Consolidation in CEE Fuel Retail 2005

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Extended expert view: Consolidation in CEE fuel retail

Acquisitions and value enhancing developments put the creation of a CEE champion on hold

It is three years since stories about the creation of a central European oil champion involving Austria's OMV, Hungary's MOL and Poland's PKN started to circulate. However, with the

three companies tackling different acquisition priorities over the last 2-3 years and now focusing on enhancing company value, the deal is firmly on the backburner.

Although the bulk of this value will come from upstream activities, this also requires the development of a clearly defined downstream proposition and the attainment of a more

efficient forecourt network, especially in the case of PKN Orlen.

Reference Code: BFEN0084Publication Date: May 2005

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Extended expert view: Consolidation in CEE Fuel Retail

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© Datamonitor (Published May 2005) This report is a licensed product and is not to be photocopied

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Executive Summary

Extended expert view: Consolidation in CEE Fuel Retailing

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© Datamonitor (Published May 2005)

This report is a licensed product and is not to be photocopied

EXECUTIVE SUMMARY

Forecourt retail acquisitions in CEE have been pronounced

It is three years since stories about the creation of a central European oil champion involving Austria's OMV, Hungary's MOL and Poland's PKN started to circulate, and over a year since the latter two signed a document stating their intention to start consolidating. However, with the three companies tackling different acquisition priorities over the last 2-3 years, the deal is firmly on the backburner.

Network improvements are required to enhance competitive performance

Now that the consolidation in Central and Eastern European forecourt retailing has entered a second phase, the focus for the companies involved is achieving increased market value in light of their newly acquired assets. Although the bulk of this value will come from upstream activities, this also requires the development of a clearly defined downstream proposition and the attainment of a more efficient forecourt network, especially in the case of PKN Orlen.

Freshly developed markets may prove attractive to the major oil companies

Only when MOL, OMV and PKN have enhanced their company valuations and CEE market activity subsides a little, will a large-scale co-operation become more of a reality. However, by this time, a truly global Western oil player, or indeed an eastern company might attempt to buy its way into the market.

Table of Contents


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TABLE OF CONTENTS

EXECUTIVE SUMMARY 3

Forecourt retail acquisitions in CEE have been pronounced 3

Network improvements are required to enhance competitive performance 3

Freshly developed markets may prove attractive to the major oil companies 3

INTRODUCTION 6

FORECOURT RETAIL ACQUISITIONS IN CEE HAVE BEEN PRONOUNCED 7

NETWORK IMPROVEMENTS ARE REQUIRED TO ENHANCE COMPETITIVE PERFORMANCE 12

FRESHLY DEVELOPED MARKETS MAY PROVE ATTRACTIVE TO THE MAJOR OIL COMPANIES 15

APPENDIX 17

Related products 17

European Forecourt Retailing Database 17

Forecourt Retailing analyst contacts 17

Table of Contents


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LIST OF FIGURES

Figure 1: PKN’s move into the Czech Republic increases its site numbers by 14% 11

Figure 2: OMV and MOL’s average site throughput exceeds PKN’s 12

Figure 3: OMV has a stable ownership structure 16

Introduction


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INTRODUCTION

In the first four months of 2005 all eyes have been focused on Central and Eastern Europe’s forecourt retailing markets as the first major stage of regional consolidation comes to an end. As the key players involved, including OMV, PKN and MOL, now focus on enhancing company value, this is a trend which is unlikely to dissipate any time soon.

This Extended Expert View highlights the core retail developments in this region, focusing on three of the most important players, Hungary’s MOL, Poland’s PKN Orlen and Austria’s OMV. It outlines recent acquisition activity and summarizes the strategic intentions of the companies in their key markets from a retail perspective.

The Expert View comprises three further sections. The first section details the acquisition activity in CEE markets over the last 2 to 3 years. The second section discusses the new retail positions of MOL, OMV and PKN in terms of the relative efficiency of their recently acquired sites and touches on the strategic intentions of the companies.

Finally, some of the speculation surrounding the future of these companies is touched upon, namely the likelihood that a combination of these three companies will create a regional force and the prospect of Western European or Eastern players waging acquisition efforts on the freshly developed companies.

Further information on Datamonitor’s European Forecourt Retailing Database is given in the Appendix.



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FORECOURT RETAIL ACQUISITIONS IN CEE HAVE BEEN PRONOUNCED

It is three years since stories about the creation of a central European oil champion involving Austria's OMV, Hungary's MOL and Poland's PKN started to circulate, and over a year since the latter two signed a document stating their intention to start consolidating. However, with the three companies tackling different acquisition priorities over the last 2-3 years, the deal is firmly on the backburner.

OMV

Austria’s OMV is one of the largest oil groups in Central and Eastern Europe (CEE) with annual sales reaching almost EUR10 billion. It was this company’s core acquisition of Romania’s Petrom, coupled with the approval of PKN’s takeover the of Czech Republic’s Unipetrol, which signaled the end of the first phase of regional consolidation in the industry.

The strong domestic position of OMV and the geographic location of the Austrian retail market leader have given the company easy access to the growth markets of CEE, providing a strong basis for a comprehensive expansion programme across the region. The company now has a retail presence in over half of the CEE countries, including the Czech Republic, Slovenia, Slovakia, Hungary, Bulgaria and Romania.

In late 1998, the company acquired BP’s networks in the Czech Republic, Slovakia and Hungary. By 2000, it had a 24.5% fuel retail share in Slovenia, 11% in Slovakia, 10% in Hungary and 9% in the Czech Republic. Organic growth in each of these markets is apparent as the market shares now sit at 26.2%, 14.7%, 16% (or 15% excluding recently acquired Avanti volumes) and 10.1%, respectively. This is a positive result given that a market share of at least 10% was stated as desirable to ensure profitability.

Additionally, OMV extended its CEE fuel retailing operations by entering the high growth potential markets of Bulgaria and Romania. These two markets were its priority in terms of acquisition investment. In Bulgaria it purchased 25 sites from Petrol but the takeover of Romania’s Petrom in 2004 has been OMV’s most pertinent purchase to date.



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Until the Petrom deal, MOL has gotten the better of OMV in regional acquisitions. However, given that MOL had stated in 2002 that it intended to double the value of the company, something of the magnitude of the Petrom acquisition was necessary to achieve this.

To date, the Petrom acquisition has produced very desirable results. In January 2005 it was the most valuable company on the stock markets in CEE, a result accomplished in part through a capital injection from OMV. Its value on the Bucharest Stock Exchange rose by more than EUR 2.5 billion to EUR 5.59 billion in one month. It was worth around EUR 1.27 billion in January 2004 and is now around 4.5 times that. OMV’s planned investment in Petrom is between EUR 300 million and EUR 400 million per annum over the next three to five years, with the majority of its short and medium-term objectives focusing on upstream operations.

The upstream assets of the Romanian company present OMV with huge opportunities in the Danube area and in Iran, Pakistan and Kazakhstan. However, with regards to forecourt retailing its focus is largely on the CEE region, and Romania, a country of some 22 million people that will likely join the European Union by 2007, holds great potential in this regard.

Given the investment needed in Petrom and its upstream priorities, OMV has admitted that a strategic cooperation with MOL, PKN or both, is not something which is likely to happen any time soon. Indeed, the company is on the way to meeting its core objectives without such partnerships or consolidation.

Table 1: OMV’s strategic goals and their achievement

2001 2004With

Petrom 2008

target Oil and gas production (boe/day) 78,000 125,000 345,000 350,000Market share in the Danube region 9% 14% 18% 20%Number of filling stations 1,160 1,773 2,385 - Refinery capacity 13 18.4 26.4 - Source: Datamonitor/ Portfolio.hu/Datamonitor D A T A M O N I T O R



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MOL

MOL, a former state owned company, is the largest integrated oil and gas company in Hungary in terms of sales. It is now a listed company with shares listed on the Budapest, Luxembourg, and more recently, the Warsaw Stock Exchange. OMV also has a 10% interest in the company.

As a forecourt retailer, MOL has historically dominated the Hungarian market with a 43.1% market share in volume terms at the end of 2003. Running in parallel to its consolidation activity has been a network improvement effort in its domestic market, typical of a former national company. Investments in modernization of these sites has allowed MOL to increase its average site throughput from 3.45 million litres in 2000 to 4.10 million litres at the end of 2003, a 19% increase over a three year period.

Much of MOL’s consolidation activities over the last 5 years have been focused downstream as this was where the greatest opportunities existed. It is now hoping to invest more upstream.

MOL firstly acquired Slovak market leader, Slovnaft in 2000. This relationship was initiated in March 2000 when it purchased a 36.2% stake in the company. The newly formed company planned a coordinated network development programme initially with a focus on the Romanian market. The long-term objective was to be among the top three fuel retailers in the country. MOL’s market share of the Romanian market has increased from 2.7% in 2001 to 5.7% in January 2004. However, given that this is a little shy of its target of 8-10% it has taken measures to meet this through the acquisition of 57 Shell Romania stations, announced in November 2004. This acquisition has made MOL the second largest petrol retailer in the country with over 130 sites.

In 1999, MOL also entered the Croatian market, opening the first station of the small planned network. Recent activity has significantly strengthened its position in this market also. In 2004 it took 25% of INA, Croatia’s state-owned oil and gas company, and in June it plans to bid for a controlling stake. MOL has also shown interest in buying a stake in Bosnia's Energopetrol.

Although it has been suggested that MOL’s recent acquisition activity and its listing on the Warsaw Stock exchange will facilitate its eventual merger with Poland’s PKN Orlen, this is unlikely to happen in the short term. MOL has admitted that Poland is an interesting market and the prospect of a strategic partnership is something that is not out of the question.



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PKN Orlen

Of the three players, PKN Orlen seems to be the one speaking most positively about some kind of partnership with another one of the CEE majors. Although it has been making progress in improving its operations it has acknowledged that it lacks the scale to survive as an independent.

However, it is in a strategic quandary over where it is directing its investments, which serves to decrease the attractiveness of the company to potential partners. To date, most investments have been focused downstream, and this hasn’t proved as profitable as initially hoped. Consequently, the company is reassessing its lack of oilfield assets. It currently secures supplies through term contracts with Russian oil suppliers.

The first major downstream investment was the purchase of around 490 petrol station sites in Germany, which have yet to make a profit. As a result, the company is currently reviewing its German network, which operates under the brands of Orlen Deutschland and Star. The company is reported to be in discussions regarding a potential sale of the network or, alternatively, a strategic partnership with another German player.

The company has recently had better luck with the EU Commission’s approval of its acquisition of Unipetrol, signifying PKN’s entrance into the Czech forecourt retailing market. PKN Orlen’s acquisition of a 62.99% stake in Czech Unipetrol, estimated at $480 million, was originally agreed in April 2004. The Unipetrol group consists of the wholly-owned subsidiaries Chemopetrol, Kaucuk, and Benzina. Through the acquisition of Benzina, PKN Orlen will acquire over 300 Benzina branded petrol station sites, making it the largest forecourt retailer in the Czech market in terms of network coverage and second to Shell in terms of market share.

As the key national player, one of Benzina’s major advantages is its countrywide network coverage. However, many of its sites are inefficient and require further investment. PKN has recently announced that it will sell some 100 of the acquired stations and will also consider buying some 70 BP Aral stations up for sale in the Czech Republic.



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Figure 1: PKN’s move into the Czech Republic increases its site numbers by 14%

Source: PKN Orlen / Datamonitor D A T A M O N I T O R

PKN's lack of focus on upstream activities compared to OMV and MOL means that it is behind them in terms of market valuation. The net worth of both MOL and OMV is over 50% higher than PKN. However, when the merger was originally discussed the three players had a similar market value. Until PKN catches up with its CEE peers, the prospect of a merger will fade further into the distance.



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NETWORK IMPROVEMENTS ARE REQUIRED TO ENHANCE COMPETITIVE PERFORMANCE

Now that the consolidation in CEE forecourt retailing has entered a second phase, the focus for the companies involved is achieving increased market value in light of their newly acquired assets. Although the bulk of it will come from upstream activities this also requires the development of a clearly defined downstream proposition and the attainment of a more efficient forecourt network, especially in the case of PKN Orlen.

Despite CEE forecourt retailing companies having made some strides towards network enhancement, especially in their traditional markets, most are still some way behind the Western European major oil companies, not only in terms of market share, but also network efficiency.

Figure 2: OMV and MOL’s average site throughput exceeds PKN’s

BP

Jet

MOLOMV

Shell

Esso

Repsol

Cepsa

Galp

PKN Orlen

Total

Statoil

Agip

Texaco

Q8

Benzina AS

Erg Petroli

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0Average site throughput (m litres per year)

Sum

of s

ites

(Jan

200

4)

Volume Share (2003)

BP

Jet

MOLOMV

Shell

Esso

Repsol

Cepsa

Galp

PKN Orlen

Total

Statoil

Agip

Texaco

Q8

Benzina AS

Erg Petroli

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0Average site throughput (m litres per year)

Sum

of s

ites

(Jan

200

4)

Volume Share (2003)

Source: Datamonitor D A T A M O N I T O R



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Table 2: Euro 261 network efficiency and volume share

Average site throughput

(litres m per year) Sum of sites (Jan 2004)

Volume Share (2003)

BP 5.5 5,814 10.8%Jet 4.8 2,104 3.4%MOL 3.8 430 0.6%OMV 3.4 1,258 1.5%Shell 3.3 11,176 12.5%Esso 3.2 8,264 9.0%Repsol 3.1 3,721 3.9%Cepsa 3.0 1,765 1.8%Galp 2.9 1,053 1.0%PKN 2.6 1,890 1.7%Total 2.6 8,973 7.9%Statoil 2.6 1,953 1.7%Petrom 2.5 683 0.6%Agip 2.1 9,004 6.3%Texaco 2.0 2,278 1.6%Q8 1.8 3,885 2.4%Benzina 1.7 313 0.2%Slovnaft 1.6 303 0.2%Erg 1.4 1,975 0.9% Source: European Forecourt Retailing Database, 2004 D A T A M O N I T O R

1Euro 26 includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,

Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK, Czech Republic, Hungary,

Poland, Bulgaria, Estonia, Lithuania, Romania, Slovakia, Slovenia.

By using 2003 company volumes and market share data in their respective markets, we have produced a

Euro 26 market share figure for each of the companies listed above. E.g. The Euro 26 market share for

OMV will = (OMV Austria volumes + OMV Czech Rep volumes + OMV Hungary volumes + OMV Bulgaria

volumes) / Total Euro 26 volumes, i.e. it does not take account of OMV's sales in markets where its

presence is marginal. Nevertheless, this is a valid representation of their share of the total volumes sold

across all of the 26 markets listed above.

.



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MOL and OMV are in a superior position to PKN in terms of network efficiency. Their average annual volumes per site are 3.8 and 3.4 million litres respectively, whilst PKN’s average is 2.6. This calculation captures MOL’s network in Hungary, Romania and Slovenia, OMV’s sites in these three markets in addition to Austria, Czech Republic, Bulgaria, Lithuania, Romania and Slovakia and PKN’s sites in Poland.

Encouragingly, PKN has recently announced a new retail strategy with an objective to enhancing the performance of its networks. It is segmenting the network into premium and economy with approximately 1,000 premium stations and 900 economy stations. The planned average yearly capital expenditure is PLN390 million (EUR 94 million) over 2005-2009. It hopes to exceed an average throughput of 2.5 million litres per annum across its company-owned stations.

When examining OMV and MOL’s newly acquired sites, scope for improvement is also apparent. OMV’s Petrom had an average throughput of 2.5 million litres in 2003, whilst its owner’s existing sites were more efficient at 3.4 million litres per year. Similarly, although MOL achieves an average yearly site throughout of 3.8 million litres per year, the newly acquired Slovnaft is 1.6 million litres per year. PKN is in a similar situation with Benzina’s average site throughput being less than half of many of its competitors, at 1.7 million litres per year. Whilst this is partly due to the rural location of many sites, there is scope to significantly reduce this differential, without compromising its national geographic presence.

Fortunately OMV’s key strategic priority is development of the newly acquired Petrom assets in Romania. Additionally, MOL has just announced investments of EUR 70 million to expand its Romanian network to 190-200 filling stations in next 5 years. This includes EUR 12 million for the integration of the 59 Romanian petrol station sites it purchased from Shell. Therefore, OMV must waste no time in ensuring that it maximizes the amount of fuel going through its network to sustain volume share in this rapidly liberalizing market.



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FRESHLY DEVELOPED MARKETS MAY PROVE ATTRACTIVE TO THE MAJOR OIL COMPANIES

Only when MOL, OMV and PKN have enhanced their company valuations and CEE market activity subsides a little, will a large-scale co-operation become more of a reality. However, by this time, a truly global western oil player, or indeed an eastern company might attempt to buy its way into the market.

Whilst all three players agree that further consolidation, or at the very least, strategic partnerships may make sense in the long run, it is difficult to foresee a compromise being reached. Currently PKN and the Polish government envisage an even merger between itself and MOL, for example. However, given the current market valuations of the two companies, MOL shareholders consider this objectionable. Although the Polish state selling its 10% share would serve to reduce this obstacle, PKN’s price will have increased by the time this happens.

With or without a tie-up, the CEE market will settle and be concentrated around two to three players over the next 3-5 years. Ironically, when this time comes there is a strong likelihood that an external player from the east or west might show interest in a grand acquisition.

The perceived competitive threat of Russian companies at the moment varies. Whilst OMV representatives have stated that Lukoil, especially in conjunction with ConocoPhillips, for example, is a serious competitive threat, others feel comfortable that Russian companies are not a concern given their management structures and bureaucratic and political pressures.

Meanwhile, the Western European major oil companies are slowly moving away from the CEE markets. Shell has sold its Romanian stations to MOL, and BP is leaving the Czech market. However, this isn’t to say that one won’t attempt to snap up a key CEE player at a later date. The activity of these companies in 5 years time is impossible to predict. A lot depends on the ownership structure of the companies involved. OMV’s shareholder structure can be described as stable, with IPIC (the Abu Dhabi-based oil company) and the Austrian government as the core owners. Their combined stake in OMV is now 49%. It is OMV’s desire that the two core shareholders will never account for anything less than 40%+.



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Figure 3: OMV has a stable ownership structure

MOL

OMV10%

Slovintegra, Slovbena8%

Hungarian government

12%

Domestic or domestic depositary

8% MOL Treasury5%

International institutional investors

56%

MOL employees1%

OMVIPIC

18%

Freefloat50%ÖIAG (Austrian State

Holding co.)32%

PKN OrlenNafta Polska S.A.

17%State Treasury

10%

The Bank of New York12%

Others61%

MOL

OMV10%



12%


8% MOL Treasury5%


56%

MOL employees1%

MOL

OMV10%



12%


8% MOL Treasury5%


56%

MOL employees1%

OMVIPIC

18%


Holding co.)32%

OMVIPIC

18%


Holding co.)32%


17%State Treasury

10%


Others61%


17%State Treasury

10%


Others61%

Source: Datamonitor / Company websites D A T A M O N I T O R

Irrespective of what the future holds the key thing is that regional integration is working effectively to ensure there is strong impetus behind further development in CEE, providing benefits for customers and shareholders alike.

Appendix


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APPENDIX

Related products

European Forecourt Retailing Database

Covering over 20 forecourt retailing markets across western and central Europe, we provide you with in-depth data regarding site numbers, market shares, fuel sales, shop and car wash sales, all at the touch of a button. Updated annually, this versatile database enables you to examine historic trends as well as forecasts to 2008, and compare developments in market segments and competitor performances.

Key reasons to use this database

• Dissect over 20 of Europe's markets into key categories including market volumes, value and network analysis

• Benchmark over 60 fuel retailers across Europe by comparing network ownership, throughput, shop coverage and unmanned networks

• Plan by using national forecasts to 2008 for site numbers and fuel volumes

Forecourt Retailing analyst contacts

Anne Marie Davis 0044 (0) 20 7675 7871 [email protected]

Andrew Hill 0044 (0) 20 7675 7096 [email protected]

Consolidation in CEE Fuel Retail 2005

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