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Apr 5, 2017

S3 BLACKLIGHT: Polish Oil Refiner PKN ORLEN’s Short Interest is Shrinking

Short interest in Polski Koncern Naftowy ORLEN SA (PKN PW), better known as PKN ORLEN, has been decreasing after topping $600 million for the first time in half a year. Short interest averaged $340 million for the first three quarters of 2016, but spiked in October and November 2016, hitting a then historical high of $605 million on November 1st. Short sellers were responding to PKN ORLEN’s price rally as hopes for a rebound in oil prices seemed likely after the 3rd quarter OPEC meeting. Short interest hit $639 million in early March and is now down to $560 million.

PK ORLEN’s stock price continued to rally, underpinned by positive 3rd quarter results showing Ebitda of 2.31b Zloty versus 1.63b Zloty in 2015. In addition, they continued to maintain their excellent refining margin of $6.4/bbl and predicted continued strong domestic gas and diesel demand. PKN ORLEN continues to maintain its competitive refining profit margins due in part to minimal Capex expenditures and favorable exchange rates where its revenues are USD based, debt is EUR based and reporting is PLN based.

In 2016 the Polish government was exploring the possibility of a merger of three of Poland’s larger oil and gas companies, state owned PGNiG, 27% state owned PKN ORLEN and 53% state owned Grupa Lotos (LTS PW). Although this mega-merger did not materialize, there has been continuing talks about a merger between PKN ORLEN and Grupa Lotos in an effort to streamline operating costs and create a larger worldwide footprint. Strong revenue growth coupled with this ongoing M&A tailwind has been a boon to PKN ORLEN’s stock price as it was up 17.41% in 2016 and up 30.64% so far in 2017.

Short sellers have built their positions even as PKN ORLEN rallied for over a year. Short interest averaged $380 million in 2016, with short sellers losing $89.0 million in net of financing mark to market P\L for a -23.4% return. Short sellers are keeping most of their positions on in 2017, averaging $525 million of short interest, but their conviction is not being profitably rewarded as year to date losses have totaled $146.9 million, or down 28.0%.

Shorts have covered over 2.6 million shares of their shorts since the end of February and if PKN ORLEN’s stock price continues to rally we may see more of the remaining 20.8 million shares bought back. With average daily trading volume at just over one million shares per day, a large block of short covering could boost PKN ORLEN’s stock price even more.

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Head of Research, S3 Partners
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