Management’s discussion and analysis of 2019 financial results

’In 2019, the world’s economy growth rate markedly slowed down, driven by numerous factors, including declining global demand for crude oil and liquid fuels, customs wars interfering with international trade flows, the US-Iran conflict, and a deteriorated outlook for both emerging economies and the eurozone.

For another year running, the impact of macro variables on the entire Oil&Gas sector, in which the ORLEN Group operates, was far from favourable. As crude oil prices slid by more than USD 7/bbl bringing about even sharper declines in product prices, the model downstream margin reported by PKN ORLEN shrank by USD 1.5/bbl compared with the level in 2018. Another important factor was the extremely narrow price spread between the Urals crude and the Brent benchmark, of barely USD 0.8/bbl.

Those figures show that our earlier market assumptions and projections related to the entry into force of the new IMO regime were widely off the mark. I refer mainly to the Urals versus Brent price spread, as well as to high margins on middle distillates.

Despite these macro headwinds, in 2019 the ORLEN Group delivered a strong operating performance, with LIFO-based EBITDA coming in at PLN 9.2bn and net profit at PLN 4.3bn. The Group is on a stable financial footing, as its net debt was reduced by nearly PLN 3.2bn, to PLN 2.4bn, with the financial leverage of 6.3%. PKN ORLEN follows a policy of regular profit sharing – in 2019, we paid a total of PLN 1.5bn, that is PLN 3.5 per share, in dividends to our shareholders.’

Jan Szewczak

Member of the PKN ORLEN Management Board, Finance

The ORLEN Group’s revenue came in at PLN 111,203m, having grown 1.4% year on year, mainly on the back of a 0.9% increase in sales volumes reported across all operating segments. The revenue growth was partly attributable to a change in the sales structure, with reduced sales of low-margin heavy refining fractions. The higher revenue was earned despite lower prices of gasoline (down 9%), diesel oil (down 7%), heavy fuel oil (down 17%), ethylene (down 9%) and propylene (down 8%).

¹ Net impairment losses on property, plant and equipment and intangible assets:
– 2019: PLN (179)m, comprising chiefly impairment losses on the ORLEN Upstream Group’s exploration assets in Poland,
– 2018: PLN 704m resulting mainly from the reversal of impairment losses on assets in the Unipetrol Group’s Downstream segment (PLN 741m) and from the recognition of impairment losses on assets in Upstream (PLN 18m).

Profit earned in 2019 was PLN 848m higher year on year:

• and amounted to PLN 1,171m, an effect of improved downstream segment’s sales structure as a result of reduced sales of heavy fractions, combined with higher sales volumes across all operating segments (up 0.9% year on year),
• PLN (223)m year on year – negative effect of macroeconomic volatility, which was mainly due to the negative impact of lower Urals/Brent differential (down USD (0.7)/bbl) and lower margins on light distillates, heavy fractions, olefins, PTA and PVC, partly offset by higher margins on middle distillates and fertilizers as well as the depreciation of the złoty against other currencies,
• PLN (100)m yoy – negative effect of other factors, including:
  • The effect of a change in net other income/(expenses) of PLN (586)m year on year (after elimination of the net effect of impairment losses on assets), due mainly to the absence of the compensation of PLN (264)m paid by insurers in 2018 in connection with the accident at the Unipetrol Group’s ethylene unit, the measurement and net settlement of derivative financial instruments related to operating exposures, the net ineffective portion of the measurement and settlement of operating exposures of PLN (180)m year on year, and deficits of materials at third-party warehouses of PLN (156)m year on year.
  • The effect of net changes in inventory write-downs to net realisable values, of PLN 203m (y/y), caused by the negative effect of falling crude prices in 2018.
  • PLN 283m (y/y) – other factors, including mainly the effect of higher fuel wholesale and retail margins combined with higher overheads and labour costs.

Including the net effect of impairment reversals of PLN (179)m (mainly in respect of downstream assets at the Unipetrol Group, of PLN (131)m), the ORLEN Group’s LIFO-based EBITDA for 2019 totalled PLN 8,993m.

The negative impact of changes in oil prices on inventory valuation which was reflected in EBITDA amounted to PLN (131)m. As a result, the ORLEN Group’s EBITDA for 2019 came in at PLN 8,862m.

Earnings after depreciation and amortisation of PLN (3,497)m reached PLN 5,365m.

In 2019, net finance expenses were PLN (11)m and included mainly net interest expense calculated using the effective interest rate of PLN (241)m, as well as the settlement and measurement of net financial instruments of PLN 254m.

After tax expense of PLN (1,054)m, the ORLEN Group posted a net profit of PLN 4,298m, down by PLN (1,306)m year on year.

Equity amounted to PLN 38,607m as at the end of 2019 and was PLN 2,868m higher than at the end of 2018, chiefly as a result of recognition of a net profit of PLN 4,298m for 2019 and the effect of exchange gains/(losses) on translating the equity of foreign operations of PLN 138m, combined with a decline in equity following payment of PLN (1,497)m as dividend from retained earnings and the effect of hedging reserve of PLN (33)m.

As at December 31st 2019, the Group reported a net debt of PLN 2,448m, down PLN (3,151)m year on year.

Expansion of the ORLEN Group’s power generation, petrochemicals, maintenance services, IT and trade activities led to a 1,055 year-on-year increase in total workforce, to 22,337 employees.

The ORLEN Group operates in three major business segments. Corporate functions provide support for business processes performed within the segments.

LIFO-based EBITDA by segment [PLNm]

Change in segment performance [PLNm]

The ORLEN Group allocated PLN 5,457m for the 2019 investment programme (taking into account the impact of IFRS 16).

Capital expenditure by segment [PLNm]

Capital expenditure by market [%]