Erste Bank Recommends Buying Petrom Shares

Erste analysts have an Accumulate recommendation on Petrom with a target price of RON 0.6080 per share, according to a country report published by Erste Bank.

Due to the RON appreciation, higher salaries, rising steel and building costs, operating costs are expected to remain at around 12.5 USD/boe, well above Petrom"s target of 9 USD/boe.

Romanian gas prices are the main short-term driver of Petrom"s stock. Currently, gas access is already liberalized, while prices are still set by the state. However, liberalization should also take place here. This means that the current gas price of 150 USD/thcm should rise to 250-260 USD/thcm by the end of next year to reach the import level. However, the current political turmoil in Romania could slow down the process. Erste economists expect that the price for nonhouseholds will reach this import price level by 2009, while for households, the process could be slower (2012-15). It is possible that some households will pay the full price, but receive some compensation. Petrom plans to set up a fund to subsidize some households.

Analysts do not anticipate significant improvement in the company"s refining performance before 2010, when the third and fourth stages of the Petrobrazi upgrade are achieved.

Currently, the free float of the Petrom stock is pretty small compared to the overall size and market capitalization of the company. Petrom"s free float has a value of EUR 573mn (at RON 0.545 per share). The free float could increase, due to two reasons. According to market information, the Romanian government is preparing to issue some 8% of the total shares of Petrom to the employees by the end of the year, in accordance with the privatization agreement of the company. The 8% of stake will be directly distributed to the company"s employees at a price equal to 0.0525 euro/share, the price received by the state from the Austrian OMV group at the time it took over Petrom. The employees of Petrom will pay EUR 235mn for a stake that is worth, at present, around EUR 750mn on the Bucharest Stock Exchange. Also, the Romanian government has plans to sell the remaining state-owned shares to the market or directly to OMV.

Currently, the majority shareholder in Petrom is OMV (51.01%), followed by AVAS (30.86%), Proprietatea Fund (9.89%) and BERD (2.03%). According to the Erste report, the sale of the employee shares is pretty likely this year. However, thecurrent political turmoil in Romania (after the presidential election and earlier elections) may hamper the process. The second opportunity is more likely to happen between 2008 and 2010. Other than this, there is also the possibility that both the EBRD and the Proprietatea Fund will sell their shares, increasing the float on the market.