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The Wall Street Journal: Polish Oil Firm Aims to Mend Unit With Eye for Central Europe Lead

EXTRACT: Unipetrol owns 51% of the refinery while the remainder is divided between units of Royal Dutch Shell PLC, Eni SpA of Italy and ConocoPhillips of the U.S., which each holds 16.3%.

THE ARTICLE

By SEAN CARNEY
August 2, 2006

Polish oil refiner PKN Orlen SA is shaking up its Czech subsidiary, Unipetrol AS, in a quest to become central Europe’s leading oil refining and petrochemicals business.

Overhauling the formerly state-owned Czech petrochemical holding company is a test of PKN Orlen’s mettle. The Polish group is divesting Unipetrol’s noncore units, making personnel changes and confronting legal disputes, Unipetrol Chief Executive Francois Vleugels said in an interview.

For PKN Orlen, turning Unipetrol around is a huge challenge, said Mr. Vleugels, a Belgian who joined Unipetrol April 1. Unipetrol reported that net profit fell 8% to 3.41 billion koruna ($152.7 million) in 2005, despite a 12% increase in revenue to 80.95 billion koruna.

Speaking at Unipetrol’s Prague headquarters, Mr. Vleugels said the company must shed all noncore and underperforming units to improve its core refining operation and overall management of the subsidiary. Unipetrol’s holdings extend to oil processing, plastics, chemicals, fertilizers and a retail filling-station chain.

Since buying Unipetrol in 2005 for 14.9 billion koruna, PKN Orlen also has acquired Lithuanian refiner Mazeikiu Nafta AB and is interested in buying a minority stake in Slovak pipeline operator Transpetrol AS from Russian oil producer OAO Yukos.

A focus on refining at Unipetrol and divestments of the plastics and fertilizer businesses at the Czech holding, along with the purchase of Mazeikiu, should enable PKN Orlen to rival Austria’s OMV AG in Central European refining capacity. OMV has refining capacity of more than 500,000 barrels a day, compared with more than 300,000 barrels a day for PKN Orlen.

PKN Orlen reported 2005 net profit of 4.59 billion zlotys ($1.49 billion) on sales of 41.19 billion zlotys.

Unipetrol will retain the retail gasoline and chemical-products units, which PKN Orlen calls strategic for the group’s business.

To fully utilize Unipetrol’s refining capacity, analysts say PKN Orlen should simplify the ownership structure at Unipetrol’s main refinery, Ceska Refinerska AS, whose two locations have a combined capacity of 174,700 barrels a day. Unipetrol owns 51% of the refinery while the remainder is divided between units of Royal Dutch Shell PLC, Eni SpA of Italy and ConocoPhillips of the U.S., which each holds 16.3%.

Analysts would like to see Unipetrol put cash generated by divestments into a buyout of Ceska Rafinerska’s minority shareholders. “The complicated ownership structure is a major obstacle to investment, and the refinery is constantly losing competitiveness to regional peers as a result,” said Peter Tordai, analyst at KBC in Budapest.

Ownership changes and attempts at divestments so far have had limited success. The first planned sales of Unipetrol subsidiaries, plastic and rubber maker Kaucuk AS and PVC maker Spolana AS, are behind schedule.

Spolana, which analysts see fetching at least one billion koruna, attracted weak interest and reportedly only two bidders made the final round. Unipetrol has yet to close a deal. Unipetrol on July 17 chose Polish chemical company Chemiczna Dwory SA for 90 days of exclusive negotiations on the sale of Kaucuk. Kaucuk’s could fetch about five billion koruna. Mr. Vleugels described the delays as “hiccups” but said the deals are moving forward.

Unipetrol also is considering the sale of 14,057-barrel-a-day refinery Paramo AS, 56 miles west of Prague in Pardubice, Mr. Vleugels said. He said Paramo’s division making car oils and lubricants won’t be sold.

PKN Orlen’s streamlining at Unipetrol includes unloading within the next 18 months as many as 50 filling stations belonging to Unipetrol subsidiary Benzina AS. Unipetrol will maintain its 330-station total by buying other stations in better locations from competitors, Mr. Vleugels said. Unipetrol could be in luck. Last week, Hungarian oil-and-gas company MOL NyRt said it may sell its Czech chain of 34 filling stations under the Slovnaft brand. Unipetrol’s spokeswoman Daria Kulinska said that the company is interested in acquiring the stations.

PKN Orlen also must resolve legal challenges to some Unipetrol assets before selloffs can move at full speed.

Before acquiring Unipetrol, PKN struck a deal with ConocoPhillips that forward-sold 100 Benzina stations to ConocoPhillips. But now, Unipetrol isn’t surrendering the stations ConocoPhillips wants. PKN Orlen Chief Executive Officer Igor Chalupec recently told the Polish press that the company intends to retain the stations. ConocoPhillips declined to comment.

PKN Orlen also faces unresolved legal challenges, including forward-sale contracts that Unipetrol signed with Deza AS, a subsidiary of privately held Czech chemical and fertilizer company Agrofert Holding AS. Before its privatization, Unipetrol agreed to sell to Deza its subsidiaries Aliachem AS, a chemical maker, and Lovochemie AS, a fertilizer maker. Unipetrol’s PKN-appointed management doesn’t want the companies and is ready to sell but is holding out for a better price.

The sales should have been made in January and contracts stipulate penalties for not selling the companies to be about 1.5 million koruna daily, or 550 million koruna annually, Mr. Vleugels said.

Unipetrol will report its second-quarter financial results Aug. 11 and its chief executive indicated they would show the company overhaul is making a difference. “The net results in the second quarter will show systematic improvements across the group,” Mr. Vleugels said.

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