of the refineries."

On the retail side of things, Unipetrol is trying to diversify rapidly by franchising new Benzina gas stations. That comes hard on the heels of a revamp of the existing stations - 90% are slated for a facelift by the end of the year, Vleugels says.

A further blip on the manager's radar could come from the current management shake-up at PKN. In March, CEO Piotr Kownacki was asked to step down from his role by the government (which controls PKN) and a new company supervisory board and chief executive will be appointed in May. Vleugels says officials of the new government of Prime Minister Donald Tusk have pledged to name professional managers to the state-owned company, not political appointees. Kownacki was a political appointee of the previous conservative government. Vleugels says he's watchful but "not too worried" about the changeover.

Regardless of changes at the top, Vleugels remains focused on his plans. "We will continue the execution of the upgrades until the end of this year and the beginning of the next year," he says. "Investors are expecting them."

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INTERVIEW: More bumps on road ahead for Czech refiner Unipetrol

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