BRE Bank Securities

27 February 2009

PKN Orlen

BRE Bank Securities

Update 27 February 2009

PKN Orlen Buy PKNA.WA; PKN.PW (Reiterated)

Oil & Gas

Poland

Avg daily trading volume (3M)

Free float

Market cap

Target price

Current price PLN 21.45

PLN 40.20

PLN 9.174bn

PLN 6.177bn

PLN 59.35m

Upward Shift in Urals-Brent, USD/PLN

Since the beginning of the year, PKN Orlen shares have underperformed their gas&oil counterparts in the CEE region, shedding a hefty 17% compared to Lotos’s 6% and MOL’s 4% slippage. As we do not see anything in the company’s fundamentals that would justify this downturn, we are reiterating it as a buy. While the tightening in the sales volumes of chemicals and petrochemicals seen in Q408 results will continue to weigh on profitability in 2009, this effect should be offset by strong profits and cash flows generated by the refining business. This scenario will be supported by an expected widening of the Urals/Brent spread, a strong dollar, and reduced costs of oil consumption for the own purposes. These trends will make PKN Orlen stand out among European refiners, for whom 2008 was a year of record refining margins (PKN’s benchmark recorded a decline in 2008, creating a low base). Finally, we predict an appreciation in PKN share value fueled by improving global sentiment to the oil&gas sector supported by rising oil prices.

Q408 Results, FY2009 Outlook PKN Orlen (and especially its Refining business) generated good-quality results in Q408, even if the bottom line was a huge loss which was mainly a consequence of accounting principles (as evidenced by PLN 1.1 billion cash flows from operations). Based on our predictions as to zloty trends, we expect to see about PLN 1 billion in mark-to-market losses on euro loans again in Q109, followed by reversals in the following quarters as the zloty appreciates. LIFO EBIT should stay at its 2008 level in spite of the slowdown in Petrochemicals, thanks to a strong Refining business.

Likely Rise In Urals-Brent Spread, Oil Prices The second half of 2008 saw a dramatic shrinkage in the Urals/Brent spread to which PKN Orlen's profitability is extremely sensitive (at a USD/PLN exchange rate of 3.39, a shift by just $1 on a barrel causes a shift in EBIT by over PLN 500m). An analysis of the situation of Russian exporters and of crack spreads on diesel and HSFO led us to the conclusion that the tightening was temporary, and the spread is due to rebound soon. Further, a slowdown in US fuel and petroleum inventory buildups should drive the prices of crude oil up.

Loan Covenant Breach Not As Bad As It Sounds PKN Orlen warned in its Q408 announcement that its debt had surged to PLN 12.6bn from PLN 9.8bn on a weak zloty and due to a completed repurchase of Polkomtel shares. At the same time, LIFO charges ramped up the ratio of debt to EBITDA over the limits set in the company’s financing agreements with banks. While we think that there is no chance that the loans will be called, the banks might use the situation to raise margins. Even then, interest rate cuts will be able to offset the possible increase in debt service costs.

Shareholder Structure

Sector Outlook

Refining fundamentals are very volatile at the moment, but positive trends are starting to emerge, which should lead to a steadying in the cash flows of refineries. The expected in increase oil prices will further help boost sentiment in the sector .

Company Profile

PKN Orlen is the largest refinery in the CEE region, with 14.1 million tons of annual capacity. In addition to crude refining, PKN Orlen is also active in the chemi-cals industry via its subsidiary Anwil, and in petro-chemicals through BOP. In 2005, PKN Orlen took over the Czech “Unipetrol” group, followed by the acquisi-tion of Lithuania’s Mazeikiu Nafta in 2006.

Kamil Kliszcz

(48 22) 697 47 06

kamil.kliszcz@dibre.com.pl

www.dibre.com.pl

BRE Bank Securities does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

PKN Orlen vs. WIG

Nafta Polska 17.30%

State Treasury 10.20% ING OFE 5.17%

Others 67.33%

Important dates

30.04- coonsolidated FY2008 report 14.05- consolidated Q109 report

16

21.2

26.4

31.6

36.8

42

08-02-20 08-05-20 08-08-20 08-11-20 09-02-20

PLN

PKN Orlen WIG

(PLN m) 2007 2008 2009F 2010F 2011F

Revenue 63793.0 79535.0 62292.5 74645.2 82028.6 EBITDA 5035.3 3249.0 5260.5 5059.3 5793.9

EBITDA margin 7.9% 4.1% 8.4% 6.8% 7.1%

EBIT 2603.9 758.0 2524.6 2250.1 2679.7

Net income 2412.4 -659.0 2033.6 1730.5 1717.9

DPS 0.00 1.62 0.00 0.00 0.83

P/E 3.8 -13.9 4.5 5.3 5.3

P/CE 1.9 5.0 1.9 2.0 1.9

P/BV 0.5 0.5 0.4 0.4 0.4

EV/EBITDA 4.1 7.5 4.9 5.3 4.8

DYield 0.0% 7.6% 0.0% 0.0% 3.9%

PKN Orlen

27 February 2009 2

BRE Bank Securities

BRE Bank Securities

Q408 – Solid Cash Flows from Refinery

Consolidated fourth-quarter results

(PLN m) Q4 2008 Q4 2007 change Q4 2008F* Actual vs. Forecasts

consensus Actuals vs. Consensus

2008 2007 change

Revenues 16 449 16 902 -2.7% 16 284 1.0% 18 610 -11.6% 79 535 63 793 24.7%

EBITDA -1 275 730 - -1 196 -6.7% -888 -43.6% 3 249 5 035 -35.5%

EBITDA margin -7.8% 4.3% - -8.2% - -4.8% - 4.1% 7.9% -48.2%

EBIT -1 965 104 - -1 804 -9.0% -1 566 -25.5% 758 2 604 -70.9%

Pre-tax income -3 586 676 - -3 615 0.8% - - -533 3 011 -

Net income -3 047 634 - -3 400 10.4% -2 774 -9.8% -659 2 480 -

*after PKN’s preliminary fourth-quarter guidance announcement, we revised our LIFO loss estimate from PLN 1.9bn to PLN 2.5bn Source: PKN Orlen, F-forecasts by BRE Bank Securities, PAP Consensus Estimates

A reliable comparison of PKN’s reported figures with consensus estimates is made difficult by a large number of one-offs, that is why the comments below relate to our own Q408 estimates. The fourth-quarter EBIT figure was slightly lower than expected, but, after adjustment for the LIFO effect, it turns out to be higher than we predicted (the LIFO charge amounted to PLN 2.7bn vs. our estimate of PLN 2.5bn calculated based on PKN’s preliminary data release on February 3rd). The adjusted EBIT figured to PLN 748m vs. PLN 696m estimated and PLN 117m posted a year earlier. The Refining segment generated a LIFO EBIT of a whopping PLN 935m (the reported figure was a PLN 1.8bn loss), compared to our expected PLN 474m and an adjusted LIFO EBIT of PLN 25m posted in Q407. Such a strong profit was owed to higher volumes produced by both PKN Orlen and Unipetrol (+PLN 210m), an PLN 470m increase in profits generated by Mazeikiu Nafta (improved throughput, volumes), and lower costs of energy (+PLN 240m). We want to point out that the PKN Group processed over 35% of crude oil more in Q408 than a year earlier. There were no surprises in Retail, which posted an EBIT of PLN 165m vs. our estimated PLN 174m, marking an increase from the PLN 67m reported in Q407, achieved thanks to stronger volumes (+PLN 59m), retail margins (+PLN 17m), and non-fuel-related margins (+PLN 28m). The segments of Chemicals and Petrochemicals missed expectations. Anwil posted a profit of just PLN 33m vs. our expected PLN 52m, due mainly to a considerable drop in PVC volumes. Petrochemical volumes also decreased by 14% y/y in spite of long maintenance downtime in 2007. We had predicted margin tightening on polyolefins, but we had not foreseen such a huge downturn in sales before Q109. All in all, Petrochemicals posted a PLN 97m operating loss, falling far short of our expected PLN 158m profit (in addition to lower volumes, inventory write-downs in the amount of PLN 130m also contributed to this result). Other operating income came in line with expectations at PLN 33m. “Unattributed expenses” were unexpectedly high at PLN 321m vs. estimated PLN 200m, the reason being an undetermined one-time charge related to business risks in the amount of PLN 86m.

Consolidated quarterly results by segment

Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408

EBIT 385 1 311 848 120 565 1 646 512 -1 965

Refinery 65 921 462 241 240 1 407 184 -1 778

LIFO -184 596 267 564 325 860 -316 -2 713

Retail 68 113 175 67 103 109 247 165

Petrochemicals 370 349 294 55 232 35 104 -97

Chemicals 83 69 56 38 91 73 87 33

Other -69 6 -9 -45 1 74 29 33

Unattributed -132 -146 -130 -236 -102 -52 -139 -321

EBIT (LIFO accounting) 569 715 581 -444 240 786 828 748

Amortization and depreciation 619 582 603 613 587 607 608 690

EBITDA 1 005 1 893 1 451 733 1 152 2 253 1 120 -1 275

Finance gains/losses -160 186 -223 507 226 402 -388 -1621

Pre-tax income 215 1 478 611 627 790 2 048 124 -3 586

Net income 49 1 110 593 601 625 1 668 21 -3 047 Source: PKN ORLEN

PKN posted a finance loss of PLN 1.65bn in Q408, which included PLN 134m in interest charges and PLN 1.5bn in negative exchange differences (incl. a PLN 1.16bn loss on euro-loan value adjustments). The finance loss was slightly lower than we had predicted (PLN 1.9bn) thanks to recognition in equity of negative exchange differences on dollar-loan adjustments in the amount of PLN 414m. The deferred tax asset was also higher than

PKN Orlen

27 February 2009 3

BRE Bank Securities

BRE Bank Securities

expected (PLN 469m vs. PLN 215m), and helped reduce the Q408 net loss to PLN 3 billion. In spite of a nominally huge loss, PKN Orlen generated a staggering PLN 1.1 billion in operating cash flows in the fourth quarter, compared to negative cash flows of PLN 537m a year earlier. The driver was PLN 2.78bn in cash unlocked from working capital, which fully offset the LIFO charge against EBIT. Operating cash flows vs. Working capital

1 684

1 046

594

1 314

630

986

1 281

238

1 103

-557-573

1 533

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408

-1000

-500

0

500

1000

1500

2000

quarterly changes in w orking capital cash flow s from operations

Source: PKN ORLEN

What raised the biggest concerns in PKN Orlen’s Q408 report was a surge in net debt and breach of covenants covering several loans. Read on for more details.

Outlook for 2009

Refining (Wholesale and Retail) As sales of petrochemicals dwindle, the business of refining is going to be the main driver of operating profits and cash flows for PKN Orlen this year. Although margins on the refining product slate are bound to shrink in the face of a global economic slowdown, this decline will be offset by a wider Urals/Brent spread (see below for an explanation), and a high USD/PLN exchange rate. According to our estimates, the sensitivity of PKN Orlen’s EBIT to a one-dollar shift in the Urals discount at a USD/PLN exchange rate of 3.39 is about PLN 590m. Since sweet crude has a large share in the output of Unipetrol, an increase in the spread by $1/Bbl should offset a decline in average refining margins by $0.8/Bbl. Our estimates indicate that Refinery’s LIFO EBIT this year will approximate PLN 1.9bn, i.e. more or less the amount posted in 2008. In our assumed scenario in which oil prices reach $60 by the end of the year (read on for an explanation), another factor supporting earnings in 2009 will be inventory revaluation gains which, we think, could amount to PLN 540m vs. a PLN 1.8bn loss reported a year ago. For Retail, we predict a year-on-year drop in earnings by ca. PLN 68m as a result of narrower margins generated by service stations (a decline against a high Q308 when retailers enjoyed the benefits of a downturn in wholesale), a general market slowdown, and a possible decline in non-fuel margins. This loss of earnings might be partly offset by curbed renovation plans (and fewer shutdowns). We assume that retail capex will be reduced from PLN 549m to PLN 344m this year.

Petrochemicals & Chemicals 2009 is looking tough for petrochemical producers, both in terms of margins, and in terms of sales volumes. The market has not been able to recover from the dramatic downswing of Q408, and, while it displays signs of a possible pickup from time to time, there is no way of telling how long it will take for sales to go back to normal. In the best-case scenario, at the current price level, sales should start to recover in Q209, but margins will stay low. All in all, petrochemicals will generate much weaker profits in the next 2-3 years than in the period between 2005 and 2007, when EBITDA averaged in excess of PLN 1 billion per year. For 2009, we project an operating loss of PLN 141m, a major portion of which will be reported in the first quarter.

PKN Orlen

27 February 2009 4

BRE Bank Securities

BRE Bank Securities

PKN’s petrochemical margins vs. olefin market margins

700

900

1100

1300

1500

1700

1900

2100

2300

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109F

0

100

200

300

400

500

600

petrochemical margins (olefins) (PLN/t) (left scale) Adjusted EBITDA of the Petrochemical segment (PLN m)

*Products (50% ethylene+30%propylene+15%benzene+5%toluene)-Raw materials(70%naphtha+30%LS vacuum gasoil), spot prices Source: Bloomberg

The market for Chemicals has also taken a turn for the worse, as reflected in weaker sales and margins on both nitrogen fertilizers (for a detailed discussion of the future of the fertilizer industry, refer to our research update on ZA Puławy dated 24th February) and polyvinyl chloride. On a positive note, sales volume rebuilding in case of chemicals is going to be faster than in case of petrochemicals, and we expect PKN Orlen to achieve an EBIT of PLN 116m in 2009 vs. PLN 285m in 2008. Earnings in the segment will also be pulled down by increased depreciation and amortization charges related to ongoing PVC projects. Financial Operations Financial transactions may prove to be one of the main factors shaping PKN Orlen’s earnings this year. Exchange-rate volatility will affect the exchange differences arising on euro loans (US dollar loans are tied with the investment in Mazeikiu Nafta and carried only on the balance sheet). Looking at current exchange rates, PKN may post a mark-to-market charge as high as PLN 1 billion in Q109. In subsequent quarters, a strengthening zloty will probably help minimize these losses, which are really just an accounting charge. However, if the Polish currency should not gain in value, PKN’s full-year bottom-line income may fall far short of our baseline estimates (the positive effects of a higher LIFO effect and a higher dollar conversion factor will not be able to offset higher interest expenses on foreign-currency debt, or higher negative exchange differences which, incidentally, are not tax-deductible). A sensitivity analysis for our forecasts is shown on the next page.

PKN Orlen

27 February 2009 5

BRE Bank Securities

BRE Bank Securities

Estimate sensitivity to exchange rates

Baseline Scenario

Q109 Q209 Q309 Q409 2009F

Avg. USD/PLN exchange rate 3,45 3,55 3,40 3,15 3,39

USD/PLN exchange rate at period end 3,60 3,50 3,30 3,00 3,00

Avg. EUR/PLN exchange rate 4,44 4,55 4,20 4,00 4,30

EUR/PLN exchange rate at period end 4,70 4,40 4,00 4,00 4,00

EBIT 69 1 013 796 646 2 525

LIFO Effect -120 512 89 60 542

EBITDA 752 1 698 1 481 1 330 5 261

Net finance gains/losses -1356 595 826 -93 -28

Net income -1 295 1 419 1 477 433 2 034

Exchange rates flat at current level

Q109 Q209 Q309 Q409 2009F

Avg. USD/PLN exchange rate 3,45 3,65 3,65 3,65 3,60

USD/PLN exchange rate at period end 3,65 3,65 3,65 3,65 3,65

Avg. EUR/PLN exchange rate 4,50 4,70 4,70 4,70 4,65

EUR/PLN exchange rate at period end 4,70 4,70 4,70 4,70 4,70

EBIT 69 1 161 1 073 1 183 3 485

LIFO Effect -120 624 277 418 1 200

EBITDA 751 1 845 1 758 1 867 6 221

Net finance gains/losses -1357 -100 -109 -115 -1681

Net income -1 295 844 769 850 1 167 Source: estimates by BRE Bank Securities

Acquisitions and Divestment PKN’s Management have recently unveiled plans to sell Anwil and the holdings in Polkomtel (the stake has an estimated value of PLN 3.4 billion, or PLN 8 per share). Only the telecom assets have a chance to deliver an acceptable price in the current macroeconomic environment, however, even with great determination on PKN’s part, the sale is not likely to be finalized this year (all Polish shareholders of Polkomtel have to agree to sell, and launch a right-of-first refusal procedure). As for the Anwil divestment, the present timing is bad for potential profits given the depressed valuations of comparable companies. PKN’s acquisition plans for this year include an unscheduled purchase of a 10% stake in Mazeikiu Nafta from the Lithuanian government, prompted by the latter’s decision to exercise its put option (the cost of $290m is factored in our estimates for Q209). Another substantial capital outlay would be an acquisition of an upstream producer, which is already in the works, and for which feasibility studies and a due diligence audit have already been done (the producer is a public company which owns deposits in different parts of the world). The acquisition might be made jointly with PGNiG. It is hard to comment on these plans without knowing the details, but it seems to us that the risk of overpayment in an environment where assets are generally underpriced is low. That is why, at current oil prices, the takeover will probably have a neutral impact on Orlen’s value.

Present and Future Macroeconomic Trends

Crack Spreads Between 2004 and 2008, refineries enjoyed higher-than-average crack spreads which expanded in line with global economic growth and fuel demand from developing countries (the 2004-2008 CAGR for China was 7%). These trends peaked in 2008, as tight diesel supply across the world sent crack spreads to unprecedented highs ($250-$300/t). As a result, even with US gasoline demand considerably weakened, the BRENT-ROT refining margin averaged $8.2/Bbl (ten-year average at $3.6/Bbl). The profitability of fuel production remained strong amid a gloomy economic outlook, though only thanks to a dramatic downturn in the prices of crude oil, which helped to rapidly reduce the negative crack spreads on heavy residuum. At present, narrowing diesel margins are driving down margin benchmarks in Europe and elsewhere. Refinery profits are additionally under pressure from planned capacity expansion,

PKN Orlen

27 February 2009 6

BRE Bank Securities

BRE Bank Securities

especially in China and India. While most of the major ventures have been either unintentionally or deliberately delayed (one example is the delayed commissioning of the world’s largest refinery complex in India with an expected annual capacity of 61 million tons). overall, global refining capacity is expected to increase by 2% in 2009, while demand according to the IEA is going to decline 1.1%. The impact of the expanded capacity on Europe will probably be less severe because most of the new refineries are located in Asia, and because of recently tightened EU restrictions on sulfur content in fuels which might push some of the smaller refineries out of the market (e.g. the cost of a diesel desulfurization plant is approximately PLN 450m as estimated by Lotos, and PLN 400m as estimated by PKN Orlen which already uses six diesel HDS units). As for margins, however, they are inevitably going to decrease, possibly as far as to the level of their medium-term averages. To reach a five-year average, margins would have to pull back 25-30% vs. 2008; a return to a ten-year average would suggest a contraction by as much as 50%. In the mean time, data for the first two months of the year suggest an increase compared to Q108.

BRENT-ROT, NWE cracking margins according to BP (USD/Bbl)

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1Q

97

3Q

97

1Q

98

3Q

98

1Q

99

3Q

99

1Q

00

3Q

00

1Q

01

3Q

01

1Q

02

3Q

02

1Q

03

3Q

03

1Q

04

3Q

04

1Q

05

3Q

05

1Q

06

3Q

06

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

NWE Brent Cracking (USD/Bbl) (BP) BRENT-ROT (USD/Bbl)

Source: Reuters, BP

The four-year rally in benchmark margins obviously benefitted the PKN Orlen refineries, but, because of heavy internal usage for power generation (the refinery in Płock uses 15% of crude purchases for its own purposes) and a relatively low quality of Mazeikiu Nafta's product slate (which is 18% heavy fuel oils), the nominal crack spreads reported by these refineries failed to match those reported, for instance, by Reuters. In fact, PKN even saw a contraction in margins in late 2007 / early 2008 as soaring crude prices not only widened the negative crack spreads on HSFO, but also hurt the competitiveness of oil-fired power generation. In the end, the Orlen Group’s crack spreads in 2008 averaged just $2.9/Bbl compared to $3.7/Bbl in 2007 (even after margins improved on reduced oil prices in the second half of the year). At the same time, the BRENT-ROT margin increased from $4.9/Bbl to $8.2/Bbl. These relationships are important from the standpoint of the expected drop in benchmark margins underpinned by the economic slowdown. It follows from them that PKN Orlen should be more resistant to unfavorable margin trends than its Western-European counterparts, due to a lower comparable base built last year, and thanks to savings generated on energy fuel. Another important consideration is the company’s relatively strong exposure to gasoline fractions (gasoline + naphtha), the margins on which are starting to recover from the 2008 downturn (thanks to the influence of the US market). Last but not least, there is the USD/PLN exchange rate, which weighed on Polish refinery earnings when the zloty was appreciating.

PKN Orlen

27 February 2009 7

BRE Bank Securities

BRE Bank Securities

Crack-spread estimates for PKN Orlen (USD/BBl)

-5.0

-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

Jan-0

5

Mar-05

May-

05

Jul-05

Sep-0

5

Nov-0

5

Jan-0

6

Mar-06

May-

06

Jul-06

Sep-0

6

Nov-0

6

Jan-0

7

Mar-07

May-

07

Jul-07

Sep-0

7

Nov-0

7

Jan-0

8

Mar-08

May-

08

Jul-08

Sep-0

8

Nov-0

8

Jan-0

9

Crack spreads Quarterly average

2.9

5.8

6.3

4.4

1.4

3.7

1.6

1.83.4

6.2

2.2

3.1

1.6

3.5

0.7

3.5

1.6

Source: Bloomberg, estimates by BRE Bank Securities

Capacity usage by US refineries vs. gasoline crack spread

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

Jan-0

0

May-0

0

Sep-0

0

Jan-0

1

May-0

1

Sep-0

1

Jan-0

2

May-0

2

Sep-0

2

Jan-0

3

May-0

3

Sep-0

3

Jan-0

4

May-0

4

Sep-0

4

Jan-0

5

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

-50

0

50

100

150

200

250

300

350

Capacity usage at US refineries gasoline cracks (USD/t)

Source: EIA, Bloomberg, estimates by BRE Bank Securities

Urals-Brent Spread The Urals/Brent spread gradually sloped down from around $3/Bbl to $1/Bbl in the second half of 2008. Some analysts proposed that the decreased difference between prices of light and heavy crude was a permanent trend deliberately created by Russian exporters who redirected their sales and thus reduced the supply of Rebco oil in Europe. We disagree. In our view, falling crude prices and a weakening global demand created an environment which was hardly conducive for such “blackmail” by the Russians, not to mention the practical aspects of implementing such a scheme in such a short time (about 60% of Russian oil exports are supplied to Europe via the Primorsk harbor and the Druzhba pipeline, and 30% are shipped via Black Sea ports). A more plausible explanation for such a rapid shrinkage in the spread lies in the relationships between margins on diesel and heavy fuel oils, and the profitability of exports from the viewpoint of Russian refiners.

PKN Orlen

27 February 2009 8

BRE Bank Securities

BRE Bank Securities

Urals/Brent spread (US$/Bbl)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Jan-0

4

Mar-04

May-

04

Jul-04

Sep-0

4

Nov-

04

Jan-0

5

Mar-05

May-

05

Jul-05

Sep-0

5

Nov-

05

Jan-0

6

Mar-06

May-

06

Jul-06

Sep-0

6

Nov-

06

Jan-0

7

Mar-07

May-

07

Jul-07

Sep-0

7

Nov-

07

Jan-0

8

Mar-08

May-

08

Jul-08

Sep-0

8

Nov-

08

Jan-0

9

URALS/BRENT Quarterly average

2.93.2

4.2

6.1

5.2

3.6

4.5

3.5

3,7

5.1

4.3

3.9 3.6

3.7

2.8 3.1 3.0

4.3

2.51.8

1.2

Source: Bloomberg, estimates by BRE Bank Securities

On the point of exports profitability during the downturn in oil prices seen in Q308 and Q408, an analysis of movements in simplified gross margins on Russian exports depending on oil prices and export duties indicates that Russian producers experienced a dramatic contraction in margins on international Urals sales. Such deterioration of profitability stemmed mainly from Russia’s formula for determining export duties, which was based on the trailing average for the preceding quarter, and was therefore trailing behind revenues which were falling together with spot prices. Attempts by the Russian government to relieve the situation by reducing export duties failed as oil prices continued on a sharp downward spiral. The situation probably contributed to the decrease in oil volumes in the Baltic Sea, which in turn contributed to the shrinkage in the Urals/Brent spread. Prices finally steadied, and export duties have since adjusted themselves to market reality, offering hope for a gradual increase in exports by Russian producers. According to unofficial information from traders, the volumes shipping out of Primorsk have started to increase. The state of Russia’s national financials also has a bearing on the matter. Russian oil export duties (USD/Bbl) vs. Urals/Brent spread

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

Russian export duties (USD/Bbl) Export duties/Prices of Urals crude

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Urals/Brent spread estimated gross margins on oil exports (price-drilling costs-export duties)

Source: Bloomberg, Rosneft, FTS, estimates by BRE Bank Securities

PKN Orlen

27 February 2009 9

BRE Bank Securities

BRE Bank Securities

Another important factor which was responsible for the decline in the Urals/Brent spread in H208 were crack spreads on diesel and heavy fuel oil. The output of these products (in addition to sulfur content) is what makes for the difference between prices of Brent and Urals crude from the standpoint of refiners. Put in simple terms, Urals yields a slightly higher diesel output than Brent, but it also generates more heavy residuum which generates negative margins. That is why, when assessing the competitiveness of Russian oil, one should take into account diesel and HSFO margins as well as Urals’s spread versus benchmark. In the first half of 2008, strong demand drove the diesel crack up to a level between $250 and $300 per ton, while high prices of crude depressed the cracks on heavy oils to a negative $250/t. In these settings, refiners gained a strong bargaining position against Urals suppliers which helped keep the spread to benchmark high. The situation changed dramatically with the start of a downward movement in oil prices. As crude fell, negative cracks on HSFO narrowed (additionally supported by increasing demand from the energy industry, which used heavy fuel oil to replace natural gas), and, at steadily high diesel margins, increased the competitiveness of Rebco crude, and made refiners more willing to accept lower spread levels (the diagram below shows how the relationship between HSFO and diesel cracks improved in Q3 and Q4 2008). The settings are very different now. The economic slowdown is curbing global demand for diesel, as demonstrated by reduced crack spreads. At nearly $100/t, they are almost on a par with the negative HSFO cracks. In our opinion, this shift justifies a wider discount in the prices of Urals – otherwise, distillation of this high-sulfur crude will cease to be financially viable. From what we gather, the discount is indeed widening, and actual deals made on the Baltic Sea factor in a spread to benchmark much higher than would follow from quotes on Western European commodity exchanges ($0.5/Bbl). Crack spreads, diesel vs. HSFO, and Urals/Brent spread (USD/Bbl)

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Q105 Q205 Q305 Q405 Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109

diesel vs. HSFO crack spread per barrel Urals/Brent spread

Source: Bloomberg, estimates by BRE Bank Securities

Summing up, the Urals/Brent spread is bound to start expanding soon for the reasons explained above (increase in Russian exports and decrease in diesel cracks). We expect the spread to be back at $2-$2.5/Bbl by the second half of the year.

US Crude Oil and Fuel Inventories We believe that in 2009 petroleum pricing trends may be crucially affected by the demand situation in the US. In addition to the fact that the US has long been the world’s biggest fuel consumer, the advantage of the American market lies in that its evolution can be traced week by week, thanks to the data published by the Department of Energy. Thus, the weekly EIA releases function as a bellwether for the global petroleum market and it is there where we should seek any potential indication of future improvement. Having analyzed current and historical data, we are inclined to think that the first such signals are currently appearing.

PKN Orlen

27 February 2009 10

BRE Bank Securities

BRE Bank Securities

Impact of changes in the retail price of gasoline on US demand, 1968-2009F

6%

5%5%4%

6%

4%

-2%

2%

5%

3%3%

-5%

-6%

0%-1%

1%1%2%

3%2%

2%

0%

-1%-1%

1%

3%

2%

2%

2%1%

3%

2%

1%1%

3%

1%

2%

0%1%

0%

-3%-2%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Y/Y increase/decrease in gasoline demand change in average retail price of gasoline (lef t scale)

Source: EIA, estimates by BRE Bank Securities

The chart above, which illustrates the relationship between the US demand for gasoline and its retail price, indicates that there is a clear difference between the current situation in the market and the 1979-80 crisis, which nowadays is so frequently used to justify predictions of an upcoming breakdown in consumption. Thirty years ago, we saw two years of much more radical increases in the average retail price of gasoline (+37% and +45%), which smothered the demand for more than a while (growth did not return until 1983). While in 2008 we saw a significant surge in prices as well, it was by and large offset by the H2'08 breakdown in the petroleum market (all in all, the year-average growth rate was merely 16%). Prices have fallen so radically that for the American consumer the current price of gasoline is 42% lower than last year's average (55% from the absolute peak values). In this context, price elasticity of demand should work in the opposite direction than in H1'08. Of course, given the clients’ “crisis" sentiment, we cannot expect consumption to increase significantly, but it could stabilize at the current level (last year's decrease by 3% has already determined a low base). This scenario has been made more likely by the data that have been coming from the US in the past few weeks: the year-on-year rate of consumption growth has been consistently getting less and less negative (calculated for the monthly moving average). As recently as at the start of January, the data suggested a 4% decrease in demand, but near the end of February, the negative growth approached 0%. We believe that if this tendency persists, it will have significant implications for the trends in the fuel and petroleum markets, eventually leading to increases in crude oil prices.

US demand for fuels vs. prices

18 000

18 500

19 000

19 500

20 000

20 500

21 000

21 500

22 000

22 500

Jan-0

5

Apr-05

Jul-05

Oct-05

Jan-0

6

Apr-06

Jul-06

Oct-06

Jan-0

7

Apr-07

Jul-07

Oct-07

Jan-0

8

Apr-08

Jul-08

Oct-08

Jan-0

9

0

200

400

600

800

1000

1200

1400

1600

US fuel demand, Bbl/week price of gasoline, USD/t price of diesel, USD/t

Source: EIA, Bloomberg

We consider demand stabilization a necessary but insufficient condition for the reversal of the current upwards trends on petroleum and gasoline inventories. There does remain the issue of imports, which in the recent months played an important role in the buildup of above-average stockpiles in the US. The strong supply of petroleum worldwide encouraged speculative purchases, all the more so that in futures contracts, the contango exceeded USD 15/Bbl (February vs. December). Such profitable arbitrage possibilities should, however, be soon closed off by the key producers, above all through output cuts (OPEC is already pursuing this path). This will reduce speculative imports into the US, which, given the expected increase in capacity utilization at US refineries (cf. the clear increase of crack spreads on gasoline) should lead to a decrease in stockpiles. Under this scenario, the price of crude oil could exceed the

PKN Orlen

27 February 2009 11

BRE Bank Securities

BRE Bank Securities

USD 50/Bbl threshold and improve sentiment to the oil&gas sector, which would have its impact on the Polish oil companies as well. EIA’s most recent data are already showing a decrease in gasoline inventories, with stable demand and decreased inventories at the crucial Cushing oil hub. Our scenario therefore seems likely to play out.

US crude oil and gasoline Inventories

250 000

270 000

290 000

310 000

330 000

350 000

370 000

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oc

t-0

5

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oc

t-0

6

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oc

t-0

7

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oc

t-0

8

Ja

n-0

9

0

20

40

60

80

100

120

140

160

US crude oil inventories (left scale) Price of Brent crude, USD/Bbl

50 000

70 000

90 000

110 000

130 000

150 000

170 000

190 000

210 000

230 000

250 000

Jan

-05

Ap

r-0

5

Jul-

05

Oct

-05

Jan

-06

Ap

r-0

6

Jul-

06

Oct

-06

Jan

-07

Ap

r-0

7

Jul-

07

Oct

-07

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

0

200

400

600

800

1000

1200

1400

US gasoline inventories (lef t scale) price of gasoline, USD/t

Source: EIA

Debt In Q4’08, Orlen saw a significant increase in its consolidated net debt, from PLN 9.8bn to PLN 12.6bn. This increase in debt stems mostly from the revaluation of foreign currency loans (PLN 2.1bn out of the total PLN 2.7bn increase – the reminder is a PLN 733m loan taken to finance the purchase of Polkomtel shares) and is thus merely an accounting artifact. Unfortunately, coupled with the negative LIFO effect in the last two quarters, it has led Orlen to violate loan covenants related to the net debt/EBITDA ratio. For FY2008 earnings, this parameter currently stands at 3.9. Given the goals of Orlen’s strategy, it should not exceed 3.5. This is why, in accordance with IAS, Orlen had to reclassify most of its long-term loans as short-term loans, because the banks may call them in. At present, negotiations are ongoing and no decisions have been taken (most likely, the loans in question are three EUR-denominated loans: a EUR 1bn loan from an international bank consortium, a EUR 0.8bn loan from a consortium of six banks, and a EUR 0.3bn loan signed in January 2008). We believe the banks are unlikely to call these loans in (the EBITDA decrease is a non-cash phenomenon, and the net debt/LIFO EBITDA ratio is 2.5), but they could take advantage of the situation to increase loan margins. A 200bps increase in margins on these loans would entail a EUR 40m increase in finance costs (almost PLN 190m at the current exchange rate). At the same time, we should notice the significant decline in EURIBOR, which should fully offset the higher margins this year. A problem might appear in the ensuing years, when interest rates might start increasing again.

Orlen’s net debt vs. EBITDA and LIFO EBITDA

4.4

3.1

8.18.8

7.87.3

8.88.4

7.5

9.8

12.6

14.114.7

13.9 14.0

1.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Q106 Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

net debt/ EBITDA moving average net debt/LIFO EBITDA moving average net debt (PLN bn)

Source: PKN Orlen, estimates by BRE Bank Securities

PKN Orlen

27 February 2009 12

BRE Bank Securities

BRE Bank Securities

Macroeconomic Assumptions

Macroeconomic assumptions underlying the DCF model $/Bbl 2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F

Brent crude 54.5 65.4 72.8 98.0 52.9 70.0 80.0 90.0 90.0 90.0 90.0 90.0 90.0 90.0

Urals crude 50.4 61.2 69.5 95.1 50.6 67.5 77.6 87.6 87.7 87.7 87.7 87.8 87.8 87.8

Urals-Brent spread 4.1 4.2 3.3 2.9 2.3 2.5 2.4 2.4 2.3 2.3 2.3 2.2 2.2 2.2

PKN’s product margin 6.3 4.5 6.4 4.9 3.7 3.8 4.0 4.2 4.4 4.7 4.9 5.2 5.5 5.5

Mazeikiu Nafta’s product margin 5.4 2.1 3.6 2.7 2.0 1.5 4.8 5.0 5.3 5.5 5.7 6.0 6.2 6.2

Unipetrol’s product margin 8.5 5.9 7.3 9.7 6.8 6.3 6.3 6.3 6.4 6.4 6.5 6.5 6.5 6.5

Oil throughput (millions of tons)

Orlen 12.8 13.7 14.0 14.2 14.3 15.7 15.7 15.7 15.7 15.7 15.7 15.7 15.7 15.7

Unipetrol 2.6 4.3 4.1 4.5 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7 4.7

Mazeikiu Nafta 5.0 9.2 9.6 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0

Petrochemical output (‘000 of tons) 1923 3051 3059 2956 2601 3204 3400 3804 3600 3804 3600 3804 3600 3805 Chemical products output (‘000 of tons) 1326 1804 1826 1759 1767 1778 1798 1878 1878 1878 1878 1878 1878 1878

Chemical & Petrochemical Lines

Margin on chemicals (EUR/t) 500 535 620 609 502 530 559 587 587 579 579 579 579 579

Margin on petrochemicals ($/t) 498 559 660 553 370 452 472 524 524 507 507 507 507 507

Margin on HDPE+LDPE ($/t) 666 683 660 650 490 511 536 600 600 580 580 580 580 580

Margin on PP ($/t) 679 625 634 659 425 520 545 609 609 589 589 589 589 589

Margin on PTA ($/t) 896 1041 671 862 862 922 1041 922 862 862 922 922

Other macroeconomic assumptions 2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F

USD/PLN exchange rate 3.23 3.11 2.77 2.42 3.39 2.96 2.80 2.69 2.69 2.69 2.69 2.69 2.69 2.69

EUR/PLN exchange rate 4.02 3.90 3.78 3.48 4.30 3.91 3.80 3.50 3.50 3.50 3.50 3.50 3.50 3.50 Source: Bloomberg, PKN Orlen, Mazeikiu Nafta, forecasts by BRE Bank Securities

PKN Orlen

27 February 2009 13

BRE Bank Securities

BRE Bank Securities

Earnings Forecast and Valuation Our DCF model (which factors in PKN’s interests in Polkomtel) produced a nine-month per-share target price of PLN 40.2.

DCF Analysis

Model Assumptions

1. Cash flows were discounted as of December 31, 2008. When determining equity value, we take into account net debt as of December 31, 2008, subtracting the February installment of damages for Mazeikiu Nafta (USD 63m) and adding the price of the 10% stake in MN that will be bought under the Lithuanian government’s put option (USD 299m).

2. The macroeconomic assumptions are as forecasted above. 3. We add the value of Polkomtel shares to equity value, including shares bought at the

end of 2008 at purchase price of PLN 733m. 4. We decided to make an allowance for PKN Orlen’s ongoing dispute with Agrofert,

which is claiming an outrageous PLN 3bn – a claim which we find ridiculous given the price paid for Unipetrol. We assumed that PLN 1bn is a safe allowance (40% of Unipetrol’s value at the time of the acquisition in 2005), and, since PKN Orlen recognized PLN 376m to that end in FY2005, we adjusted our valuation for the remaining PLN 624m. It should be stressed that PKN’s Management does not believe additional provisions to secure Agrofert’s claims will be necessary.

5. The amortization and depreciation expense projected for 2018 is higher than CAPEX, which is unsustainable over a long term, prompting us to revise the D&A expense to PLN 1.9 billion for terminal value calculation purposes.

6. When calculating FCFTV, we based the terminal value calculations on the sales growth rate and EBITDA margins projected for 2018.

7. We assume that FCF after FY2018 will grow at a rate of 1%. Risk-free rate is 6.15%, and beta is 1.0.

PKN Orlen

27 February 2009 14

BRE Bank Securities

BRE Bank Securities

DCF Valuation Model For PKN Orlen (PLN m) 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017 2018 2018+

Revenue 62 293 74 645 82 029 91 072 92 060 92 917 92 800 93 993 93 997 95 046 95 046

change -21.7% 19.8% 9.9% 11.0% 1.1% 0.9% -0.1% 1.3% 0.0% 1.1% 0.0%

EBITDA 5 260.5 5 059.3 5 793.9 6 659.7 6 274.6 6 102.8 6 061.0 6 262.5 6 427.7 6 496.9 6 496.9

EBITDA margin 8.4% 6.8% 7.1% 7.3% 6.8% 6.6% 6.5% 6.7% 6.8% 6.8% 6.8%

Amortization and depreciation 2 735.9 2 809.2 3 114.2 2 830.0 2 642.6 2 489.4 2 343.4 2 256.3 2 173.1 2 153.9 1 925.9

EBIT 2 524.6 2 250.1 2 679.7 3 829.8 3 632.0 3 613.4 3 717.6 4 006.2 4 254.6 4 343.0 4 571.0

EBIT margin 4.1% 3.0% 3.3% 4.2% 3.9% 3.9% 4.0% 4.3% 4.5% 4.6% 4.8%

Tax rate on EBIT 479.7 427.5 509.1 727.7 690.1 686.6 706.3 761.2 808.4 825.2 868.5

NOPLAT 2 044.9 1 822.6 2 170.5 3 102.1 2 941.9 2 926.9 3 011.3 3 245.1 3 446.2 3 517.8 3 702.5

CAPEX -3 996 -4 660 -3 945 -1 926 -1 926 -1 926 -1 926 -1 926 -1 926 -1 926 -1 926

Working capital -1 336 -373 -1 354 -1 207 -20 -17 2 -24 0 -21 0

Capital investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FCF -551 -402 -15 2 799 3 639 3 473 3 431 3 551 3 693 3 725 3 702

WACC 9.0% 9.1% 9.1% 9.3% 9.5% 9.6% 9.6% 9.7% 9.8% 9.8% 9.8%

discount factor 91.7% 84.1% 77.1% 70.5% 64.4% 58.8% 53.6% 48.9% 44.5% 40.5% 40.5%

PV FCF -505 -338 -11 1 975 2 344 2 042 1 840 1 736 1 645 1 510

WACC 9.0% 9.1% 9.1% 9.3% 9.5% 9.6% 9.6% 9.7% 9.8% 9.8% 9.8%

Cost of debt 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2%

Risk-free rate 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2%

Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0%

Net debt / EV 39.2% 38.7% 39.2% 34.5% 30.7% 29.5% 28.4% 27.0% 25.7% 24.8% 24.8%

Cost of equity 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2%

Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

FCF growth after the forecast horizon 1.0% Sensitivity analysis

Terminal value 41 966 FCF growth in perpetuity

Present value of the terminal value (PV TV) 17 015 0.0% 1.0% 2.0% 3.0% 4.0%

Present value of FCF in the forecast horizon 12 237 WACC +1.0ppt 32.2 35.8 40.2 45.7 52.8

Net debt 13 406 WACC +0.5ppt 33.9 37.9 42.8 49.0 57,2

Minority interests 2 764 WACC 35.8 40.2 45.7 52,8 62,4

Allowance against Agrofert claim -624 WACC -0.5ppt 37.9 42.8 49.0 57.2 68.5

Equity value 12 458 WACC -1.0ppt 40.2 45.7 52.8 62.4 75,9

Number of shares (millions) 427.7

Equity value per share (PLN) 29.1

Per-share value of interests in Polkomtel 8.0

Equity value per share (PLN) 37.1

Cost of equity (9M) 8.4%

Target Price 40.2

EV/EBITDA('09) for the target price 6.3

P/E('09) for the target price 8.5

TV to EV 51%

PKN Orlen

27 February 2009 15

BRE Bank Securities

BRE Bank Securities

Relative valuation

P/E EV/EBITDA

Price 2007 2008F 2009F 2010F 2007 2008F 2009F 2010F

MOL 9470 5.0 5.2 6.5 6.1 3.6 4.2 4.2 3.8

OMV 20.7 3.9 3.2 4.9 3.9 3.6 2.8 3.5 3.0

Lotos 11.2 1.6 -1.7 3.8 3.1 2.0 27.7 6.8 7.2

Tupras 15.7 3.5 4.4 4.8 4.1 3.5 2.6 3.6 3.4

Hellenic 5.5 6.1 6.5 8.0 7.1 5.8 5.9 6.9 6.2

Unipetrol 111.3 4.9 20.5 7.9 7.0 2.3 4.0 3.1 2.9

SNP Petrom 0.1 3.3 2.7 2.8 2.7 1.7 1.2 1.4 1.2

ERG 9.7 22.8 12.1 16.0 11.6 3.9 2.7 3.8 3.0

Neste 9.9 4.9 5.6 7.3 6.8 3.8 4.0 4.6 4.3

Motor Oil 6.9 5.5 5.6 6.6 5.2 5.6 5.7 6.0 5.2

INA 1083.8 11.1 7.4 8.0 5.6 6.4 5.2 5.2 4.1

Maximum 22.8 20.5 16.0 11.6 6.4 27.7 6.9 7.2

Minimum 1.6 -1.7 2.8 2.7 1.7 1.2 1.4 1.2

Median 4.9 5.6 6.6 5.6 3.6 4.0 4.2 3.8

PKN ORLEN 21.5 3.8 -13.9 4.5 5.3 4.2 6.5 4.0 4.2

(premium / discount) -23.0% -349.6% -31.3% -5.1% 14.9% 62.0% -5.6% 9.7%

Implied price

Median 4.9 5.6 6.6 5.6 3.6 4.0 4.2 3.8

Multiple weight 50.0% 50.0%

Year weight 0.0% 0.0% 50.0% 50.0% 0.0% 0.0% 50.0% 50.0%

Equity value per share (PLN) 23.8

EV/EBITDA based on net debt at year-end 2008

PKN Orlen’s net debt is adjusted for interests in Polkomtel. Lotos’s multiples were calculated based on 2007-2010 net debt values.

PKN Orlen

27 February 2009 16

BRE Bank Securities

BRE Bank Securities

Income Statement (PLN m) 2006 2007 2008F 2009F 2010F 2011F 2012F

Revenue 52 867 63 793 79 535 62 293 74 645 82 029 91 072

change 28.4% 20.7% 24.7% -21.7% 19.8% 9.9% 11.0%

EBIT 2 576.6 2 603.9 758.0 2 524.6 2 250.1 2 679.7 3 829.8

Refinery 1 614.0 1 689.0 53.0 2 451.6 1 908.1 2 099.1 2 340.9

incl. LIFO effect 32.0 1 167.0 -1 843.0 541.6 446.4 377.8 597.5

Retail 439.0 423.0 625.0 555.9 629.3 648.3 717.8

Petrochemicals 842.0 1 068.0 144.0 -126.1 10.6 196.0 962.1

Chemicals 224.0 246.0 285.0 122.0 171.0 207.0 264.7

Other 8.0 -155.0 137.0 110.0 125.8 129.9 150.9

Unattributed costs -550.4 -667.1 -616.0 -588.8 -594.7 -600.7 -606.7

EBIT (LIFO ACCOUNTING) 2 544.6 1 436.9 2 601.0 1 982.9 1 803.7 2 301.9 3 232.2

Profit on financing activity -68.0 139.8 -1 558.0 -241.7 -270.8 -761.7 -802.2

Extraordinary gains/losses 0.0 0.0 0.0 0.0 0.0 0.0 1.0

Other 220.7 267.4 267.0 213.6 213.6 213.6 213.6

Pre-tax income 2 729.3 3 011.1 -533.0 2 496.5 2 192.9 2 131.6 3 241.2

Tax 669.1 530.6 99.0 403.7 416.7 405.0 615.8

Minority interests 74.2 68.0 27.0 59.2 45.7 8.6 12.8

Net income 1 986.0 2 412.4 -659.0 2 033.6 1 730.5 1 717.9 2 612.5

change -56.6% 21.5% -127.3% -408.6% -14.9% -0.7% 52.1%

margin 3.8% 3.8% -0.8% 3.3% 2.3% 2.1% 2.9%

Amortization and depreciation 2 108.1 2 431.4 2 491.0 2 735.9 2 809.2 3 114.2 2 830.0

EBITDA 4 684.7 5 035.3 3 249.0 5 260.5 5 059.3 5 793.9 6 659.7

change -30.4% 7.5% -35.5% 61.9% -3.8% 14.5% 14.9%

EBITDA margin 8.9% 7.9% 4.1% 8.4% 6.8% 7.1% 7.3%

Shares at year-end (millions) 427.7 427.7 427.7 427.7 427.7 427.7 427.7

EPS 4.6 5.6 -1.5 4.8 4.0 4.0 6.1

CEPS 9.6 11.3 4.3 11.2 10.6 11.3 12.7

ROAE 11.2% 12.4% -3.3% 9.8% 7.7% 7.2% 10.3%

ROAA 5.0% 5.3% -1.4% 4.1% 3.3% 3.0% 4.4%

PKN Orlen

27 February 2009 17

BRE Bank Securities

BRE Bank Securities

Balance Sheet (PLN m) 2006 2007 2008F 2009F 2010F 2011F 2012F

ASSETS 45 419.1 46 103.3 49 286.0 49 780.3 55 710.4 59 036.9 60 737.5

Fixed assets 27 660.8 26 736.4 31 571.0 32 830.6 34 681.6 35 512.2 34 608.1

Property, plant and equipment 25 199.7 24 833.5 28 610.0 29 880.3 31 715.3 32 555.0 31 707.2

Intangible assets 619.8 531.0 570.0 559.2 575.3 566.2 509.9

Equity interests 716.3 700.3 1 561.0 1 561.0 1 561.0 1 561.0 1 561.0

Other fixed assets 1 125.0 671.5 830.0 830.0 830.0 830.0 830.0

Current assets 17 758.3 19 367.0 17 715.0 16 949.7 21 028.9 23 524.7 26 129.3

Inventories 7 398.9 10 365.4 9 105.0 9 999.3 11 520.7 13 146.6 14 685.7

Short-term receivables 6 293.7 6 884.5 6 381.0 4 997.7 7 309.5 8 032.5 8 918.0

Other current assets 1 714.4 618.9 893.0 713.0 713.0 713.0 713.0

Cash and cash equivalents 2 351.3 1 498.2 1 336.0 1 239.8 1 485.7 1 632.6 1 812.6

(PLN m) 2006 2007 2008F 2009F 2010F 2011F 2012F

LIABILITIES 45 419.1 46 103.3 49 286.0 49 780.3 55 710.4 59 036.9 60 737.5

Equity 18 850.9 19 935.3 19 648.9 21 657.3 23 174.3 24 323.3 26 377.0

Share capital 1 057.6 1 057.6 1 057.6 1 057.6 1 057.6 1 057.6 1 057.6

Other equity 17 793.3 18 877.6 18 591.3 20 599.7 22 116.6 23 265.7 25 319.3

Minority shares 2 731.6 2 638.0 2 764.0 2 823.2 2 868.9 2 877.6 2 890.4

Long-term liabilities 8 958.1 11 091.4 5 066.0 15 125.9 15 882.1 16 860.9 15 540.8

Loans 6 211.2 8 602.7 2 611.0 12 670.9 13 427.1 14 405.9 13 085.8

Other 2 747.0 2 488.7 2 455.0 2 455.0 2 455.0 2 455.0 2 455.0

Short-term liabilities 14 878.4 12 438.7 21 807.1 10 173.9 13 785.1 14 975.1 15 929.2

Loans 4 277.9 1 719.2 11 282.0 2 532.2 2 683.4 2 879.0 2 615.2

Trade creditors 8 221.4 9 181.2 8 418.0 6 593.1 10 053.1 11 047.5 12 265.5

Other 2 379.1 1 538.2 2 107.1 1 048.6 1 048.6 1 048.6 1 048.6

Debt 10 489.1 10 321.9 13 893.0 15 203.1 16 110.5 17 284.9 15 701.0

Net debt 8 137.8 8 823.7 12 557.0 13 963.3 14 624.8 15 652.2 13 888.4

(Net debt / Equity) 43.2% 44.3% 63.9% 64.5% 63.1% 64.4% 52.7%

(Net debt / EBITDA) 1.7 1.8 3.9 2.7 2.9 2.7 2.1

BVPS 44.1 46.6 45.9 50.6 54.2 56.9 61.7

PKN Orlen

27 February 2009 18

BRE Bank Securities

BRE Bank Securities

Cash Flows (PLN m) 2006 2007 2008F 2009F 2010F 2011F 2012F

Cash flows from operating activities 3 693.2 1 965.1 3 609.0 3 700.7 4 269.5 4 034.5 4 837.2

Net income 2 060.2 2 480.4 -632.0 2 092.8 1 776.3 1 726.6 2 625.4

Amortization and depreciation 2 108.1 2 431.4 2 491.0 2 735.9 2 809.2 3 114.2 2 830.0

Working capital -492.8 -2 830.4 1 341.0 -1 335.9 -373.2 -1 354.5 -1 206.7

Other 17.6 -116.3 409.0 207.9 57.2 548.1 588.6

Cash flows from investing activities -6 746.2 -2 845.1 -4 385.0 -4 619.5 -4 344.6 -3 857.2 -1 829.1

CAPEX -1 924.6 -3 693.7 -3 969.0 -3 995.5 -4 660.2 -3 944.9 -1 925.9

Capital investments -5 836.5 -539.5 -737.0 -1 058.5 0.0 0.0 0.0

Other 1015.0 1388.2 321.0 434.5 315.6 87.6 96.8

Cash flows from financing activities 4 277.6 27.0 612.0 822.4 321.0 -30.3 -2 828.1

Stock offering 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Debt 4 505.3 667.9 1 903.0 1 498.6 907.4 1 174.3 -1 583.9

Dividend (buy-back) 0.0 0.0 -693.0 0.0 0.0 -355.3 -345.3

Other -227.8 -640.9 -598.0 -676.2 -586.4 -849.4 -899.0

Change in cash 1 224.5 -853.1 -164.0 -96.4 245.9 147.0 180.0

Cash at the end of period 2 351.3 1 498.2 1 336.2 1 239.8 1 485.7 1 632.6 1 812.6

DPS (PLN) 0.00 0.00 1.62 0.00 0.00 0.83 0.81

FCF -4 238.3 -2 559.0 -215.0 -1 533.1 -390.7 89.6 2 911.3

(CAPEX / Sales) 3.6% 5.8% 5.0% 6.4% 6.2% 4.8% 2.1%

Market multiples

2006 2007 2008F 2009F 2010F 2011F 2012F

P/E 4.6 3.8 -13.9 4.5 5.3 5.3 3.5

P/CE 2.2 1.9 5.0 1.9 2.0 1.9 1.7

P/BV 0.5 0.5 0.5 0.4 0.4 0.4 0.3

P/S 0.2 0.1 0.1 0.1 0.1 0.1 0.0

FCF/EV -21.1% -12.4% -0.9% -5.9% -1.5% 0.3% 11.2%

EV/EBITDA 4.3 4.1 7.5 4.9 5.3 4.8 0.0

EV/EBIT 7.8 7.9 32.3 10.3 11.9 10.3 0.0

EV/S 0.4 0.3 0.3 0.4 0.4 0.3 0.0

DYield 0.0% 0.0% 7.6% 0.0% 0.0% 3.9% 3.8%

Price (PLN) 21.45

Shares at year-end (millions) 427.7 427.7 427.7 427.7 427.7 427.7 427.7

MC (PLN m) 9 174 9 174 9 174 9 174 9 174 9 174 9 174 Equity attributable to minority shareholders (PLN m) 2 732 2 638 2 764 2 823 2 869 2 878 2 890

EV (PLN m) 20 044 20 636 24 495 25 961 26 668 27 704 25 953

PKN Orlen

27 February 2009 19

BRE Bank Securities

BRE Bank Securities

Michał Marczak tel. (+48 22) 697 47 38 Managing Director

Head of Research michal.marczak@dibre.com.pl Strategy, telco, mining, metals, media

Research Department: Marta Jeżewska tel. (+48 22) 697 47 37 Deputy Director marta.jezewska@dibre.com.pl Banks

Analysts: Kamil Kliszcz tel. (+48 22) 697 47 06 kamil.kliszcz@dibre.com.pl Fuels, chemicals, retail Piotr Grzybowski tel. (+48 22) 697 47 17 piotr.grzybowski@dibre.com.pl IT, media

Maciej Stokłosa tel. (+48 22) 697 47 41 maciej.stoklosa@dibre.com.pl Construction

Sales and Trading:

Piotr Dudziński tel. (+48 22) 697 48 22 Director piotr.dudzinski@dibre.com.pl Marzena Łempicka-Wilim tel. (+48 22) 697 48 95 Deputy Director marzena.lempicka@dibre.com.pl

Traders: Emil Onyszczuk tel. (+48 22) 697 49 63 emil.onyszczuk@dibre.com.pl Grzegorz Stępien tel. (+48 22) 697 48 62 grzegorz.stepien@dibre.com.pl Tomasz Dudź tel. (+48 22) 697 49 68 tomasz.dudz@dibre.com.pl Michał Jakubowski tel. (+48 22) 697 47 44 michal.jakubowski@dibre.com.pl Tomasz Jakubiec tel. (+48 22) 697 47 31 tomasz.jakubiec@dibre.com.pl

Grzegorz Strublewski tel. (+48 22) 697 48 76 grzegorz.strublewski@dibre.com.pl

"Private Broker"

Jacek Szczepański tel. (+48 22) 697 48 26 Director jacek.szczepanski@dibre.com.pl Paweł Szczepanik tel. (+48 22) 697 49 47 Sales pawel.szczepanik@dibre.com.pl

Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/49 00-950 Warszawa www.dibre.com.pl

PKN Orlen

27 February 2009 20

BRE Bank Securities

BRE Bank Securities

Previous recommendations issued for PKN Orlen

Recommendation Hold Hold Buy Buy

Date issued 2008-05-30 2008-08-14 2008-09-17 2008-11-20

Price on day of recommendation 41.50 35.50 30.10 24.74

WIG on day of recommendation 46546.54 41049.76 36560.96 26108.55

List of abbreviations and ratios contained in the report: EV – net debt + market value EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales Recommendations of BRE Bank Securities A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from –5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. This document has been created and published by BRE Bank Securities S.A. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report. This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other entities mentioned in the present report. The present report was not transferred to the issuer prior to its publication. BRE Bank Securities S.A., its shareholders and employees may hold long or short positions in the issuer's shares or other financial instruments related to the issuer's shares. BRE Bank Securities S.A., its affiliates and/or clients may conduct or may have conducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. This report is not for distribution to third parties. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. Individuals who did not participate in the preparation of this recommendation, but had or could have had access to the recommendation prior to its publication, are employees of BRE Bank Securities S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendation. Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it is based in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.