In November 2007, PKN ORLEN announced the new ORLEN Group development strategy for 2007–2012 “Striving for regional leadership”. The strategic planning foundation was to combine shareholder and potential investor expectations with the Company’s needs and capacities.
The main corporate financial goals from the perspective of 2012 are as follows:
1) EBITDA [1] ................................... PLN 11 billion
2) ROACE [2] ....................................14%
3) CAPEX ......................................... PLN 21.3 billion
4) Financial leverage [3] ....................... 30%–40%
5) Dividend policy .............................. based on FCFE [4]
The coming years will be a period of large-scale development investments implemented throughout the overall value-building process. The return on employed capital, ROACE, for the implemented project will amount to 14 percent. In addition, in order to maintain an appropriate score for the investment rating, the level of financing with external capital and measured with a rate of leverage will fluctuate in a range between 30 and 40 percent. Due to the consequently implemented development programme, EBITDA generated at the end of 2012 will be at the level of PLN 11 billion, compared to PLN 5 billion in 2006. The strategy does not reshape the current dividend policy, according to which at least half of FCFE will be distributed among shareholders.
A series of internal (i.e. dynamic growth of ORLEN Group in recent years) and external (i.e. business and macroeconomic environment evolution) factors underlines the need for a review of strategy. The acquisition of AB Mažeikių Nafta, a Lithuanian company, was of significant influence in the updating of our approach to the creation of additional value. As a result of the evolution of our approach to the new value-building process, the new strategy is based on two complimentary pillars of growth creation: an organic growth pillar and a non-organic growth pillar. The achievement of particular goals in our segment (business) strategy will enable the Company to strengthen regional leadership in Central and Eastern Europe.
In accordance with the accepted strategic planning approach, firstly the internal growth potential is to be released, which consists of the improvement of effectiveness, optimisation and investments in core business activities in order to strengthen or achieve market leadership. The strategy focuses on the full utilisation of the synergies from the integration of the Czech Unipetrol and releasing potential value through the implementation of the Value Building Programme at AB Mažeikių Nafta, the Lithuanian company. The Company’s objective is also to significantly increase wholesale sales. In the area of retail sales, in the Polish and Czech markets, the implementation of the strategy of two brands (premium and economy) and the focus on increasing sales efficiencies of the stations are to be continued.
While continuing the controlled internal potential release process, and the resulting generation of adequate financial and operating results, the Company will actively analyse available external growth options. This is why the second pillar means the development options monitoring process, that is, expansion, among others, in the markets of the Baltic states and Ukraine. Taking into consideration the strong economic impact of the domestic consolidation of the oil and chemical industries, the Company perceives this option for development as a particularly important source of future value for shareholders.
The process of building competence in the area of crude oil exploration and production activities (upstream competence) will be continued. Any decision to launch projects in that area will be made taking into consideration the acceptable level of risk and with a view to guaranteeing an adequate return rate. Measures integrating crude oil trading and oil product wholesale trading will be reinforced.
The assumed capital expenditure (CAPEX) budget in the accepted strategy period will amount to PLN 21 billion, representing an annual average of PLN 3.5 billion. The planned investments will be implemented mainly in those areas of operations which in the Company’s opinion look particularly promising, and in which the Company has the greatest experience and strong competitive advantages.
Refinery segment
The largest part of capital expenditure is to be spent on investments in the refinery segment (PLN 8.4 billion). It is assumed that this segment will generate an additional amount of PLN 3.8 billion in comparison to the result for the base year (2006). The main operating objectives of the segment assume that the effective processing capacity will reach approximately 33 million tonnes per year with an 80 percent share of white products, assuming the use of over 95 percent of production capacities. A strong emphasis is placed on improving the processing installation effectiveness – implemented on the base of the Solomon benchmark in the whole ORLEN Group.
Retail segment
The investments in the retail segment are planned to amount to PLN 3.2 billion and in turn generate an additional PLN 600 million of EBIDTA by 2012 compared to 2006. The combination of organic and non-organic growth will be expressly visible in that area of activities. The first will be generated through, interalia, improving the effectiveness of unit sales, customising the product range so that it meets the needs of local markets and increasing the share in total sales in all markets. The non-organic growth will be generated through the market and product expansion in existing and new markets.
Petrochemicals and chemicals segment
Due to investments implemented in the growing petrochemicals market, which are to amount to PLN 5.8 billion, the Company will be the first producer in Central and Eastern Europe of Purified Terephthalic Acid (PTA). In the chemicals segment, the strategy assumes that ORLEN Group’s share in the PVC market in 2012 will amount to 55 percent in Poland and 40 percent in the Czech Republic. In total the segments will generate additional PLN 1 billion of EBITDA by 2012.
2008 will be a period of sustainable development for the Company. Further stages of refinery investments, aimed at meeting changeable market needs, such as the dynamic increase in demand for diesel, will be continued. In addition, in order to take full advantage of the prospects of the growing market for petrochemical products, further preparatory stages for construction of the PX/PTA installation will be completed. It is assumed that the increase in crude oil processing will amount to 19 percent, and only in the refinery Mažeikių Nafta itself will it increase by approximately 80 percent (year on year). Due to intensive and consequent strategic measures in the area of oil product trading and use of market trends, wholesale and retail sales are expected to increase significantly.
Refinery segment
Renovation of the refinery Mažeikių Nafta was completed successfully. The hydrocracking installation processing capacities in the Litvinov refinery (Unipetrol a.s.) were expanded. Due to such actions, the Company’s processing capacities and the processing installation effectiveness were increased. In 2007, EBIT for the refinery segment amounted to PLN 1.7 billion (an increase of 4.6 percent year-on-year).
Retail segment
The retail network restructuring and optimising process was continued. On the Polish and Czech markets the dual-brand strategy commenced in 2005 and was implemented effectively. In Lithuania, a new brand, ORLEN Lietuva, was launched. On this market, the Company with drew from implementing the dual-brand strategy as greater economic value was thus created.
Petrochemistry and chemistry
An agreement with a Japanese company, Mitsubishi Heavy Industries, for technological projects and the supply of materials, equipment and the provision of technical services related to the construction of the PTA (Purified Terephthalic Acid) production plant, was signed. A contract with Polimex- Mostostal SA for comprehensive project implementation was concluded. In the area of chemical operations, ANWIL SA took over the Czech Spolana a.s in the framework of reorganising the structure of ORLEN Group.
[1] EBITDA = operating profi t before tax and fi nancial expenses increased by depreciation; applies to ORLEN Group, LIFO inventory valuation method.
[2] ROACE = operating profi t after tax/average capital invested in a period (equity + net debt).
[3] Financial leverage = net debt/equity.
[4] Free cash fl ows for shareholders.
ORLEN Group's brands
