Jiri Kominek in Prague -

Poland's PKN Orlen, the largest oil refiner in Central Europe, plans to hang tough by retaining core assets despite mounting cash flow problems from falling oil prices and sagging demand.

PKN Orlen's management vehemently denied reports in the Czech media on August 24 that it was planning on selling its 63% stake in Czech petrochemical company Unipetrol to either Russia's Lukoil or back to the Czech state from which it purchased the company in 2005 for €575m. However, on September 7, the Czech-Slovak investment group J&T Group submitted a filing saying it has increased its stake in Unipetrol to 6.8%, fueling speculation about impending changes in Unipetrol's shareholder structure.

Management also denied it would bow into pressure from Lukoil and sell its 87% stake in the strategically important Baltic oil refinery Mazeikiu Nafta, which it purchased in 2006-2007 from the now-bankrupt Yukos oil company and the Lithuanian government for a total of €1.6bn, much to the Kremlin's fury which wanted to see it sold to a Russian interest.

"We have absolutely no plans to sell Unipetrol, or core parts of the company including Ceska rafinerska, to either Lukoil or to the Czech government, nor do we intend to sell Mazeikiu to Lukoil. The rumours circulating in the Czech media that suggest this are simply not true," PKN Orlen spokesman Dawid Piekarz tells bne.

Shortly after the sale of Mazeikiu Nafta to PKN Orlen, Russia cut off oil supplies to the refinery via the Druzhba pipeline for supposedly "technical" reasons. Since then, PKN Orlen has pursued a more costly and logistically inefficient option of supplying the refinery via tanker. This notwithstanding, a number of Czech and Polish analysts concur that retaining Mazeikiu Nafta and Unipetrol has become a matter of national security despite the Polish government controlling only 27.5% in PKN Orlen and have likened the situation to that of a clash between David and Goliath. "Despite the fact that the Polish government does not control a majority in PKN Orlen, I do not think it would allow the sale of either Mazeikiu or Unipetrol to the Russians, as this would cause Poland to become a shrinking island surrounded by Russian energy interests," says analyst Roland Paszkiewicz of CDM Pekao.

For its part, Lukoil is being evasive over its intentions to purchase Unipetrol despite numerous reports in the media since early March in which senior company officials stated on record they are pursuing plans to expand their business activities in the Czech Repulbic. "Firstly, it is not our company policy to comment on any deals until they are finalised. Secondly, we have no plans to further expand in the Czech Republic," Lukoil spokesman Vladimir Semakov tells bne.

Hard times

The recession, and with it plummeting oil prices and a drop in demand for plastics used in the automobile industry, has hit PKN Orlen and its subsidiaries including Unipetrol very hard. Unipetrol on August 31 released mid-year financial results that showed losses of €21.3m, a substantial drop from the previous year when it reported a €27.7m profit.

Although the Benzina petrol station chain subsidiary faired well, Unipetrol's other subsidiaries in the refining and petrochemical sectors such as Ceska rafinerska and Spolana did worse than expected. Analysts say, however, that PKN Orlen's reported on-year drop in profits of 33% exceeded expectations given the current state of the economy. Overall, the company processed 11% less oil compared with the same period in 2008.

Given these problems, PKN Orlen announced plans to focus on bread-and-butter activities that involve the production and sale of petroleum products and divest in non-core business assets including a 22% stake in Poland's largest mobile operator Polkomtel and its nearly 85% stake in plastics and fertilizer producer Anwil.

While PKN Orlen has debts of €3.22bn, analysts say the company has reached an agreement and has secured a moratorium on debt repayment until the end of the year. "Once PKN Orlen off loads its stakes in Polkomtel and Anwil, it will be nearly debt free," analyst Jan Tomanik of Wood & Company reckons.

PKN Orlen hired Nomura to advise it on the sale of its stake in Polkomtel, which according to analysts could raise €800m or more.

"With respect to Anwil, PKN Orlen will have to wait until the economy improves before it sells off the plastics and fertilizer holdings for a better price," analyst Jiri Zendulka of Capital Partners believes.

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