ORLEN Group strategy update for 2019-2022

Advancement and step-up of petrochemical production. Further integration of refinery assets. Commitment to low-carbon energy generation. Consistent retail business expansion. Sustainable development in upstream. Focus on a strong R&D base and innovation to support all business lines, with solid financial foundations. These are the key development directions for PKN ORLEN in 2019–2022, set out in the updated strategy approved by the Supervisory Board on December 20th. The Company also intends to keep distributing dividends, taking account of its financial position. Achievement of the set objectives means further strengthening of PKN ORLEN’s position in the competitive, demanding and fast-changing market.

The strategic development directions factor in the long-term implications of global megatrends, including the rising importance of environmental law, digitalisation of production, growing role of alternative fuels, and consumer behaviour shifts. The three pillars of the strategy – Value Creation, People and Financial Strength – remain unchanged. They will be complemented by Culture of Innovation, which will support PKN ORLEN in responding to future challenges. The Company’s 2019–2022 strategy update does not account for the acquisition of and integration with Grupa LOTOS. A new strategy for the ORLEN Group covering Grupa LOTOS will be published after a relevant clearance has been obtained from the EC and after the acquisition of a controlling interest in Grupa LOTOS has been completed.

PKN ORLEN has exceeded its average annual LIFO-based EBITDA target set for 2017–2018 by PLN 400m, reporting an annual average LIFO-based EBITDA of PLN 9.2bn. The stellar performance enabled consistent implementation of the dividend policy, with a dividend of PLN 3 per share paid to shareholders in 2017 and 2018. Financial ratios remained at safe levels, with the average annual financial leverage for 2017–2018 at 7.1%, which is far below the limit of 30% set in the strategy.

“As demonstrated by our financial results, PKN ORLEN has never been in a better shape before, which should please our shareholders. We have successfully launched a series of projects, including the petrochemical expansion programme and the acquisition of Grupa LOTOS, that will build a stronger PKN ORLEN and enhance its capabilities in the long term. We are aware of the enormous challenges facing the global energy sector, therefore our updated strategy takes account of long-term trends in raw material use, social changes and environmental law. We put a strong focus on expanding our existing assets and advancing innovation, which is to help us preserve strong competitive advantage in the extremely dynamic environment. Our business decisions are geared towards one goal: to build value and maximise our position in Poland and beyond,” says Daniel Obajtek, President of the Management Board of PKN ORLEN.

PKN ORLEN is entering the period spanned by its new strategic vision as Central and Eastern Europe’s largest business. It controls upstream assets containing 153 mboe of 2P hydrocarbon reserves, and operates state-of-the-art integrated refining and petrochemical assets capable of processing over 33m tonnes of crude oil annually. It is also a producer of electricity, generated largely in a low-carbon gas-fired process, and owner of the region’s largest retail fuel distribution network comprising nearly 2,800 service station sites with an aggregate daily volume of transactions in excess of 1.6m. Moreover, PKN ORLEN remains unchallenged as the most valuable Polish brand, and figures as the only Central and Eastern Europe’s name among The World’s Most Ethical Companies, the accolade awarded by the Ethisphere Institute.

Over the past two years, in parallel with delivering an all-time best performance, PKN ORLEN has been engaged in efforts to solidify its competitive position in the long run. Key projects to boost future business growth embarked on in 2018 included the acquisition of a controlling stake in Grupa LOTOS, launch of the petrochemical expansion programme, preparations for offshore wind farm projects and fast-tracking of the process to adapt the retail network to new mobility trends through the roll-out of alternative fuel distribution facilities. Over that time, work has also been under way to reinforce ORLEN’s foothold in foreign markets – the tender offer and squeeze-out of minority interests to buy up 100% of Unipetrol shares in the Czech Republic and a logistics optimisation project in Lithuania.

The Company’s CAPEX budget for 2019–2020 will average PLN 6.8bn annually, an increase of PLN 2.2bn over 2017–2018. Of that amount, PLN 4.9bn has been allocated to Downstream, PLN 0.7bn will be invested in Retail and PLN 0.7bn will be spent on Upstream projects. The target full-year LIFO-based EBITDA for the period will average PLN 10.3bn, up by PLN 1.1bn from 2017– 2018.

In Downstream, PKN ORLEN will continue to diversify the sources of crude feedstock supplies, entrench its market position and improve operating efficiency. Plans also include further extension of the value chain: in petrochemicals – by expanding the aromatic derivatives, olefins, and phenol capacities and investing in a fertilizer unit at ANWIL; in the refinery business – by investing in Visbreaking (towards a higher crude conversion rate) and HVO (hydrotreated vegetable oil). The Company is also preparing to invest in offshore wind power generation. There are plans to markedly broaden its R&D capabilities, e.g. in connection with the ongoing petrochemical business expansion. In Retail, PKN ORLEN will focus on expanding and upgrading the service station network, new additions to its retail offering and fostering closer ties with customers based on advanced technologies. In Upstream, the Group’s focus will be on quality assets and the most promising projects in Poland and Canada. The objective is to bring Upstream to a level where it can generate positive cash flows and operate as a financially self-sustaining business within the shortest time frame possible.

A vital vision of the updated strategy is to ensure long-term competitive advantages for the ORLEN Group by strengthening innovation both within and outside the organisation. The plans include setting up a Strategic Research Agenda, the Group’s own accelerator and CVC fund. The Group will also launch an in-house R&D centre, as a platform for networking ORLEN with science and business partners.

An essential part of the strategy will be to maintain the Group’s solid financial foundations: through diversified sources of funding and comfortable debt levels. The objective is to keep financial leverage below 30% and follow the policy of regular dividend payments, taking account of the Group’s financial position.