PKN ORLEN Value Creation Strategy

The PKN ORLEN strategy derives from the Company’s new mission statement: “Aiming to become the regional leader we ensure long-term value creation for our shareholders by offering our customers products and services of the highest quality. All our operations adhere to 'best practice' principles of corporate governance and social responsibility, with a focus on care for our employees and the natural environment”

PKN ORLEN will build its firm value primarily by harnessing its existing potential to a maximum extent. In line with the new strategy, we will continue to implement improvements in efficiency and invest in selective projects offering high returns. As part of PKN ORLEN’s focus on its core businesses, we want to strengthen the Company’s presence in its key business areas in the relevant markets, while continuing to restructure our asset portfolio.

The successful integration of Unipetrol and extraction of the resulting synergies, upon approval of the transaction by the European Commission, represents one of the key priority for PKN ORLEN. In the long-term, this will provide us with a platform for further development in the Czech Republic.

Another issue given precedence in the new strategy is that of de-politicisation of PKN ORLEN through the introduction of transparent principles of corporate governance and implementation of merit-based human resources management.

The new strategy draws on a number of detailed analyses focused on, for example, the future outlook for the refinery and petrochemical markets. As a result, we have defined paths that PKN ORLEN must follow to achieve the status of the best enterprise in its class.

PKN ORLEN will monitor availability of expansion opportunities and assess fulfilment by them of strict requirements for downstream projects and, subject to additional conditions, also upstream projects, with due consideration given to the security of supplies.

Strategic partnerships and regional consolidation can be implemented as and when the goals of the current strategy are achieved or sooner, if it would speed up achievements of the strategy goals.

Igor Chalupec, President of the Management Board, commented on the new strategy adopted by the Supervisory Board:
“…even the title of the new strategy clearly shows what will be emphasised in the coming months and years. The new strategy is for the years until the end of 2009. Yet, in no way does this imply that if we succeed in meeting the defined objectives earlier we will sit down, fold our hands and relax. On the contrary, any additional time will be used to make headway in developing the Company further.”

Key financial targets defined in the strategy until the end of 2009*:

• EBITDA over PLN 6bn,
• ROACE 17.5%,
• CAPEX in 2005–2009 PLN 1.7bn,
• Financial gearing 30% 40%,
  
• Dividend payout ratio 30%.

Key areas of efficiency improvement assumed in the new strategy:

• Continuation of the cost-cutting programme;
• Group restructuring and implementation of segmental management (Polkomtel disposal, transparent corporate structure, continuous disposals of non-core assets, etc.);
• Retail network restructuring and optimisation by 2009:
• Preventing further decline in market share and subsequently winning a 30% market share (current share in the domestic retail fuel market is estimated at 28.6%)*,
• Increase the share of the non-fuel margin in the retail margin by 10 percentage points,
• Increase average blended throughput per site by 5% CAGR
• Orlen Deutschland should be either developed to reach critical mass or considered for disposal;
• Management aimed at shareholder value creation and introduction of a performance-based employee compensation system;
• New investment projects must be tested against stringent internal rules and criteria, to account, first and foremost, for the projected rise in demand for diesel and mid-distillates, and, later, the projected market demand for petrochemicals (subject to further analysis).
  
  

“…Yet we cannot implement this strategy without altering the Company’s organisational culture. As the President of the Management Board I am personally committed to all efforts aimed at improving our corporate culture and enhancing internal communications. For me, the implementation of a system of transparent management is a priority, as is the definition of and steadfast abidance by top ethical standards,” Igor Chalupec, President of the PKN ORLEN Management Board, added.

* Additional key financial and operational data:

• Projected crude distillation capacity utilisation in Płock: 96% in 2005;
• All financial data (if not otherwise pointed) on the ORLEN Group are compliant with the IFRS,
• Given 2004 macroeconomic assumptions: target EBITDA for 2009 – ca. PLN 7.9bn;
• Annualised depreciation and amortisation (2005–2009): PLN 1.7bn;
• For PKN ORLEN (parent company) CAPEX and annualised depreciation and amortisation (2005–2009): ca. PLN 0.9bn;
• Additional capital expenditure may amount up to PLN 2.75bn;
• CAPEX (PLNm) by year: 2005 – Refining, Wholesale, Logistics: 370, Retail: 480, Petrochemicals: 300; 2006 – Refining, Wholesale, Logistics: 580, Retail: 400, annualised for 2007–2009 – Refining, Wholesale, Logistics: 350, Retail: 350; additional development opportunities estimated at: 2006 – Retail: 60, Petrochemicals: 230; annualised for 2007–2009 – Refining, Wholesale, Logistics: 350, Retail: 60, Petrochemicals: 450; Capex for other areas in PKN ORLEN, of Unipetrol, Orlen Deutschland and PKN Orlen’s subsidiaries not included;
• Retail fuel market share is calculated as PKN Orlen’s retail fuel sales /total retail fuel sales, assumed total retail sales as 75 % of diesel and 100% of gasoline and LPG entire consumption;
• Brent price assumptions (USD/bbl): 2005 = 36; 2006 = 31.8; 2007–2009 = 29.6; Source: PKN ORLEN estimates based on external forecasts;
• Brent/Ural differential assumptions (USD/bbl): 2005 = 3.5; 2006 = 3.1; 2007–2009 = 2.95; Source: PKN ORLEN estimates based on external forecasts;
• Rotterdam refining margin assumptions (USD/bbl): 2005 = 3.43, 2006 = 3.62, 2007–2009 = 4.46; Source: PKN ORLEN forecast;
• Exchange rate assumptions (PLN/EUR): 2005 = 4.40; 2006 = 4.12; 2007 = 4.08; 2008 = 4.03; 2009 = 4.10; Source: average of forecasts provided by four banks;
• Exchange rate assumptions (PLN/USD): 2005 = 3.20; 2006 = 3.16; 2007 = 3.17; 2008 = 3.37; 2009 = 3.38; Source: average of forecasts provided by four banks,
• Long-term debt/EBITDA will range from 2.5x to 3.5x.