U.S. Markets closed

Edited Transcript of LTS.WA earnings conference call or presentation 30-Oct-19 8:30am GMT

Q3 2019 Grupa Lotos SA Earnings Call

Elblaska Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupa Lotos SA earnings conference call or presentation Wednesday, October 30, 2019 at 8:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Alexander Burgansky

Renaissance Capital, Research Division - MD and Head of Oil & Gas Research

* Ildar Khaziev

HSBC, Research Division - Analyst

* Piotr Dzieciolowski

Citigroup Inc, Research Division - VP

* Tamas Pletser

Erste Group Bank AG, Research Division - Oil and Gas Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [1]

--------------------------------------------------------------------------------

The event will consist of 2 parts. During the first part, we will present the overview of our operational topics, reporting segments and overall consolidated results. And later on, we will hand over to you, opening the floor for question and answer.

I would like to introduce today's speakers. Mr. Mateusz Aleksander Bonca, the Chief Executive Officer and President of the Management Board.

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [2]

--------------------------------------------------------------------------------

Good morning.

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [3]

--------------------------------------------------------------------------------

And Mr. Jaroslaw Kawula, Vice President of the Management Board, responsible to Refining and Marketing. My name is Wojciech Zengteler, I'm representing the Investor Relations department.

And now I would like to hand over to Mr. Mateusz Aleksander Bonca, who will begin today's presentation.

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [4]

--------------------------------------------------------------------------------

Thank you, Wojciech, and once again, welcome from really, really sunny Warsaw, which is a pleasant surprise today in the morning.

As usual, we have shared a -- we'll be sharing a document with you, which is highlighting our key achievements over the third quarter and also summarizing 9 months of 2019. I would go through the first couple of sections and hand over to Jaroslaw Kawula, and finally Wojciech is going to close with the financials.

Going to Page 4, I would be happy to share a key -- a couple of key highlights for this period. First of all, 9 months cumulative LIFO EBITDA at circa PLN 2.3 billion, which is flat year-on-year, showing our capability of delivering solid and favorable results despite challenging macro environment in Upstream, and also proving the resistance of the business model that we have for the upstream and downstream, compensating at different moments of the market.

LIFO EBITDA increased by 9% quarter-on-quarter to the level of PLN 856 million. You are familiar with the number as we've been sharing this quarterly estimates on October 18. Highest dividends in company's history paid, PLN 3 per share. And obviously, some very good operational or projects highlights. EFRA project has finally made its long awaited step. We are starting the operations phase. And obviously, we'll go into details of it but that's so far, so good.

We also had a couple of successes in exploration and production business. First of all, start of production on cost-effective [Kipra] Field in Norway, with very good financials and also ahead of schedule. And also [power in the Baltics] in the Baltic Sea, we've rebuilt the Petrobaltic platform, and now it's at -- in the Baltic Sea next to B8 waiting to be attached and then launched.

From a financial point of view, thanks to new financial agreements, we have refinanced our loans for the 10-plus program, removed collateral on some assets and relaxed our restrictions on our business. Our refinancing horizon was extended, financing costs of capital have decreased and obviously, the financial liquidity was improved, which also gives us a more stable on the new trend in the future operation.

Page 5 is a deep dive into the key highlights of 9 months. Clean LIFO EBITDA remains on slightly higher level than last year, with Refining and Marketing contributing higher than in 2018. Refinery is at its full capacity, another consecutive year or quarter in a row. Just reminding you that 2017 was a maintenance shutdown in the refinery. And still 2 years down the road or 2.5 years down the road after the maintenance, we are operating at super efficiency. Nine months hydrocarbon's production at the level close to 19,000 barrels of oil equivalent decrease has been anticipating -- anticipated, reflecting the maturing structure of oil producing assets. But please note that the production from Utgard, which began at the end of September, did not impact the operating results of the segment. We are looking forward to mid-2020 for the kick-off of (inaudible) project.

Page 6, 3 -- third quarter of 2019. As I've already mentioned, a 9% increase of Clean LIFO EBITDA quarter-on-quarter, with significant Refining and Marketing contribution, higher than in previous periods. Full capacity utilized and 3 months of hydrocarbons production at a level close to 80,000 barrels per day. Obviously, with a slight decrease anticipated but reflecting the depletion of our product assets.

Going to external environment, which was slightly challenging for us, Page 8. The comparison of our figures versus our assumptions. But in principle, our strategic collections [stayed in good] figures for crude oil. And when it comes to natural gas, we stay far behind with the

(technical difficulty)

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Yes, ladies and gentlemen, we will continue with the conference in some minutes. Please hold the line.

Ladies and gentlemen, we now go on with our conference.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Hello, back again, some technical problems. So I'd assume we're back on Slide #8, speaking about nat gas situation.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much, and apologies for that. We remain connected, but this gives me a feeling that we might consider our telco as the next step of development, as there's some challenges in connection.

So anyways, going back to Slide 8, which I guess is the one where we dropped out. Our predictions when it comes to crude stayed in line. Obviously, the situation today is more or less in line with the predictions that we had in our strategic assumptions. But we -- but there is a huge decrease in value of nat gas. On the Refining and Marketing side, the HFSO crack is better. So that's negative to other strategic targets. But that's the situation.

Page 9, a couple of insights on how the market is looking, further appreciation of USD versus PLN. Slight decrease in GDP growth, but still healthy and on the right-hand side, graphs continue to show still strong domestic demand for fewer products, especially diesel demand, which has grown by almost [2.6%.]

It extends continuation of [PD visible switch] of profitability of gasoline versus diesel. And yes, these are -- this is how we view the market. And this is the conditions in which we are performing.

Now I'll hand over to Jaroslaw to take it forward to the exploration and production business.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Thank you, Mateusz, and good morning, everyone. Just to check, the operator, are we online?

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Yes, you are.

--------------------------------------------------------------------------------

Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [10]

--------------------------------------------------------------------------------

Thank you. Okay. So let's move on to E&P segment. And Slide #12 shows our producing assets. And the new figure and new field producing in third quarter is Utgard, already mentioned. The figures here show quarterly average numbers, but please take into consideration that Utgard started producing only on 18th of September. So the average production is lower due to a not complete quarter in production. So for fourth quarter, we expect even 9,000 barrels of oil equivalent per day. But it is an early production, and we expect it to go down to a plateau production for the 5 years average of roughly 4,000 barrels of oil equivalent per day.

And second important fact in the Upstream. It's not reflected here, is the B8 production that we announced 1 quarter ago, that was a short stop in B8 production. So the figures are slightly lower, but it is due to maintenance rather than just a production decline.

So let's move on to production figures. And we can see that even with this decline in B8, that the Utgard was able to produce enough to have 1% growth in production compared to third quarter of 2018. So that is a healthy situation. And of course, Utgard, as you probably know, is roughly 50-50 oil to gas. So that's also important having in mind the macro environment with crude oil relatively stable and gas prices plummeting down. So the production split is with slightly higher Norway production compared to third quarter of 2018.

So reserves. Reserves dropped due to produced oil. And that's more or less this.

Let's move on to Slide #15. With financial results, and it is a rather steep decline compared to 9 months of 2018. And this is mostly or, I would say, solely due to macro environment changes. And especially gas prices drop. So the 37% drop in EBIT after 9 months of 2019 is the result of macro environment changes. But I would like to stress out that the gas price that affects our exploration and production results has also a positive effect in the refining and marketing part because it is a significant part of our operating expenses. So reduced gas prices cause OpEx for downstream lower.

So let's move on to quarterly exploration and production. EBITDA evolution. And here, now I would say, rather significant decrease of EBIT for third quarter. It is 90% lower year-on-year. And as explained earlier, the nat gas prices is the main cause of this effect.

Let's move on to Refining and Marketing part. That's Slide #18. And beginning with volume of refined product sales. And we can see an increase in refined product sales compared to last year and the second quarter of this year, which is a reflection of very strong domestic market and continued growth of especially diesel sales.

So let's move on to Slide #19. It is cumulative 9 months result of Refining and Marketing segment, we can see 14% growth in Clean LIFO EBITDA. And it is the cumulative effect of both model margin and the appreciation of USD versus PLN.

So right, I would say, healthy results in the Refined and Marketing part. Considering third quarter only, we can see similar 14% growth. And as usually, we are showing of one-offs, and the detail is shown in the bottom of the chart. And that is showing a good, healthy situation in Refining and Marketing segment.

And last part or last slide of this part of the presentation is the evolution of refining model margin. Third quarter 2019 was healthy in this respect, USD 8.1 per barrel in the refinery model margin. And this is the part of the presentation in which I would have to explain our comment in the -- in our results that we are suspending publication of our model margin because it no longer reflects the actual product structure of refined products in the refinery due to the delayed coker startup in third quarter of 2019. So to satisfy market, we are going to publish monthly production figures with the split of products produced to give you a better understanding of how EFRA project influences the product structure of the refinery, and give you more opportunity to properly assess the effect of EFRA on refinery margins.

And after the coker project and the coal refinery stabilizes. After test runs, we are going to develop a new formula for model margin and start publishing new model margin when we are ready.

And that concludes this part of the presentation. I am handing over to Wojciech, who is going to tell you about consolidated financial results.

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [11]

--------------------------------------------------------------------------------

Thank you. Thank you very much from my side. The combination of what's been said in the segment and what's been signaled at the beginning in the highlights, Slide #24, which you can see is a slight decrease of quarterly LIFO EBITDA results year-on-year. To a larger extent influenced, of course, by the underperformance already mentioned in the upstream segment, what has been represented where the EBITDA was quite significantly lower that in the previous year.

Just I would like to mention that despite this harvested production was fairly in line. We had a slight drop of the production of the sales volumes, overall 12% year-on-year. And especially, larger contribution of this dropping from Poland. And as you know very well, Poland has this more fortunate combination of oil to gas in terms of revenue generation. So the drop of 33% in Poland has led to this negative effect, and especially combined with one of the lowest historical prices for gas that had a negative impact on the performance of the E&P area.

On slide number -- in regard to slide, I spoke about the third quarter. So one slide ahead, Slide #23. Cumulative figures for the 9 months here, a little bit smoother, showing very -- quite flat year-on-year. And the combination of 2 effects, lower performance of Upstream, compensated by a better performance of the Downstream segment. As usual below you see the breakdown of the one-off effects influencing the results. However, as you may see, there hasn't been any significant items that came up in the current year, just PLN 18 million of negatives.

And moving from reported figures to a little bit more of liquidity and cash perspective, Slide #25. Where we're showing the combination of CapEx in comparison with how the operating cash flow is moving. The CapEx [faced on a slight lever] quarter-on-quarter. Basically, we are investing money, those projects which we are already quite aware of, assets on the final round our E&P projects in Norway, mostly the Utgard that's already been out there and producing, and then which we are expecting to start producing from the first half of 2020.

So that you can see also from the quarter, the operating cash flow is above the level of PLN 1.2 billion, which brings the overall cash flow for the 9 months to the level of PLN 2 billion. So pretty close to the reported EBITDA LIFO figure. And that is proving that, let's say, moving from the figures -- the reported figures, the cash is there within the company.

Slide #26. So a snapshot of our debt situation, what's already been signaled is the recent move we've made in the refinancing of the 10-plus program, which gave us a lot of additional flexibility here, which you can see on this slide is the usual combination of parameters and ratios. The most important for us is, of course, the net debt to Clean LIFO EBITDA, where we are phasing out the effects of the lease liabilities. And if you exclude that, you can see that we remain on a healthy level without any further movement upwards.

One element that, of course, acting negatively towards the overall position, balance sheet of -- the balanced position of our debt is the strong U.S. dollar against the zloty, which has an immediate transmission to those overall ratios. This concludes the presentational part. Thank you very much.

And now I hand over back to the operator for the questions and answers.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question received is from Tamas Pletser from Erste.

--------------------------------------------------------------------------------

Tamas Pletser, Erste Group Bank AG, Research Division - Oil and Gas Analyst [2]

--------------------------------------------------------------------------------

Basically, I have 3 questions. First of all, retail. I saw that your retail performance almost doubled year-over-year. And I presume that the volumes have not improved so much year-over-year. So what has caused your retail margin to double almost from 2018? That would be my first question. My second question would be the impact of natural gas on your overall performance. I mean, you mentioned in the presentation, you produce around 8,000 barrels per day, natural gas. But I presume that your refinery is also a heavy user of natural gas. Have you calculated the net impact of the decline in natural gas prices for your operations? I just wonder how much natural gas your refinery is consuming. And finally, you mentioned in the presentation that you are now free from the obligations of this 10-plus financing program. Can it also have an impact on your future dividend payment?

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [3]

--------------------------------------------------------------------------------

Thank you for these questions. It's Wojciech Zengteler here. I will take the first question on the retail. The most important effect of the increase is, of course, the implementation of the IFRS 16, which had a predominant impact on what we are -- on what we are having in the results. The overall impact on the results of the retail area, retail part of our businesses. In -- cumulatively for this 3 quarters make up to PLN 45 million. For the third quarter, it's around 13 -- it's around PLN 14 million, PLN 15 million. So then if you look into quarterly, and sort of take out this effect, you basically move from the PLN 52 million last year, and moving into PLN 90 million this year this year, you take out those PLN 13 million, so it's to PLN 87 million. And in terms of the volumes, of course, the impact is not significant. But please bear in mind that we're constantly improving our quality of the network. The market is definitely changing. And we are seeing an improvement overall in retail and spot. So it's been sort of visible in some recent publications that also other players are strongly benefiting. And we are not in a different situation as we are operating on the same market.

--------------------------------------------------------------------------------

Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [4]

--------------------------------------------------------------------------------

Okay. Now going to question #2. Yes, this is a kind of natural hedge in terms of gas consumption versus gas production in the consolidated results. And for 2019, the numbers are roughly equal. So in terms of gas consumption, we expect to consume roughly 600 million [normal Polish meters] in the refinery. And it is more or less equal to the production figures in our upstream business. So as I told you, it's a natural hedge for the consolidated results.

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [5]

--------------------------------------------------------------------------------

And going back to the question #3 around refinancing of 10-plus and the dividend. Obviously, our goal with the 10-plus was to increase our flexibility, remove certain restrictions from the way we can use cash flows in the company, but also flatten the repayment schedule, which has certainty in 2021, if I'm not mistaken. Now when it comes to the dividend, you've seen our targets in strategy to be ready to pay out the dividends. We've also proved to have the capacity. And also based on the ongoing situation of the company, we were advising on the level of the dividends. I would say that it's slightly too early to comment on how the dividend would look going forward. But the aim of 10-plus refinancing was to, first of all, bring flexibility -- management flexibility towards us to also make the company more stable or more balanced for future development.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question received is from Ildar Khaziev.

--------------------------------------------------------------------------------

Ildar Khaziev, HSBC, Research Division - Analyst [7]

--------------------------------------------------------------------------------

I would like to ask about your decision to participate in Polimery Police project, because your Letter of Intent expires tomorrow. Are you going to report anything in the following days? And the second one, in which months are you expecting to obtain final target output from EFRA?

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [8]

--------------------------------------------------------------------------------

Wojciech Zengteler here. In terms of PDH project, just reminding a couple of facts. First of all, the letter of intent is expires in today. Second of all, the company decided to adopt a way of communicating via paragraph of insider information according to market abuse regulation. And considering our legal obligation and also best practice in terms of transparency with the outside world and with the capital market representatives. Of course, any follow-up communications would be given according to the same procedure, by means of the current reports updating the situation on the project.

--------------------------------------------------------------------------------

Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [9]

--------------------------------------------------------------------------------

Okay. I hope that answers your question. And now going to the second question regarding EFRA project. We are doing our best to use EFRA units to full extent as soon as possible. But I am not going to give you and declare some firm month. This is why we decided to publish monthly production figures. And it will definitely appear in fourth quarter, as we announced in our comments regarding EFRA project development.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question received is from Piotr Dzieciolowski from Citibank.

--------------------------------------------------------------------------------

Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [11]

--------------------------------------------------------------------------------

I have a couple of questions. Can you tell us whether you have done the assessment of potential synergies with PKN Orlen? I remember a couple of quarters ago, we discussed how your refinery could be utilized with the processing of different products from kind how it would fit into the portfolio of PKN? And what kind of synergies you can get on the back of it or how much you could save on the CapEx? That's kind of a question, given that we are finally maybe closing to the end of the transaction, and we -- I think the market should be able to value these synergies. So that's the first question. The second question, I would ask you on your CapEx for next year, given that you already finished EFRA, how -- what is the kind of a figure you have in mind for the next 2 years or 1 year and so on. And then regarding the quality of your network as a third question of your retail network. Can you tell us what actually has happened because, of course, I wasn't on 500 of your station. But the stations I visit, they seem to be very under-invested compared to peers. So can you tell us what were the recent kind of CapEx spend? How many you open? How many you shut down? Or what has really happened that you improved your network really?

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [12]

--------------------------------------------------------------------------------

Thank you very much. So I would start with the synergies. Obviously, as you all well know, the whole transaction is structured in a way that PKN is buying or is intending to purchase shares from the treasury, which means that we are a passive subject of this transaction. Obviously, as communicated before, we constantly support in a friendly manner, but within the legal limits and with a proper legal shield, we supported the due diligence that was run by PKN, and which was also -- the market was informed about the closure of this step. On top of it, there is an ongoing discussion led by PKN Orlen with the EU Commission, which obviously, also requires certain input from our side. Now the question that you had was around synergies.

I believe that the team should be asked for the business case is, obviously, the PKN's team. Our main goal is to -- within the limitations or within the limitations or within the targets that we set in our strategy, within the operational capability that we have is to maximize value for our shareholders. And at a given time when the precise structure of the deal would be announced. We will be also ready to provide our view on the fair value of the transaction. But I would kindly ask you to direct the question on synergies towards the PKN.

I would also take the last question, which is retail and under-invested statement. I'm sorry to hear that you are actually having the -- you are not lucky by dropping at the stations that you believe are under-invested. What we've been doing over the past couple of years was increasingly, we're actually investing in this, in standardizing our stations. As you know, some of them are ours, some others are not, but we continue bringing new products, continue bringing same standards, both when it comes to the quality of service, but also the merchandise that is provided at the gas stations.

And obviously, when you look at the structure of gas stations in the past and today, there is a clear increase in quality of what we -- of course, we offer, which is also highly recognized by a number of analysis that we have and the awards that we are receiving. So I'm cordially inviting you to our gas stations to enjoy the quality of service.

--------------------------------------------------------------------------------

Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [13]

--------------------------------------------------------------------------------

Can I have a follow-up question on the synergies? I actually disagree with, to certain extent, with your comments that you only have a passive role because as you rightly said, you have obligation to secure the highest value for shareholders. And that means understanding the synergies is a crucial element for the selling party. That's why I've been trying to get for the last couple of quarters, how you think about the synergies? What kind of value creation is in the deal so that the sellers of the transaction, including the funds [of the listed] can benefit from this. So given that you have all the specialists that know how this refinery operate. Can I please ask you what is the spare capacity that could be utilized for processing heavy fractions from (inaudible) refinery. Is there any synergies on the production? I -- if I was selling the refinery, I would know every single synergy and try to get value for it. So can you -- anyhow, say, whether you see the synergies and you have any kind of a figure in mind or it will be part of a transaction valuation?

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [14]

--------------------------------------------------------------------------------

Well, as you know, we are a stand-alone competitive company that is optimizing its business model as we speak with all the investments that are ongoing. Since you know the market well and the history of the market, there were also earlier discussions on how to potentially exchange certain flows of products between refineries, and these discussions are open. When you ask me for my personal view, my personal view is that there is an investment -- there is an investment opportunity, which will be valuable for LOTOS in bank. But when you ask me for the precise assessment of synergies, I would refrain from commenting at this stage given that the discussion with the EU Commission is still ongoing based on the publicly available information. This would also impact the structure of the deal and the availability of certain product streams but also trading capabilities. Hence at the moment, this element is frozen. Also between the EU commission and PKN Orlen, me personally but also the company will be able to comment on the synergies and the value of synergies.

--------------------------------------------------------------------------------

Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [15]

--------------------------------------------------------------------------------

Do you have an adviser on the disposal process? Do you have somebody helping you identify the value of LOTOS or will you do all of this work by yourself at LOTOS?

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [16]

--------------------------------------------------------------------------------

Since we both know how the M&A process flows. Grupa LOTOS at proper stages of the process is always going to work with proper quality advisers, both legal but also financial to assess the topic. At this stage of valuation or at this stage of transaction, we would also be providing our statement on the fair value of the deal.

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [17]

--------------------------------------------------------------------------------

So the last question from your side in terms of CapEx plans for the next years. As you know, and basically the reason for the situation has been explained by the CEO just a second ago. We are in a very complicated process, where there are a lot of unknowns in the air. That is why we would kindly ask you to give us some time in order to assess properly the potential CapEx and the projects where we will be contributing in the nearest future. Currently, we are definitely going to continue with the project that we are so far committed to. And here, we can name that the EFRA that still has some, let's say, leftovers to be put within 2020 budget. Not a huge amount. Definitely, to a certain extent, retail, which is improving network has helped us to contribute to higher results. Of course, projects from the Norwegian Continental shelf, Utgard, you already see the effect, which is there. Yme will contribute to 2020 CapEx. We are quite ahead of the B4 and the [SiG] decision possibly. That's why at the current stage, we wouldn't like to give a precise figure, as this would be to a certain extent, misleading because a lot of things can change in the nearest months. And we would prefer the communication on the CapEx plans, and we will come back to the market when we are ready to give a guideline that is not misleading, that will not be changing in the next days, weeks and months.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Next question received is from Alexander Burgansky from Renaissance Capital.

--------------------------------------------------------------------------------

Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [19]

--------------------------------------------------------------------------------

I have 3 questions. First, just to follow-up on this CapEx discussion. Can you please advise what is your current expectation for total CapEx for 2019? And also, when would you be able to give us CapEx guidance for 2020, because it will be quite important to properly evaluate the value of LOTOS in the possible transaction with PKN Orlen? Also the second question also relates to that transaction. You did mention that you would be providing your view on the fair value of Grupa LOTOS. I was wondering at what stage should we expect this announcement from you. Whether this will come during the transaction when PKN Orlen will buy a share of LOTOS from the treasury? And whether you will be commenting at that stage? And on the price paid to the treasury? Or whether you will be commenting when (inaudible) the minority shareholders of LOTOS. So that's my second question. And the third one, on EFRA, you did mention in the past that the commissioning of EFRA would increase your refining margins by something around $2 per barrel. I was wondering whether that estimate is still valid. And what would you expect the lift-up in refining margin in the fourth quarter of this year?

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [20]

--------------------------------------------------------------------------------

Thanks for the questions. I will follow-up on the CapEx side. 2019, most probably would end up with one, probably somewhere in the range of PLN 1 billion. Of course, it can -- in the end, probably move within the range of minus 10% to plus 10%. In terms of the guidance for 2020, a few things are ongoing -- definitely will be ongoing throughout November, December. So we would be definitely trying to come back to you with the guidance for 2020, somewhere on the December/January to give you this update.

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [21]

--------------------------------------------------------------------------------

And when it comes to the value assessment figure. First of all, once the structure of the deal is confirmed, the timing is clear, we will have an obligation to provide the market with our fair value assessment when we -- when the value would be provided. Still referring back to the current stage of the process. The process is in the stage of PKN discussing with the EU Commission on the structure and the remedy, the list of remedies to be applied to maintain the competition of the market. Therefore, once this step is closed and the timing of the transaction, the potential transaction is confirmed, we will be providing -- we will be providing our assessment.

And coming back to EFRA. Actually, I would say that already slightly earlier this year, we started sharing our assumptions on or our predictions on how we -- how EFRA would be impacting our model margin or our profitability of the refinery. Basic assumption at the time when the project was launched was around $2 per barrel of additional value for the company. Now given that the IMO is starting off in 2020, and given that there is a number of slightly differentiated predictions by analysts on how the market would behave, and we are actually very deep into reviewing these patterns. We see that the value of EFRA or of this impact might be slightly higher. We've been sharing $2 to $4.5 per barrel. But again, it's assuming these numbers are based on different market development scenarios. And obviously, the next couple of months will show how the IMO is really impacting the situation, plus how volatile the market might be in the first months of 2020.

--------------------------------------------------------------------------------

Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [22]

--------------------------------------------------------------------------------

And with respect to the impact of EFRA in the fourth quarter. Would you be able to share your expectation on the margin uplift from EFRA in the fourth quarter of this year?

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [23]

--------------------------------------------------------------------------------

So actually, what we maintain is our statement that we would -- we assume that the EFRA would go into its stable production in the fourth quarter of 2019. Meaning that we would have this impact on our financial results. To be as transparent as we can -- to be fully transparent on the impact of EFRA, we decided to publish on a monthly basis, the production figures, right? So it would be -- you will be seeing the impact and the pace at which it's starting and how it's impacting our results. And that's more or less as much as we can say at the moment. What we can probably say, for sure say, is that we are putting all the efforts into a proper startup. We are, obviously, hoping to stabilize the production as soon as possible as Jaroslaw Kawula just said. And we foresee the impact the proper throughputs within the fourth quarter of 2019. We wouldn't be able to give a more precise statement at this stage.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

We have no further questions. So I hand back to the speakers.

--------------------------------------------------------------------------------

Wojciech Zengteler, Grupa LOTOS S.A. - Senior Specialist of IR [25]

--------------------------------------------------------------------------------

Thank you very much, operator. Ladies and gentlemen, thank you very much for participating in today's call. I would like also to underline that the Investor Relations team is ready for any follow-up that you might request and any discussion that will move from this conference to our one-to-one discussions. Please utilize our phone numbers, utilize our email. We're there and ready to help to explain all the things that remains unexplained after this call. Thank you very much, and this concludes the call.

--------------------------------------------------------------------------------

Mateusz Aleksander Bonca, Grupa LOTOS S.A. - President of the Management Board & CEO [26]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Jaroslaw Kawula, Grupa LOTOS S.A. - VP of the Management Board and Chief Refining & Marketing Officer [27]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.