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Strategy

In the ORLEN Group’s Strategy as updated in 2018, Value Creation, People and Financial Strength remain the pillars of growth until 2022. The strategy update was required on account of the considerable macroeconomic volatility and the need to announce our quantitative targets for the next two years. Key development directions for the ORLEN Group in 2019–2022, as set out in the updated strategy, are to expand and enhance its petrochemical production, enter the low-carbon energy sector in Downstream, consistently grow retail sales, and sustainably develop its hydrocarbon E&P operations.

Based on its track record to date, the ORLEN Group has been consistent and successful in the pursuit of its strategic plans. The Company exceeded its average annual LIFO-based EBITDA target set for 2017–2018 by PLN 400m, posting an annual average LIFO-based EBITDA of PLN 9.2bn. The strong performance supported its regular dividend policy commitments, with a dividend of PLN 3 per share paid to shareholders both in 2017 and 2018. Financial ratios remained at comfortable levels, with the average annual financial leverage for 2017–2018 at 7.1%, far below the strategic cap of 30%.

Having delivered on its previous and current strategies, the ORLEN Group now enjoys the best ever position in its history and is excellently placed for further growth. In parallel with delivering its all-time best performance, over the past two years the ORLEN Group has also been engaged in efforts to solidify its competitive position in the long run. Key projects to boost future business growth embarked on in 2018 included the acquisition of a controlling stake in Grupa Lotos, launch of the petrochemicals expansion programme, preparations for offshore wind farm development and fast-tracking of the process to adapt the retail network to new mobility trends through the roll-out of alternative fuel distribution facilities. Over that time, work was also under way to reinforce ORLEN’s foothold in foreign markets – a tender offer was carried out to squeeze out minority interests and buy up 100% of Unipetrol shares in the Czech Republic, and initial steps were taken with a view to optimising logistics in Lithuania.

However, the rapidly changing market environment calls for continuous revision of our business ambitions. As the energy sector is facing enormous challenges across the globe, the ORLEN Group’s updated strategy embraces long-term trends in raw materials, social changes and environmental regimes. We place a strong focus on developing our existing assets and advancing innovation, which is to help us preserve a strong competitive advantage in the extremely dynamic environment. In addition, given the rapidly evolving business environment, we must adjust our planning horizon to market challenges. Therefore, in the updated strategy the ORLEN Group has changed the way of presenting its objectives and ambitions, and has committed to regularly revising and communicating its plans for future periods.

Value Creation, People and Financial Strength to remain the ORLEN Group’s growth pillars. A new addition is the Culture of Innovation, which will support the Group in responding to future challenges.

Value Creation

The ORLEN Group’s business plans for the Downstream segment are based around a continued strategic drive to consolidate its market position, achieve further growth and improve efficiency. As regards crude oil supplies, the Company will continue to diversify sources of this key feedstock. Plans include further development and extension of the value chain:

  • in petrochemicals – by investing in the construction of an aromatic derivatives complex, and in extending the olefin and phenol plants, and fertiliser capacities at ANWIL;
  • in the refinery business – by investing in visbreaking (to achieve a higher crude conversion rate), an HVO (hydrotreated vegetable oil) unit, and hydrocracking of vacuum residue in Lithuania (analysis of the pre-project phase based on the front-end engineering design and licence purchased);
  • in power generation – by preparing to enter offshore wind power generation.

In Retail, the strategy puts a focus on expanding the sales network, new additions to the retail offering and fostering closer ties with customers. Key objectives are to maintain the Group’s lead in its home markets, roll out new services and customer service channels, get ready to distribute alternative fuels, and improve customer satisfaction thanks to a flexible and personalised offering. These measures are expected to lift the non-fuel margin by more than 30% and contribute to the retail network’s organic growth with an addition of some 150 new stations by 2022.

In Upstream, the Group’s focus will be on quality assets and the most promising projects in Poland and Canada. The objective is to bring Upstream to a level where it can generate positive cash flows and operate as a financially self-sustaining business within the shortest possible time.

The Company’s CAPEX budget for 2019–2020 will average PLN 6.8bn annually, an increase of PLN 2.2bn over 2017–2018. Of that amount, PLN 4.9bn has been allocated to Downstream, PLN 0.7bn will be invested in Retail and PLN 0.7bn will be spent on Upstream projects. The target full-year LIFO-based EBITDA for the period will average PLN 10.3bn, up by PLN 1.1bn from 2017–2018.

People

Having reviewed the globally unfolding social trends, including the labour market evolution and expectations vis-à-vis the business sector, the Group has decided to further strengthen its human capital as a foundation underpinning its future sustainable growth. Key measures to be taken include a continuation of previous years’ efforts to adhere to the highest OHS standards, follow a zero accidents policy and improve staff qualifications, e.g. by consistently offering new professional advancement opportunities and improved access to training. All the strategic objectives will be pursued with respect for the natural environment as our paramount concern.

Financial Strength

An essential part of the strategy is to maintain the Group’s solid financial foundations, with diversified sources of funding and comfortable debt levels. Our objective is to keep financial leverage below 30% and, depending on the Group’s financial position, follow a policy of regular dividend payments. By keeping our financial ratios at safe levels, we will be able to seize potential inorganic growth opportunities as they arise.

Culture of Innovation

A vital vision of the updated strategy is to ensure long-term competitive advantages for the ORLEN Group by strengthening innovation both within and outside the organisation. Plans include setting up a Strategic Research Agenda, the Group’s own accelerator and CVC fund. The Group will also launch an in-house R&D centre, as a platform for networking ORLEN with science and business partners.

For 2019−2020, PKN ORLEN has adopted the following set financial and operating targets:

  • average annual LIFO-based EBITDA (before impairment losses) of PLN 10.3bn,
  • average annual CAPEX of PLN 6.8bn,
  • financial leverage below 30%,
  • net debt to EBITDA covenant below 1.5,
  • investment grade rating maintained,
  • regular dividend payments depending on the financial position of PKN ORLEN S.A.

A presentation of PKN ORLEN’s updated strategy for 2019–2022 is available from:
https://www.orlen.pl/EN/InvestorRelations/RegulatoryAnnouncements/Documents/2018_ORLEN_Group_Strategy_Upd.pdf

 

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