ORLEN has announced its strategy for 2014–2017 which reflect the
present macroeconomic conditions. The strategy pillars have remained
unchanged. The Company will focus on securing a strong position on large
and promising growth markets, strong customer-oriented approach,
operational excellence, strengthening the value chain, and sustainable
development of its upstream operations. Implementation of
growth-oriented projects in the most profitable areas will be possible
thanks to PKN ORLEN's financial strength and modern management culture.
Key objectives of the PKN ORLEN strategy:
- Average annual LIFO-based EBITDA of PLN 5.1bn in 2014−2017
- Average annual capital expenditure of PLN 4.1bn
- Increase in annual hydrocarbon production to 6m boe in 2017
- Financial leverage maintained below 30%
- Stable growth of dividend per share.
In 2014−2017, PKN ORLEN plans to spend PLN 10.8bn on development
projects, including PLN 6.4bn in the Downstream segment (refinery,
petrochemicals, power generation), PLN 3.2bn in the Upstream segment,
and PLN 1.2bn in the Retail segment. PLN 5.5bn has been allocated to
upgrade projects to maintain the high performance of production units
and to ensure compliance with regulatory requirements. The planned
capital expenditure is consistent with the assumed average annual EBITDA
of PLN 5.1bn. In the Downstream segment, growth-oriented projects will
involve improvement of refinery yields, extension of the value chain in
the Petrochemicals area (polyethylene, metathesis) and industrial
cogeneration in the Power Generation area (Włocławek and Płock CCGT
units). In the Retail segment the planned activities include further
development of the service station network, launch of new products and
services, and even greater leverage of the loyalty programme's
potential. In the Upstream segment, in Poland PKN ORLEN will continue
oil and gas exploration operations as well as activities designed to
adjust production technology to the characteristics of the local
unconventional hydrocarbon deposits. Production in Canada is expected to
be further increased to 16 thousand boe/day, with concurrent growth of
2P reserves to 53m boe in 2017.
‘Given the present market situation, we believe that the recent
developments in our industry are becoming the new reality. Accordingly,
we have decided to revise our strategic assumptions and bring them in
line with market conditions,’ said Jacek Krawiec, CEO and President of the PKN ORLEN Management Board.
vision of PKN ORLEN's growth has not changed and the Downstream
business remains at the core of its foundation. We perceive the
Downstream segment as an integrated value chain, with interrelated
operations in refining and petrochemical production, whose efficiency is
further supported by state-of-the-art industrial power generation and
strong market position. In the Retail segment, drawing on our
competitive advantages – a modern network, loyal customers, and strong
brand – we will further build our position on promising growth markets.
The final element of this development concept is sustainable growth of
hydrocarbon production. We are actively exploring for hydrocarbons in
our licence areas in Poland and Canada. We are also delivering on our
commitment to the shareholders, as we declare the intention to meet our
dividend targets. I do believe that our initiatives and the projects we
are pursuing will pave the way to further value growth,’ Mr. Krawiec added.
The strategy is being announced together with the Q2 2014 results.
Despite the challenging market environment and a (-) USD 1.7/bbl drop in
downstream margin, PKN ORLEN posted a year-on-year improvement in its
LIFO-based EBITDA, to PLN 856m (before impairment losses on property,
plant and equipment). It also saw a year-on-year rise in revenue and
maintained total sales volumes largely comparable with those seen in Q2
2013. PKN ORLEN’s results were driven primarily by the strong Retail
performance, with the segment's LIFO-based EBITDA at PLN 359m, combined
with a year-on-year growth of PLN 12m in the LIFO-based EBITDA of the
Downstream segment, achieved despite the overhaul-related shutdowns.
The positive performance of the Retail segment was due partly to the
improved non-fuel margins as well as stronger sales and increased market
shares in Poland, the Czech Republic and Lithuania. The Company
consistently developed its non-fuel sales network, with 68 new Stop
Cafes and Bistro Cafes opened in Poland in Q2 2014. However, fuel
margins declined in the Czech Republic and Germany.
In Q2 2014, the Downstream segment's performance was under pressure
from the difficult macroeconomic environment and overhaul shutdowns in
Poland. The stable LIFO-based EBITDA of PLN 612m before impairment was a
combined outcome of a year-on-year growth in sales of refining and
petrochemical products in the Czech Republic, a decline in the Polish
market, subdued sales of refining products in Lithuania, and improved
(yoy) fuel yields in the Czech Republic and Lithuania.
In the Power segment, in Q2 2014 work on the construction of the 463
MWe CCGT unit in Włocławek was well advanced. All work under this
project, including construction of the power and gas connections (PSE
and GAZ-SYSTEM), progresses in line with the original schedule, with
production launch planned for Q4 2015. The process of selecting the
contractor for turnkey delivery of a CCGT unit in Płock is also under
way. At the current stage, the construction design for the unit is being
prepared, and the key terms and conditions of the unit's connection to
the National Power Grid have been agreed upon with PSE. A final decision
on whether to proceed with the project will be made in 2014 based on
findings of the project's economic feasibility study.
PKN ORLEN remains strongly involved in hydrocarbon exploration and
production activities. The Company continued its exploration projects in
Poland. ORLEN Upstream is currently working on its 11th exploration
well in Mełgiew in the Świdnik region. If the core testing results at
the Lublin-OU1 well are positive, a brief production test will be
conducted. Analysis of the test results and interpretation of geological
data will provide basis for planning further work on preparing
documentation of the potential reserves.
In search of unconventional
hydrocarbon deposits, ORLEN Upstream plans to drill another horizontal
well in Nowy Stręczyn in the second half of the year. The plans for Q3
2014 also include a multi-stage fracturing operation in the horizontal
section of the Stoczek-OU1K well.
An important development in the Upstream was the acquisition of 100%
of shares in a production company Birchill Exploration Limited
Partnership, which is active in the field of appraisal of and production
from oil and gas deposits in Canada. The transaction fits into the
ORLEN Group's strategy to expand its oil and gas assets. Following the
acquisition of Birchill, the total hydrocarbon production in Q2 2014
reached 4.5 thousand boe/d, which means a quarter-on-quarter increase of
In Q2, the Company also continued its efforts focused on maintaining
stable financial position. As part of diversification of funding
sources, PKN ORLEN successfully completed a PLN 1bn retail bond
programme and a EUR 500m eurobond issue. Compared with the end of March
2014, the Company's debt was reduced by PLN 2.7bn, with the financial
leverage maintained at a safe level of 28.5%. In Q2 2014, working
capital was reduced by PLN 3.6bn, partly due to a decrease in mandatory
stocks following sale of stocks valued at PLN 2.2bn.
As part of its revision of the strategy for 2014-2017 and the
medium-term plan, the Company also reviewed the value of assets held by
the Group taking into account such factors as market outlook,
macroeconomic parameters as well as differences between book value of
equity holdings and the market price of PKN ORLEN shares. In accordance
with IAS 36, at the end of each reporting period an entity is required
to assess whether there is any indication that an asset may be impaired.
The assessment takes into account external (market) and internal
(following from the strategy and operating plans) factors. Following
impairment tests, PKN ORLEN decided to recognise impairment losses
totalling PLN 5bn, which brought its half-year 2014 LIFO-based EBITDA to
PLN (-) 3.2bn. ORLEN Lietuva was the largest contributor to the
impairment losses (PLN (-) 4.2bn), with the balance coming from the
refining segment of the Unipetrol Group (PLN (-) 711m) and other assets:
Spolana and Rafineria Jedlicze (PLN (-) 104m).
The situation of the Mažeikiai refinery significantly deteriorated in
H2 2013 as margins hit their 10-year low and pressures in marine sales
grew stronger (more than 50% of the Lithuanian refinery's output is
exported via marine sales). This situation is chiefly a consequence of
the US, formerly a natural market for gasoline, having become a gasoline
exporter following the shale gas revolution. As a result, ORLEN Lietuva
incurred an operating loss in 2013 and in the initial months of 2014.
An additional structural problem of the Mažeikiai refinery is
inefficient product logistics. Due to the absence of an alternative
carrier, ORLEN Lietuva is forced to transport its products using the
services of Lithuanian national railways. Construction of a product
pipeline from the refinery to the port in Klaipeda could be a solution
to this problem, especially that the Lithuanians dismantled a
19-kilometre rail section which enabled transport of products via a
shorter route through Latvia. First discussions on the product pipeline
project were initiated by ORLEN Lietuva in 2007 and continued at
subsequent meetings with Lithuanian decision makers. Since the beginning
of 2013 over a dozen official meetings devoted to this issue have been
held, but with no tangible outcome.
PKN ORLEN purchased the Mažeikiai plant in 2006 for a total of USD
2.8bn. ORLEN Lietuva's investments since 2006 consumed more than USD
900m. At the same time, cumulative EBITDA for the period was only
slightly above USD 600m. The company's negative cash flows reached USD
300m, inflating debt. At present, ORLEN Lietuva is not able to secure
financing on its own, therefore it relies on PKN ORLEN in that respect.
PKN ORLEN's financial support for the Mažeikiai plant, provided in the
form of bilateral agreements and cash pool arrangements (excluding
receivables under oil supplies), amounts to several hundred million US
‘Recognition of impairment losses is an accounting (non-cash)
procedure and does not affect the financial standing of PKN ORLEN.
Neither does this mean that ORLEN Lietuva cannot continue its business.
We will be determined in our efforts aimed at improving the
profitability of the Lithuanian refinery, i.a. through reduction of
general and labour costs, cutting down capex to less than USD 20m per
annum, and continued implementation of efficiency improvement
initiatives. However, the first and fourth quarters of each year are
typically the most challenging periods for the refining business, when
the industry faces lowest margins and weaker sales. This is why we are
bracing for worse scenarios that may materialise at the end of 2014 and
in early 2015. As the first step, we could be forced to temporarily shut
down the Mažeikiai refinery. We have estimated the costs of such a
move, i.e. costs of the shut-down itself, costs incurred during the
shut-down, and costs of the re-start. If it turns out that the costs
will be lower than a potential loss that may be generated by the
refinery, the operations of ORLEN Lietuva may be temporarily halted.
Duration of such shutdown and the decision whether the plant should be
permanently closed will largely depend on future development of global
refining margins,’ said Sławomir Jędrzejczyk, Vice-President of the PKN ORLEN Management Board for Finance.
PKN ORLEN recognised some impairment losses on ORLEN Lietuva shares
in its stand alone financial statements already in 2008, 2011 and 2012,
for an aggregate amount of PLN 3.7bn. Following the recent impairment
test, it was necessary to recognise another impairment loss of PLN 4.5bn
(write-down to zero) and a provision of PLN 0.2bn for loans granted by
PKN ORLEN to ORLEN Lietuva. In the consolidated financial statements,
the impairment loss on ORLEN Lietuva assets was PLN 4.2bn (a PLN 2.2bn
impairment loss was recognised in 2008). The value of ORLEN Lietuva
assets remaining after the impairment recognition will be PLN 0.5bn.