PKN ORLEN’s Consolidated Financial Performance in Q2 2011

In Q2 2011, ORLEN Group’s performance was under pressure from adverse macroeconomic developments, including a 50% y-o-y rise in crude prices, decline of the model refining margin and the URAL/Brent differential by a total of USD 2.2/bbl, as well as the stifling effect of high fuel prices on the market demand. However, the second quarter of the year also saw a clear y-o-y improvement of petrochemical margins – up by EUR 74/t, to EUR 795/t, while higher sales volumes in the petrochemical and retail segments translated into a 1% rise in aggregate sales volumes relative to Q2 2010. Also, the higher valuation of inventories on higher crude prices was another positive contributor to the overall result.

The first half of the year was the time of key overhaul shutdowns at all Group companies. H1 2011 also saw completion of the Company’s largest technological project  in recent years, i.e. construction of the paraxylene and terephthalic acid production complex. 

As a result, the operating profit for Q2 2011 was PLN 1bn, compared with PLN 1.12bn in Q2 2010. The Group’s LIFO-based operating profit for Q2 2011 stood at PLN 770m, up 13% y-o-y.

The adverse effect of high fuel prices and the q-o-q deceleration of the GDP growth on all PKN ORLEN markets brought about a fall in demand for gasolines (from 2% in Poland to 13% in Lithuania), with a concurrent increase in demand for Diesel oil (a y-o-y increase of 5% and 12% in Poland and Lithuania, respectively).

In those distressed market conditions, the Company’s retail sales in Q2 2011 rose by 3% in volume terms (y-o-y), driven chiefly by the Company’s performance in Poland and Germany, with flat sales volumes on the Czech and Lithuanian markets. The effect of higher volumes was, however, partly offset by shrinking retail margins. As a consequence, the operating profit of the retail segment for Q2 2011 declined to PLN 192m,  from PLN 216m reported for Q2 2010.

The petrochemical segment delivered a very good performance, driven by higher sales of fertilisers and the launch of sales of terephthalic acid, which boosted sales volumes by 13%. Lower output caused by overhaul shutdowns and higher sales to PKN ORLEN’s own retail network contributed to a 2% drop in sales volumes by the refining segment relative to Q2 2010.

- Q2 2011 clearly demonstrated that although macroeconomic conditions have improved relative to the previous years, it is far too early to talk about stabilization. Good financial performance in Q2 2011 was primarily driven by the petrochemical segment and would not have been possible if the PX/PTA complex in Płock and Włocławek, the most advanced facility of its kind in Europe, had not been placed in service. We also took efforts to stimulate demand for fuels, while their prices, for reasons beyond our control, were under strong pressures on the back of rising crude prices and depreciation of the złoty. That is why numerous promotional campaigns were launched to meet, where possible, the expectations of Polish motorists and thus strengthen PKN ORLEN’s market position - commented Jacek Krawiec, PKN ORLEN’s CEO.

Strong performance in the petrochemical segment

Operating profit posted by the petrochemical segment of the ORLEN Group was PLN 521m, up by 327% year on year. Such a strong result followed primarily from the launch of sales of terephthalic acid, produced by the PX/PTA facility put in service in June 2011, as well as the growing sales of fertilisers. The main drivers of the segment’s good performance were higher sales volumes and the improved model petrochemical margin.

Refining segment’s performance reflected macroeconomic conditions

In Q2 2011, the refining segment generated PLN 510m in operating profit, relative to PLN 983m in Q2 2010. Adverse macroeconomic factors, such as the lower model refining margin and Ural/Bent differential as well as fluctuations of the złoty against other currencies, reduced the result by PLN 456m. The positive effect of changes in crude prices on inventory valuation declined by PLN 246m on Q2 2010, whereas overhaul shutdowns, and the resulting lower sales volumes, cut the operating profit by PLN 35m during the period. Concurrently, repurchase
of mandatory crude stocks at last year’s prices added PLN 211m to the Q2 2011 operating profit.

The LIFO-based operating profit of the refining segment in Q2 2011 was PLN 303m.

Further debt reduction

In Q1 and Q2 2011, ORLEN Group’s net debt was reduced by PLN 572m, and came at PLN 7.9bn as at June 30th 2011, which means that the debt stayed relatively flat on the end of 2010. The financial gearing was reduced to a safe level of 31% (y-o-y), in line with the debt ceiling of 30-40% set forth in PKN ORLEN’s development strategy.

The net debt/EBIDTA covenant ratio provided for in loan agreements remained at a safe level of 1.24.

- The deleveraging and efforts to improve our financial standing were among the key objectives of the long-term development strategy adopted by PKN ORLEN in 2008.  It is now evident that we have maintained a safe level of gearing and despite the unstable macroeconomic conditions seen in recent months, we have been consistently improving our financial standing - said Sławomir Jędrzejczyk, ORLEN’s CFO.

Orlen Lietuva’s profit growth, Unipetrol’s stable position

In spite of the challenging macroeconomic conditions, ORLEN Lietuva managed to record higher sales volumes in both its on- and offshore distribution channels. The company improved its operating performance by maximizing its processing capacities and maintaining high (74.7%) fuel yields. In Q2 2011, ORLEN Lietuva generated operating profit of PLN 4m, as opposed to a PLN 13m loss in 2010. In H1 2011, the company’s EBIT advanced by PLN 220m year on year.

In Q2 2011, the operating profit of the Unipetrol’s petrochemical segment grew by 56%. The company also reported record-high sales of Diesel oil and considerably improved sales of Verva high-margin fuels. However, the effect of higher volumes was offset by the difficult conditions in the refining sector as well as lower retail margins. The market environment had an adverse effect on Unipetrol’s operating profit which retreated year on year to PLN 30m.

Activities releasing capital

In the period under review, the Company continued its disinvestment activities designed to release capital through disposals of non-core assets.

In June 2011, PKN ORLEN executed a preliminary agreement on the sale of its entire 24.39% interest in Polkomtel S.A. to Spartan Capital Holdings Sp. z o.o. The pre-tax profit on the transaction will amount to PLN 2.5bn. The purchase of Polkomtel shares by Spartan Capital Holdings is subject to approval by the Office of Competition and Consumer Protection.

In the past quarter, the Management Board of PKN ORLEN made a decision to re-launch the process of selling Anwil shares. The Company prepares Anwil S.A. for separate disposals of two of its business lines: fertilisers and PVC. Advanced negotiations are also under way with a potential partner regarding sale of another tranche of mandatory fuel stocks.

New business segments

PKN ORLEN continues efforts to increase its presence in the upstream and energy  production sectors. A wide range of crude oil exploration activities are currently under way: seismic data acquired during the surveys carried out on the Latvian shelf of the Baltic Sea is analysed, work continues on the exploration well located in the licence area in the Polish Lowlands, and the data relating to the Lublin region is analysed and the process of selection of further drilling sites in the region continues. Moreover, in the Lublin region, seismic surveys were also continued on the shale gas licences. PKN ORLEN holds six licences for exploration of unconventional gas deposits. The Company seeks acquisition of further licence locations for its exploration activities related to both shale gas and tight gas.

The procedure of selecting the contractor for the gas-fired power plant in Włocławek is also in progress. In Q2 2011, an application was filed for a permit to construct a power-generating unit as part of the project; the construction is scheduled to start in 2012. The power plant will be placed in service in 2014, and the total capital expenditure on the project will reach approx. PLN 1.5bn.