PKN ORLEN’s Q3 2013 Consolidated Financial Results

In Q3 2013, PKN ORLEN:

• posted a LIFO-based EBITDA of PLN 0.8bn,
• reported growth in retail volumes across all markets,
• signed an agreement to acquire TriOil Resources Ltd., a Canadian company holding production assets in Canada.

The Company's Q3 2013 financial performance was mainly driven by macroeconomic factors, including a sharp fall in the refining margin and the Brent/Ural differential (down USD 5.6 USD/bbl year on year), the appreciation of the złoty on the US dollar, and retreating sales volumes for refining and petrochemical products.

The adverse impact of these macroeconomic factors was partially offset by stronger retail sales across the markets, as well as improved margins on fuels and non-fuel products. While appreciable and steady rise in the GDP of Germany, the Czech Republic and Lithuania drove up diesel oil consumption on those markets, diesel demand in Poland fell, with the grey market for the product remaining strong. The German market also saw a rise in gasoline consumption. The petrochemical segment’s margins expanded and this improvement  was further supported by the złoty's depreciation against the euro. As a result, the Company turned in LIFO-based EBITDA of PLN 0.8bn.

“Despite severe macroeconomic pressures, PKN ORLEN keeps delivering stable financial results. Ath the same time, we consistently pursue our 2013-2017 strategy by investing in power generation assets and the upstream business. The commencement of the acquisition process in Canada, the payment of dividend to shareholders for the first time since 2007, and the reduction of our debt to below PLN 5bn, a level not seen since 2005, were all key achievements this past quarter,” commented Jacek Krawiec, President of the PKN ORLEN Management Board.

Deterioration of refining margins and the year-on-year decline of the Brent/Ural differential, which slid to its lowest since 2002, were the key factors with a bearing on the performance of the refining segment, which in Q3 posted LIFO-based EBITDA at PLN 52m. Further, unwelcome market developments in the Czech Republic and on ORLEN Lietuva's markets, coupled with the periodic maintenance shutdown (every 4 years) at the Kralupy refinery were the main forces behind a PLN 17m year-on-year decline in sales volumes’ contribution to the segment’s result. It was only partly offset by a marked improvement in sales volumes on the Polish market, as well as improved capacity utilisation and fuels yields at PKN ORLEN.

The Company also consolidated its foothold in the retail business, despite continually shrinking fuel consumption in Poland. The retail segment's Q3 LIFO-based EBITDA of PLN 450m, a PLN 90m year-on-year improvement, was supported by stronger fuel margins on the Polish, German and Czech markets. The retail segment also enjoyed a PLN 17 year-on-year rise in non-fuel sales. In this respect, the Company is rapidly expanding its Stop Cafe and Stop Cafe Bistro networks, with 95 new outlets opened all over Poland throughout Q3.

The petrochemical segment delivered a year-on-year improvement in LIFO-based EBITDA of PLN 60m, driven primarily by a wider petrochemical margin. A shift in the sales mix prompted a positive effect, despite a 6% drop in total sales by volume (yoy), as higher polymer and PVC sales volumes, combined with record-breaking PTA sales, helped offset Unipetrol's lower petrochemical output and a decline in fertiliser sales following unscheduled downtime at Anwil and Spolana.

The ORLEN Group continued its efforts to retain a sound financial standing, despite prevalent macroeconomic headwinds. Thanks to steady deleveraging effort, debt fell to PLN 4.8bn at the end of Q3 2013, taking the leverage to 17.8%. During the quarter, the Company paid out dividend of PLN 642m, or PLN 1.5 per share, with a dividend yield on the average 2012 PKN ORLEN share price at 3.8%.

“We have repeatedly stressed that our priority is to maintain financial health. Our consistent efforts to deliver stable results and a reasonable approach to CAPEX planning have been noted by Fitch Ratings, which – after four years – returned PKN ORLEN to investment grade territory with a BBB- rating and a Stable outlook,” said Sławomir Jędrzejczyk, Vice-President and CFO of PKN ORLEN.

A landmark event in the Company's upstream development was the conclusion, through its subsidiary ORLEN Upstream, of an agreement initiating the TriOil Resources Ltd. acquisition process. The Canadian company, listed on the Toronto Stock Exchange, carries with it a portfolio of oil and gas producing assets of potentially around 20 million boe of both proved and probable reserves. By the end of June 2013, the company had drilled 179 gross wells and was seeing daily production volumes close to 4.1 thousand boe. An essential factor here is the Canadian company's unique know-how, which upon consummation of the transaction will be transferred to ORLEN Upstream, facilitating its development of the technology needed, for instance, to extract shale gas. The approximately PLN 563m acquisition could be closed in November 2013, subject to approval of the transaction by at least two-thirds of votes cast by TriOil Resources Ltd. Shareholders represented at the company’s general meeting.

In parallel with the acquisition process, the Company has maintained an unwavering focus on domestic exploration for both conventional and unconventional oil and gas. As part of Q3 2013's progress on the Lublin Shale project, one vertical well was drilled within the Wierzbica licence, and work begun in the previous quarter within the Lubartów licence was brought to completion. In addition, new 2D seismic was acquired as part of the Mid-Poland Unconventionals and Hrubieszów Shale projects. In the period, the exploration for oil and gas from conventional deposits included analysis of well data from the Sieraków and Kambr projects, as well as acquisition of new 2D seismic and continued preparations for the initial spudding of the Karbon project.

Q3 2013 also saw ongoing work on the Company's power generation projects. Work on the construction of a 463 MWe combined-cycle co-generation gas turbine (CCGT unit) continued in Włocławek, where all key components are already being manufactured and the connection agreements with PSE Operator and GAZ–SYSTEM are moving ahead on schedule. The concept for a similar project in Płock is also being worked up. During the quarter bids were placed for construction of a CCGT combined heat and power plant, to be built on an EPC basis, and for a long-term service agreement, and the contractor selection process was begun. A final decision on whether to proceed with the project will be made based on the findings of the project's economic feasibility study.