PKN 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.
‘The 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 0.8 boe/d.

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 dollars.

‘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.​