PKN ORLEN’s Consolidated Financial Performance in Q1 2011

The main drivers of the ORLEN Group’s improved performance were growing sales volumes across all business segments, as well as higher petrochemical margins. The results were also boosted by the higher valuation of inventories on the back of the rising price of crude. PKN ORLEN’s operating profit was at PLN 1.3bn, PLN 0.9bn up on Q1 2010. The ORLEN Group’s LIFO operating profit for Q1 2011 reached PLN 450m.

Given the continued high level of oil prices prevailing globally, the Company took measures to minimise the adverse effect of this situation and prevent the emergence of a demand barrier on the client side of the market. Those measures proved effective, with the aggregate sales volume in the first three months of 2011 growing by 0.5m tonnes over the Q1 2010 figure. In the same period, the volume of processed crude rose by 3%, to 6.4m tonnes.

Owing to the market pressure on fuel margins in the retail segment, retail sales’ EBIT decreased by PLN 30m relative to Q1 2010. Lower retail margins in Poland and the Czech Republic were partly offset by increased sales volumes on the Polish, German and Czech markets (up by 4% year on year), but the total EBIT on retail sales was down by PLN 49m (y-o-y) in Q1 2011, to PLN 26m.

- This was a particularly difficult quarter in terms of bringing our product prices in line with the macro-environment on the one hand and the customer expectations on the other. The reported growth in retail sales volumes shows that we have adopted the correct strategy - said Jacek Krawiec, PKN ORLEN’s CEO. 

- Despite volatile and challenging macroeconomic conditions, our performance is improving consistently. This is the result of our optimisation efforts undertaken during the recession, our ability to respond quickly to the changing business environment, and the investment processes which we continued despite the economic slowdown - Jacek Krawiec added.

Growth in the refining and petrochemical segment

To minimise the effect of the conversion units’ shutdowns in Q1 2011, PKN ORLEN increased the share of low sulphur oil in aggregate throughput and in the operating reserve. The outcome was a reduced level of the REBCO operating crude reserve, purchased, according to the LIFO method, in previous years at lower prices, which had a positive effect on the operating performance in the period. This inventory movement benefited Q1 results on a LIFO basis by some PLN 300m. The combined effect of other factors, including a PLN 30m (y-o-y) decline in depreciation/amortisation charges, was PLN 46m (y-o-y). The operating profit recorded by the refining segment for Q1 2001 was in excess of PLN 1bn.

Compared with the first three months of 2010, Q1 2011 saw a PLN 14m rise (y-o-y) in the refining segment’s capex, to PLN 146m. Key projects included the construction of a new K8 boiler at the Płock CHP plant, construction of the Claus II unit and the related infrastructure, modernisation and intensification of the HF Alkylation unit, completion of the technological start-up of VII Diesel Oil Hydrorefining Unit with related infrastructure, replacement of high-pressure components at the Hydrocracking Unit at PKN ORLEN SA, as well as replacement of a part of the reactor at the Fluid Catalytic Cracking Unit at ORLEN Lietuva.

The ORLEN Group’s petrochemical segment generated an operating profit of PLN 385m, up by PLN 280m on Q1 2010. This performance was driven mainly by higher petrochemical margins and larger sales volumes of olefins, polyolefins and plastics, with a relatively stable level of fertiliser sales.

The petrochemical segment’s capex in the first three months of the year was PLN 135m. The largest projects carried out in Q1 2011 also included, in addition to the PX/PTA plant, construction of an oxygen plant at Anwil and a system for the supply of energy carriers to the PTA Plant.

Debt maintained at a safe level

As at March 31st 2011, the ORLEN Group’s net debt was PLN 8.5bn, down by PLN 1.8bn year on year. Gearing was reduced from 47% in Q1 2010 to 33% in Q1 2011. The net debt/EBITDA covenant ratio, provided for in the loan agreements, remained at a safe level of 1.3. Thus, the objectives set in the Company’s long-term development strategy have been achieved.

- The good news for our investors is that in addition to improving the performance we managed to gradually reduce our debt, and now ORLEN can grow more rapidly and achieve even better operating results - said Sławomir Jędrzejczyk, ORLEN’s CFO.

UNIPETROL and ORLEN Lietuva in the black

The Unipetrol Group’s operating result grew PLN 33m to PLN 87m. Higher sales volumes and improved petrochemical margins contributed to a PLN 61m year-on-year increase in the result of the petrochemical segment. However, the result of the refining segment declined PLN 26m on Q1 2010, adversely affected by the macroeconomic factors, partially offset by a PLN 17m positive valuation of inventories on higher crude prices (y-o-y). The Unipetrol Group also recorded a further, 39% year-on-year growth in sales of high-margin Verva fuels. Corporate overheads were down by PLN 3m year on year, which was attributable chiefly to the continued implementation of the cost optimisation programme.

In Q1 2011, ORLEN Lietuva also posted positive results: its operating profit was up PLN 203m year on year, to PLN 100m, with improved performance seen in all operating segments. The operating result of ORLEN Lietuva’s refining segment grew PLN 200m over Q1 2010, which followed from a PLN 179m y-o-y increase in inventory valuation on higher crude prices, offset by the adverse effects of changes in the macroeconomic environment. Stronger fuel margins and stable sales volumes contributed to the improved result of the retail segment (up PLN 0.4m relative to Q1 2010). Cost optimisation measures implemented by ORLEN Lietuva helped to reduce corporate overheads by PLN 2m on Q1 2010.

New operating segments

PKN ORLN continued preparations for drilling work through its subsidiary ORLEN Upstream as part of a shale gas exploration project. The first borehole is to be drilled in Q4 2011. Recognising the potential of shale gas, ORLEN Upstream obtained another, sixth licence for exploration for unconventional gas deposits in the Hrubieszów area. In the energy segment, efforts were continued to prepare a project involving construction of a power plant in Włocławek, valued at approximately PLN 1.5bn. In February, PKN ORLEN received indicative bids for the construction of the power generation unit. Currently they are being analysed, and the potential contractor will be selected at the end of Q3 or the beginning of Q4 2011. In Q1 2011, work also commenced to adapt the CHP plant in Płock for the future environmental requirements provided for in the Industrial Emissions Directive with respect to emissions of sulphur dioxide (SO2), nitrogen oxides and dust. The Płock CHP plant is the largest industrial CHP plant in Poland.