UBS downgrades Orlen to “sell” on weak macro outlook, negative FCF risk

Investing.com -- UBS has downgraded Orlen SA (PR:PKN) to “sell” from “neutral,” citing limited upside following an over 80% year-to-date rally and growing concerns over macroeconomic headwinds and persistent negative free cash flow. 

The revised 12-month price target is PLN75, up from PLN64, but below the current share price of PLN86.52 as of July 17.

The brokerage raised Orlen’s valuation multiple to 4x EV/DACF (from 3.5x) to reflect prolonged strength in refining margins, yet noted that the premium to historical levels is now unjustified. 

The gap to peers’ 2026 EV/DACF multiple has narrowed to 4%, which UBS views as excessive given Orlen’s projected weaker profitability, lower dividend yield, and looming FCF deficits.

UBS expects Orlen’s free cash flow to turn negative from FY26 to FY28 due to higher capital expenditure and a weakening macro environment. FY25 may remain slightly positive due to a large working capital release in 1Q. 

UBS projects free cash flow to fall to PLN8.3 billion in deficit in 2026 and PLN9.6 billion in 2027. The brokerage also highlighted risks tied to potential M&A activity, including management’s PLN8 billion annual M&A budget and recent interest in U.S. midstream and biogas investments.

Despite short-term EBITDA and EPS revisions, UBS increased FY25–26E EBITDA by 2% and EPS by 10%, the brokerage remains 2% below consensus on FY26–27E EBITDA and 13% below on EPS. 

EPS is now expected at PLN12.82 in FY25E, PLN9.48 in FY26E, and PLN8.26 in FY27E. Dividend per share is forecast at PLN6.48 in FY25E, with the yield averaging 7% in FY25–26E, lagging European peers’ 10% average.

Second-quarter results are expected to show a 23% quarter-on-quarter drop in EBITDA to PLN8.9b, with weaker oil and gas prices, seasonal softness in the energy segment, and a weaker USD outweighing stronger refining margins. 

The brokerage also flagged a potential $290 million provision stemming from a court ruling in a Gazprom-related dispute, though this is not yet factored into forecasts.

UBS’s macro assumptions suggest a tougher outlook ahead, with refining margins projected to fall to $4.2/bbl in 2026 from over $11/bbl currently.

European gas prices (TTF) are expected to decline to €31/MWh in 2026 and €28/MWh in 2027 due to incoming LNG supply.

Orlen’s own macro assumptions remain more optimistic, leading to a 13% gap between its 2030 EBITDA target of about PLN45 billion and UBS’s estimate of PLN39 billion.

UBS said the recent outperformance, narrowing peer discount, and deteriorating cash generation profile support the downgrade. 

Key risks include further capex escalation, large-scale acquisitions, and macro volatility in oil, gas, and power prices.