Q1’2006 – poorer results, good prospects for the next quarter

An important factor of the macro-economic environment shaping the economic conditions in the first months of 2006 was constituted by low quotations of refining margin (drop by 28% in relation to Q1’2005) and the Ural/Brent differential lower by 29% compared to same period last year. Those factors decisively affected reduction, respectively, of the Group’s operating result by PLN 138 million (differential) and PLN 133 million (crack margin). The petrochemical sector also saw a significant worsening of the business outlook, resulting in a drop of margins on ethylene by 19,6%, and on propylene by 10.4%, which brought about a decline in PKN ORLEN operating profit by PLN 130 million. Oil prices were higher by 42% than in Q1’2005, however, accompanied by declining margins, this factor failed to affect Company’s results.

Disadvantageous weather conditions and a tense situation in the earth gas market resulted in supply limitations, reducing the EBIT profit of PKN ORLEN by PLN 110 million.

The impact of macroeconomic factors has not been counterbalanced by significant increases in sales volumes attained in the frames of the implementation of operating measures. In the fuel wholesale sector consolidated sales increased by almost 33%, and in retail sector – by 22.5%.

There has been a significant rise in the sales of petrochemical products of ORLEN Group – by 131.6%. PKN ORLEN itself recorded sales volume increase by 11% in fuel wholesale sector, approx. 28% in the area of petrochemical products and 6.5% in retail fuel sales.

The level of the utilization of production capacities reached the level of 92.8%.

Internal factors favorably affected the result - a significant increase in the sales volume of Olefin and Poliolefin, higher wholesale and retail fuel sales and the first advantageous outcomes of the OPTIMA saving program yielded jointly the profit of PLN 123 million.

The Company consistently implements pro-effectiveness measures and effectively implements value-creating strategies. An analysis of the results for Q1’2006 under conditions comparable to 2004 confirms that financial assumptions for 2006 have been implemented on schedule. EBIDTA for Q1’2006 increased by 24.1% compared to Q1’2005, against the declared growth by 15%. Fixed costs excluding strategic projects dropped by 1%. CAPEX amounted to PLN 264 million. ROACE dropped by 7.5%, which was related to a change in the capital structure after purchase of Unipetrol assets.

In comparison to Q1’2005, the Group’s incomes in the first three months this year increased by 66.5% reaching the level of PLN 11 331 million, this is largely contributed to by Unipetrol consolidation. Operating profit was at the level of PLN 451 million and was higher by 12% - compared to Q4’2005 and lower by 43.5% compared to Q1’2005. In the refining sector the operating result amounted to PLN 139 million, in petrochemical sector - PLN 310 million, chemical – PLN 57 million, and in retail sector – PLN 6 million.

Lower level of operating profit resulted mainly from the effect of negative outcome of the drop in Ural/Brent differential and refining margins, losses recorded by ORLEN Deutschland and Unipetrol in retail sector, as well as a drop in retail per unit margins on fuels.

In the first three months this year ORLEN Group yielded the net profit of PLN 365 million –16% higher than the results of Q4’2005 and 45% lower than Q1’2005 result. As a result of a growth in variable costs caused by Unipetrol consolidation and higher raw material prices, operating costs of the Group rose significantly in comparison to Q1’2005 but dropped by over 14% compared to Q4’2005. A comparison of the first quarter of 2006 with the fourth quarter of 2005 shows the maintained cost discipline – a 19% drop in costs of external services and 8% drop in salaries costs.

In Q1’2006, implementation of the OPTIMA program was right on schedule and yielded PLN 54 million. The leader in savings is still the refining segment – PLN 20 million. Very good results in cost reductions were also recorded in thechemical segment – PLN 13 million.

Savings of PLN 4 million were yielded by the retail segment. Other initiatives yielded PLN 17 million. In a comparative listing of individual cost reduction areas the best result within the Group was recorded in procurement centralization - PLN 14 million and production – PLN 11 million.

Adverse outcomes of disadvantageous weather conditions and limitations of gas supplies most severely hit the refining and chemical segments, which is reflected in the net profit results for those areas. In the case of refining operations, shortages of gas and harsh winter reduced the operating result by PLN 110 million. A significant impact on reduction of this segment’s result by PLN 96 million also resulted from differences in values of stocks reallocated for processing (LIFO). An important factor were also growing costs of energy raw materials affecting costs of use of energy for own needs, which additionally reduced the result by PLN 120 million.

Harsh winter adversely affected the financial result of the chemical segment, mainly Anwil. This impact has been largely compensated by the increase in sales volume in the segment by over 86%, however Anwil lost PLN 17 million due to the products’ prices drop and increasing prices of raw materials. As a result the net profit in the segment reached the level of PLN 57 million.

The best results in Q1’2006 were yielded by petrochemical segment. Despite the disadvantageous business outlook – dropping margins on products, this area generated the profit of PLN 310 million, a result over 14% higher compared to Q1’2005. The segment’s growth dynamics was mainly influenced by consolidation of the Czech assets of PKN ORLEN, which yielded as much as PLN 135 million.

As regards fuel sales volume, Q1’2006 was successful for the retail segment. The sales on Polish stations rose by 6.5%, and in the entire Group - by 22%. The higher volume enabled a rise in the results by PLN 13 million. The consistently developed non-fuel operations added PLN 7 million. The German network of the group brought about the loss of PLN 4 million, but due to restructuring program currently implemented it is lower than in Q1’2005, when the loss amounted to PLN 36 million. Negative balance was also recorded by the Czech retail network Benzina – PLN 8 million.

The growing volumes, persistance in cost reduction and analysis of macroeconomic conditions and market trends in April and May this year allow for an optimistic outlook for results of Q2’2006 and implementation of business plans. Quotations of refining margins and Ural-Brent differential in the beginning of the second quarter this year were in aggregate higher by 57% compared to the first quarter this year.