Lotos faces capital hurdle for planned Gdansk petchem complex

06 March 2014 14:49 Source:ICIS News

LONDON (ICIS)--Grupa Lotos would be unable to participate in creating a zloty (Zl) 12bn ($3.96bn, €2.87bn) petrochemical complex on Poland’s Baltic Sea coast without raising extra capital, the refiner said on Thursday.

The balance sheet of Lotos, which is working on plans for the complex in Gdansk with fellow state-controlled Polish company Grupa Azoty, was not currently able to handle a major stake in such an ambitious undertaking, according to an assessment of Lotos chief financial officer Mariusz Machajewski.

Lotos and Grupa Azoty – Poland’s largest chemicals producer and Europe’s second largest fertilizer producer – have moved to the feasibility study phase of the project and would make a decision on whether to go ahead with it by the end of this year, he added.

The companies have not ruled out bringing on board a third, probably foreign, investor, but analysts have warned the search for such an investor might prove fruitless.

“The CFO's comments are fair and are in line with our thinking,” Prague-based investment bank WOOD & Company said in a note to investors.

“Lotos has a weak balance sheet – Zl 5.7bn net debt at the end of 2013 and very slow deleveraging due to the lack of FCF [free cash flow] – while it also has extremely ambitious investment plans, including the petchems project, a refinery upgrade – a delayed coker for around Zl 2bn and the B8 field development ... as well as additional ambitions to buy Norwegian producing assets,” it added.

Lotos may not find it easy to attract new capital with its questionable track record of investment returns and FCF generation, the bank cautioned.

“Given the uncertainty regarding the investment plans, let alone the economics of some of the projects and the lack of FCF in the next four-to-five years, or more, Lotos's equity at current valuations is hardly investable, in our view,” it concluded.

($1 = €0.72, $1 = Zl 3.03, €1 = Zl 4.18)

By Will Conroy