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Moody's changes outlook on PKN ORLEN's Ba1 rating to positive

October 9, 2012
London, 09 October 2012 -- Moody's Investors Service today changed the rating outlook for Polski Koncern Naftowy ORLEN S.A ('PKN ORLEN') to positive from stable and affirms its Ba1 Issuer Rating. Concurrently, Moody's upgraded the Baseline Credit Assessment ('BCA') of PKN ORLEN to ba2 from ba3.


Today's rating action reflects the sustained recovery in operating performance and financial metrics reported by PKN ORLEN in the past eighteen months despite the challenging operating conditions persisting within the European downstream sector. Together with the completion of the refinancing of its main revolving credit lines and the sale of its 24.39% stake in Polkomtel for PLN3.7 billion during 2011, this has helped underpin the group's financial flexibility and recovery in credit metrics.

Since the downturn of 2009, PKN ORLEN's operating profitability has recovered to healthier, albeit lower than pre-crisis, levels. This has benefited from robust petrochemical volumes (boosted by the commissioning of a new paraxylene and PTA plant in Plock) and margins, as well as resilient contributions from retail activities underpinned by volume growth, which partially offset downward margin pressure. While conditions in refining have remained tough, performance has been supported by the efficiency and upgrading initiatives implemented with a view to increasing crude oil throughput, raising diesel production (e.g. new desulphurisation unit in Plock) and improving energy efficiency (e.g. catalytic cracking plant at Unipetrol).

Moody's notes that PKN ORLEN's financial results have continued to fluctuate significantly quarter-on-quarter. This has reflected persistent volatility in refining margins and Ural-Brent differentials, while a high level of maintenance shutdowns contributed, at times, to constrain capacity utilisation rates and fuel yields. In the past eighteen months, PKN ORLEN generated negative free cash flow (before receipt of divestment proceeds) as a result of a significant working capital increase reflecting surging crude oil prices. Combined with the negative translation effect of the depreciation of the Polish zloty on PKN's US dollar and Euro-denominated debt (44% and 40% of total debt at end of June 2012), this has prevented any decrease in the group's absolute level of debt (as adjusted by Moody's). That said, Moody's also notes that the debt position of PKN ORLEN is materially inflated by its strategic reserves obligations, which accounted for PLN8.3 billion of its inventories at the end of 2011, compared to an adjusted net debt of PLN9.8 billion. In this respect, any change in Polish regulations, which would reduce the mandatory reserves obligations of PKN ORLEN, would benefit its financial profile.

Looking ahead, Moody's cautions that the more benign operating conditions (in terms of refining/petrochemical margins and Ural-Brent differentials) that have benefited PKN ORLEN in the past six months, may not extend into 2013. With new capacity expected to come on stream, margins could come again under pressure at a time when global economic growth conditions are uncertain. Still, based on current capex guidance and assuming stable working capital requirements, PKN ORLEN should be able to return to positive free cash flow generation and sustain the recovery in its Moody's adjusted credit metrics, including retained cash flow to total debt close to 25% and net debt to EBITDA below 3 times.

An upgrade of PKN ORLEN's rating into the investment grade category would however be predicated on the confirmation that, leaving Moody's expectations regarding future operating profitability and cash flow generation aside, the recovery in the group's financial metrics in line with the above guidance and its return to positive free cash flow will not be put at risk by its future investment plans and cash distribution policy, which are expected to be unveiled during its forthcoming strategic update.


The principal methodology used in rating Polski Koncern Naftowy Orlen S.A was the Global Refining and Marketing Rating Methodology published in December 2009. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Plock, PKN ORLEN is the largest oil refining and fuel retail group in Poland, and one of the leading companies in this sector in Central Eastern Europe (CEE). The company is engaged in processing of crude oil into a broad range of petroleum products, transportation, wholesale and retail distribution of such products. PKN ORLEN reported revenues of PLN107 billion and EBITDA of PLN4.4 billion for the fiscal year ended 31st December 2011.


For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Francois Lauras
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Olivier Beroud
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Company — PKN ORLEN
  • Full name
    Polski Koncern Naftowy ORLEN S.A.
  • Registration country
  • Industry
    Oil and gas