ORLEN Group’s Q2 results affected by volatile macroeconomic conditions, sales decline at service stations offset by growth in other areas
ORLEN Group ended the second quarter of 2022 with revenue at PLN 58bn and a net profit of PLN 3.7bn. Nearly half of the Group’s revenue was generated from sales in foreign markets. Fuel sales at ORLEN service stations in Poland accounted for approximately 8% of the Group’s LIFO-based EBITDA. The result recorded by ORLEN stations in Poland went down by PLN 127m year on year, mainly due to shrinking fuel margins. Like other fuel and energy companies around the world, the ORLEN Group operated at the time in an unprecedented, extremely volatile macroeconomic environment due to the ongoing conflict in Ukraine. Despite these headwinds, it maintained an approximately 50% share in the Polish fuel market (combined retail sales of the ORLEN service station network and wholesale), as well as a 53% and 82% share in the Czech and Lithuanian markets, respectively. As a consequence of reduced consumption of Russian crude oil, rising gas prices, and a high discount rate, the ORLEN Group’s consolidated result for the first half of 2022 was affected by impairment losses of PLN 2.9bn, of which PLN 2.8bn relates to refining assets. The impairment losses reflect projected future results of the assets.
As a direct consequence of the war in Ukraine and unstable macroeconomic conditions came a decline in the supply of fuels in Europe and around the world, with a strong effect on their market prices, and thus on the model refining margins of all oil companies. In view of the risk of a global economic recession, a drop in fuel demand is projected, which means that the coming months will be particularly challenging for the fuel industry amid continued high commodity prices. PKN ORLEN’s model refining margin for July this year fell by almost a half month on month.
“Our results clearly show that the diversification of ORLEN Group’s operations allows us to generate growing profits from business areas other than production and sale of fuels. Our petrochemical business, which produces, among others, feedstock for modern plastics, has delivered excellent performance. Good results have also been recorded by our power generation segment, which already generates as much as 60% of its electricity output from low- and zero-carbon sources. In the second quarter, our upstream segment posted a five-fold increase in earnings, with its operating profit reaching half that of the retail segment, which was impacted by lower fuel margins. The refining performance comes as no surprise to the market, as it is in line with the results achieved by the industry globally. However, we are already seeing signs of a deterioration in the macroeconomic climate for the sector, making the upcoming months highly challenging in view of the projected decline in fuel demand, coupled with continued high commodity prices. Of particular importance in this context are our growth projects, such as investments in renewable energy and alternative fuels, which have translated into a permanent improvement in our security and independence from commodity supplies from across Poland’s eastern border. In the first half of the year alone, we made capital expenditure of PLN 6.3bn, a figure close to the ORLEN Group’s total capex for 2014–2015. Crucial to ensuring Poland’s energy security is also effective integration with Grupa LOTOS. Our upcoming results will reflect the effect of the process to build a strong multi-utility player,” says Daniel Obajtek, President of the Management Board of PKN ORLEN.
In the second quarter of 2022 the ORLEN Group reported:
- Sales volume of 9.8 million tonnes
- LIFO-based EBITDA of PLN 5.3bn
- Net profit of PLN 3.7bn
- Revenue of PLN 58bn
In the first half of the year, ORLEN Group’s capex reached PLN 6.3bn. Among the key growth projects are investments that will significantly boost the competitiveness of the ORLEN Group in the long term. These include offshore wind farms, expansion of the olefin business line (currently, Europe’s largest petrochemical investment project), and a vegetable oil hydrogenation plant to produce environmentally friendly fuels capable of reducing emissions even by as much as 80%. Capex is planned to be increased in the second half of the year, with the spending at a record level of PLN 15.2bn for the year. Concurrently, the ORLEN Group reduced its debt by PLN 4bn (q/q) and maintained the net debt to EBITDA ratio at a safe level of 0.42x. It also maintained investment grade ratings of BBB- with a positive outlook from Fitch and Baa2 with a positive outlook from Moody’s. The stable financial situation and the growth plans underway in all areas of business activity have made it possible to approve payment of dividend for 2021 at PLN 3.5 per share, as recommended by the Management Board. The dividend payment date has been set for October 3rd 2022.
In the second quarter of 2022, the refining segment posted LIFO-based EBITDA of PLN 1.8bn, chiefly on account of the macroeconomic conditions and the disconnection between global oil prices and fuel product prices. This was caused by a worldwide increase in fuel demand and limited supply in Europe and globally due to the war. Oil throughput at the Płock refinery rose by 30% year on year, from 3.3 million to 4.3 million tonnes, while its capacity utilisation went up from 81% to 107% during that period, mainly driven by growing fuel consumption in Poland. In the first half of the year, Poland’s consumption of diesel oil rose by 8% and gasoline by as much as 14.5% (up by 720,000 and 320,000 tonnes, respectively).
The petrochemicals segment delivered record-high LIFO-based EBITDA of PLN 1.6bn, an increase of more than 60% year on year, The result was driven by a 31% year-on-year increase in sales volumes, to 1.4 mt, including: of olefins (up 254%) and polyolefins (up 26%), which are used in the production of plastics, PVC (up 54%) and PTA (up 10%). The steadily growing demand for petrochemical products resulted in an increase in capacity utilisation at the ORLEN Group’s main petrochemical units, including the olefins unit (up 87%) and the PVC unit in Włocławek (up 75%).
In the second quarter of 2022, the power generation segment delivered EBITDA of PLN 1.2bn (roughly on a par with the figure posted last year), which includes EBITDA of PLN 941m (up 28% y/y) generated by the Energa Group. Total energy output of the ORLEN Group in the period was 2.7 TWh of electricity and 10 TWh of heat, of which approximately 60% was generated by renewable and gas-powered energy sources. A 4% year-on-year rise in electricity output was attributable to, among others, higher installed wind power generation capacity (y/y). The CCGT unit and the CHP Plant in Płock also produced and sold more electricity. The installed capacity of the ORLEN Group is currently 3.4 GWe and 6.3 GWt. In the second quarter of 2022, further progress was made on strategic projects to develop zero-carbon power generation sources, including offshore wind assets in the Baltic Sea.
In the past quarter, the retail segment delivered EBITDA of PLN 695m, down 16% year on year. The profit earned by the service stations in Poland deteriorated by PLN 127m, while in Germany improved by PLN 23m. This was primarily due to shrinking fuel margins in the Polish market, with a concurrent increase in the German market and comparable levels in the Czech and Lithuanian markets (y/y). At the same time, retail sales volumes of the entire ORLEN Group increased by 4% (y/y), with gasoline sales up by 4%, diesel oil by 4%, and LPG by 1%. Sales in Poland increased by 15% (y/y). The Group reported higher fuel consumption in Poland and the Czech Republic, with a decline in Germany and Lithuania (y/y). The consumption was chiefly driven by the lifting of the pandemic-related lockdown and other restrictions as well as the large influx of refugees from Ukraine.
At the end of the second quarter of 2022, the ORLEN Group’s retail network comprised 2,885 service stations, a net y/y addition of 31. As many as 2,309 service stations (approximately 80% of the entire network) already feature StopCafe/Star Connect non-fuel outlets, including 1,768 in Poland, 326 in the Czech Republic, 170 in Germany, 29 in Lithuania, and 16 in Slovakia. This represents a year-on-year addition of 69 stations: 38 in Poland, 10 in the Czech Republic, 19 in Germany, and 2 in Slovakia, with the number of service stations featuring non-fuel outlets in Lithuania having remained largely unchanged. PKN ORLEN was also rolling out alternative fuel infrastructure, increasing its availability by 289 points, an over two-fold increase (y/y). As a result of these efforts, the number of alternative refuelling points available to customers grew to 567, including 519 EV charging stations, 2 hydrogen refuelling stations and 46 CNG stations.
As a result of high oil prices in the second quarter, the upstream segment recorded as much as a five-fold increase in EBITDA (y/y) and an operating profit of PLN 304m. This quarterly result is close to that generated by the upstream segment for the entire 2020. The figure was primarily driven by the macroeconomic environment and higher sales volumes (up by 3% y/y), including a 125% oil sales increase, partly offset by lower sales of natural gas (down by 7%) and gas condensate (down by 4%). The average production volume in the period expanded by 0.6 thousand boe/d, including 0.3 thousand boe/d in Canada and 0.3 thousand boe/d in Poland.
Capital investments and acquisitions In the second quarter of 2022, PKN ORLEN finalised its largest ever acquisitions, which will enable it to build a strong, integrated multi-utility group. In early June this year, PKN ORLEN and Grupa LOTOS agreed and signed a merger plan involving transfer of Grupa LOTOS assets to PKN ORLEN. The PKN ORLEN and Grupa LOTOS merger was also approved by an overwhelming majority of both companies’ Shareholders. Shortly afterwards, i.e. August 1st 2022, the merger was finalised upon its registration by the District Court in Łódź.
The process to merge PKN ORLEN and PGNiG was also continued according to plan. In July 2022, both companies agreed and signed a merger plan involving transfer of PGNiG assets to PKN ORLEN. In exchange for shares in the gas company, its shareholders will receive shares in the expanded PKN ORLEN. The merger will enable the building in Poland of an integrated portfolio of power generation assets based on renewable energy sources, in particular offshore wind farms. It will also facilitate making a full use of the potential of gas-fired units to balance the irregular generation profile of renewable energy sources.
In the past quarter, PKN ORLEN also continued to consistently implement its strategic investment projects, thus enhancing its value and competitive advantage. In June, PKN ORLEN put in service the first mobile hydrogen refuelling station in Poland. Two more hydrogen stations available to all hydrogen-fuelled vehicles will open in Poland next year. The ORLEN Group will allocate PLN 7.4bn to hydrogen projects by 2030.
The Group also invested in its upstream operations. In May 2022, ORLEN Upstream, an ORLEN Group company, began producing electricity from its natural gas fields in Bajerze and Tuchola. The mines, which are located in the Province of Bydgoszcz and Toruń, have sufficient resources for about 14 years of production. Annually, they will be a source of electricity for approximately 70,000 households.
Work also continued on the construction of Poland’s first offshore wind farm. Baltic Power of the ORLEN Group is the first wind farm developer in the Polish zone of the Baltic Sea to have completed a geotechnical survey. The measurements were carried out over the farm’s site, with an area of more than 130 km2, and along the over 30 km long power evacuation route. Baltic Power has also signed an agreement to lease a site in the Port of Łeba, where an offshore wind farm service centre will be built. At the same time, ORLEN Neptun has entered the final stage of the procedure for the lease of land in the Port of Świnoujście. If it is finalised, the first installation port for offshore wind farms on the Polish coast will be opened in the Province of Szczecin in early 2025. This facility, together with a second installation port which is planned to be built in Gdańsk, will be able to provide a comprehensive range of services for all wind projects in the Baltic Sea. The wind farm, which is to have a capacity of up to 1.2 GW, has been slated for construction in 2024–2026. The project will involve the erection of approximately 70 offshore wind turbines with a minimum capacity of 14 MW each, which will ultimately supply clean energy even to one million households.