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Announcement:

Moody's changes its outlook on PKN Orlen to stable (Issuer Rating: Ba1)

09 Nov 2010

Frankfurt am Main, November 09, 2010 -- Moody's Investors Service has today changed its outlook on all ratings of Polski Koncern Naftowy Orlen S.A ('PKN Orlen'). to stable from negative (Issuer Rating: Ba1). All ratings of the group remain unaffected.

The change in the outlook was prompted by continued robust operating performance and an improvement in the financial profile of PKN Orlen since we downgraded the group's ratings by-one notch to Ba1 with a negative outlook back in May 2009. PKN Orlen benefited from an improvement in petrochemicals market conditions in H2 2009 and YTD September 2010 while refining margins and Light / Sour crude differentials remained volatile and depressed throughout fiscal year 2009 before recovering modestly during H1 2010. In light of stabilizing refining & marketing market conditions at a pretty low level compared to peak 2007-H1 2008 market conditions, PKN Orlen performed above expectation. Reported EBIT (according to LIFO) jumped to PLN 1,467 million YTD Sep. 2010 from PLN -226 million in previous year leading to PLN 989 million of free cash flow (PLN -695 in previous year). The improvement in operating performance of the group reflects PKN Orlen's (i) high complexity refining assets offering strong leverage to gradually improving crude differentials, (ii) focus on middle distillates with the improvement in diesel cracks largely outpacing structurally weak gasoline margins, and (iii) operating efficiency measures across all assets with welcomed improvements at Orlen Lietuva and Unipetrol. The financial profile of PKN Orlen improved with CFO / Debt and FCF / Debt increasing from 20.4% and -9.6% respectively at FYE 2008 to around 36% and 15% on an LTM September 2010 basis.

Going forward Moody's expects that market conditions in the European refining market environment will remain challenging and volatile. Refining cracks and differentials should however continue to recover very gradually from the trough reached in H2 2009 supported by a modestly improving macroeconomic environment. Structural overcapacities in North America and Europe will only be gradually reduced limiting the beneficial impact of a recovering demand for distillates products. Against this backdrop PKN Orlen should be able to sustain its credit profile through at least neutral free cash flow generation. Moody's notes that PKN Orlen will be facing a heavier maintenance turnaround schedule in fiscal year 2011 impacting the overall refining throughput of the group and hence reducing the positive impact of moderately stronger refining cracks and differentials expected for 2011.

PKN Orlen is seen as relatively comfortably positioned in its current rating category. Further positive rating pressure would be predicated upon a combination of continued sound operating performance, finalization of asset sales to further reduce leverage and prudent balance sheet management. PKN Orlen's ability to maintain RCF / Net debt in the mid twenties on a sustainable basis and to consistently generate free cash flow would be key in restoring an investment grade rating.

Negative rating pressure has largely abated over the last nine months. An unexpected pullback in refining market conditions leading to a deterioration in operating performance and cash flow generation and to resurging financial covenant pressure could exert negative pressure on the ratings. Failure to maintain RCF / Debt metrics in the low double digits and to avert negative free cash flow generation would lead to negative pressure on the ratings.

The liquidity profile of PKN Orlen is adequate. The issuer had PLN1.2 billion of cash & cash equivalents on balance sheet and access to approximately PLN4 billion of various undrawn bank lines at 30th September 2010. The main cash flow needs over the next twelve months consisting of working capital requirements, capex and dividends to minority shareholders are expected to be covered from operating cash flows. PKN is expected to have comfortable headroom under its financial covenants at fiscal year-end 2010. Moody's highlights the strong reliance of the group on bank lending (including financial covenants) to fund its business as a source of weakness in assessing the liquidity profile of the group.

The last rating action was on 19 May 2009, when Moody's downgraded PKN Orlen by one-notch to Ba1 and changed the outlook to negative on all ratings.

The principal methodology used in rating PKN Orlen S.A. was Moody's Global Refining and Marketing Rating Methodology, published in December 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

PKN ORLEN, headquartered in Plock, is the largest oil refining and 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 PLN 67.9 billion and an EBITDA of PLN 3.7 billion for the fiscal year ended 31st December 2009.

Frankfurt am Main
Stanislas Duquesnoy
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's changes its outlook on PKN Orlen to stable (Issuer Rating: Ba1)
No Related Data.
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