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ORLEN Group strategy

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In November 2008, we developed the 2009-2013 ORLEN Group strategy. The impulse to prepare a new strategy were the major changes taking place in the micro and macroeconomic environment and, first of all, the need to strengthen the Company’s position for our dynamic development.

We will focus our activities on our core business: refineries and the petrochemical business, fully integrated with refineries, and managing the largest retail network in the region. While focusing on our core business, we are also planning divestment in the chemical and telecommunications sector in order to release the capital involved. When improving our core business, we will not forget about our development – we plan to develop our production business and enter into a new area – the electric energy sector.

Successful measures aimed at efficiency improvement will give us a good start for our further development. The key measures will include: further improvement of our operating efficiency, asset integration, improved sector management and value chain extension.

Basic financial data – sustainable development in safe financial parameters

The main financial goals until 2013 are as follows EBITDA [1]........  PLN 7.8 bn
ROACE [2]...........................................................................................   11% CAPEX.................................................................................................   PLN 12.6 bn
Financial leverage [3] .........................................................................   30%– 40%
Dividend policy....................................................................................   based on FCFE
[4]

PKN ORLEN’s capital expenditure in 2009-2013 leveled at PLN 12.6 bn, of which: refinery - 41%, petrochemicals - 39%, retail - 11%, E&P - 6% and support functions - 3%. Investment resources until 2013 include investment projects aimed at development (58%) as well as due to stricter regulatory requirements (6%) and necessary reconstruction (36%).

CAPEX – annual average (%)CAPEX

 

One of the basic assumptions of the Companys strategy is to achieve PLN 7.8 bn EBITDA in 2013, given stock valuation with the LIFO method. The financial goal does not take into account divestments, potential acquisitions or strategic partnerships. We will be consequently aiming at an improved return on invested capital, which is supposed to amount to 11% in 2013. The company priority is to maintain debt level within 30%-40% of the value of equity capital. In 2009, financial leverage will temporarily increase due to the continued implementation of advanced investment projects. We expect an increased free cash flow for 2010 and consequent reduction in financial leverage over the next few years, enabling for the Company’s further dynamic development.

EBITDA according to LIF O (PLN bn)

ROACE (%)

To ensure continuous generation of financial resources and to support financial leverage reduction, we base our dividend payment policy on the FCFE indicator – at least 50%. Sale of assets not related to the Company’s core business will definitely increase free cash flow to shareholders.

Commentary

Financial safety upon implementation of strategic plans will be ensured by our investment project policy, which takes into account verification of plans based on the rate of return and prioritising plans depending on the market situation.

Refinery production

In the refinery sector, one of the key measures will be to increase the production of diesel oil and petrochemical charge, combined with increased oil processing. In 2013, the output of the most profitable medium distillates will go up by 6 percentage points compared to 2007, to a minimum level of 49%. Consequently, diesel oil production will go up by 44%, to 12.5 mn tonnes.

Where economically justified, service oil processing in selected ORLEN Group refineries will be considered.

In 2009–2013, we will implement an investment programme at the assumed expenditure of PLN 5.2 bn. The largest investment projects in the sector will result in an increased diesel oil production, among others at the desulphurisation unit in Płock and in AB Mažeikiu Nafta.

Improved efficiency will be achieved based on Solomon’s benchmarks: improved energy consumption, labour intensity and plant utilisation indices. Those measures will result in PLN 4.5 bn EBITDA in the refinery sector in 2013.

Logistics

A major element of improving our competitive advantage will be the further development of logistics. Among the most important projects in this area is the construction of a product pipeline from the Mažeikiai refinery to a sea terminal, which will enable increased export volume and lower transport costs. There will also be new product pipeline sections in Poland between Ostrów Wielkopolski and Wrocław, and between Boronowo and Trzebinia. We are also planning to thoroughly use the potential of existing and new caverns in order to satisfy our storage requirements and profit from the stored products’ business cycles. We will continue to restructure our network of owned storage facilities.

Wholesale

The main objective of the wholesale sector is to maintain its leading position in its respective states. Strategic assumptions for this sector focus on increasing EBITDA by PLN 200 mn in 2013, mainly through improved trade conditions. One of the major elements of the strategy is to sell over 1/3 of the volume via the company’s own retail network and to secure and actively take over import channels.

Retail

As for the fuel station network, we will continue our previous successful brand policy and increase non-fuel sales efficiency per station and per brand. The average annual capital expenditure in the retail sector will amount to PLN 300 mn, i.e. the total of PLN 1.4 bn in 2009–2013. In 2013, the retail sector impact on EBITDA is expected to be PLN 1.2 bn. The crucial element of our retail strategy will be the continued rebranding of fuel stations and the development of franchise networks. Until 2013, we expect improved retail sales volume share on all home markets by 4 percentage points.

Petrochemicals

PKN ORLEN’s progress in the petrochemical sector will be determined by investments in production facilities and efforts to further enhance efficiency. The situation may improve after price policy changes and changes in indicators and output structure upon application of Solomon and PTA [5] benchmarks. One of the most important investment projects will be the PX/PTA installation, which will ensure an increase in EBITDA to PLN 2.7 bn in 2013. This strategy provides for PLN 4.9 bn of capital expenditure for petrochemical purposes until 2013. Upon analysis of the situation, it seems that there is a need for divestments, too. Due to limited synergy with the core business, we decided to release capital engaged in the PVC and artificial fertiliser plants.

Exploration and production

In order to ensure the best possible solutions in terms of raw material policy, we will establish long-term oil supply contracts, some of them offering substantial discounts, and short-term purchases will focus on temporarily undervalued brands. One of our chief objectives will be to ensure at least two supply directions for each refinery. This will ensure safety and optimum structure of supplies.

E&P projects will mainly focus on the already identified sources in states with stable position sand acceptable risk levels. We plan to regularly analyse the situation in the sector and profit from investment opportunities, and, where possible, make strategic partnerships. We plan to achieve PLN 182 mn EBITDA in the sector in 2013.

Energy

One of the new elements of our strategy is the energy power sector. In order to ensure safety in the sector, we will implement organic growth, mainly through investing in co-generation and increased media production to respective plants. We are also planning non-organic growth within the existing technologies, assuming potential cooperation with business partners.

[1] EBITDA = operating profit before tax and financial expenses increased by depreciation; applies to ORLEN Group, LIFO stock valuation method.
[2] ROACE = operating profit after tax / average capital invested in a period (equity + net debt).
[3] Financial leverage = net debt / equity.
[4] FCFE – Free Cash Flow to Equity.
[5] PTAI – Phillip Townsend Associates, Inc.

 


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