Record results for PKN ORLEN in 2005
Net profit in Q4 amounted to PLN 340 mn while EBITDA was PLN 1,027 mn. The Q4 results were affected by such factors as the setting up of a one-off reserve to cover the economic risk, restructuring, and a write-off relating to the updating of the value of liabilities in the amount of PLN 282 mn. Excluding those one-off write-offs, EBITDA would amount by PLN 1.3 billion, i.e. to a level above the average for 3 quarters of last year. The fourth quarter of 2005 (after the elimination of negative goodwill relating to the acquired assets of Unipetrol over the acquisition price in the amount of PLN 2,006 mn), yielded a consolidated net profit for PKN ORLEN of PLN 2,718 mn, i.e. an increase of almost 6 % over 2004. The net profit, including negative goodwill, was PLN 4,724 mn.
ROACE excluding negative goodwill equalled 13.5 %, while EBITDA amounted to PLN 4,791 mn. Fixed costs within the Group (excluding Unipetrol) went down by 3.8%, while labour costs dropped by 5% (employment at that time went down by 5.7%). As of the end of 2005 the implementation of the comprehensive cost cutting programme had yielded PLN 882 million of repeatable savings – i.e. 110% of the target value assumed for the years 2003-2005.
The major macroeconomic factors shaping the economic conditions in the oil sector in 2005 were: a rise in crude oil prices to $54.48/b, i.e a rise of 42% compared to 2004, a drop in refinery margins of 9% (y/y) to $5.12/b and an increase of 2% (y/y) in the Brent/Ural differential to $4.2/b.
Last year PKN ORLEN achieved an income 39% higher than in 2004, of PLN 42,804 mn. This result included a significant contribution from the consolidation of Unipetrol, increased sales volumes, and higher prices for refined and petrochemical products. The main source of income for the Group in 2005 was the refining segment – PLN 21,421 million. Good results were also attained in the retail segment, which recorded income growth of 19% compared to the previous year. Excluding the effect of the Unipetrol consolidation the income growth in this segment amounted to 15%. Income growth in the petrochemical sector (excluding Unipetrol) amounted to 10%.
The operating profit of the Group for the four quarters of 2005 amounted to PLN 5,060 mn, or PLN 3,054 mn after the elimination of the negative goodwill effect, which yielded a result PLN 384 mn higher than in 2004.
The operating profit for the four quarters of last year in the refining segment amounted to PLN 2,874 mn (including PLN 158 mn from Unipetrol) i.e. 27.7% more compared to the result for 2004. This segment was characterized by the highest growth dynamics resulting from increased sales volumes.
The refining segment recorded a 21% growth in sales of refined products (annual volume amounted to 11,061 thousand tons). In a comparison of results between 2004 and 2005, sales of fuel oil rose by 35%, petrol by 28%, and jet fuel by 25%.
Several investments were deployed in the refining area in 2005 in the Manufacturing Plant in Płock, including the modernization and re-launch of the Aromatics Extraction unit and construction of the installation for the FCC Naphtha desulphurization unit. Due to the modernization of the Aromatics Extraction unit it will be possible to use optimally the production potential for such aromatic compounds as: benzene, toluene and xylene. The desulphurization of FCC naphtha is a precondition for the manufacture of so-called sulphur-less petrol, i.e. fuel with a sulphur content of below 10 ppm, which will be required in the European Union starting from 2009.
There has been a visible and significant improvement in the retail segment results achieved through pro-effective measures. They have brought about growth in the effectiveness of the sales of fuel and non-fuel products. The implementation of the operating cost reduction program also contributed to the better result. Last year saw the effects of the implementation of the plan for the restructuring and development of the retail network in Poland. The sales channel management programme was implemented. Moreover support functions, such as finance, administration and investment, were centralized and made more efficient. In the context of the investment programme, 64 stations were modernized and 40 new facilities were constructed. Moreover two new station brands were introduced: under the premium offer – ORLEN stations selling VERVA fuels and, under the economy offer – BLISKA stations. As a result of the remedial measures undertaken, the decline of PKN ORLEN’s share in the retail market stabilized at a level of 27 %. The operating profit of the segment rose to PLN 105 mn (Unipetrol consolidation – PLN 15 mn) compared to a loss of PLN 6 mn in 2004.
In 2005 the petrochemical segment yielded an operating profit of PLN 895 mn (including PLN 105 mn from the Unipetrol consolidation). In 2004 the profit from petrochemical activities amounted to PLN 881 mn. These results reflect growth in the sales volume (compared to 2004) of approx. 28%, despite a significant drag on the results due to the results of the modernization standstill of the Olefin II manufacturing Plant in Płock. At the same time, due to implementation of the project – one of the most technologically complex investment tasks of recent years – the Group doubled its manufacturing capacity of ethylene and tripled its manufacturing capacity of propylene. Full utilization of these manufacturing capacities will take place in 2006.
Implementation of the three-year Comprehensive Programme of Operational Cost Cutting (KPRKO) ended last year. The effects of the programme exceeded the planned target of PLN 800 mn by over 10%, attaining the level of PLN 882 mn. In the fourth quarter of 2005 the effects of KPRKO implementation amounted to PLN 227 mn. As announced, the cost reduction programme will be continued through the OPTIMA programme.
Prospects
In 2006, PKN ORLEN plans to follow up with the measures provided for in the Value Creation Strategy for the Group. As regards the improvement of efficiency and investments, those measures will cover the further implementation of segment management which assumes the creation of 6 business segments in the whole Capital Group: Refining activities, Oil, Wholesale operations, Retail operations, the Petrochemical segment, and the Chemical segment.
Further proactive activities include the follow-up of the Partnership Program with Unipetrol a.s. and the preparation of the Czech group for the implementation of segment management principles, the follow-up of the cost reduction OPTIMA programme, and the extensive restructuring of ORLEN Deutschland. The following investment projects are envisaged in the area of production: the construction of an aromatics installation complex, HON VII installation and follow up of the construction of the FCC Naphtha hydrodesulphurization unit. The Group also plans to implement the subsequent stages of its plans for the development of the retail sector and the project for improving the security of the fuel distribution chain.
With a view to strengthening its position in the domestic market and expanding into new markets, PKN ORLEN intends to carry out further restructuring of the Capital Group. In the first quarter of 2006, work on the bio-fuel strategy will be completed. Plans also provide for the implementation of an operating plan for upstream activity. The Group wishes to remain an active participant in the merger and takeover market in the refining segment in Central, Eastern and Southern Europe.
The investment assumptions for 2006 provide for expenditure of PLN 2.7 billion. The investment structure in the breakdown to sectors is as follows: Refining activities – PLN 1,152 mn (including PLN 194 million for Unipetrol), Retail operations – PLN 475 mn (including PLN 25 mn for Unipetrol), Petrochemical segment – PLN 780 mn (including PLN 411 mn for Unipetrol), Chemical sector – PLN 215 mn (including PLN 69 mn for Unipetrol). Other tasks will require capital outlays of PLN 74 mn.
The macroeconomic forecasts for 2006 assume a growth in the refining margin (to $5.33/b), accompanied by a decline in oil prices (to $53.0/b) and in the Ural/Brent differential ($3.5/b). According to forecasts, the Polish zloty will strengthen against both the USD and EUR. An assessment of potential market changes compared to 2005 indicate a slight acceleration in the retail market growth rate (from 2.1% to 2.4%). A slowing of the increase in domestic liquid fuel consumption is forecast (from 1.3% to 1.1%) while it is also assumed that the demand for petrol will decrease while the consumption of fuel oil will rise.
Financial assumptions for 2006
• EBITDA growth > 15 % under comparable conditions1
• Fixed costs - below the 2005 level2
• CAPEX – approx. PLN 2.7 billion Press Office
