PKN ORLEN’s consolidated financial results in Q2 2012

In Q2 2012, PKN ORLEN recorded:

• Over PLN 1.2bn in LIFO-based operating profit
• 9% increase in revenue (yoy)
• 2% increase in fuel sales (yoy)

The key factors affecting the Company’s Q2 performance included the over twofold rise in the model refining margin and Ural/Brent differential, the weakening of the złoty against the US dollar, and an 8% year-on-year drop in the refining segment’s sales on the back of the maintenance shutdown at ORLEN Lietuva. As a consequence, the Company posted over PLN 1.2bn in LIFO-based operating profit, up by PLN 463m on the same quarter of the previous year. Revenue amounted to PLN 28bn, up by 9% (yoy).  

Q2 2012 saw further weakening of demand for gasoline across all PKN ORLEN’s markets. Consumption of diesel oil also fell – except in Germany, where it grew by 2%. Despite these developments, PKN ORLEN recorded a 2% year-on-year increase in retail fuel sales – thanks to higher volumes on the Polish, German and Lithuanian markets. The increase can be attributed to the consistent implementation of a balanced pricing policy.

“Our pricing policy is working to the Company’s advantage. The retail segment’s performance has been improving steadily amid the challenging market conditions and there has been a growth in fuel sales, which means increasingly higher market shares for our products,” said Jacek Krawiec, PKN ORLEN’s CEO. “In Q2, the macroeconomic environment for our business was more favourable, as evidenced by our LIFO-based operating profit, which reached its highest level in six years,” added Jacek Krawiec.

The one-month maintenance shutdown at the Mažeikiai plant and the winding up of production at the inefficient Paramo refinery (following a drop in fuel consumption on the Czech market) significantly affected the refining segment’s sales, which were down by 8% relative to Q2 2011. The decrease was partly offset by higher refining margins and the depreciation of the złoty against the US dollar. The refining segment’s result was also driven by oil price fluctuations (inventory valuation was higher by PLN 955m year on year). As a result, the segment’s consolidated EBIT was negative at PLN -66m.

Higher PTA sales and the positive effect of lower PLN/EUR exchange rate were mitigated by a drop in sales of other products, as well as lower petrochemical margins. A 3% year-on-year decline in the petrochemical segment’s sales was related chiefly to the fact that the market was anticipating a price reduction on the back of depressed oil prices. In consequence, operating profit of the ORLEN Group’s petrochemical segment was PLN 379m, down by PLN 142m compared with the corresponding period of 2011.

As sales volumes continued to grow (up by 2% in the retail segment), the segment posted operating profit of PLN 252m, up by PLN 60m relative to Q2 2011, despite a further decline in fuel consumption, in some cases by as much as 8% (diesel oil in Poland). Other contributors to the result included higher fuel margins both in Poland and in Germany. The Company also posted higher non-fuel margins, as it continued to develop its non-fuel offering while investing in the network expansion: at the end of June, ORLEN operated as many as 708 Stop Cafe and Stop Cafe Bistro catering outlets, i.e. 73 more than a year before.

The sound liquidity position and safe level of financial ratios were maintained thanks to continued optimisation efforts. The Company’s debt remains at a safe level of PLN 8.2bn, in line with its strategy, with the financial leverage at 27.7%. After Q2 2012, the net debt/EBITDA ratio stood at 2.25. Operating cash flow was significantly affected by a one-off payment of PLN 0.5bn of corporate income tax following the sale of shares in Polkomtel, as well as by VAT settlement (PLN 0.3bn) related to the sale of a tranche of mandatory reserves in Q1 2012.
In June, PKN ORLEN floated its seven-year bonds issued in February 2012, with a value of PLN 1bn, on the WSE’s Catalyst debt securities market.

“On the one hand, the drop in oil prices came as a relief after many months of pressure on margins, but on the other hand, it compounded the effect of oil inventory revaluation on our performance,” said Sławomir Jędrzejczyk, ORLEN’s CFO. “Despite such irregularities, our liquidity position remains healthy and all the financial ratios are maintained at safe levels, allowing us to pursue growth-oriented projects” added Sławomir Jędrzejczyk.

PKN ORLEN is carrying on its shale gas appraisal work in areas covered by its exploration licences.
Based on the results of test drilling carried out last year in the Wierzbica licence area, the Company decided to drill a horizontal well at this location in Q3 2012. Concurrently, an analysis of samples collected from an exploration well in Lubartów is under way. In June, preparatory work in the Garwolin licence area was completed, while in July PKN ORLEN launched the drilling of the first well in the Province of Warsaw. In the entire 2012, the Company intends to drill between five and seven exploration wells, including up to two horizontal ones.

PKN ORLEN is also continuing work focused on the exploration for conventional natural gas and crude oil. As part of activities carried out in cooperation with Kuwait Energy on the Latvian shelf in areas covered by two exploration and production licences, an analysis of 3D seismic has been completed and possible drilling locations have been identified. The Company analysed the results of geotechnical tests of the seabed and signed a contract for a semi-submersible drilling rig, which will be placed within the Latvian economic zone of the Baltic Sea. In 2012, two exploration wells are to be drilled in the area. 3D seismic surveys have been scheduled under the exploration project carried out by ORLEN Upstream in the Lublin region.

In the Sieraków licence area, where PKN ORLEN has worked on a joint project with PGNiG, a site has been selected for another appraisal well. At present, preparations are under way to select a contractor to perform the drilling operations.

Preparations for the construction of a power unit in Płock are also well advanced. An analysis of concept scenarios has already been completed and a feasibility study has been prepared for the project with an expected capacity within the range of 450-600 MWe. Work on the Environmental Impact Report and connection of the unit to the utilities has also started. Simultaneously, the Company is in the process of selecting a contractor to connect the power unit to the national and in-house power grids. Gas supplies have already been arranged with Gaz-System. In turn, the construction of a gas-fired power plant in Włocławek has entered the final stage of selecting the general contractor. The construction of the plant is to start later this year, while its launch is scheduled for 2015.

Independent experts have confirmed PKN ORLEN’s standing, including the Company, as the only Polish business, in the prestigious list of the world’s 500 largest corporations compiled by the Fortune magazine. During the year, PKN ORLEN moved up 50 places in the list, to reach No. 297. The Company also received a special award for using modern Internet-based communication tools in its investor relations in the 5th edition of the "Złota Strona Emitenta" ("Golden Website of Listed Company") competition. The modern website launched by the Company with teenagers in mind, "Poczuj Chemię" ("Feel the Chemistry"), was awarded the title of "Pozytywista Roku 2011" ("Positivist of the Year 2011") by the Wokulski Foundation in the Science and Education category.