PKN ORLEN Strategy for 2013–2017

The targets adopted under the new strategy include:

• 58% increase in average annual LIFO-based EBITDA, to PLN 6.3bn
• 44% rise in average annual operating cash flows, to PLN 5.6bn
• total CAPEX of PLN 22.5bn by 2017
• gradual growth in dividend payments, ultimately reaching 5% of the average annual market capitalisation
• net financial leverage below 30%

“There are no signs to indicate that uncertainty will stop to overcast the markets in the foreseeable future. Therefore, we have worked through various scenarios and forecasts for the coming years. Our final decision was to make conservative assumptions for the new strategy. I firmly believe that the targets we have set will adequately match the challenges ahead and enable successful exploitation of growth opportunities by the largest oil company in the CEE region. Financial security remains our overriding priority – nobody rational incurs debt in uncertain times; however, we can make plans for dynamic growth as our debt has been cut down by over PLN 8bn in the past few years,” said Jacek Krawiec, President of the PKN ORLEN Management Board.

Since the most critical moment in 2009, when the company’s financial leverage  reached its peak  (over 66%), PKN ORLEN's debt has been reduced by over PLN 8bn. In 2012, it has remained at a safe level below 30%.

“Having delivered on its 2008–2012 strategic objectives, PKN ORLEN may revisit its plans for growth, large-scale investment programmes, and - for the first time since 2008 - dividend payment. The company's financial recovery has laid a strong foundation for continued growth of the ORLEN Group in the years to come,” adds Sławomir Jędrzejczyk, Vice-President of the Management Board and Chief Financial Officer at PKN ORLEN.

The most important change compared to the previous strategy, which was approved in 2008, is the increase in capital expenditure on growth areas: the new strategy doubles the pool of funds available for investment projects, from PLN 7.7bn to PLN 15.1bn. In the next five years, the Group plans to spend a total of PLN 22.5bn on the necessary modernisation and growth programmes. The figure comprises PLN 6.1bn on projects in the crude oil refining segment, PLN 4.2bn in the power segment, PLN 5.1bn in the upstream segment (notably shale gas), PLN 4.7bn in the petrochemical segment, and PLN 2.4bn in the retail segment. An amount of PLN 6.9bn will be drawn from the pool depending on a project's economics and the company's financial position (including PLN 0.5bn on projects in the crude refining segment, PLN 1.2bn in the petrochemical segment, PLN 0.1bn in the retail segment, PLN 2.4bn in the power segment, and PLN 2.7bn in the upstream segment).

Funds needed to implement future projects will be obtained as income streams derived from further efficiency improvements and exploitation of competitive advantages. Achieving those targets will raise average annual EBITDA by as much as 58% relative to 2008–2012, to PLN 6.3bn. Average annual operating cash flows are forecast at PLN 5.6bn, up by 44%, which means an additional PLN 28bn between 2013 and 2017. Investment programmes will thus be neutral to the company's debt position, with financial leverage preserved at the safe level achieved in the past years.

At present, the most advanced development project is construction of a CCGT unit in Włocławek. The last of preliminary stages was completed yesterday upon selection of the General Contractor and obtaining the PKN ORLEN Supervisory Board's consent to enter into a contract with the company. The first gas-fired power plant for PKN ORLEN will be constructed by a consortium, including General Electric International Inc. operating through General Electric International S.A., Polish Branch, and SNC-LAVALIN POLSKA Sp. z o.o. The net value of the contract for construction of a 463MWe power plant is estimated at approximately PLN 1.1bn, while the value of the entire project is put at PLN 1.37bn. The new unit will cogenerate electricity and heat for the Anwil Group, PKN ORLEN and other entities. It is expected  that approximately half of its output will be sold on the market.  The unit is scheduled to come on stream in December 2015.

Change in the dividend policy
The stabilisation of the company's financial position allows it to assume that, starting from next year, a new policy for profit distributions to shareholders will be implemented; it provides for gradually increasing dividend payments. The dividend amounts will be based on the average share price in the previous year, and will depend on the achievement of strategic objectives, security of the company's financial position (financial leverage, net debt to EBIDTA ratio and rating) and macroeconomic forecasts. Ultimately, dividend is to amount to 5% of PKN ORLEN's average annual market capitalisation. Linking dividend to the average annual share price will make it independent of temporary price swings. Under this method, dividend is not related to net profit, which in the refining sector tends to be highly volatile and include non-cash items, such as revaluation of inventories and bank borrowings, thus failing to fully reflect the amount of cash generated by the company. The dividend yield provided for in the updated strategy is consistent with dividend policies applied by many European and global petroleum companies, whose dividend yields in the last year were within the range of 2.6% to 5.6%.

Maximising efficiency of the refining business
With state-of-the-art integrated production assets allowing PKN ORLEN to maintain its strong position on the competitive market, the refining segment continues to be the cornerstone of the Group's business. Efficiency improvements in the segment are oriented towards:
- increasing crude throughput by 2.2 million tonnes,
- increasing fuels yield to 77%,
- reducing energy intensity by 4 marks (Solomon energy intensity index).
Average EBITDA in the segment is projected to grow by PLN 700m a year.  The 2013-2017 investment plan for the refining business provides for higher expenditure on obligatory and modernisation projects (PLN 4.7bn), with a smaller pool of funds earmarked for development, high-profitability only, projects (PLN 1.4bn).

Development and further operational improvements in the petrochemical business
The assets and position of PKN ORLEN as the largest petrochemical company in the region and a leading producer of olefins and polyolefins, combined with forecasts of steadily rising demand for these products in the region, create potential for value growth, taking into account the economic cycle. The segment intends to leverage that potential by stepping up production at the key units, enhancing efficiency of olefin production by 7pp and boosting sales of polymers and PTA by approximately 20%. The achievement of these targets is expected to translate into an annual average increase in EBITDA (LIFO) of PLN 1.1bn. Following completion of the key investment project, the PTA unit in Włocławek, the segment will not require major development investments, therefore its capital expenditure will be lower than in the previous five years, yet still at a considerable level of PLN 2.7bn.

Increase in retail sales
In 2006–2012, the efficiency of the European network of PKN ORLEN service stations improved significantly – average fuel sales per station went up from 2.3m litres to 3.4m litres of fuel a year. The new strategy provides for further improvement in this area, assuming a target of 4m litres of fuel sales per station in 2017. The strategic objectives include also a 3pp increase in the company’s share in the home markets (Poland, the Czech Republic, Germany, Lithuania) and higher profits on sales of non-fuel products. These goals may be achieved with the support of, among other things, strong and recognisable brands. The structure of spending in the retail sales segment reflects a reduction in adaptation investments, the majority of which will be completed this year, and stronger financial involvement in expansion of the network, including construction of motorway stations. The total development expense over the next years will reach PLN 1.7bn.

Development of power and heat generation capacities
Based on the forecasts of growth in the demand for electricity in Poland, accompanied by a decrease in the domestic generation capacities, and given PKN ORLEN’s good position to expand its power generation assets, the company plans to make significant investments in this area by 2017. By that time, PKN ORLEN’s installed generation capacity will increase from the current 345MWe to 1400MWe. The planned location of the new cogeneration capacities close to industrial customers (Płock, Włocławek) is a vital point of the strategy as it guarantees continuous offtake of electricity and heat, thus ensuring sound economics of the planned investments. The upcoming projects envisage the use of technologies relying on natural gas, which is environmentally friendly and beneficial in terms of CO2 emissions. Execution of the planned investments in the power segment is expected to provide a stable stream of profits already in 2017.

Development of the hydrocarbon production segment – intensified work in shale gas licence areas in Poland
Gas consumption per capita in Poland is less than a half of the EU average. The unconventional gas deposits in Poland create a potential to bridge the gap thanks to domestic production, without the need to increase gas imports. In the coming years, the company may invest up to PLN 5.1bn in oil and gas exploration and production. As part of the basic pool of funds, amounting to PLN 2.4bn, PKN ORLEN intends to drill at least 50 wells in its licence areas, including production wells in the Lublin Shale licence area. The company has allocated additional funds of PLN 2.7bn to the hydrocarbon production segment. Depending on the results of work, this amount may be spent on drilling more wells or on acquisition of additional shale gas licences in Poland and potential M&A projects. The planned pace of investments in shale gas projects in Poland will permit production to be launched and operating profit to be generated already in the medium-term perspective, i.e. in 2016.