Consolidated financial results of PKN ORLEN after four quarters of 2012
Consistent implementation of operational targets and strategic objectives despite volatile market conditions
In 2012, PKN ORLEN generated LIFO-based operating profit and net profit of nearly PLN 2.2bn. The ORLEN Group reported a high total volume of sales in excess of 35m tonnes, comparable with the volume seen in 2011, a 1% increase in crude oil throughput, and a 12% rise in sales revenue. The value of sales exceeded PLN 120bn, meaning that in 2012 every hour the Group’s revenue grew by PLN 14m on average. The most significant factors affecting PKN ORLEN’S macroeconomic environment in 2012 included: appreciation of the Polish currency against the US dollar and the euro; the level of total refining margins and URAL/BRENT differential – very volatile but higher than a year ago; the level of petrochemical margins; and stable crude oil prices. On the other hand, the Group’s performance was under pressure from declining consumption and the growing grey economy.
PKN ORLEN consistently worked on reducing its debt, and in Q4 2012 the financial leverage came down to 22% – a level that allows the Group to pursue major development projects. The update of PKN ORLEN’S strategy until 2017, announced in November last year, provides for growth directions and sets ambitious goals which, when met, will transform PKN ORLEN into an energy conglomerate resilient to changes in the economic climate. As part of the development projects carried out last year, four exploration wells in unconventional deposits were drilled, steps were taken to acquire two new licences held by Exxon Mobil, and the general contractor for the gas-fired power project in Włocławek was selected.
In 2012, PKN ORLEN reported:
- Record-high sales revenue of PLN 120bn
- High total sales volume of 35.2m tonnes
- LIFO-based EBITDA (before impairment losses) of PLN 5.1bn
- LIFO-based operating profit of nearly PLN 2.2bn (up PLN 2.5bn on 2011)
- Debt reduction to PLN 6.8bn
- Important one-off items in Q4 2012: PLN (-)700m impairment losses on non-current assets and PLN (-)513m revaluation of stocks.
The company’s performance in 2012 was driven primarily by macroeconomic factors. The model refining margin and Ural/Brent differential grew substantially year on year – by 3.2, to USD 7/bbl, the złoty strengthened against the US dollar and the euro, and sales volumes remained stable despite the shutdown at ORLEN Lietuva for a comprehensive overhaul. On the back of these developments, the company posted a PLN 2.9bn LIFO-based operating profit which, however, was reduced to PLN 2.2bn following recognition of PLN 0.7bn impairment losses on non-current assets (refining segment of Unipetrol). Despite that, the 2012 LIFO-based EBIT was up PLN 2.5bn year on year. The reportable operating profit was close to that seen in 2011. The strongest growth was reported by the petrochemical segment, fuelled by both improved sales and a significant rise in margins. The retail business’ operating result also came in very strong, up 46% year on year. Despite the marked decline in consumption in Poland and a pressure on margins in the Czech Republic, in 2012 the segment’s eroded margins steadily regained ground, mainly in Poland and in Germany.
In 2012, all of PKN ORLEN’s markets suffered from falling GDP and depressed gasoline consumption, while Poland also saw a decline in Diesel oil consumption. In light of these factors PKN ORLEN’s ability to maintain its total sales volume in 2012 relatively unchanged over the previous year attests to the effectiveness of the company’s strategy oriented towards increasing customers’ activity and stimulating demand.
“Our operating and financial performance in 2012 significantly improved over the previous year, despite the challenging environment. It allowed us to strengthen PKN ORLEN’s position, as evidenced by the 1st place in the EMEA Oil and Gas Exploration and Production category of the Platts 250 Global Energy Company Rankings,” said Jacek Krawiec, PKN ORLEN’s CEO. “I believe that the company’s current strength offers a solid base for successful implementation of the key development directions outlined in PKN ORLEN’s new strategy until 2017, which we have presented recently, and for a dynamic development of new business segments,” he added.
The robust performance of the petrochemical segment was attributable to both larger sales volumes and a marked improvement in margins. In 2012, the segment’s LIFO-based operating profit exceeded PLN 1.2bn, relative to a PLN 95m loss reported in 2011. The growth was seen in sales volumes of most of the segment’s key products, i.e. olefins and polyolefins, fertilizers and PCV.
A 2% increase in retail sales and a gradual margin recovery despite falling consumption on most of the home markets provided the foundation for improvement in operating profit, which after four quarters of 2012 came in at PLN 647m (up 52% year on year). On the one hand, the operating performance was undermined by the growing grey market and depressed demand for fuels and, on the other hand, it was supported by a steady margin expansion in Poland and Germany.
The refining segment’s operating profit before inventory valuation exceeded PLN 1bn, relative to a PLN 135m operating loss seen in 2011. That result came on the back of higher average margins and favourable PLN/USD exchange rates. The segment suffered a slight decline in sales (2%) caused mainly by lower consumption in Poland and the Czech Republic. Its performance was also adversely affected by impairment losses on the Unipetrol Group’s refining assets.
PKN ORLEN owes its strong liquidity position as at the end of 2012 to continued implementation of initiatives aimed at reducing debt and capital employed. Its debt fell to PLN 6.8bn, which resulted in further reduction of the financial leverage, to 22% in Q4. The net debt/EBITDA covenant stood at 1.58. As part of measures designed to reduce capital employed, PKN ORLEN executed two transactions of sale of mandatory stocks with a total value of PLN 2.4bn. The effects of optimization efforts were viewed positively by Fitch and Moody’s, rating agencies, which revised PKN ORLEN’s rating outlook from stable to positive.
“Last year’s financial performance clearly demonstrates PKN ORLEN’s operational flexibility and efficiency in a volatile market environment. We kept financial leverage below the safety limit declared in the strategy. Through the measures implemented to reduce capital employed we were able to release PLN 2.8bn. I believe that ever improving ratings and the consistent pursuit of strategic objectives will allow us to regain an investment grade rating in the near future,” said Sławomir Jędrzejczyk, the company’s CFO and Vice-President of the Management Board.
PKN ORLEN is preparing to take further steps in developing its new business segments, i.e. the upstream segment and the power segment, which are at the core of the Group’s updated strategy. Last year PKN ORLEN completed four shale gas exploration wells, including one horizontal and three vertical wells. Preparations for hydraulic fracturing and the launch of another horizontal well are underway. PKN ORLEN is also exploring for conventional oil and gas reserves. As part of those projects, an appraisal well in the Polish Lowland (Sieraków) was completed. The company is preparing to launch work in the Latvian Shelf, where the first well is to be drilled this year.
The most advanced growth-oriented power project, namely the construction of the CCGT plant in Włocławek, entered a new phase last year. In the fourth quarter a contract was executed with the general contractor, i.e. the consortium of General Electric International Inc. and SNC-LAVALIN POLSKA. The construction work is to be launched towards the end of the first quarter of this year. The net value of the contract for construction of a 463 MWe power plant is estimated at approximately PLN 1.4bn. The new unit will co-generate electricity and heat, and its customers will include the Anwil Group and PKN ORLEN. Approximately 50% of the energy to be produced in Włocławek will be sold to external customers. The unit is expected to be placed in operation in Q4 2015. With respect to the other power project, i.e. construction of a CCGT plant in Płock, alternative design solutions have been reviewed and the feasibility study for the power output of 450-600 MWe has been prepared. The environmental decision has also been obtained. At present, the economics of the project are being examined.
Last year PKN ORLEN was highly recognised by various Polish and foreign experts. In the prestigious Platts 250 Global Energy Company Rankings the company came at the top in the EMEA Refining & Marketing category. Among the world’s largest power sector companies, PKN ORLEN took the 83rd position. For five consecutive editions, we have remained part of the elite group of companies included in the RESPECT Index of the Warsaw Stock Exchange. The company also won the award for “The Best Annual Report 2011” in the enterprise category, and received the 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. For the sixth time, ORLEN was recognised as the most precious Polish brand in the MARQA’12 ranking and for the twelfth time won the Trustworthy Brand title in the survey conducted by Reader’s Digest. We also received Godło Jakości Obsługi 2012 (Service Quality Emblem 2012) in the service station category, and we were included in the TOP 100 of Poland’s Most Friendly Companies. In recognition of the very good working conditions offered to our employees, we also received the TOP Employers Polska certificate.
