LETTER FROM THE PRESIDENT
OF THE MANAGEMENT BOARD
Ladies and Gentlemen, Dear Shareholders,
The fuel and energy industry is largely driven by macroeconomic factors and trends in the global economy. Last year, the operations of the entire sector, including PKN ORLEN, were severely affected by the continuing headwinds in the macroeconomic environment. All over the world, companies had to face the unprecedented developments presented by the COVID-19 pandemic. Its adverse effects were particularly strong in the refining industry owing to the far-reaching restrictions on the mobility of people and goods.
However, PKN ORLEN once again successfully proved that with its sustainable development strategy and safe financial management it can operate efficiently in a challenging environment and deliver stable performance. This is demonstrated by the financial figures. In 2020, PKN ORLEN posted a robust LIFO EBITDA before impairment of PLN 12.4bn and net profit of PLN 2.8bn, including gain on bargain purchase of the Energa Group. Record high operating performance was delivered by the Retail and Power Generation segments, with EBITDA before impairment of PLN 10.7bn. Despite adverse macroeconomic impacts related to the COVID-19 pandemic, revenue came in at PLN 86.2bn.
Last year, we actively managed our sources of financing and maintained our financial ratios at a safe level. In the fourth quarter, PKN ORLEN issued PLN 1 billion worth of sustainability bonds, with the margin linked to our MSCI ESG rating performance. We secured very good terms of financing – the interest rate was the lowest in PKN ORLEN’s history and the margin was the lowest since the 2008 financial crisis. With the stable and solid financial standing, we were able to pursue many important growth-oriented projects, on which we spent a total of PLN 9 billion last year, as planned.
In 2020, PKN ORLEN worked consistently to build its value and competitive advantages. We developed and expanded petrochemical production and proceeded with the integration of our refining assets, placing a great focus on developing the segment. We have started the largest petrochemical investment in Europe, which is the extension of the Olefin Complex at the Production Plant in Płock. Furthermore, the pace of R&D and implementation work, supporting all areas of our business, was accelerated. In 2021, we opened a modern Research and Development Center in Płock. Above all, however, we focused even more on transforming the ORLEN Group into a multi-utility conglomerate, which is our future. We intend to achieve this goal by giving effect to planned consolidation of the Polish market.
In April 2020, the ORLEN Group was joined by the Energa Group. This is undoubtedly a success, as the acquisition was completed in just four months, which makes it the largest and shortest process of this type in Poland. By combining the potentials of the two companies, we will be able to continue activities aimed at increasing the role of low- and zero-carbon energy sources in the national energy mix, and thus Poland's energy security.
Last year, we moved significantly closer to finalising the acquisition of the LOTOS Group, a process we see as a requisite driver of the business future of both companies, their shareholder value and energy security of Poland. In July 2020, after months of difficult negotiations, PKN ORLEN obtained conditional clearance of the transaction from the European Commission. Its closing is in the final straight. We are in talks with potential partners with whom PKN ORLEN will implement the remedies negotiated with the European Commission for the merger with the LOTOS Group.
Last July, we initiated the process to acquire the PGNiG Group, and in March this year the European Commission decided that our application for approval of the transaction should be considered by the President of the Office of Competition and Consumer Protection. The decision followed from the fact that the intended concentration will not have any significant impact on competition outside Poland. Obtaining the clearance is critical in the context of building a strong multi-utility group which will be a significant player on the competitive European market.
The acquisition of Polska Press added to the rapid growth of our retail business. It is a business decision that will pay off, considering that the publishing house owns 20 newspapers and, first and foremost, websites with ca. 17.5m users that can be leveraged as a platform to reach new customers and explore consumer preferences and conduct other research.
In 2020, we moved forward with our key expansion projects. The construction of the visbreaking unit, which is of strategic importance to our refinery in Płock and which started last year, is progressing on schedule and will be completed in December 2022. Concurrently, work will be under way to connect the new facility to other refinery units. According to estimates, once complete, the project will add PLN 400m or more to the Group’s annual EBITDA. In 2020, we continued to implement the Petrochemical Development Programme, designed to increase our petrochemical production capacity by at least 30%.
Last year, PKN ORLEN’s efforts also focused on diversification of crude oil supplies, which helped significantly enhance Poland’s overall energy security. Further diversification of crude supply sources for the Płock refinery was an effect of business relationships forged with oil producers from outside Europe, including Africa, the Persian Gulf and the US.
One of the priorities was also to strengthen the ORLEN Group companies. For example, ORLEN Południe is being consistently transformed into an advanced biorefinery. As part of these efforts, a project to build Poland’s first unit for the production of propylene glycol continued last year at the Trzebinia-based plant. Our Włocławek-based company ANWIL proceeded with the nitrogen fertilizer capacity expansion programme started in 2019.
We also continued initiatives designed to further build the position and recognition of the ORLEN brand abroad. We fully delivered the cobranding strategy to standardise the service station chain image on foreign markets by adding the ORLEN Group logotype to the local brands (star in Germany and Benzina in the Czech Republic and in Slovakia). In Germany last year we opened our first ORLEN-branded service station near Berlin. Another station opened in Hamburg in March this year. The cobranding process was supported by PKN ORLEN’s involvement in Formula 1 and sponsorship of Robert Kubica.
In 2020, we developed and unveiled the ORLEN Group Strategy 2030 that will enable the Group to achieve further rapid expansion and position itself as a leader of the energy transition in Central Europe. As a fuel and energy company, we understand the need to consider the long-term prospects for our industry, therefore growing the power generation business through investments in low- and zero-emission sources is one of the pillars of the new PKN ORLEN strategy that will significantly enhance Poland’s energy security. Recognising the great potential for building new energy sources in Poland, last year we decided to launch the construction of a gas-fired power generating unit in Ostrołęka. The project will be implemented by PKN ORLEN in partnership with PGNiG and Energa.
Over the next years we intend to become a major producer of energy from zero- and low-carbon sources, which is increasingly in demand. To this end, we are going to spend a record amount of PLN 47bn on such investments by the end of the decade. The largest portion of this spending will be allocated to renewables, such as offshore wind farms, onshore wind farms, and photovoltaic projects.
We place great emphasis on developing petrochemical production. The 2030 Strategy envisages that around a half of the Group’s profits from crude oil processing will be derived from the petrochemical business. Expansion of the existing portfolio and entry into new business areas will help entrench the Group’s position as a leading petrochemical producer in Central Europe.
Another pillar of PKN ORLEN's business is the retail segment, which has delivered record results in recent years. We intend to maintain this trend, for instance by attracting new customer groups through a broad, integrated offering of non-fuel products and services. To this end, last year we acquired RUCH – the transaction will help us develop new food and convenience store formats under the ‘ORLEN w ruchu’ brand and the ‘ORLEN paczka’ (ORLEN Parcel) courier services segment. Expansion of our offering will be advantageous to our customers and shareholders alike.
Neither do we forget to invest in technologies of the future. We are committed to the development of hydrogen technology. Aware of the future role of hydrogen as a major transport fuel, PKN ORLEN is stepping up work on alternative fuels, solidifying its leading position on this demanding market. Last year we started building a hydrogen hub in Włocławek, with Płock being the planned site of the next project of this type. We are developing hydrogen technologies at ORLEN Południe in Trzebinia. We have also signed a number of agreements with local governments as potential customers for the hydrogen.
We have summarised our strategy with the ORLEN Group’s strategic declaration on achieving climate neutrality by 2050. This is an ambitious goal, which we announced as the first oil company from Central Europe. Our carbon neutrality strategy is based on four pillars: energy-efficient production, zero-emission power generation, fuels of the future, and green finance. We are positive that this goal can be achieved by building a single robust multi-utility group with diversified sources of revenues and profits, resilient to macroeconomic factors. Therefore, we are consistently pursuing the planned acquisition processes and ambitious investment projects.
This year, we are making further progress on our major growth projects, crucial for the Group’s future. I am confident that their completion will translate into even better performance of the ORLEN Group and benefits for the Shareholders.
We are seizing the opportunity presented by the global drive to counteract the negative effects of climate change. PKN ORLEN is an active participant of energy transition – we want to lead this process in Central Europe. We are well aware of the challenges posed by energy transition, which is why we have prepared a strategy for change. We show how, in what direction, and at what pace we want to develop. We want to create the future. Responsibly.
President of the Management Board, Chief Executive Officer,
PKN ORLEN S.A.