PKN ORLEN’s consolidated financial results for Q2 2016

LIFO-based EBITDA reached PLN 2.6bn despite lower downstream margins (down USD 2.9/bbl yoy) and a year-on-year decrease in sales volumes (by 5%), caused by scheduled maintenance shutdowns and emergency stoppages at the Steam Cracker and Fluid Catalytic Cracking units at the Litvinov plant in the Czech Republic. The adverse impact of these factors was offset by the weakening of the złoty against the US dollar (by 5%) and the euro (by 7%), as well as by better fuel and non-fuel margins in the retail segment. Relative to the same period of 2015, PKN ORLEN saw increased diesel oil consumption in all its home markets. Gasoline consumption increased in Poland and Lithuania, declined in the Czech Republic, and remained stable in Germany.

'Despite less favourable macroeconomic conditions and the maintenance shutdowns in Q2, we keep delivering good results. With this goal in mind, we continue to pursue our growth-oriented projects, which help us improve efficiency and diversify revenue sources. In recent months, we have decided to start a particularly important project in the very promising petrochemical segment. In June, we embarked on the construction of a strategic polyethylene unit in the Czech Republic. We are also satisfied to have received more than PLN 600m as part of compensation for damage caused by the accident in Litvinov,’ said Wojciech Jasiński, the CEO and President of the Management Board of PKN ORLEN.

Q2 2016 was another period of solid performance by PKN ORLEN’s retail segment, as it turned in a LIFO-based EBITDA of PLN 441m, one of the best on record, on a 4% y-o-y increase in total sales volumes. Over the period, PKN ORLEN expanded its market shares in the Czech Republic and Lithuania (by 1.5pp and 0.2pp y-o-y, respectively), while retaining its market position in Poland and Germany. The positive impact of higher (y-o-y) fuel margins in Poland, the Czech Republic and Germany, coupled with improved non-fuel margins across all markets, was offset by the persistent black market in Poland and increased operating costs incurred by service stations on higher sales volumes. PKN ORLEN was consistently developing its non-fuel offering, bringing the total number of Stop Cafe and Stop Cafe Bistro outlets as at the end of Q2 2016 to 1,622 (a y-o-y addition of 191), including 1,454 in Poland, 145 in the Czech Republic, and 23 in Lithuania.

The downstream segment’s LIFO-based EBITDA for the past quarter came in at PLN 2.3bn. The strong result was supported by a rise in petrol and PTA sales (up by 2% and 11% y-o-y, respectively), weakening of the złoty against the US dollar and euro, and partial compensation for damage caused by the Steam Cracker fire in Litvinov (over PLN 0.6bn in compensation received). These supportive factors were partially offset by a decline in model refining margin (down 19% y-o-y) and lower capacity utilisation (down 16pp y-o-y), including (-)6pp at Płock due to a shutdown of the diesel oil and petroleum tar hydrodesulfurisation units and the Hydrocracker, (-)49pp at Unipetrol mainly as a result of an emergency shutdown of the Steam Cracker and Fluid Catalytic Cracking unit, and (-)7pp at ORLEN Lietuva following a regular maintenance shutdown of the refinery. Key business development projects under way included the construction of a polyethylene (PE3) unit at Litvinov. The EUR 314m-worth project with an annual capacity of 270 thousand tonnes was on schedule.

In the power generation area, Q2 2016 saw continued construction and assembly work on the process facilities and administration building for the 596 MWe CCGT project in Płock. Installation of the equipment began, and the high and intermediate pressure sections of the steam turbine were laid on foundations. In Q2 2016, an environmental permit was issued for the 400 kV unit line. The Płock unit is scheduled to come on stream in Q4 2017. In the CCGT project run in Włocławek, Q2 2016 saw successful completion of grid tests performed with PSE and of steam tests performed with ANWIL, while work continued to optimise the operation of the steam and gas turbines. In addition, an annex was signed to the contract with the General Electric International/SNC-LAVALIN POLSKA consortium, which defines further steps related to defects detected during commissioning. In connection with the conclusion of the Annex till the mid-September 2016 the Power plant will be in hot commissioning, during which electricity and technological steam will be generated and sold to the customers. In the following months a shutdown is scheduled to conduct the repairs, repeated guarantee measurements and trial run, after which the Power plant will be commissioned by the consortium of companies to PKN ORLEN. Start of commercial operation of the Power plant is expected for the first quarter 2017.

In the upstream segment, PKN ORLEN is taking consistent steps in pursuit of its strategic objectives, including the segment’s sustainable growth. In Q2 2016, the Company completed the acquisition of 3D seismic data in the regions of Mazowsze and Lublin and was preparing to make further seismic data acquisitions in the areas where it cooperates with PGNiG. Drilling and production tests in the exploration well in the Edge project area were completed and preparations were made to drill further wells and develop the sites. A new licence for hydrocarbon exploration and appraisal in the Carpathian Mountains (Poręba-Tarnawa licence) was also obtained. As regards the Canadian producing assets, in Q2 2016 the drilling of two new wells (1.8 net) was commenced, three fracturing operations (2.8 net) were carried out, and two wells (1.5 net) were brought on stream. The average production in the period was 12.8 thousand boe/d. In July 2016, ORLEN Upstream and PGNiG signed a letter of intent on joint exploration, appraisal and production of hydrocarbons in new areas in Poland. The companies will cooperate in the Pomorski Basin, Lublin Basin, Przedsudecka Monocline, Gorzów Block, Carpathian Foreland, and Carpathian Mountains.

In the second quarter of 2016, the Company maintained its sound financial standing, reducing its net debt by PLN (-)0.4bn (q/q) with the financial leverage kept at the safe level of 19.8%, and generated operating cash flows of PLN 1.8bn. A EUR 750m eurobond issue was successfully completed and the bonds were listed on the Catalyst market in July 2016. At the end of Q2 2016, more than 80% of the Company’s financing was represented by retail bonds, corporate bonds and eurobonds, due on average in Q3 2020.

‘The Company’s liquidity position remains stable. We are also taking advantage of opportunities emerging on capital markets to diversify our financing sources and extend payment deadlines. In the past quarter, we also managed to increase our non-bank financing. To bring more activity to the Polish stock exchange, we decided to list the eurobonds also on the Catalyst market,’ said Sławomir Jędrzejczyk, the CFO and Vice President of the PKN ORLEN Management Board.

In May this year, PKN ORLEN signed a contract with Saudi Aramco for the supply of oil to PKN ORLEN’s refineries in Poland, the Czech Republic and Lithuania, providing for monthly supply volumes of approximately 200,000 tonnes. The contract term is from May 1st to December 31st 2016, with an option of automatic extension for successive years. As part of the efforts to ensure stable supplies, in June 2016 PKN ORLEN and Rosneft signed an annex to the 2013 contract for supplies of oil to Unipetrol, which will continue in effect until 2019, and entered into a contract with Tatneft for the supply of oil to the Czech refinery until 2017.