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Edited Transcript of LTS.WA earnings conference call or presentation 20-Aug-19 7:30am GMT

Q2 & H1 2019 Grupa Lotos SA Earnings Call

Elblaska Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupa Lotos SA earnings conference call or presentation Tuesday, August 20, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jaroslaw Kawula

Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer

* Mateusz Aleksander Bonca

Grupa LOTOS S.A. - President of the Management Board & CEO

* Wojciech Zengteler

Grupa LOTOS S.A. - Senior Specialist of IR

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Conference Call Participants

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* Michal Kozak

Trigon Dom Maklerski S.A., Research Division - Research Analyst

* Oleg Galbur

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

* Piotr Dzieciolowski

Citigroup Inc, Research Division - VP

* Robert Maj

IPOPEMA Securities S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Grupa LOTOS' Second Quarter and Half Year 2019 Financial Results Conference Call.

I will now hand you over to Mr. Wojciech Zengteler, Investor Relations. Sir, please go ahead.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [2]

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Thank you, operator. Good morning, ladies and gentlemen, from a sunny Warsaw. Today, we will present to you the figures for the second quarter of 2019 and the overall first half 2019.

Today's presentation will consist, as usual, of 2 parts. First, we will go through the presentation that was delivered in the morning. And later on, we will have time for question-and-answer session.

I would like to invite -- I would like to introduce today's speakers, Mr. Mateusz Aleksander Bonca, the CEO and the President of the Management Board.

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [3]

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Good morning.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [4]

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And Mr. Jaroslaw Kawula, Vice President of the Management Board responsible for Refining & Marketing.

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [5]

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Good morning.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [6]

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Now I would like to hand over to Mr. Mateusz Aleksander Bonca who will begin the presentation.

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [7]

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Good morning, everyone. It's a pleasure to meet you again after this fantastic 6 months of 2019. The presentation is, as usual, structured in a way that we would present key highlights; then obviously a couple of words on the strategic objectives for 2017-'18, the results of it; and then a couple of words on external environment; and then, obviously, we will go into the details of each of the segments.

So if I may ask you to go to Page 4. These are the key highlights showing that the LIFO EBITDA was above PLN 1.4 billion, flat year-on-year for the first 6 months of 2019, which shows that we are capable of delivering solid and stable results despite worsening of the overall macro environment and also the events that were happening, and we'll discuss later.

The EBITDA LIFO decreased 5% year-on-year for the second quarter of 2019. It's ending up at PLN 783 million. You've seen this figure already as we've published our quarterly estimations 1st of August. On 30th of June, our General Shareholders Meeting approved the highest dividend in company's history, which is PLN 3 per share, and this would translate into a dividend yield close to 4% if you look at today's share price.

What is extremely important to us and we are really excited about is the EFRA Project that has finally made to the long-awaited milestone, the ready for start-up phase. And we hold our declaration of having the additional margin delivered still by the end of current year. What is also important to note is that we've been running at a very high capacity, full capacity for the first half of the year despite the disruptions that happened on the pipeline. And this also shows the strength of LOTOS and LOTOS refinery and its location close to the sea.

Page 5 gives you a glimpse into half year 2019 numbers in more detail comparing to the previous periods. As you see, again, flat EBITDA LIFO. And then, obviously, refinery running at full capacity second year in a row. Our hydrocarbons production close to 20,000 barrels oil equivalent -- barrels of oil equivalent per day. The decrease has been anticipated by us and also hopefully by you, and it reflects the maturing structural part of production assets with this view -- with the view of new fields coming in, in the fourth quarter and the beginning of 2020. I'm talking about Utgard and Yme.

Page 6 is the second quarter 2019 figures, a slight drop in LIFO EBITDA, again, a confirmation of strong crude oil throughput. And what might be interesting for you to note is the net debt to LIFO EBITDA parameter which is 0.8. And we have also indicated the impact of lease liabilities due to changes in the accounting standards.

Now a couple of words on strategy execution for 2019 -- '17 and '18. Just a couple of slides since we are very precise in setting our targets for this -- for both periods for '17 and '18 and then '19-'22. We've shared a couple of pages proving that we are delivering on what has been announced. So 2 years into the strategy, our condition -- our financial condition is stable in terms of both cash flows and debt reduction. Our operating targets are met. You will see 2P reserves of 90 million barrels, average production at 22,000 barrels per day, our throughput of the refinery of 10.8 million.

CapEx, this you would note that due to certain delays both on EFRA and also in the Upstream, some of the CapEx has been rescheduled into the second strategic period, so '19-'22. Still, we are proving that the highly complex projects are getting delivered.

Page 9 gives you a glimpse on -- there was a 2-pager in the strategy, which was showing KPIs for the period. If you look at the operational metrics, they are met only in the retail. It's close to the target when it comes to the number of gas stations, but the refining and also exploration and production both running well. EBITDA, higher than expected at the beginning. Total CapEx, slightly rescheduled and very healthy in that situation. This proves that what we've announced end of 2016 is getting delivered. And we also hope that going forward, even keeping in mind certain delays in projects, keeping in mind those delays, the second period of the strategy, the KPIs will be met.

Now external environment, coupled, of course, on what's happening on the market versus the assumptions that we had on Page 11. Macroeconomic environment, Brent, I would say, in line with the expectation that we've set. Natural gas, slightly below. And then looking at the product crack spreads: gasoline, lower; diesel, lower; and heavy fuel oil, also higher, which means that we were actually in a more challenging macro scenario that we've expected. Still looking at the financials, we've defended our results comparing to the last year and last periods.

Page 12 gives you a glimpse on how we see the market. We see the appreciation of U.S. dollar, but we also see a strong GDP growth in Poland. And we see healthy consumption of our key products on the domestic market, both diesel and gasoline.

Page 13, another glimpse into how the cracks and crude oil and nat gas prices were changing over time. Interesting to note, but obviously clear to you as well is the change of relation between diesel and gasoline back to the previous periods figures.

Now I would hand over to Jaroslaw Kawula to talk first about Exploration & Production and then Refining & Marketing.

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [8]

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Thank you. So now let's move to Slide #15, and we are showing the average production and reserves of all our key assets.

And on Slide #16, we can see these numbers accumulated. Our overall production figures, the production has dropped year-on-year by 13%. And the production split is typical, so the vast majority is Norway, second is Poland and Lithuania is the least significant one. Hopefully, we are going to see improvement in the Norwegian production after the announced projects finalize namely Utgard and Yme next year.

So comparing reserves. Compared to the last -- to the end of 2018, the reduction of reserves is only the effect of produced oil.

Let's move to Slide #18 which shows the results. And a negative result is the effect of lower production, but also the effect of macro environment, lower crude prices and, most importantly, nat gas prices.

Let's move to Slide #19. This is the half year, the previous one was totally. This one is half year, but the conclusions are similar. The effect is lower, minus 13% in EBIT year-on-year.

Now let's move to Refining & Marketing. And one word of explanation, we decided to change reporting in both our key segments. So instead of Upstream and Downstream, we are now reporting Exploration & Production and Refining & Marketing which are, in our opinion, better descriptions of our key operations.

So let's move to Slide #21, where we are showing the volume sales of refined products, and very good results for second quarter of 2019, showing very good resistance to market environment and especially to disruptive environment caused by chloride problem in pipeline euros.

That transfers to very healthy results in Refining & Marketing showing improvement in quarter-to-quarter -- I mean, year-on-year, but quarterly results of plus 3% despite macro environment that was not that favorable and, of course, despite this chloride problem.

Now let's move to half year, Slide 23. Here, we can see improvement in clean EBITDA LIFO of 14%, but that shows very healthy and very good operating parameters of Refining & Marketing segment.

Slide 24 showing model margin evolution. And as you can see, we are in a negative trend right now for the past couple of quarters. And the switch of the position with PKN is the effect of a switch between gasoline and diesel crack spreads.

And now let me hand over to Wojciech Zengteler who is going to present the overall consolidated financial results. Thank you.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [9]

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Thank you very much. Ladies and gentlemen, Slide #26, the decomposition of the operating results comparing year-on-year with fairly, fairly flat development. A few items that I would like to highlight here. The increased depreciation year-on-year is a net effect of 2 components: first of all, within Exploration & Production segment, we have a lower depreciation, which is a natural consequence of the lower level of hydrocarbons production; on the other hand, the introduction of the IFRS 16 leases caused an increase of depreciation within the Refining & Marketing segment.

The one-off items decomposed below, 2 usual effects: so the FX differences and the so-called LIFO inventory impairment, which we are showing, too, in order to assure consistency with the figures reported in the previous periods.

Slide #27, which has the similar structure, but it is showing the cumulative results 2019 comparing to 2018. And basically, the same story, net profit staying a little bit below, but the reported figures are lower than in the previous periods. That's, of course, a consequence of the macro environment where the key parameters were rather flat instead of being in a growing trend, what's happening last year which, of course, has an effect on the inventory valuation and brings the reported figures up.

Slide #28, more into, let's say, financial side, not from the side just the P&L, but the operating cash flow and the CapEx. The CapEx within the current year, the operating cash flow within the current year, a little bit lower than the reported EBITDA. This has been caused, first of all, by the movements on the working capital, the increase of receivables with the 2 other elements staying pretty flat, and the other element negatively influencing cash flow comparing with the previous period in the tax paid, which is a normal compensation of the tax due to be paid for the payables that were set from what has been paid in advance mostly for Grupa LOTOS but also for LOTOS Norge. Simply, the payment -- tax payments for 2018 in the end were lower than the effective tax that was to be paid, the due tax, and that is why now we have to compensate and make up for the previous years. So a normal cash flow situation, nothing unexpected.

And on Slide #29, where we are confirming the overall situation in terms of debt, here also a change comparing to 2018. We're trying to show the effects of the IFRS 16 for the leases, which obviously has a negative influence on our parameters. But here, those bars have 2 components. First of all, this is the situation that would have been if the IFRS was not introduced. Just to show you that, in fact, we are not growing in debt, but this is simply a different method of presentation. So just the accounting rules changed, nothing changed within our financial situation.

Thank you very much. This concludes the presentation side. And now I hand over back to you, operator, and we are ready to take the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michal Kozak from Trigon.

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Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Research Analyst [2]

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I have 3 questions. The first one, what was your annual volume gas consumption? And how much did you save on gas price decline in the first half of this year, but only in the refining segment and maybe on year-on-year basis?

The second question, could you give us any guidance on Upstream volumes for the second half of this year?

And the first -- and the third question, do you think that it's likely for LOTOS to maintain refinery throughput next year on a year-on-year basis, but despite EFRA Project and amidst signs of a weaker macro environment?

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [3]

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Okay. Thank you for your questions. Jaroslaw Kawula speaking. Annual gas consumption of the refining part of LOTOS is roughly 0.5 billion cubic meters. And taking into consideration that our model margin reflects gas consumption of the refinery, we can say that currently, the effect of lower prices of natural gas is reflected in the reduction of operating cost by -- excuse me, from $2 to $1.2 per barrel -- $1.5 per barrel in Q2.

Now second question, Upstream volumes in second half of 2019. We expect that the production of our currently producing fields will be dropping in a manner similar to previous quarters. But we expect the Utgard field to come onstream in fourth quarter of 2019 with the production of 4,000 barrels per day. So that should be reflected at the end of this year.

And last question regarding crude oil throughput. Currently, I don't see any reasons why we would reduce our crude oil throughput next year. With EFRA onstream, the most probable case is the crude oil maximization.

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Operator [4]

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We have a question from Piotr Dzieciolowski from Citibank.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [5]

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I wanted to ask you a couple of things. So firstly, you -- a couple of months ago, you stated you will be working on an update on the strategy. I just wanted to ask you when shall we expect any new message in terms of a medium-term development for the company?

And second thing, what -- if you can give any directions, what kind of -- what are your plans with the cash flow after the EFRA completion? Do you think about increasing dividends? Do you think about new projects? What kind of -- directionally, what these projects could be?

And also, can you please give us an update on this Letter of Intent with Grupa Azoty PDH project? Where is this now going? And have you taken any decisions or new actions in this scope?

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [6]

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Thank you very much. This is Mateusz Bonca. Thank you for all these questions. I'll take them one by one and, hopefully, result in (inaudible).

So what we did today is we presented how we did in 2017-'18 versus our strategic targets. We've also looked into the figures. And my personal belief is that the figures that we have published in our strategy that we -- that is still ongoing until 2022 are in parallel, in line with what is happening with the company. Therefore, given the changing regulatory environment, given the IMO directive with 2 directives, the investments that we are now considering and also the certain delays on the projects that we have, meaning EFRA, B8, you obviously understand that the moment when we should be publishing any revisions into the strategy should be slightly later than today.

Now I would add into it the discussion that is happening between PKN Orlen and the EU Commission on the potential merger between the 2 companies, which also adds to the -- adds a bit of a flavor to the overall situation. Therefore, we continue with the strategic KPIs that we've set end of 2016, which are giving us direction until 2022. And obviously, we are hoping to take certain investment decisions. This would go directly to the question that you -- the second question on the cash flows.

We are planning to take certain investment decisions towards the end of this year, beginning next year. One of those would be directly linked with our Refining & Marketing segment. So this would be the next big investment in the refinery. As you always know, we've published a couple of strategic directions. Now the most probable one is the [LOTOS] block, and we are in the final stages of technical and economical revisions of the project.

We are also in the last stages of decision-making for B4/B6, so final investment decisions for that one. And you've seen the Letter of Intent signed with Grupa Azoty where we are actually running a proper due diligence of the project to decide on whether and how to get involved in the project that is also in line with the strategic targets that we are setting end of 2016. We've been naming olefins as one of the potential directions for the future development of Grupa LOTOS. So that's how we plan on the strategy on the use of future cash flows and also on the PDH.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [7]

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Okay. Excuse me, I didn't understand your project in the refinery. What's this project? Can you give us a little bit more detail? What is this about?

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [8]

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Okay. As we announced the publishing our strategy at the end of 2016, we were at the time considering 4 options for Downstream investments in the second strategic period. And one of these options was and is a Group 2 base oils production block. The effect of both EFRA and previous expansion program, 10+, means we've got some attractive feedstock to produce base oils. And this is why we treat this as an opportunity to increase model refining margin and to play a major role in lubricants business, which is shifting towards more advanced Group 2, Group 3 base oils. So we are now doing studies related to both technology and market environment for this project.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [9]

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Okay. And just the one follow-up on this B4/B6, I mean from my memory, that's a gas project. What is your breakeven gas price to make this project economical? And is the current low gas price not creating any risk for the investment decision?

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [10]

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Going back to B4/B6, we are actually still ahead of a final investment decision, so we are actually reviewing the economics of the project. We're also observing how the market -- the gas market is developing. I wouldn't really disclose the metrics of the project at this stage. But we are planning to take a decision towards the end of this year, in the fourth quarter of 2019, together with the partner that is with us on the project.

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Operator [11]

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Our next question comes from Oleg Galbur from Raiffeisen Bank.

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Oleg Galbur, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [12]

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I have 3 questions. My first question one actually is a follow-up on the previous question regarding the production expectation for the second half of this year. Just to make sure I got it right, you said that you expect in the second half of the year the production to decline at the same rate as in the second quarter? Or you expect it to be flat in comparison to the second quarter of this year? And also if you can say a few words about the level of production expected for the next year. That would be my first question.

And then secondly, staying in the Upstream segment, we noticed that the average lifting costs have declined versus last year in Poland and Norway in the first half of this year. So I wonder if you could provide us more details and explain what have been driving the lifting costs lower?

And finally, on EFRA, you have provided a rather wide range of the expected impact of EFRA between $2 and $4.5 per barrel. So could you help us understand what sort of key assumptions are behind this impact and share with us some more details regarding the calculation, for example, what level of Brent/Urals spread do you expect for, let's say, the lower and upper end of this interval?

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [13]

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Thank you very much. This is Mateusz Bonca. So production expectation, just to explain, if you look into the current portfolio of our producing licensees or fields, you would see that this pattern continues. So there would be a certain natural drop in production and in line with what has been happening historically. Now we also have Utgard which is kicking in. I wouldn't really tell you the precise date on which it kicks in. But I believe we have a feeling on how significant the production that would be kicking in is, it's around 4,000 barrels per day, as Jaroslaw has just presented. So we will be observing the moment of Utgard kicking in, and this would have an impact on how the second half of this year and especially fourth quarter looks in terms of production.

You also asked about the EFRA Project. And here, you see that there is a rather wide range of the impact, $2 to $4.5, $4.6 per barrel for the refinery. The production or the product volumes that have been announced when the project was initiated are not really changing. But we are basing our current assumptions on rather a wide range of analysis performed by sophisticated analytics houses, right? We are actually seeing that there is certain discrepancy on how we think the impact of IMO would be. Obviously, EFRA is -- or the impact of EFRA is multiplied by the effect of IMO on the market. Each of the analytics houses or each of the analysis that we see, market analysis, shows that there would be an increase in -- or there would be an impact on the market. However, the range of those forecasts differ significantly.

So the best what we could do now based on what we see on the market is just to show the range, confirming that the initial assumptions of EFRA were maintained. However, we see certain upside if we -- if some of the forecasts that are maybe slightly more impressive if they come true. So this is how we see the EFRA. I wouldn't really disclose the details of our forecast initially of the parameters. We never did this, so we wouldn't really do it at the moment.

Now when it comes to lifting costs, I would hand over to Wojciech who will explain this.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [14]

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The differences on the lifting cost are not significant, first of all. I mean we are not talking about material changes. So in principle, there hasn't been anything systematical changing in the way we're calculating the costs. However, if you need further analytics, and we can drive it down in detail to really exclude any potential elements impacting it. But as I said, marginal differences the lifting costs for Norway are by $1 lower; for Poland, by $2 per barrel lower. So these are not significant changes in our view. Still -- and we don't see any particular elements. Still, if there is such a need, we will do some more enhanced analytics on this.

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Operator [15]

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We have a follow-up question from Piotr Dzieciolowski from Citibank.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [16]

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My extra questions. I just wanted to understand about the EFRA, given this is ready for start-up, what could go wrong with this? Do you have an insurance in case the installation doesn't start? Or it's not -- how do you assess a technical risk of this installation not really properly working at this point? Or have you done already test runs and it should all be fine?

And second thing, the same on the Norwegian production. I mean compared to the strategy we have before, I understand you showed the targets you delivered on the financials on your strategy, but the truth is that was mainly because the environment was very favorable while, in fact, operationally, you had couple of slippages both on the Downstream as well as on the Upstream side. So what is the risk that Utgard and Yme come later than expected or not as planned? How do you see this profile developing?

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [17]

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Okay. The question about EFRA reaching ready for start-up in the end of June, we are currently in the advanced stage of commissioning of key units of EFRA, namely the Delayed Coking Unit. And so far, we haven't noticed any problem that is material or, in other words, that is -- that hasn't been already addressed and we go forward with this. And we plan to do several test runs. So far, we have nothing to say else than what we announced in our message that we expect EFRA results in fourth quarter of 2019. And I hope that answers this question. Thank you.

And I'll pass on to Mateusz, who will answer about the Upstream or the Exploration & Production projects.

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [18]

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Yes. So I would say, I would actually refer back to the strategic assumptions. Actually, I'm excited that we are meeting financial targets. But obviously, what you've noted is that there are certainly delays with the ongoing projects, which is nothing new both for the Exploration & Production segment and also the Refining & Marketing. So these types of, as you named it, slippages do happen. What is key for us is to make sure that each of these investments is designed and then built up to quality safety standards and also will produce in the long term for the company.

Now as you may well know, the closer you are to the start-up phase, the lower the risk of significant slippages, right, so both with our EFRA Project but also with the Utgard and Yme projects. We went through a number of challenges, but we are close to the moment where these projects will be kicking in. What is especially exciting is the, as you named it nicely, YME project, the Yme project, which indeed probably consumed all the potential challenges that would have happened. But with the new plan that is now moving according to the schedule, we do maintain our assumptions on also disputes starting up towards the mid of next year, so second quarter of next year. So the projects' risk in time is decreasing. And we are doing all we can to make sure that these projects, when put into proper production or operational modes, will then stably produce in the next years.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [19]

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Okay. And just on a slightly different subject, on the PKN and LOTOS merger, do you -- when you think about the company, do you think about it in dual tracks or with or without PKN? Or do you just operate in the wait-and-see mode and see where we get to the completion of this deal? And how do you see the chances of this really being passed through before the new European Commission setup or they give a green light or not? I mean what you're basically thinking about the ongoing delay from the merger?

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [20]

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So that question is how we think about the merger itself. Obviously, we are still an independent company today, so we are pursuing our initiatives. We are active on the market. We are competing with all the competitors, all the market players that we have, and we pursue our strategic targets that have been set. Obviously, within the company, there is a team that is within the legal boundaries supporting the process of providing information to the EU Commission or to PKN for -- about the due diligence and the process that is run in front of commission.

I wouldn't really comment on the deadlines. You've seen the announcements both by PKN and by EU Commission on when the decision or how the process is structured today. We are obviously -- or my strategic goal is to make sure that the company is both mentally ready for the merger in case it comes through, if it happens, but it's also running at full capacity in a competitive mode until any fundamental decisions when it comes to shareholders structure come into place. And that's it, right? So we are competing. We are continuing our projects. We are targeting the goals that we've set. But we are also supporting, in a positive manner, we are supporting the transaction. There have been no objections from any other shareholders, and the transaction has been long in the market. So we are continuing in a positive mode. That's it.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [21]

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One more to follow up on the question on the lifting costs from Oleg Galbur. On the Norwegian side, we are seeing an improvement of structure in a sense that there is higher portion of costs from Sleipner versus Heimdal. And Sleipner definitely has a more efficient there, more cost-awareness approach, so they are more cost effective, and that's probably driving this $1 or $2 of improvement for Norway.

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Operator [22]

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We have a question from Robert Maj from IPOPEMA.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [23]

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So it's Robert Maj from IPOPEMA Securities. Well, my question on -- a couple of questions. So first, on the contamination of the crude in the Druzhba pipeline. Should we expect any distortion in the results in the second half, in the third quarter and the fourth quarter? That's the first question.

Second question is on the cost of the delays on the EFRA Project. What would be the additional CapEx that you needed to spend on the project? Because it is heavily delayed since over the year. What was the amount that you paid to the contractor or the construction company?

And the third question would be on the Upstream in -- on the Baltic Sea and also in Norway. LOTOS have been pretty slow in developing the Upstream deposits in -- on the Baltic Sea. Recently, you have purchased one of the exploration platforms for the B3 deposit. What should we expect to happen next with the development of the Baltic deposits? And what will be the strategy of the company with Petrobaltic being underinvested over the last years? Where LOTOS would head next with the local deposits?

And on the Norway deposits, I mean we know that Exxon Mobil is exiting its deposits on the North Sea. Would you see any appetite for the company to be part of the potential transaction -- M&A transactions in that region? Or are you satisfied with Utgard and Yme being delivered somewhere next year?

And maybe when we speak about Yme, what would be the production of these deposits going -- this deposit going forward? You mentioned that Utgard would be 4,000 barrels per day. So what should be the Yme production starting from the second quarter next year?

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [24]

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Okay. Jaroslaw Kawula here. Thank you for your questions. The crude oil quality problem in the Druzhba pipeline, we don't see any reasons to assume the impact of current situation on quarter 3 and quarter 4 financial results. As announced by PERN and the Ministry of Energy, the crude oil of good quality is coming from Russia through this pipeline. PERN is doing blending operations to blend away these chlorides with good quality oil. So the oil -- the refinery is getting -- is meeting the specification of GOST. So from the refinery perspective, the situation is, I would say, more or less normal.

Now the cost of delay of EFRA, we can say that the project budget has not increased and will be met. So having that in mind, we don't expect additional CapEx to be spent on EFRA due to delay. Thank you.

And now I am giving the microphone to Mateusz who will answer the third question. Thank you.

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [25]

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All right. So coming back to the Exploration & Production, and in Poland, indeed, we are actually running a couple of projects. One is the B8 development or increasing production. And you have B4/B6. We've also, as you noted, purchased another 2 that would support B3 upgrades. And going forward, there are still a number of licensees that are on a number of areas on the Baltic Sea where we might be considering or LOTOS Petrobaltic might be considering increasing the intensity of its operations. So with the current portfolio of the Baltic Sea projects, we still remain the key operator on the Baltic Sea with the biggest experience here. And we believe that certain further developments will be happening going forward.

And you also asked about Yme, the next year's contribution or the contribution in a stable state. Our assumption, our plan based on the project's parameters is around 5,000 barrels per day of oil equivalent product. So this is what should be kicking in towards the mid of next year.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [26]

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Yes. If I may, a follow-up on this Exxon exiting the North Sea deposits. Would you be interested and have more appetite for these deposits going forward? And if I may come back to the EFRA Project, what should we expect from the depreciation/amortization change in the fourth quarter this year after commissioning the project on quarterly basis going forward?

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [27]

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Okay. So Exxon Mobil first and our interest in the pipeline of projects. We are both considering single licensees or single fields but also looking into other M&A opportunities. Obviously, when any of those is close to getting materialized, we will be informing the market, right? But believe us -- or believe me, as much as you know about Exxon Mobil or some other transactions, potential transactions, we are also looking at those actively.

And now Wojciech would comment on the depreciation.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [28]

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In terms of the additional depreciation following the completion of the EFRA Project, it's difficult to definitely state what portion of the fixed assets under construction -- or assets under construction would be switched to fixed assets already in the fourth quarter. But in general, if you think of overall budget of EFRA, which is around PLN 2 billion, and the sale -- different life expectancy of different elements that are making the whole project, which is a number of pipelines of different little elements because there is literally hundreds of separate fixed assets, each of them have a different expectancy life. The depreciation probably should be, on an annual basis, ranging logically somewhere between PLN 100 million and PLN 150 million.

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Robert Maj, IPOPEMA Securities S.A., Research Division - Analyst [29]

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Okay. And which day should we expect the final switch-on of the installation?

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [30]

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Let me -- so we are actually -- after we RFSU, we are continuously starting up the installation. It's a complex piece of equipment that is being set. And therefore, we are already in a commissioning phase and testing phase of certain elements of the installation. And as announced earlier, we hope for the full complex to be running and contributing in the fourth quarter of 2019, but it's not like a single switch launch that is happening.

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Operator [31]

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We have no further questions for the moment. Dear speakers, back to you for the conclusion.

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Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [32]

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Thank you very much, and thank you, ladies and gentlemen, for participation in the call. For any information that's of your interest, the Investor Relations team is ready for a follow-up. So please call us and give us a line via the email, and we will be happy to respond. Thank you very much, and have a good day.

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Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [33]

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Thank you.

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Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [34]

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Thank you.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.