Jan Cienski in Warsaw -
Polish refiner PKN Orlen continues to be haunted by its disastrous 2006 decision to invest in Lithuania's Mazeikiu refinery. The company announced on July 23 PLN5bn (€1.2bn) in impairment charges on its second quarter earnings, the bulk of that figure being attributed to Mazeikiu. Analysts say Orlen is finally facing up to the facts.
The Mazeikiu write-down came to PLN4.2bn, with troubled refining subsidiary Unipetrol accounting for another PLN711m. Orlen was forced to act after an awful second half of 2013, during which refining margins fell, and downward pressure continued on sea-borne sales, accounting for more than half of the Lithuanian refinery's output.
Even worse, Orlen says that may not be the end of the bad news from Mazeikiu. "We are bracing for worse scenarios that may materialise at the end of 2014 and in early 2015," said Vice President Slawomir Jedrzejczyk, in a statement. "As the first step, we could be forced to temporarily shut down the refinery."
State controlled Orlen was pressured into making the Mazeiku investment in 2006, mainly for political reasons. Forging closer ties with Lithuania was a key part of the foreign policy strategy of former president Lech Kaczynski, who wanted to avoid a Russian company taking control as Yukos, the energy giant brought down by the Russian government, was forced to sell its stake in the refinery.
Orlen paid $2.8bn for Mazeikiu, as well as investing an additional $900m in modernising the plant. The investment ran into trouble almost immediately. The pipeline supplying it with Russian crude was shut down in 2006, ostensibly for repairs, and has yet to reopen. That has forced Orlen to supply the refinery by sea, a much more expensive route.
Lithuanian authorities have also been uncooperative. They dismantled part of a rail line which supplied the refinery with crude via neighbouring Latvia, and have still not agreed to construct a pipeline connecting Mazeikiu to the sea.
Analysts suggest the write-down is a sign that Orlen's management is beginning to admit to itself how much money has been swallowed by its ill-advised Lithuanian venture. "PKN has finally faced reality after a few quarters (or years) of denial and made another round of major impairments, which it hopes is the final round to be able to continue with a clean sheet (and balance sheet)," writes Robert Rethy of Wood & Co.. "Following the noise around Mazeikiu, the write-offs are probably less of a surprise, but the size of the impairments did come as a surprise."
Excluding the write-offs, Orlen posted PLN330m zlotys in earnings before interest, taxes, deductions and amortisation. On a busy day for the shares, the company's stock lost 5.8% on the Warsaw Stock Exchange by the close on July 23.
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