Operations Diversification And Retail Expansion Will Build Future Resilience

Key Takeaways

• Diversified operations and strategic investments aim to stabilize Orlen's revenue and boost capital efficiency and net margins.
  
• Retail expansion and improved regulatory conditions in Poland are expected to drive future revenue growth and enhance earnings stability.
  
• Weak demand and increased competition are challenging refinement and petrochemical profitability, with macroeconomic instability, regulatory risks, and potential project changes impacting long-term growth.

Catalysts

Operates in refining, petrochemical, energy, retail, gas, and upstream business.

• Orlen's diversified business model, which includes refining, petrochemicals, energy, and upstream operations, aims to build resilience in various market conditions. This diversity is expected to stabilize revenue and earnings despite volatile market environments.
  
• The company's focus on CapEx discipline and strategic investment adjustments, such as potentially resizing or halting the Olefins project and focusing investments on higher-value projects like biofuels, aims to improve capital efficiency, potentially boosting net margins and overall earnings.
  
• Orlen's retail expansion in markets like Austria and Hungary, combined with improving fuel margins, suggests future revenue growth, contributing positively to earnings stability and expansion.
  
• The improvement in Poland’s regulatory environment, with the discontinuation of certain charges like windfall taxes, is expected to improve Orlen's net earnings, reflecting better cost management.
  
• Orlen's plans to enhance its gas and energy infrastructure, supported by new financing deals from entities like the European Investment Bank, support long-term revenue growth by modernizing its grid capacities and ensuring steady cash flow generation from stable segments like energy distribution.

Orlen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Orlen's revenue will decrease by -6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 4.3% in 3 years time.
• Analysts expect earnings to reach PLN 11.4 billion (and earnings per share of PLN 12.36) by about January 2028, up from PLN 3.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting PLN16.8 billion in earnings, and the most bearish expecting PLN9.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 16.3x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 43.3x.
• Analysts expect the number of shares outstanding to decline by 7.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.59%, as per the Simply Wall St company report.

Orlen Future Earnings Per Share Growth

Risks

• The petrochemicals segment is experiencing ongoing challenges due to weak demand and increased competition from territories with structurally cheaper gas-based feedstock, negatively impacting its profitability and operating results.
  
• The refining segment faces headwinds from a significant 65% year-over-year drop in refining margins, affected by weaker global demand and increased refining capacity elsewhere, which could adversely affect segment earnings.
  
• The macroeconomic environment poses risks with continued uncertainty in gas and oil supply, exemplified by disruptions from Norwegian sources and fluctuating Brent crude prices, potentially destabilizing revenue streams.
  
• Planned capital expenditures (CapEx) are under scrutiny, with scenarios including potentially ceasing or resizing major projects, such as Olefins, which could result in penalties and impact long-term growth forecasts and investment efficiency.
  
• There is ongoing regulatory risk in segments like energy sales, where unanticipated changes previously led to significant impacts on EBITDA, indicating potential volatility in earnings due to external regulatory shifts.

Valuation

• The analysts have a consensus price target of PLN72.35 for Orlen based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of PLN90.3, and the most bearish reporting a price target of just PLN59.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN261.6 billion, earnings will come to PLN11.4 billion, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 10.6%.
• Given the current share price of PLN52.8, the analyst's price target of PLN72.35 is 27.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.