PKN, Lotos have little room for upstream - Fitch

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Poland’s top two oil groups, PKN Orlen and Lotos will be hard pressed to expand oil exploration as they have planned expensive refinery upgrades, Fitch Ratings said on Friday.

Any substantial investments in the exploration and production (E&P) segment could increase their credit risk unless they cut capital expenditures in other segments, the rating agency warned. “While increasing operations in the upstream segment may lower business risk for an oil refining company by way of vertical integration, the risk of overpaying for E&P assets has increased in the current environment of elevated crude oil prices,” Arkadiusz Wicik, the head of Fitch’s Energy, Utilities and Regulation team, said in a report.

Investors have also expressed concerns, dragging Lotos shares to new all-time lows after the company boosted its capex plan for 2006-2012 to 12.9 billion zlotys ($6.0 billion), up from 7.3 billion earlier this month. Most of the increase will be directed at expanding its upstream business. Analysts said it was unclear how Lotos would finance the additional spending and that it may overpay for new fields.

Poland’s governments have pressed state-controlled Lotos and PKN as well as gas monopoly PGNiG to expand their own production to lessen the country’s reliance on foreign energy, which mainly originates from its eastern neighbor, Russia. Poland has also been among the loudest voices in the European Union to increase its energy independence. PKN, which has no upstream operations, is expected to update its strategy by October after changes among its top executives. Its current 21.3 billion zlotys spending plan allocates only limited funds towards the E&P sector.

The region’s other two large oil groups, Hungary’s MOL and Austria’s OMV, both have some upstream businesses. By 0930 GMT, PKN shares fell 2.1%, while Lotos edged up 0.2%. Warsaw’s main WIG20 index .WIG20 dropped 2.1%. (Reuters)

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