PKN ORLEN's consolidated financial results for 3Q2020
29-10-2020   
SOLID FINANCIAL PERFORMANCE DELIVERED BY ORLEN GROUP DESPITE EXTREMELY CHALLENGING MARKET ENVIRONMENT

Amid the historically harshest macroeconomic headwinds for the refining industry, PKN ORLEN delivered solid financial performance. The Company’s LIFO-based EBITDA for Q3 2020 came in at PLN 2bn and its net profit reached PLN 0.7bn. This was mainly an effect of the invariably strong earnings delivered by power generation and retail, which overall lifted the LIFO-based EBITDA by nearly PLN 0.6bn year on year.

The power generation segment recorded LIFO-based EBITDA of PLN 1bn, a steep year-on-year improvement of 98%. Almost 75% of its total electricity output came from renewable and gas-fired sources. The retail segment also posted over PLN 1bn in LIFO-based EBITDA, a year-on-year increase of 12%. Solid results despite the challenging macroeconomic climate were also posted by the petrochemical segment, which added PLN 0.5bn to the Group’s LIFO-based EBITDA for the third quarter.

The Group enjoyed a stable liquidity position by diversifying the sources of capex funding to upgrade its refining assets, expand and advance its petrochemical assets, deploy innovative solutions in retail sales and develop low- and zero-carbon generation sources. PKN ORLEN was Central Europe’s first oil refiner to commit itself to a target of reducing CO2 emissions from its existing downstream assets by 20% and an ambition to achieve a zero carbon footprint by 2050. One source of funding for the programme will be ESG-linked bonds, which PKN ORLEN expects to issue already in 2020.

“The well diversified business is what allows PKN ORLEN to deliver consistent financial results and continue on a path of sustainable development. We are staying abreast of changing trends through intensive development of our petrochemical, retail and – especially – power generation segments. That last business area, which has undergone some major changes over recent years, was a huge contributor to the resilience of PKN ORLEN’s performance in this challenging quarter. This confirms that the acquisition of the Energa Group was a good move, supported by a sound business rationale. In order to realise full synergies within the Group, we are now looking to buy up all the shares in Energa. This will allow us to fully integrate the assets and generate added benefits for our shareholders,” says Daniel Obajtek, President of the PKN ORLEN Management Board.

For Q3 2020, PKN ORLEN reported:
- PLN 23.9bn in revenue
- PLN 2.0bn in LIFO-based EBITDA
- PLN 0.7bn in net profit

As the Energa Group’s data was consolidated within the ORLEN Group, earnings booked by its power generation segment for the third quarter increased by PLN 486m. As at the end of the third quarter, the ORLEN Group had a total installed generation capacity of 3,246 MWe, of which 1,436 MWe was attributable to Energa.

PKN ORLEN’s retail segment turned in a record high LIFO-based EBITDA of PLN 1bn, driven by a rise in fuel margins on the German and Polish markets, with margins on the Lithuanian market broadly unchanged. The strongest growth in fuel margins was recorded in Germany, with comparable growth rates seen in the Czech Republic and Poland. Compared with the same period of the previous year, the number of Stop Cafe/Star Connect food service outlets (including convenience stores) grew by 73, to 2,181 locations at the end of September. These included: 1,710 Stop Cafes in Poland (including 592 convenience stores), 310 Stop Cafes in the Czech Republic, 131 Star Connect locations in Germany, 28 Stop Cafes in Lithuania, and 2 Stop Cafe outlets in Slovakia. In parallel, the retail segment was being developed through innovative solutions. In August 2020, PKN ORLEN launched another leading-edge drive-through format in Europe, where customers can make purchases without getting out of their vehicles along the Wrocław – Poznań route. Two more such stations are due to be opened in Warsaw and Wrocław. As a result of an effort to adapt the ORLEN Group’s European network to alternative fuel sales: in the third quarter, there were 182 alternative refuelling points, a year-on-year addition of 90, including: 81 in Poland, six in the Czech Republic and three in Germany. PKN ORLEN announced the construction of hydrogen refuelling (HR) points at two Benzina stations in the Czech Republic (in Prague and Litvínov) by the end of this year, to be made available to motorists in 2021. There are also plans to open more HR stations – in Brno, Plzeň and Prague, along the D10 motorway. These projects will support the ORLEN Group’s commitment to achieve carbon neutrality by 2050.

The refining segment delivered a LIFO-based EBITDA of PLN (-) 370m, but the LIFO-based EBITDA delivered by the Płock refinery, classified as a Super Site according to WoodMackenzie, was positive at PLN 18m. Factors weighing on the result included contracting margins on light and middle distillates, a USD 1.1/bbl drop in the Brent/Urals differential, and a strengthening of the PLN against the USD. Among other adverse factors were lower sales volumes of gasoline, diesel oil and JET fuel. The refining performance was supported by an uplift in margins on heavy fractions and a lower cost of internal consumption following a decline in crude oil prices. The capacities of all the refineries were utilised in 93% on an aggregate crude throughput of 8.2m tonnes. The Płock refinery processed 4.2m tonnes of crude oil – a volume comparable with that recorded in the same period last year – despite the market pressure on refining margins.

In the petrochemical segment, sales volumes in Q3 2020 remained flat year on year, at 1.3m tonnes, which translated into a LIFO-based EBITDA of PLN 502m, of which PLN 106m was delivered by ANWIL. In the period under analysis, sales in Poland rose by 7% (y/y) as a result of higher sales of olefins, fertilizers and PVC, while in Lithuania sales soared by 110% (y/y) driven by an expanded market share. A decrease of 16% (y/y) was recorded only in the Czech Republic, mainly as a consequence of a slump in demand from the automotive and construction sectors and the effect of maintenance shutdowns.

The upstream segment generated a LIFO-based EBITDA of PLN 44m. In Poland, in Q3 2020 work on the development of the Bystrowice field (Miocene project) entered the construction and assembly phase. Further progress was made on the design work and formalities related to the development of the Bajerze and Tuchola fields (Edge project). At the end of Q3 2020, drilling of the Grodzewo-1 well (Płotki project) was also commenced. Preparations and 3D seismic data acquisition were completed for Koczała-Miastko as part of the Edge project. In addition, the interpretation of 3D seismic data for Wilcze (Edge project) and Brzezie-Gołuchów (Płotki project) was initiated, while regional 2D seismic profiles under the Karpaty project were being processed. In Canada, at the end of Q3 2020 preparations were accelerated and work commenced on the fracking of two wells in the Kakwa area.

The Group maintains a stable liquidity position, diversifying its financing sources. PKN ORLEN secured funds of up to EUR 1.75bn under a working-capital revolving facility contracted in late July 2020, which may be applied toward its capital investment projects, including development of low- and zero-carbon generation sources, upgrades of refining and petrochemical assets, and implementation of retail innovations. By the end of 2020 PKN ORLEN plans to issue bonds which value may reach PLN 1bn. One of the considered elements is the introduction of ESG elements enabling issue of bonds based on the assessment of the issuer's commitment to sustainable development and corporate responsibility. The strategic financial ratios also remained at safe levels. Including the effect of the Energa Group acquisition, the net debt to LIFO-based EBITDA ratio at the end of the third quarter of 2020 was maintained below the cap of 1.5x set in the Group’s strategy. As at the end of the period, financial leverage was 28.4%, also below the strategy limit of 30%.

Specific targets and implementation tools were unveiled by PKN ORLEN in early September 2020 as part of its ambition to achieve a zero carbon footprint by 2050. The Company pledged to reduce CO2 emissions from its current refining and petrochemical assets by 20% and from power generation by 33% per unit of output by 2030. These targets are based on the business pillars in which PKN ORLEN already has extensive experience and a strong market position, including energy efficient production, zero-carbon power generation, fuels of the future, and green finance.
PKN ORLEN strives to achieve maximum environmental neutrality, energy efficiency and superior safety standards. Its expanding ESG competencies are reflected in the 2020 rating upgrade from Sustainalytics. PKN ORLEN ranked fifth among 86 Oil & Gas Refining and Marketing companies (in the Refiners & Pipelines category). The Company was promoted from the high risk category in 2019 to the medium risk category, which means it is at medium risk of experiencing financial impacts from ESG factors.

In the three months to September 30th 2020, PKN ORLEN’s key expansion and innovation projects were progressing on schedule. Nearing completion was the construction of the Research and Development Centre in Płock, which will support the implemention of proprietary technologies and provide a modern platform to link PKN ORLEN with science and business partners. Earthworks were under way on the Visbreaker project, which, once put on stream in late 2022, will help increase the yield of high-margin products: gasoline and diesel oil. The Polyethylene 3 unit at the ORLEN Group’s Czech plant in Litvínov reached full capacity. Also, an environmental impact report was filed and an engineering design contractor was selected for PKN ORLEN’s offshore wind farm project in the Baltic Sea.

Acquisition processes were also continued, designed to expand PKN ORLEN’s business and enhance its competitive position in the region, wider Europe and globally. Having obtained relevant clearance from the European Commission in July, in August PKN ORLEN and LOTOS Group signed a memorandum of understanding with the Polish State Treasury on the acquisition of shares and control of the Gdańsk-based group by PKN ORLEN. A negotiation team was assembled for the purpose, tasked with developing the final transaction scope and structure. After the PGNiG acquisition process was launched on July 14th, work was under way to apply to the European Commission for approval of the concentration. Concurrently, a due diligence process was being carried out at the target, pursuant to a confidentiality agreement signed between both parties in the third quarter of this year. A tender offer for 100% of Energa Group shares was announced during the quarter, with the tendering period scheduled to end November 20th 2020.

 
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