Petrom 1Q 2011 results - positive

Exploration expenditures (RON 114 mn) soared more than three times compared to 1Q 10, a consequence of increased activity. Production cost now stands at USD 16.28/boe in Romania. R&M suffered from the high costs of crude consumption, which are even more pressing in these times of high crude prices. Net special charges were recorded at the amount of RON 106 mn, mainly attributable to the closure of the Arpechim refinery. The inventory valuation (CCS effect) exerted a positive influence of RON 105 mn. Utilization rate now stands at 81%, only reflecting Petrobrazi. Retail business is in decline, caused by the high oil price and the unfavourable demand situation in SEE. G&P disappointed due to higher import quotas (38% in 1Q 11, compared to 29% in 1Q 10) and prices. Additionally, the Romanian Energy regulator ordered gas internal gas consumption to be calculated at the basket price, causing a negative effect for Petrom.

The significant appreciation of RON against USD at closing rates led to FX losses related to USD loans given by Petrom to its Kazakh subsidiaries. This led to a net financial result of RON -181 mn, substantially lower than in 1Q 10 (RON 14 mn).

Being an upstream heavyweight, Petrom managed to profit from the rising oil price. This concealed weak developments downstream and in gas. Nevertheless, we see the company in a good development towards modernization and better cost efficiency. The sale of the 9% government stake, the likely gas market liberalization and the start of power generation provide additional upside. We therefore expect a positive market reaction today and intend to confirm our 'buy' recommendation.

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