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ORLEN Group 2016 Integrated Report

II nagroda specjalna w kategorii Raport Zintegrowany | Najlepszy raport on-line

Letter from the President of the Management Board

Capitals:  

Ladies and Gentlemen, Dear Shareholders,

 

For the ORLEN Group and other companies in the petrochemical and refining industry, a key success factor is the ability to seize the opportunities arising from shifts in the economic and market landscape to maximise profit and further strengthen the company’s financial and competitive position. Looking back at this past year, we can safely say that we successfully delivered on all these objectives. Our robust financial performance was also appreciated by the market – on November 21st 2016 PKN ORLEN for the first time topped the list of the most valuable companies on the Warsaw Stock Exchange. In the years ahead we aim to further grow our business in line with the ambitious goals we set ourselves in the ORLEN Group 2017−2021 Strategy that was unveiled in December last year.

Wojciech Jasiński
CEO and President of the Management Board.

The global macroeconomic and market developments had a major influence on our operations and financial performance in 2016. The price of Brent crude averaged just under USD 44 per barrel in 2016, representing a 17% drop on 2015 and a 12-year low. The overall downstream margin also retreated on tighter gasoline and petrochemical margins. Continued low oil prices supported our financial results and created attractive upside opportunities for PKN ORLEN and other oil companies that had managed to diversify their revenue sources sufficiently in advance and could fully exploit the market conditions. The last quarter of 2016 marked a watershed on the domestic fuel market as new legislation helped to significantly curtail grey market in fuels, driving up consumption of diesel oil and enabling businesses engaged in the official trade in fuels to fully leverage their competitive advantage.

2016 LIFO-based EBITDA adjusted for the effect of impairment losses on non-current assets reached a record level of PLN 9.4bn.Total sales volumes grew 2%, with a record 10 billion litres of fuels sold last year. The full-year results were adversely impacted by maintenance shutdowns, including the downtime of the steam cracker in Litvínov, the Czech Republic.

In downstream, we moved forward on the major expansion projects aimed at improving efficiency of the Group’s production assets. In the Czech Republic, a project to build the new PE3 polyethylene unit was launched in 2016 as one of the ORLEN Group’s most-awaited investments, which will help to solidify PKN ORLEN’s position on Central Europe’s chemical and petrochemical markets. Another of our key petrochemical projects, to build a metathesis unit in Płock, entered the construction phase. Launched in early 2017, the visbreaker project is another major downstream efficiency improvement initiative, expected to increase crude distillate yields and operational availability of the refinery. Last year, progress was made on the construction of Poland’s largest CCGT plants: in Włocławek (463 MWe) and Płock (596 MWe). In parallel, we took steps to make our service stations more energy self-sufficient. Pilot photovoltaic solar energy projects implemented at PKN ORLEN facilities delivered promising results, which are now being analysed. The project to deploy wind turbines at petrol stations, which is expected to take our green technology solutions to the next level, was at a preliminary stage.

In 2016, the ORLEN Group maintained its position of the retail market leader in the region.Our retail chain reported 1.4 million transactions daily, contributing to a record EBITDA of PLN 1.8bn. We also broadened our range of non-fuel products and services, with around 1,691 Stop Cafe and Stop Cafe Bistro outlets operating on our home markets, including 1,500 in Poland, 168 in the Czech Republic, and 23 in Lithuania. We made strategic efforts to roll out our food & beverage and on-site convenience store formats. But not only that – we now also strategically target a strong customer orientation and unique purchasing experience, planning to open 130 new-format Stop.Cafe and O!Shop outlets this year.

Our macro environment, and the persistently low oil prices in particular, had a strong bearing on the direction of our activities in upstream. In 2016, total 2P reserves of our production projects increased from 97 MMBOE to around 114 MMBOE at the end of 2016. Last year we also carried out further work in our licence areas in Poland: under a letter of intent signed with PGNiG, drilling of an exploration wells began in the Wielkopolska region, and ORLEN Upstream independently launched a drilling programme in the Małopolska region province. Our new corporate strategy announced late last year provides for cautious continuation of upstream projects with the purpose of increasing the output and 2P reserves.

We managed to deliver our expansion plans while maintaining a stable financial position. In 2016, we reduced our debt and the net debt ratio, and managed to further expand the portfolio of available funding sources. During the year, PKN ORLEN, through its subsidiary ORLEN Capital AB, successfully placed a EUR 750m eurobond issue. The largest issue of investment grade corporate eurobonds made its debut on the Catalyst markets of the Warsaw Stock Exchange.

Last year we made efforts to secure reliable feedstock supply sources, enhancing the security of fuel supplies in Poland. We also significantly strengthened our crude oil supplier base by extending the contract with Saudi Aramco for another year. A new contract setting oil transmission rates was signed with MERO, and we entered into a contract with Jadranski Naftovod of Croatia whereby crude oil will be transported to our Czech refineries via the Janaf pipeline. Amendments were signed to contracts with Rosneft and Tatneft for the supply of crude oil to our Czech refineries. Also, natural gas supplies were secured for another five years under a long-term contract with PGNiG.

In the Czech Republic, we brought PE3, our largest petrochemical unit, to the construction phase. The project will increase the utilisation of the ethylene unit and facilitate stronger integration of petrochemical and refining production at the Unipetrol Group. As part of the process to optimise the ORLEN Group’s asset base in the Czech Republic, Benzina and Ceska Rafinerska were merged with Unipetrol RPA, with the latter transaction closed in early 2017. To better respond to the very demanding and competitive market, and to open up to new business challenges, Spolana, previously a part of ANWIL, was incorporated into the Unipetrol Group through an intra-group acquisition.

The ORLEN Lietuva Group delivered very good results last year. Capitalising on the favourable macroeconomic situation, it worked at nearly full capacity and substantially improved efficiency in recent years. Aware of how sensitive the Mažeikiai refinery is to changes in the macroeconomic landscape, we focused on preparing it for leaner times.

The ORLEN Group proceeded with consolidation processes, to more flexibly respond to market challenges. In 2016, we completed the sale of ORLEN Transport. The aim of the process to dispose of non-core assets is to build PKN ORLEN’s value in the long run.

Throughout 2016 we worked on strengthening our innovation-oriented corporate culture. Initiatives in this area included the launch of ‘Innovations, Start-ups’, an online cooperation and knowledge sharing platform dedicated to new technology solutions. Also the crowdsourcing contest, closed in 2016, to find solutions for recovery and utilisation of low-temperature heat, attracted keen interest from innovators the world over. Currently, we are working on projects combining power generation and retail, to improve energy self-sufficiency of our petrol stations. We are also running pilot tests of solutions based on such natural elements as bacteria absorbing industrial odours or algea used to produce fuel biocomponents.

PKN ORLEN’s strategy, adopted in December 2016, is our response to the major shifts taking place in the economic, social and technological landscape. We identified the strategic directions to follow throughout the next five years and formulated detailed financial objectives for 2017 and 2018. Our plans for profit and capex figures are ambitious but feasible. In 2017 and 2018, PKN ORLEN expects to spend an average of PLN 5.4bn a year on investment projects, of which PLN 3.7bn in Downstream, PLN 0.6bn in Retail, and up to PLN 0.8bnin Upstream. Annual LIFO-based EBITDA in the period is expected to average PLN 8.8bn. The ORLEN Group enjoys a sound market and financial standing, so its strategy until 2021 does not herald any revolutionary changes but guarantees stable growth.

A key factor contributing to our further steady development is the dedication of our People, one of the pillars of PKN ORLEN’s strategy. Our staff’s commitment to all their day-to-day duties determines the ORLEN Group’s market success. I would like to thank them for their work. My special thanks go to Members of the Supervisory Board for their support in everything we do to meet our strategic objectives and build up PKN ORLEN’s strength.

Corporate Social Responsibility (CSR) is an integral part of the ORLEN Group’s strategic development plan. In pursuing business objectives, we are always guided by the principle that value growth should be aligned with the interests of external stakeholders and rely on sustainable and responsible use of resources. The overriding objective of the ORLEN Group’s CSR efforts is to create value both for the Group companies and for its stakeholders. The highest ethical, social and environmental standards are not merely procedures, but are part and parcel of the Group’s day-to-day operations.With a view to building lasting and positive relations with all of our stakeholders, this year again we have prepared an integrated report, which is our third annual report based on the integrated reporting standards, combining financial data with a description of non-financial aspects of our business. The report has been prepared in accordance with the guidelines of the International Integrated Reporting Council and the Global Reporting Initiative (G4 Sustainability Reporting Guidelines).

Have a good read!


Wojciech Jasiński
President of the Management Board, CEO
PKN ORLEN S.A.


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