(Bloomberg) -- Poland’s Orlen SA is slashing its biggest petrochemicals investment after construction costs jumped more than sixfold, downsizing the project to one based largely on already built infrastructure. The stock dropped.
The decision comes amid a review by the state-controlled company’s new managers as they seek to rein in spending planned by their predecessors, who turned Orlen from a oil refiner and retailer into a sprawling national energy champion with side businesses such as running newspapers.
“In its original form, it was a monumental, unnecessary, badly prepared, wrongly estimated and completely irrational investment,” Chief Executive Officer Ireneusz Fafara told reporters in Warsaw on Wednesday. “We’ve chosen the best of bad available options.”
The Olefin III project has ballooned into a 51 billion zloty ($12.6 billion) “trap” that is no longer tenable, the Plock, Poland-based company said in a regulatory filing. The facility was initially seen costing 8.3 billion zloty.
Orlen will use already-built infrastructure to pursue a new ethylene unit, which is set to start operating no earlier than 2030. The new investment will cost an additional 21.4 billion zloty, including financing expenses and will generate earnings before interest, tax, depreciation and amortization at 550 million zloty to 800 million zloty annually.
‘Limited’ Returns
Orlen shares dropped as much as 3.3% and traded 1.9% lower as of 10:48 a.m. in Warsaw, the biggest daily slide since Nov. 19. The planned internal rate of return on the new project is “limited,” according to Michal Kozak, an analyst at Warsaw-based broker Trigon Dom Maklerski SA.
The new management of Orlen, appointed after the 2023 parliamentary elections, has pledged to respect minority shareholders as well as focus on profitability and core operations, making a clean break with its predecessors who were routinely accused of focusing on political goals.
Nevertheless, Orlen’s market valuation has shrunk by a quarter since Fafara was picked in April. The selloff has mainly stemmed from a prolonged uncertainty over the future of costly investments as well as uncertainty over dividends.
The firm plans to publish its new strategy in January.
(Updates with costs of new project, shares, CEO and analysts comments from the first paragraph.)
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