PKN ORLEN moving forward with its strategic growth projects, while delivering solid performance and maintaining sound liquidity

During Q2 2020, further progress was made on the Group’s strategic capital projects, including the construction of a visbreaker unit designed to improve the Płock refinery’s operational efficiency. Additionally, the period saw completion of the main part of the largest petrochemical project ever in the Czech market – the polyethylene unit, and continued intensive work on the offshore wind farm project to be built in the Baltic Sea, which led to the filing of an environmental report on July 23rd 2020.

On April 30th 2020, PKN ORLEN closed the purchase of an 80% equity stake in the Energa Group, engaged in the generation, sale and distribution of electricity and heat. It was also negotiating with the European Commission on the intended acquisition of its main peer Grupa LOTOS, with the deal conditionally cleared on July 14th 2020. That date marked the kick-off of an integration process with the incumbent gas supplier PGNiG Group, as a letter of intent to that end was signed between PKN ORLEN and the Polish State Treasury.

“The financial performance we delivered, despite the challenges posed by the coronavirus pandemic, will allow us to go through with our growth projects and acquisition plans. Given our recent acquisition of the ENERGA Group, PKN ORLEN’s liquidity remains sound. ENERGA’s operating earnings from the business are stabilising the results of the entire ORLEN Group which confirms that our vision of building a multi-utility business is the right path to follow. Operating within a volatile environment and challenging industry, we need to diversify our revenue streams and consolidate our position not only in Europe, but globally. To that end, we are consistently pursuing further M&A plans to acquire LOTOS Group and the PGNiG Group. We realise that only an integrated approach can ensure a competitive edge to all the Group entities, with added benefits for our Shareholders, Customers and the Polish economy,” says Daniel Obajtek, President of the PKN ORLEN Management Board.

For Q2 2020, PKN ORLEN reported:

• PLN 5.7bn in LIFO-based EBITDA, up PLN 3bn year on year
• PLN 4bn in net profit, up PLN 2.4bn year on year
• PLN 17bn in revenue

The refining segment delivered a LIFO-based EBITDA of PLN 614m. It was achieved despite falling margins on gasoline, diesel oil and JET. The refining performance was supported by an uplift in margins on heavy fractions, a lower cost of internal consumption following a drop in crude oil prices , a weakening of the złoty against the US dollar, and fair value remeasurement of inventories as the prices of crude oil and petroleum products went up in Q2 2020. The capacities of all the refineries were utilised in 71% on an aggregate crude throughput of 6.2 million tonnes, with sales at 5.2 million tonnes.

The petrochemical segment’s LIFO-based EBITDA came in at PLN 251m, of which PLN 63m was attributable to ANWIL and PLN 72m to PTA. Over the second quarter, the petrochemical capacities were utilised in 73%, reflecting a round of regular maintenance shutdowns.

The power generation segment recorded LIFO-based EBITDA of PLN 749m In the second quarter, almost 80% of the total electricity output came from renewable and gas-fired sources. PLN 260m of the power generation’s financial result was contributed by the ENERGA Group. As at the end of the second quarter, the ORLEN Group had a total installed generation capacity of 3,253 MWe, of which 1,443 MWe was attributable to ENERGA.

The retail segment booked LIFO-based EBITDA of PLN 726m, driven by increase of fuel margins on Polish, Czech and Slovak markets with comparable level of margin on Lithuanian market. The highest dynamics of fuel margin growth was achieved in Germany, with comparable dynamics in the Czech Republic and Poland. Compared with the same period of the previous year, the number of Stop Cafe/star Connect food service outlets (including convenience stores) grew by 93, to 2,162 locations at the end of June. These included 1,701 Stop Cafes in Poland (including 552 convenience stores), 308 Stop Cafes in the Czech Republic, 26 Stop Cafes in Lithuania, and 127 star Connect stores in Germany. In line with the strategy, PKN ORLEN’s European service station network is being adapted to sell alternative fuels. At the end of the second quarter, electric vehicle chargers were available at 86 stations, including 58 in Poland, 21 in the Czech Republic and 7 in Germany. This represents a year-on-year increase by 56 chargers, including 45 in Poland, 6 in the Czech Republic and 5 in Germany. PKN ORLEN also operates two hydrogen stations in Germany and 42 CNG stations in the Czech Republic. A cobranding process was completed in the second quarter of 2020, which helped strengthen the ORLEN brand visibility within the Group’s European network.

The upstream segment generated LIFO-based EBITDA of PLN 10m, with sales volumes up on higher average production by 1,000 boe/d, including 900 boe/d in Canada and 100 boe/d in Poland (y/y). The segment’s performance was mainly driven by subdued oil, gas and condensate prices in Canada. During the second quarter of 2020, work was carried on to develop the Bystrowice field (Miocene project), and progress was made on the design work and formalities relating to the development of Bajerze and Tuchola (Edge project) and Chwalęcin (Płotki project). Drilling work was completed on the Pławce-3/3H well (Płotki project), continued on the Dylągowa-1 well (Bieszczady project) and commenced on the Sieraków-2H well (Sieraków project). Also, the construction of drilling pads for the Płotki and Sieraków projects was completed.

One-off items, which increased LIFO-based EBITDA by PLN 4.8bn:

• recognition of PLN 3.7bn as a gain on the bargain purchase on April 30th 2020 of Energa shares;
• upward remeasurement of inventories by PLN 1.2bn. The reason for the write-down reversal was an increase in crude oil prices in Q2 2020 and higher selling prices of products due to a gradual recovery in demand following the reopening of global economies;
• recognition of impairment losses on non-current assets of PLN (-)0.1bn. The impairment losses reflected a decision to relinquish a licence for the exploration, appraisal and production of crude oil and natural gas in the Bieszczady area.

ORLEN Group posted profit on the bargain purchase of the Energa Group, despite of offering over 20% premium in relation to the market price of the company's shares on the date of the tender offer. The stock market valuation of Energa shares - similar to the valuations of other Polish companies in the energy sector - has been under strong pressure for several years, remaining well below its net asset value. This was largely due to the company's high debt, systematically declining dividends payments and development plans based on coal assets. By taking over the Energa Group, PKN ORLEN has decided to change the company's policy towards low and zero-carbon sources and, as a financially strong shareholder, is ready to support the Energa Group in this regard. PKN ORLEN, among others has undertaken to support Energa in raising funds for its Ostrołęka C power plant project, based on an alternative, gas-fired technology. PKN ORLEN finalized the purchase of Energa’s shares on 30th April 2020. Offered price of PLN 8.35 per share was satisfying for investors holding a total of 80% of the company’s share capital, including the Polish State Treasury (with a 53% equity interest) and other shareholders with combined interests of 27%, including large group of institutional investors.

As previously announced, PKN ORLEN was moving forward with its growth projects. A preliminary geotechnical investigation of the seabed and environmental surveys were completed for the offshore wind farm project in the Baltic Sea. Work on the refinery’s key project involving the construction of a visbreaker unit was under way in Płock. The Research and Development Centre, which is being built under PKN ORLEN’s largest-to-date petrochemical asset expansion programme and which is scheduled for commissioning in late 2020, entered a final phase. At ORLEN Południe’s Trzebinia site, work commenced on a project to build a lactic acid unit, the first such facility using microorganisms on an industrial scale. Progress was made on the construction of Europe’s largest unit for the production of environmentally friendly propylene glycol. In addition, the Group consistently pursued the development of its fertilizer capacities at ANWIL of Włocławek. It also completed the construction of the main part of the polyethylene unit in the Czech Republic.

The ORLEN Group’s liquidity position remains healthy. Operating cash flow for the second quarter of 2020 was in excess of PLN 3.3bn, a level roughly unchanged year on year. The Group maintained commitment to its existing liquidity management policy, which provides for diversified funding sources. Funding for future operating and investment activities was proactively secured under a EUR 1.75bn revolving credit facility provided on July 29th 2020 by a syndicate of 16 banks, which replaced the existing syndicated facility of 2014. The Group’s strategic financial ratios also remain at safe levels. Including the effect of the ENERGA Group acquisition, the net debt to LIFO-based EBITDA ratio stood at just 0.92x at the end of the second quarter of 2020, well below the cap of 1.5x set in the Group’s strategy. As at the end of the period, financial leverage was 26.2%, also below the strategy threshold of 30%.
In July 2020, Moody’s upgraded the ORLEN Group’s rating outlook from negative to positive and affirmed its rating of Baa2, highlighting the Group’s running and planned growth capex projects and its stable financial condition. The agency’s decision took account of the ongoing acquisition processes, which are positively viewed also by Fitch Ratings.

In the second quarter of 2020, the Supervisory Board of PKN ORLEN reappointed all Management Board members for a new three-year term. Earlier, the Minister of State Assets, acting on behalf of the Polish State Treasury, had reappointed Daniel Obajtek to the Management Board of the Company. Mr Obajtek was subsequently reappointed President of the Management Board by the Company’s Supervisory Board.