ORLEN Group’s Q3 results adversely affected by volatile macroeconomic conditions and economic slowdown and boosted by first effects of merger with LOTOS Group
In the third quarter of 2022, the ORLEN Group posted LIFO-based EBITDA of PLN 11.7bn, including PLN 3.1bn attributable to one-off items. Adjusted LIFO-based EBITDA came in at PLN 8.6bn, down by PLN (-) 2.1bn, or (-) 20%, compared with the second quarter of 2022. Revenue amounted to PLN 73bn, with almost half of the figure generated by foreign sales. The power generation segment, which increased its electricity output and improved its operating profit relative to the previous quarter, had a positive impact on the Group’s performance. The upstream segment again delivered very good results, with average hydrocarbon production up 62% quarter on quarter. Sales at ORLEN stations in Poland accounted for 4% of the Group’s LIFO-based EBITDA. The result recorded by ORLEN stations in Poland went down by PLN 139m year on year, mainly due to declining fuel margins. Like other 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. Nevertheless, since the beginning of the year the Group’s capex has reached an all-time high of nearly PLN 11bn, significantly strengthening Poland’s energy security and independence in terms of access to commodities.
– Our third-quarter results are already indicative of the first effects of building a strong multi-utility group. We have scaled up our operations and are gradually unlocking the synergies offered by the combination of PKN ORLEN’s and LOTOS Group's potentials. Our strategy aimed at business diversification is paying off. Despite the extremely volatile macroeconomic conditions and deteriorating economic climate due to the armed conflict in Ukraine, in the third quarter we delivered results that give us financial security and the ability to invest in areas which are pivotal to growing the integrated Group’s value. We are well placed to tackle strategic challenges, the most important of which is to ensure stable energy supplies for the Poles. The successfully completed merger with PGNiG also serves this purpose. Together, now as Central Europe’s largest energy group, we are fuelling the Polish economy during these turbulent times, and our future results will confirm the correctness of our rational actions – said Daniel Obajtek, President of the PKN ORLEN Management Board.
In the third quarter of 2022, the ORLEN Group reported:
- LIFO-based EBITDA of PLN 11.7bn, after eliminating the temporary gain of PLN 5.9bn on bargain purchase of LOTOS Group
- LIFO-based EBITDA adjusted for one-off items of PLN 8.6bn
- Revenue of PLN 73bn
- Sales volume of 12.8 mt
- Net profit of PLN 6.8bn
In the first nine months of 2022, the ORLEN Group’s capex reached PLN 10.8bn and was allocated, among others, to strategic growth projects that in the long term will bolster the Group’s competitiveness and resilience to market volatility, significantly contributing to strengthening Poland’s energy security. The projects are mainly investments in offshore wind farms, but also include Europe’s largest petrochemical investment in expansion of the olefin business line, hydrogen projects, and modern biomethane plants that will provide access to stable and environmentally friendly energy sources. Concurrently, the ORLEN Group reduced its debt by PLN 6.8bn quarter on quarter and maintained the net debt to EBITDA ratio at a safe level of 0.09. In view of PKN ORLEN’s successful merger with LOTOS Group and PGNiG and stable financial position, the Group was assigned the highest rating ever. Moody’s Investors Service upgraded PKN ORLEN’s rating to A3, while Fitch Ratings upgraded PKN ORLEN’s Long-Term Issuer Default Rating (IDR) by two notches, to BBB+. Given its sound financial footing and consistent implementation of business objectives across all areas of operations, on October 3rd 2022 PKN ORLEN paid dividend for 2021 in the amount of PLN 3.5 per share, that is at a level consistent with the Group’s strategy.
In the third quarter of 2022, the refining segmentposted LIFO-based EBITDA of PLN 8.0bn Adjusted for one-off items, including PLN 1.7bn attributable to the acquired LOTOS Group, LIFO-based EBITDA fell PLN 1.4bn (20%) quarter on quarter. The segment’s performance was chiefly driven by 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 short supply in Europe and globally due to the war. Oil throughput at the ORLEN Group refineries was 10.5 mt, an increase of 3.3 mt quarter on quarter, of which 1.8 mt was attributable to the inclusion of the Gdańsk refinery’s throughput. Capacity utilisation at the Group’s refineries was 98%, with the Płock refinery running at 102%, and remained broadly flat year on year, reflecting mainly rising fuel consumption in Poland, which has increased 0.3 mt year to date. A 51% quarter-on-quarter sales growth was reported in the three months to September 30th 2022, including 57% in gasoline, 54% in diesel oil, 59% in LPG, 46% in JET aviation fuel and 9% in heavy fuel oil. Sales rose 62% in Poland, 22% in the Czech Republic and 47% in Lithuania.
At PLN 698m, LIFO-based EBITDA posted by the petrochemical segment fell almost 60% quarter on quarter as a result of the economic slowdown, lower petrochemical margins on olefins, polyolefins, PVC and fertilizers, and the weaker euro against the US dollar. Sales decreased by 18% quarter on quarter, to 1.1 mt. In Poland, sales went down 21%, with the decline reported mainly for fertilizers due to high natural gas prices affecting production costs and selling prices, as well as olefins and PTA; sales in the Czech Republic dropped 12%, led by lower fertilizer sales, with sales in Lithuania up 40%.
In the three months to September 30th 2022, the power generation segment posted EBITDA of PLN 1.6bn, up 36% on the previous quarter. The figure includes EBITDA of PLN 1,088m generated by the Energa Group, up 13% on the previous quarter. Total electricity output of the ORLEN Group in the period was 2.8 TWh, of which 55% was generated by renewable and gas-powered energy sources. The 4% quarter-on-quarter increase in electricity output was due, among other things, to higher demand from ORLEN Lietuva. The installed capacity of the ORLEN Group was 3.4 GWe and 6.8 GWt. In the third 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.
The retail segment’s EBITDA for the third quarter was PLN 856m. The quarter-on-quarter growth of over 20% was driven by higher seasonal sales and promotional campaigns. However, EBITDA fell 8% year on year, reflecting a 23% year-on-year contraction in the fuel margin in Poland, with the fuel margins in Germany and the Czech Republic up 29% and 5%, respectively. Third-quarter sales volumeexceeded 2.5 mt, an increase of 9% quarter on quarter, including 11% in Poland, 4% in the Czech Republic, 4% in Germany, and 5% in Lithuania. Sales of gasoline, diesel oil and LPG went up 11%, 7% and 5%, respectively.
At the end of the third quarter of 2022, the ORLEN Group’s retail chain comprised 2,898 service stations, up by 13 stations quarter on quarter, including in Poland by 6, in Slovakia by 4, and in the Czech Republic by 3, with the number of stations in Germany and Lithuania remaining relatively unchanged. As many as 2,323 service stations (over 80% of the entire network) are already complete with the StopCafe/Star Connect non-fuel format, including 1,775 in Poland, 332 in the Czech Republic, 171 in Germany, 29 in Lithuania, and 16 in Slovakia. PKN ORLEN also worked on rolling out the alternative fuel infrastructure, increasing the network by 33 points quarter on quarter. As a result of these efforts, the number of alternative refuelling points available to customers grew to 600, including 552 EV charging stations, 2 hydrogen refuelling stations and 46 CNG stations.
Operating profit of the upstream segment rose by approximately 150% quarter on quarter, to PLN 842m. This is mainly due to the consolidation of the result delivered by the LOTOS Group companies, amounting to PLN 0.5bn. Sales in the third quarter rose 26% quarter on quarter, including crude oil and natural gas sales up respectively by 81% and 27%, with sales of gas condensate down 8%. Average production rose by 11.6 thousand boe/d quarter on quarter, or 62%, including increases of 3.8 thousand boe/d in Poland, 9.3 thousand boe/d in Norway and 0.5 thousand boe/d in Lithuania, with a decrease of 1.9 thousand boe/d in Canada.
Capital investments and acquisitions. In the third quarter of 2022, PKN ORLEN finalised its largest ever acquisitions, which enabled it to build a strong, integrated multi-utility group with a leading role in the energy sector in Central and Eastern Europe. On August 1st 2022, the District Court in Łódź registered the merger of PKN ORLEN and LOTOS Group. Earlier, the merger had been approved by an overwhelming majority both companies’ Shareholders. In the following months, the Shareholders approved the merger of PKN ORLEN and PGNiG. The merger was entered in the National Court Register on November 2nd 2022, marking the establishment of Central Europe’s largest energy group ranking among top 150 companies in the world by revenue and serving more than 100 million customers. The merger offers the ORLEN Group the potential to make multibillion investments that strengthen the energy security and independence of Poland and the entire region, and is therefore able to effectively deliver the energy transition in the markets where it is present.
Work continued on the construction of an offshore wind farm. ORLEN Group’s Baltic Power is the first company in Poland to have secured all key contracts, including for the construction, transport and installation of foundations, offshore and onshore substations, as well as cables and wind turbines. PKN ORLEN has also made a strategic decision to build an offshore installation terminal for offshore wind farms in Poland, the first such installation on Poland’s territorial sea. The terminal will be located in the Port of Świnoujście and will be one of the most modern facilities of its kind in Europe. The joint venture project between the ORLEN Group and Northland Power will require 76 state-of-the-art 15 MW turbines from Vestas, whose components will be manufactured at the supplier’s new plant in Szczecin. The turbine manufacturing plant, to be manned by a staff of 700, is scheduled for completion in 2024, while the ORLEN Group’s installation terminal at the Port of Świnoujście will commence operations in 2025. In the past quarter, PKN ORLEN also signed a letter of intent with Klaipėdos Nafta AB to invest in offshore wind farms in Lithuania.
Strategic investments in the development of the petrochemical segment were also made. In July 2022, PKN ORLEN acquired Basell Orlen Polyolefins assets engaged in LDPE production, with an annual capacity of about 100,000 tonnes, as well as LDPE sale and customer service in Poland. PKN ORLEN expects to close the transaction by the end of this year, meanwhile obtaining all the required antitrust approvals from the competent authorities in Poland and the Netherlands. At the same time, in response to growing market demand PKN ORLEN is looking into the possibility of building a low density polyethylene (LDPE) unit at the Płock Plant. In the third quarter of 2022, the Company signed a license and front-end engineering design agreement with a world leader in polymer technology. If the investment is carried through, it will add a new petrochemical product – low-density polyethylene resins – to the Company’s portfolio PKN ORLEN also continued talks with Saudi Aramco and SABIC on possible collaboration in carrying out investment projects within various segments of the petrochemical business. Joint implementation of such projects would enable the ORLEN Group to fully integrate the refining and petrochemical segments and utilise the capabilities of the Gdańsk refinery.