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Edited Transcript of PKN.WA earnings conference call or presentation 30-Jul-20 8:00am GMT

·55 min read

Q2 2020 Polski Koncern Naftowy Orlen SA Earnings Call PLOCK Aug 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Polski Koncern Naftowy Orlen SA earnings conference call or presentation Thursday, July 30, 2020 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Konrad Wlodarczyk * Michal Perlik * Robert Sleszynski ================================================================================ Conference Call Participants ================================================================================ * Alexander Burgansky Renaissance Capital, Research Division - MD and Head of Oil & Gas Research * Henri Jerome Dieudonne Marie Patricot UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst * Michal Kozak Trigon Dom Maklerski S.A., Research Division - Senior Analyst * Oleg Galbur Raiffeisen CENTROBANK AG, Research Division - Financial Analyst * Piotr Dzieciolowski Citigroup Inc. Exchange Research - Research Analyst * Tamas Pletser Erste Group Bank AG, Research Division - Oil and Gas Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, welcome to the PKN ORLEN Second Quarter 2020 Consolidated Financial Results Conference Call. At our customer's request, this conference will be recorded. (Operator Instructions) It is now my pleasure to hand you over to Mr. Konrad Wlodarczyk, IR Director. Sir, you may begin. -------------------------------------------------------------------------------- Konrad Wlodarczyk, [2] -------------------------------------------------------------------------------- Thank you, operator. Good morning, ladies and gentlemen. Welcome to the conference call regarding PKN ORLEN consolidated financial results for the second quarter 2020. Today's presentation that was e-mailed to you is available as well on our website. The presentation will be delivered by me and Michal Perlik, who is the Executive Director for Finance Management. And after the presentation, there will be a Q&A session, during which several directors from PKN ORLEN will be ready to answer your questions. With no further delay, I go to Slide #3. So key facts and figures. In second quarter, PKN ORLEN achieved PLN 5.7 billion EBITDA LIFO. And this result includes a profit on the bargain purchase of ENERGA shares in the amount of PLN 3.7 billion without impairment of assets in the amount of minus PLN 146 million. We show the clean results for your benefit, just to make your life easier, on the Slide number 30 in the supporting section. The second quarter was definitely a real challenge for us because it was fully reflected negative impact of COVID. Due to decline in fuel consumption and lower demand for petrochemical products as well as due to plant maintenance shutdown, sales volumes decreased by 21% year-on-year. Moreover, lower demand for fuels and high fuel inventories put a high pressure on margins. Our model downstream margin decreased by USD 3.8 per barrel year-on-year. PKN ORLEN, as we always underline, thanks to our operational flexibility, of course quickly reacted to the decline in the fuel consumption by adjusting the schedule and accelerating plant maintenance shutdowns, eliminating import of diesel, reducing jet production, and limiting crude oil processing. In the second quarter, we processed 6.2 million tonnes of crude oil, which is 71% utilization ratio. In the second quarter, we maintained also financial strength. We generated PLN 3.3 billion of cash flow from operations. We realized CapEx at the level of PLN 2.2 billion. Our net debt at the end of the second quarter amounted to the level of PLN 102452.9 billion, of which PLN EUR 5.9 million is the debt of ENERGA Group, and this gives a 26% financial gearing. And what's worth to mention, AGM approved the dividend payment for 2019, recommended by the management Board at the level of PLN 1 per share. The dividend was paid 28th of July 2020. I would also underline a few things that we did in the second quarter. So regarding M&As, we obtained conditional approval of the European Commission for acquisition of LOTOS Group. We acquired also 80% of ENERGA Group shares. We paid in total almost PLN 2.8 billion. We signed a letter of intent with state treasury initiating takeover process, commencing also work on concentration application to the European Commission, and we also kicked off a due diligence process. And we are planning to acquire 65% of RUCH. We do not slow down, of course, with our investment. So currently, I can confirm our target to spend PLN 7.7 billion CapEx in 2020. Including ENERGA, it will even increase up to PLN 9 billion. In the second quarter, we completed the construction of the main part of PE3 installation in Czech Republic, so polyethylene installation. We submitted an environmental report, and we are finalizing the process of selecting a designer for an offshore wind farm on the Baltic Sea. We started construction of the Visbreaking installation in Plock and we signed a license and the base project agreement as a part of the expansion of phenol production capacity. We signed also a license and the base project agreement for the modernization of H Oil installation. As we have already informed, we plan also to construct a hydrogen hub in Wloclawek by the end of 2021. In addition, we emphasize that we focus on the development of low- and zero-emission energy sources, an example of which is a declaration of commitment to the construction of Rowenka (sic) [Ostroleka] C power plant under the condition of using technology based on gas. We are consistently developing a network of petrol stations by opening stations in Slovakia, implementing ORLEN brand at foreign [constant] stations as a part of co-branding. We are also developing a network of stations in terms of the availability of alternative fuel. We are socially responsible. Therefore, we were fully involved in the fight against coronavirus. We allocated over PLN 100 million to help prevent the spread of coronavirus. And we received a Golden Leaf of CSR by Polityka. So this is a ranking of the most socially engaged companies operating in Poland. Now I will go into the details of second quarter results, starting from the macro environment. So Slide #5. Macro in the second quarter has significantly worsened versus previous year. So in second quarter, model downstream margin, as I've mentioned before, decreased by USD 3.8 per barrel, which is 30% lower year-on-year, mainly due to refining and petrochemical margin decrease due to lower demand on fuels and petrochemical products as a result of COVID and the lower Brent/Ural differential. As a result of crude oil price decrease by USD 39 per barrel, we had lower cost of our own consumption. Diesel and gasoline margins decreased by 33% and 65%, respectively, at higher margins on heavy heating oil by 55% year-on-year. Weaker zloty versus dollar and euro was supporting for operational results. Next Slide #6 shows GDP and fuel consumption. So in the second quarter, we expect sharp decrease in GDP year-on-year on all domestic markets. Fuel consumption reported double-digit decrease year-on-year, both in diesel and the gasoline in comparison to other countries. It's worth to mention that Lithuania presents surprisingly well, where diesel consumption is slightly lower than the year ago. This is mainly due to the lower pandemic scale. So the Lithuanian economy wasn't totally frozen. And moreover, farmers benefited from low prices, thanks to diesel storage that they could buy till the end of the first half within the limit of fuel for agricultural purposes. It's worth to underline that from month-to-month, we record significant increase of fuel sales. However, dynamics year-on-year are still negative. Now I will present financial and operating results for the second quarter 2020. So we are moving to Slide #8. And in the second quarter 2020, we recorded revenues decrease by minus 20% -- 42% year-on-year, mainly due to lower quotations of refining and petrochemical products resulting from crude oil price decrease and lower sales volume. We achieved PLN 5.7 billion EBITDA LIFO. So increased by PLN 3 billion, mainly as a result of recognition of the profit on the bargain purchase of ENERGA shares in the amount of PLN 3.7 billion. Besides, we recorded a negative impact of lower sales volumes, market deterioration, usage of historical layers of inventories, lower wholesale margin and lower non-fuel margins in retail, which was limited partially by positive impact of consolidation of ENERGA Group results for May and June and inventory revaluations, so net realizable value. The positive impact of the partial reversal of NRV amounted to PLN 1.2 billion in the second quarter. Just to remind you, in Q1, we had a negative NRV impact of minus PLN 1.6 billion. As a result of the crude oil price decrease, we recognized negative LIFO effect in the amount of PLN 0.5 billion. That caused a drop of reported EBITDA to the level of PLN 1.5 billion. Net result on financials amounted to PLN 0.1 billion due to positive impact of net FX differences and net settlements and valuation of derivative financial instruments. That was limited by interest costs. In the second quarter, we achieved, all in all, almost PLN 4 billion net profit. Next slide, Slide #9, presents speed of EBITDA LIFO by segment. Presented results exclude profit on the bargain purchase of ENERGA shares in the amount of PLN 3.7 billion. So we are going down to the level of PLN 2 billion EBITDA LIFO. So from second quarter, it's also worth to mention, we decided to separate refining petchem as well as energy segment from the downstream basket. So this higher transparency is definitely an effect of consolidation of ENERGA Group, which means that energy segment starts to contribute significantly to overall results of PKN ORLEN. And petchem is the way we're going to develop in the future. So definitely, it's a natural move from us. Refining. Refining delivered PLN 614 million, so lower by PLN 237 million year-on-year due to negative effect of sales volume drop, macro deterioration and usage of historical layers of inventories, limited by positive impact of net realizable value. Petchem, PLN 251 million, lower results by PLN 457 million year-on-year due to negative effect of sales volume drop and macro deterioration. Energy, almost PLN 750 million, increased by PLN 317 million year-on-year due to positive impact of the consolidation of ENERGA Group results and macro improvement, limited by negative effect of energy sales volumes drop. Retail delivered PLN 726 million. So lower results year-on-year, PLN 133 million due to negative effect of sales volumes drop and lower nonfuel margins, limited by positive effect of higher fuel margin. Upstream, 0 plus decreased by minus PLN 73 million due to negative macro effect limited by positive effect of sales volumes increase. Corporate functions, we recorded higher cost by PLN 146 million, including mainly expenses on COVID donation for our foundation, ORLEN Dar Serca as well as higher cost of insurance and IT system. Now let's go deeper into the detail. So moving to Slide #10. Refining delivered PLN 0.6 billion in the second quarter, which is lower by PLN 0.2 billion year-on-year, which is visible on the lower graph. Macro effect was negative at the level of PLN 0.2 billion due to drop in the light and middle distillate cracks, lower Brent/Ural differential by minus USD 0.40 per barrel and negative impact of hedging transaction and cash flows from product sales and crude oil purchases. Above-mentioned negative effects were limited by positive effect of higher cracks on heavy refining fractions, lower internal usage cost due to crude oil price drop and weakening of Polish zloty versus U.S. dollar. Volume effect was as well negative at the level of minus PLN 0.2 billion. So we recorded sales decrease in the refining segment by minus 23% year-on-year due to lower sales of gasoline, diesel oil, LPG, jet and heavy fuel oil. Besides we recognized positive net realizable value in the amount of PLN 1.2 billion year-on-year and minus PLN 0.8 billion from usage of historical layers of inventories due to conducted shutdowns mainly in PKN ORLEN and Unipetrol. Slide #11 shows operating data of refining segment. So in the second quarter, we processed 6.2 million tonnes of crude oil, which is minus 2.1 million tonnes less than in second quarter 2019, as a result of lower utilization in all of our refineries due to significant impact of COVID on the macro situation. In Unipetrol, utilization was lower by minus 55 percentage points due to extended shutdown of Kralupy refinery and planned shutdown of refining and petrochemical part in Litvinov refinery. In Lithuania, utilization was lower by minus 22% year-on-year as a result of reduced throughput due to unfavorable macro conditions, impact of the maintenance shutdown started at the end of March and unplanned shutdown of HDT diesel installation. In Polska, we see in the table that utilization was lower by 11 percentage points year-on-year, mainly due to shutdown of CDU units, HDS units, PTA installation and accelerated maintenance shutdown of FCC unit and metathesis unit as a result of lower demand for fuel, so COVID impact. Going into split market by market, in Poland, total sales of refining products dropped by minus 24% year-on-year, including lower sales of gasoline minus 13%; diesel, minus 20%; and jet fuel by minus 87% with a positive dynamic in bitumen sales by 12% up year-on-year. In ORLEN Lietuva, volumes decreased by minus 13%, 1-3, year-on-year, as a result of lower gasoline sales by minus 23% and jet by minus 82% and higher diesel sales by 16% year-on-year. In the Czech Republic, sales decreased by minus 39% year-on-year as a result of lower sales of gasoline, minus 23%; diesel, minus 38%; and jet, minus 88%. Next slide, Slide #12. Petchem segment, petchem delivered, in the second quarter, PLN 251 million of EBITDA LIFO, which is lower by minus 65% year-on-year. The most important factor responsible for the drop was macro environment in the amount of minus PLN 224 million, of which margin drop effect of minus PLN 200 million; and second factor, sales volumes dropped minus PLN 147 million. Negative macro impact year-on-year was due to a drop in margins on olefins and fertilizers, partially compensated by higher margins on polyolefins and PVC and positive impact of weakening of Polish zloty versus euro. In second quarter, we recorded a sales volume decrease by 17% year-on-year, of which in Poland, by minus 6%; in the Czech Republic, minus 36%. Sales volumes decrease by product shows that olefins dropped by minus 21%, polyolefins, minus 20%; PVC, minus 13%; PTA, minus 13%, and we observed higher sales of fertilizers by plus 12%. Over half of petchem results was generated by Anwil so namely speaking, PLN 63 million and also result on the PTA sales, PLN 72 million. Next slide, Slide #13, shows operational data in the petrochemical segment. So in the second quarter, the impact of COVID was clearly visible. Due to maintenance shutdowns and demand decrease from Automotive & Construction business, utilization ratio of petchem units dropped, with the exception of fertilizers in Wloclawek, where the ratio improved by 11 percentage points. In PKN ORLEN, we realized PTA shutdown, and we also accelerated Metathesis shutdown. In Unipetrol, there was a planned cyclical shutdown in Litvinov Refinery. And in ORLEN Lietuva, at the end of March, we started maintenance shutdown of the refinery. Next slide, Slide #14, energy. Energy segment delivered almost PLN 750 million EBITDA LIFO in the second quarter, which is higher by 73% year-on-year. Of course, including ORLEN Group at the level of PLN 490 million and the consolidated result of ENERGA Group for the month of May and June at the level of PLN 260 million. Positive macro effect of circa PLN 0.1 billion is a result of lower gas prices, partially limited by lower energy prices and lower sales volumes. And those results comes from lower energy demand as a result of COVID. Others include mentioned consolidation of the results of Energa Group, which is described in more details in the supporting section, Slide #37. So now let's move to the selected energy segment data, so Slide #15. And this slide confirms that we are focused on developing low and zero-emission energy sources. So in the second quarter, ORLEN growth, including the acquired ENERGA Group, produced 2.8 terawatt hours of electricity, which is almost 80% that comes from RES and gas fueled units. Sales reached 7 terawatt hours and distribution 5. As a result of consolidation, the group's current installed capacity is more than 3.2 gigawatts electrical. Of which, more than 1.8 gigawatts is in ORLEN growth and more than 1.4 gigawatt electrical in ENERGA. In second quarter, gas consumption in ORLEN Energy segment was almost 0.4 billion cubic meters, excluding ENERGA, and CO2 emission were 1.6 million tonnes, excluding ENERGA as well. Next slide, Slide #16, retail. Originally, the second quarter generated decent results of PLN 726 million, which is lower by PLN 133 million year-on-year, so 15% lower. Despite a significant decrease of volume due to COVID, we perceive this, as I've mentioned, as a quite decent result. We recorded lower sales volumes by 20% year-on-year. But data for June and first weeks of July are almost at the levels from last year. So this is quite promising, especially in terms of gasoline consumption. In the second quarter, after the significant drop of nonfuel sales in April, we observed an increase in May and June, especially on the hot beverages and snack sales. In total, minus 14% decrease year-on-year. Non-fuel margins decreased in Poland and the Czech Republic and increased in German State and a comparable level in Lithuania. We expand our fuel stations network by adding 10 new stations in Slovakia, and it's also worth to mention that we have opened the first fuel station in Germany near Berlin, operating under ORLEN brand. We constantly support the Polish economy through cooperation with Polish producers. So namely speaking, around 85% of the products available at ORLEN stations were produced in Poland. PKN ORLEN is also developing its network to increase the availability of alternative fuels. Slide #17 shows operational data. So at the end of second quarter, we were running 2,832 fuel stations, of which more than 3/4, so 75% were equipped with nonfuel concept StopCafe. Number of fuel stations increased by 30 year-on-year. We opened new stations on all markets where we operate in. Due to drop in fuel consumption as a result of COVID, retail noted sales volumes decreased by 20% year-on-year. Lower sales was recorded on all markets. Market share increase in the Czech Republic and Slovakia at comparable levels on other markets. It's worth to highlight also further dynamic growth on non-fuel sales. Another 7 locations were opened in the second quarter, and at the end of Q2, we were running 2,162 coffee corners, which increased by 93 year-on-year, and we are running also 552 convenience stores. We do not forget, of course, about development of electromobility. We just connected 4 new fast chargers to the network and launching next month. It's planned in the near future. At the end of second quarter 2020, our clients could use 86 chargers, 58 in Poland, 21 in the Czech Republic, 7 in Germany, which means higher by 56 year-on-year. We also have 2 hydrogen stations and 42 CNG gas stations. Slide #18. In -- to upstream, in the second quarter, delivered PLN 10 million EBITDA LIFO, which is lower by 88% year-on-year. This is mainly due to negative macro impact, due to decrease of crude oil price and NGL prices decreased at higher gas prices, what eliminated positive impact of higher sales volumes, both in Canada and Poland. 6% increase of average production year-on-year to the level of 18,800 BOE per day is the outcome of higher average production in Canada by 900 BOE per day and higher in Poland by 100 BOE per day. Slide #19. So the details on upstream. We have circa 197 million BOE 2P reserves of crude oil and gas. Average production in the second quarter reached 18,800 BOE per day. In the second quarter, CapEx on upstream amounted to less than PLN 40 million and was realized only in Poland. When it comes to operating activities realized in the second quarter, we can summarize that in Poland, among others, we continue to work on the development of deposits on Miocen, Edge and Plotki projects. The construction of drilling sites for Plotki project was completed. We continued seismic data processing on Plotki Edge and Karpaty projects. And as a result of conducted analyses of economic profitability, we took the decision to withdraw from the Bieszczady project and we made the impairment of assets, yes as well. While in Canada, we realized tasks related to optimization of production in the key areas of operations, like Kakwa and Ferrier. We reduced CapEx program due to low prices of liquid hydrocarbons and we adjust operating activity to macro situation in order to optimize obtaining operating margins. Now we will go to Slide #21. So now Michal will give you more color on the cash flows, working capital, debt and CapEx. -------------------------------------------------------------------------------- Michal Perlik, [3] -------------------------------------------------------------------------------- Thank you, Konrad. A few words about our liquidity position and sources of our debt financing. So let's start with Slide #21. We generated PLN 3.3 billion of net inflow from operations in second quarter 2020, out of which PLN 1.5 billion was generated by EBITDA, excluding LIFO effect. Another PLN 2.3 billion was related to improvement of our working capital. We have improved working capital in all 3 categories, meaning inventories decreased by PLN 0.2 billion. Receivables has decreased by PLN 1.1 billion. And payables have increased by PLN 0.9 billion. a short comment here. The change in all 3 categories was mainly related to change of prices, both in terms of crude oil and products. We did not observe any substantial changes in volumes. Maybe one more comment related to change in receivables and change in payables. The increase in payables was mainly driven by increase of crude oil prices on average in June versus March this year. On the product side, we recognize a different trend due to the fact that mainly petrochemical -- petchem products -- prices remained pretty high in March, and they went down starting April. So the prices, mainly of petchem products, were much lower in June as compared to March. Minus 0.5 of other adjustment. Here, we have 4 major positions, minus 0.4 is related to change in balance of deposits, plus 0.4 is driven by change in provisions. Minus 0.2 is related to free-of-charge property rights to CO2 emissions received by the group. And minus 0.3 is income tax paid. We spent PLN 2.2 billion on CapEx in the second quarter 2020. And the net outflow from investment was minus 2.6. Minus 0.4 adjustment was mainly related to cash spent on acquisition of ENERGA, decreased by cash that ENERGA had on the balance sheet on the purchase day. Plus PLN 1 billion was related to settlement of derivatives. Here, we are mainly talking about commodity swaps, which are hedging our time mismatch on deliveries of crude oil via vessels. As you can remember, we had a positive book settlement of these instruments in the first quarter of this year, mainly in March. We also had a positive settlement in April. And what we can see in this position is actually cash settlement related to -- mainly to those 2 months. Another PLN 0.2 billion is related to increase in advance payments and investment liabilities. Altogether, in the first half of this year, EBITDA LIFO brought us PLN 3.6 billion. Minus PLN 2.5 billion was related to LIFO effect. We have improved our net working capital by PLN 3.7 billion altogether during the first half of the year. On the other hand, we spent PLN 3.4 billion on CapEx. Another 2 positions are related to ENERGA purchase. So we spent PLN 2.8 billion for the payment for 80% of shares of ENERGA. And as of the date of purchase, ENERGA had minus PLN 6.2 billion of net debt on the balance sheet, which starting 1st of May is presented in our consolidated balance sheet. Minus 0.9 of other adjustments is related to 2 positions: Paid income tax, minus 0.6; and paid interest, minus 0.3. Altogether, the net debt of the group increased by PLN 0.5 billion, which was, as you can see, mainly or very much driven by the acquisition of ENERGA. On the next slide, we can see more information about our debt position. As of the end of the second quarter, we had PLN 10.9 billion of net debt, out of which PLN 5.9 billion was related to ENERGA. Our financial gearing went up to 26.2%. However, it is still below our strategic target, which is 30%. Net debt-to-EBITDA LIFO increased -- ratio increased to 0.92. Even when excluding a gain on the bargain purchase of ENERGA Group, this ratio is still below our strategic level of 1.5x. Due to the acquisition, also the sources of our debt financing structure has changed. You can see that now we are also presenting ENERGA bonds. And in the credit and loans, we also have a part related to ENERGA. We generally recognize ENERGA debt portfolio as a [balance], both in terms of tenors and prices. And we don't see any need to refinance those, any of ENERGA debt financing or that instruments at the moment. Two important issues that we recognize are happened after the end of the quarter. 2 days ago, ENERGA has signed an agreement with SMBC Bank for ESG-linked formula credit of EUR 120 million. And yesterday, we have signed an RCF agreement with a club of 16 banks for the total amount of EUR 1.75 billion, which fully secured our liquidity for the next couple of years. And as you can see in our financial statement, currently we are using around PLN 250 million of this RCF. So we have around EUR 1.5 billion of free capacity at the moment. This RCF is signed for 3 years, plus 1, plus 1. Maybe one more comment. You can also observe in our notes that we have some reclassification in terms of debt from the long term to short term. It was mainly related to the fact that our current RCF is terminating in April 2021, but this one has been already replaced with the new one that I was -- I have just mentioned. Another reclassification was related to our Eurobonds EUR 500 million issue, which is maturing on June 2021. We keep our ratings both from Fitch and Moody's on the investment grade. Moody's recently has changed the outlook from negative to positive following the information about our acquisition plans and the comment that we are planning to conclude both LOTOS and PGNiG acquisitions on the non-cash basis and we would like to keep our leverage ratios on the safe level. So that's all from my side. Thank you. I will give back to Konrad. -------------------------------------------------------------------------------- Konrad Wlodarczyk, [4] -------------------------------------------------------------------------------- Thank you, Michal. So the last section is showing current macro environment and the outlook for the second half of the year. So Slide #25. In the first quarter, the downstream margin decreased by USD 2.30 per barrel quarter-on-quarter to the level of USD 5 per barrel as a result of lower refining margin, a lower B/U differential and lower petrochemical margin. Crude oil price increased by, first in USD 13 per barrel quarter-on-quarter. So the average USD 43 per barrel, mainly as a result of decline in U.S. crude oil inventories to the level of 536 million barrels comparing to 541 barrels at the end of June, which was historically high level. The scale of the increase in crude oil prices was limited by the mitigation of crude oil production restrictions by OPEC+ by 2 million barrels per day to the level of 7.7 million barrels per day in the period from August to the December. So since May, just to remind you, production decreased by 9.7 million barrels per day as well as the rising tension between the U.S. and China, which triggers more fears of a decline in crude oil demand. Crack margins on the diesel decreased by minus 27% quarter-on-quarter, so average USD 45 per tonne, mainly due to concerns about the decline in demand due to increase in COVID cases, reduced demand on the European market as well as increasing inventories in RR region. Crack margin on gasoline increased by 38% quarter-on-quarter average USD 80 per tonne, mainly as a result of demand recovery for fuels, so increased mobility as a result of easing restrictions and also beginning of the holiday season as well as increase in European gasoline exports to other regions, U.S. inventories decline, and low water level on the Rhine River, which restricts intra-European trade. Margins on heavy fuel oil decreased by 50% quarter-on-quarter. Average minus USD 93 per tonne, so mainly due to concerns about the decline in demand due to increase in COVID cases and increase in inventories in ARA region. Slide 26 shows you brand differential behavior that decreased by USD 0.8 per barrel, so average minus USD 0.8 per barrel, mainly as a result of lower supply of euros due to record low volumes of Ural oil loads in ports. So the shortest loading program since July 2004, increased demand for Ural due to recovery of the Chinese economy, lower availability of alternative grades of crude oil as a result of OPEC+ reductions of crude oil supply, and the completion of maintenance shutdowns in Russia [refineries]. Petchem margin decreased by EUR 48 per tonne quarter-on-quarter, averaged EUR 798, mainly as a result of increased feedstock quotations, so NAFTA [and Tele sVideo did] increase in crude oil prices. We are currently observing increase in petchem margins up to EUR 820 almost per tonne, mainly as a result of increase in polymer prices. Slide #27 shows market outlook by the end of 2020. So in terms of crude oil price, we expect the price to remain around USD 40 per barrel in coming quarters. So the forecasted increase in the demand for crude oil as a result of economic recovery should lead to the decline in oil stocks. Of course, it's possible to further lift restrictions on the reduction of oil production by OPEC+ and increased production in the U.S. So we currently, as I've mentioned, observe those restriction are less restricted, if I may say so. In terms of margins, in the second half of the year, we expect an improvement in the refining margin, assuming a V-shaped scenario, due to lower dynamics of crude oil price increase and the consolidation of global refining industry, which is forced by economic factor. I mean excess of refining capacity resulting from adjustments to IMO regulations with a decline in demand due to COVID. This will translate into increasing margins at refineries that we'll colloquially say, survive on the market. Petchem margins should remain around EUR 800 per tonne. Petchem definitely depends on the economic activity, which has fallen sharply. But in Europe, which is an importer of many basic petrochemicals, has opened up opportunities for local production due to collapse in imports. On the demand side, we expect increase in demand for fuels as well as petrochemical products as a result of forecasted economic recovery. In terms of regulation, nothing has changed compared to last quarter. So that's all from my side. So thank you very much, and we are ready to take the questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And the first question comes in from Michal Kozak from Trigon. -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- [Audio Gap] Will it extend the process of buying LOTOS? And the second one, I see the risk, especially to a lot of shareholders, but after making JV which is a processing refinery, right, operating as a cost center. Margin of this entity will be, in my opinion, redirected to other competitors, foreign competitors that will buy JV stake. And if you don't buy 100% of LOTOS shares, the risk of -- for minorities could be huge in my opinion, because they will stay without significant part of EBITDA. Could you correct me if I'm wrong, please? -------------------------------------------------------------------------------- Konrad Wlodarczyk, [3] -------------------------------------------------------------------------------- Michal, can you repeat the question because the line is pretty bad. The first question, yes. -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [4] -------------------------------------------------------------------------------- Okay. The first question, if you decide to swap outlets with other competitors, will it extend the process of buying LOTOS? -------------------------------------------------------------------------------- Michal Perlik, [5] -------------------------------------------------------------------------------- No, we have 12 months to work out the remedies conditions. It doesn't matter whether it will be disposal for cash or swap assets. So we expect that we will spend on the remedies development around 12 months. And your second question was? -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [6] -------------------------------------------------------------------------------- And my second question, with the margin of JV refinery will be mostly redirected to foreign competitor, because after making the JV, it will be operating as a processing refinery. And if you don't buy 100% of LOTOS shares, risk of minorities could be huge, because they will do... -------------------------------------------------------------------------------- Michal Perlik, [7] -------------------------------------------------------------------------------- Okay. It's too early to say more details about it. It will be subject of negotiation with potential partner in JV. -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [8] -------------------------------------------------------------------------------- Okay. But will it be a processing refinery? -------------------------------------------------------------------------------- Michal Perlik, [9] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [10] -------------------------------------------------------------------------------- So it will operate as a cost center, yes? Not profit? -------------------------------------------------------------------------------- Konrad Wlodarczyk, [11] -------------------------------------------------------------------------------- I think it's too early at this stage to comment this, yes? We have to dispose 30% of shares in LOTOS refinery sale. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes in from Piotr Dzieciolowski of Citi. -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [13] -------------------------------------------------------------------------------- This is Piotr from Citi. I have 3 questions, really. One is on your potential acquisition of LOTOS and PGNiG still meant to happen. And when you look at the balance sheet, it doesn't seem that you can buy everything for cash, and that requires share swap transactions. How do you think about the option of a tender offer for PKN shares by state treasury in this context? Because -- any really transaction made for shares against a lot of OPEC bigwigs will likely increase their stake above 33% stake. Should we also think about stakes [take] together with them or separately, that will be treated as separate entities? That's question number one. Second, does this PGNiG and LOTOS fulfill your M&A ambitions? There is a group [effortay] that could fit your strategy as well? Or is this the end of building the large conglomerate? Or you think you could buy something more? And then thirdly, I just wanted to understand what happened in the assumptions of the valuation of ENERGA and your auditor. because the same people or the same company Deloitte, stated at the beginning of the year, advising to ENERGA management, that the fair value PLN 7 [oil is] at the tender offer. And yet half a year later, they come up and say, well, there's a PLN 3.5 billion gain on favorable acquisition. Like how much trust do you have versus such auditor who changes their mind in a half a year? And there's the same auditor who has something other books of different big scandal in Poland as well. When is the time you can select a new auditor? -------------------------------------------------------------------------------- Michal Perlik, [14] -------------------------------------------------------------------------------- Okay. So maybe let me answer for the last question because I believe we are mixing 2 things, the valuation of the assets under the PPA and the valuation of the company itself. When you are evaluating the assets under the PPA, you are splitting the asset for CGUs and evaluating them separately one by one. If any one of the assets evaluated under the CPA process has -- and you are evaluating them based on the DCF methodology -- that's what we did so far in this process. And if any of these assets has a negative cash flow, discounted cash flow, then you are presenting it in the books at a 0 value. Not at the negative value, but at the 0 value. That doesn't mean that the future losses that selected CGUs are generated will not incur in the future. When you are evaluating the company as a whole, which we did on the -- during the process tender -- tender process, we didn't have detailed information on the separate CGUs, that's first. And the second and the most important thing, is that you are evaluating the whole company based on the consolidated cash flow, which is taking into consideration both positive cash flow, and negative cash flow which are offsetting positive cash flow. So you are taking also into consideration future losses generated by selected part of the companies. And that's why from the accounting perspective, we have recognized a profit or gain on the fair gain purchase of the -- of ENERGA. And I would like to state very clearly, we shouldn't mix those 2 categories in the same way. I don't know if it... -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [15] -------------------------------------------------------------------------------- Yes, not quite. But being more specific, so we charted that ENERGA had a negative cash flow valued at roughly 3.5 billion that you find now recognize at 0. -------------------------------------------------------------------------------- Michal Perlik, [16] -------------------------------------------------------------------------------- For example, Ostroleka B has a negative cash flow. -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [17] -------------------------------------------------------------------------------- I thought from the beginning, you said you're not going to do it. So how be that... -------------------------------------------------------------------------------- Michal Perlik, [18] -------------------------------------------------------------------------------- I'm not saying C. B, Ostroleka B. -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [19] -------------------------------------------------------------------------------- Yes, but the negative cash for the duration of Ostroleka B, we would discuss whether it has a negative cash flow, because it goes into capacity market. And it also -- so it will be highly subsidized straight forward. And then the duration of the asset is 5 years and the amount of it is far, far lower than 3.5 billion. I just wanted to understand, like, what are the main big blocks that you could justify that 3.5 billion, 3.6 billion difference between the gain now versus the fair value that the auditors [stated] half a year ago? Because there's huge value. I mean, it's double the price, right? So they were the management of ENERGA, which it's their responsibility was saying, we think it's fair value. But now you actually say it was totally different. It's twice. So what are the main blocks that like specifically, which asset created this difference? -------------------------------------------------------------------------------- Michal Perlik, [20] -------------------------------------------------------------------------------- So answering your question about CGUs that are generating negative cash flow, it's retail space when we have actually allocated majority of headquarters' also cost, and Ostroleka B, as I mentioned. -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [21] -------------------------------------------------------------------------------- That's 3.5 billion negative cash flow for headquarter and for Ostroleka B. Let's take this question off-line. It's -- I don't want to bother, rather with the kind of PPA allocation on the ENERGA. Can you say and maybe on this potential share swap transactions for LOTOS and PGNiG, what kind of consequences it may lead to the potential tender offer for PKN. Is it fair? Or is it not fair statement? Or how do you think about this transaction? Is it constraining factor? -------------------------------------------------------------------------------- Robert Sleszynski, [22] -------------------------------------------------------------------------------- Okay. So Robert Sleszynski speaking. As we discussed before, and when we were announcing the potential acquisition of PGNiG, we were describing that we are giving ourselves some time to prefer internally and probably in corporation at some stage with the main shareholder the structure of the transaction which would be beneficial for all of the shareholders and also for PKN ORLEN, in order not to weaken the balance sheet going forward. So as we described also, what we were informed that we received the conditional approval from European Commission that we are granted more or less 18 months, both to finalize the discussions with potential partners and to take over Grupo LOTOS. So this is exactly the time during which we will be discussing the most appropriate structures of the transaction. And what is also important, we want to do it more or less at the same time. So of course, share swap is possible, but maybe some payments in kind are also feasible. Maybe to some extent, some partial tender offer will be required, either from the perspective of PKN ORLEN or maybe state treasury. In other words, at that stage, given the macro environment so far, it's difficult to comment on the ultimate transaction structure. So we would need some time, as I said, to prepare that internally. And of course, very important will be the fact how we would agree the ultimate parameters with potential partners -- I mean remedy takers in the LOTOS transaction. This will be also important part of setting up the strategy going forward, including the transaction structure. So of course, everything is feasible. And as you are fully aware, the law gives a lot of possibilities. So that today, we will not comment on the ultimate approach. But our main priority is to -- not to weaken the balance sheet, but it is to, rather to strengthen the balance sheet following the transaction. -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [23] -------------------------------------------------------------------------------- And do you think you can buy more assets in Poland? -------------------------------------------------------------------------------- Robert Sleszynski, [24] -------------------------------------------------------------------------------- Personally, or as a company? -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [25] -------------------------------------------------------------------------------- So you -- personally are you -- let's -- as a company, as PKN ORLEN. Like, can there be another, like another business or -- I cannot -- on that, we are done with M&A for now. -------------------------------------------------------------------------------- Robert Sleszynski, [26] -------------------------------------------------------------------------------- I think that we are done as of now. This is a quite significant step forward from my perspective. And a very important part of the transaction [for the day] post-merger integration plans. And to be frank, LOTOS and PGNiG is a quite significant move, so that we are rather focused on that too. -------------------------------------------------------------------------------- Piotr Dzieciolowski, Citigroup Inc. Exchange Research - Research Analyst [27] -------------------------------------------------------------------------------- When I was just thinking about creating this big entity, just the last question, would it not make sense that PGNiG takes over you rather than you take over PGNiG? I mean, at the end, the outcome for the [stake] is the same. And it's easier technically to do it the other way around, and they have more money to do it and so on. -------------------------------------------------------------------------------- Robert Sleszynski, [28] -------------------------------------------------------------------------------- Well, from a technical perspective, yes, everything is feasible. At the end, there must be a leader. And to be frank, the leader is one, and this is PKN ORLEN, and this is what I can comment on actually. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- Our next question comes in from Patricot from UBS. -------------------------------------------------------------------------------- Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [30] -------------------------------------------------------------------------------- Henri Patricot from UBS. Thank you for the [ED] update. I have 3 questions, please. The first [opture] on CapEx. Firstly, on the 2020 CapEx program of PLN 9 billion CapEx. So can you give us a sense of what would be the cash CapEx figure associated with that? And then whether there's any possibility that the ultimate CapEx figure would come in below that? I see in particular that you're spending much less on the upstream? So is PLN 9 billion real -- the most realistic outcome? Or could it be lower? And then secondly, can you give us a sense of the 2021 CapEx, what it is likely to be, just considering PKN plus ENERGA for the time being? And finally, I'd also like to ask on the refining side, and with Ural is trading at a premium to Brent until very recently, whether you've adjusted your crude slate to mitigate this impact? And just broadly a reminder of what your crude slate looks like currently? -------------------------------------------------------------------------------- Unidentified Company Representative, [31] -------------------------------------------------------------------------------- So in terms of CapEx, as we indicated, we would like to, let's say, spend up to PLN 9 billion. So this is in line what we said previously. So PLN 7.7 million in PKN ORLEN Group and PLN 1.3 billion in ENERGA. Of course, we also underline that we have some flexibility, up to 10% could be postponed to the next year. So talking about the year 2021, I think it's too early, because at the end of this year, we're going to publish a strategy of PKN ORLEN growth. So please be patient. -------------------------------------------------------------------------------- Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [32] -------------------------------------------------------------------------------- In terms of the refining and your [also crude] slate? -------------------------------------------------------------------------------- Unidentified Company Representative, [33] -------------------------------------------------------------------------------- Yes, yes, let me comment a little bit on that. The unprecedented level of differential we faced recent months made us -- redirected our sourcing of crude to the refinery. So [above] on that COVID lower demand and some maintenance cost, that's not only Urals as a basic throughput to our refinery was on, but more alternative trade came into our refinery in between, just to mitigate this unprecedented level of differential. That's what I would say on that. -------------------------------------------------------------------------------- Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [34] -------------------------------------------------------------------------------- Okay. So what have you been using instead of Urals? -------------------------------------------------------------------------------- Unidentified Company Representative, [35] -------------------------------------------------------------------------------- Well, mainly North Sea, which is 40s petrol, a little bit CPC. All those grades now, which differential between standard level, although are lower. So those trades are our basic throughput now. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Our next question comes in from Alexander Burgansky of Renaissance Capital. -------------------------------------------------------------------------------- Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [37] -------------------------------------------------------------------------------- So I have a question regarding the statement that you plan to do both transactions with LOTOS and PGNiG on a noncash basis. Do I understand correctly that you're referring to the acquisition of the treasury stakes in both of those entities? And when it comes to making offers for minority shareholders in PGNiG and Grupo orders, you will have to make those offers on the cash basis? -------------------------------------------------------------------------------- Michal Perlik, [38] -------------------------------------------------------------------------------- Actually, as I said, there are some structures which probably would be also feasible, in the payment in kind, for example, may be realized only -- may be realized only as a share swap. And actually, we don't have to offer -- we don't have to offer a cash offer at the end. But to be frank, as I said a couple of minutes ago, we need a couple of months to investigate a bit deeper the transaction structures. And as of today, of course, here internally in ORLEN, we have a couple of them, which SDNs may come up only with noncash offers with share swaps. But yes, you are right. In some cases, that might be required that we'll need to offer some cash for the shares [seen] for minorities. But as I said, today it's difficult to comment on the ultimate structure. At -- in a year's time, let's say, we will see what are the macro conditions, what are the market caps of each specific company, all of them: PGNiG, LOTOS, and PKN ORLEN. And then we will decide what is the best and the ultimate structure and what is the best approach for the shareholders, for the companies in order to be able to strengthen the balance sheet and be able to invest money; for example, in renewables because this is one of the key goals which we have going forward. So yes, you need to be patient a bit because we need some time to understand precisely what the ultimate structures may be. -------------------------------------------------------------------------------- Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [39] -------------------------------------------------------------------------------- But I understand the structures, that different structures you may put in place with respect to your dealings with the treasury. But with respect to minority shareholders, can you then please maybe elaborate on the scenarios? What will be the scenario under which you may not offer a cash buyout to minorities? Because my current understanding is that according to the law, if you cross certain thresholds, then you have to make an offer to minorities. And so what you're saying now that there are some structures that you may put in place, if I understand correctly, that may allow you not to make that cash offer to minorities. So can you please explain the scenario under which that may play out? -------------------------------------------------------------------------------- Michal Perlik, [40] -------------------------------------------------------------------------------- Unfortunately, it's too early to comment. Please, apologies, but we need some time to be more precise. As I said, we have some scenarios prepared here internally, but there are some verifications needed. And really, please be a bit patient. But in some time, we'll come back to that discussion. But as of today, I wouldn't like to go into that many details. -------------------------------------------------------------------------------- Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [41] -------------------------------------------------------------------------------- But from the point of view of minority shareholders in PGNiG or Grupo LOTOS, I mean they need to have some confidence that their rights will be protected in the event of these transactions going ahead. And my at least understanding of the current law is that an acquirer have to make a mandatory cash offer, which cannot be below the 6-month average price, et cetera, et cetera. So the conditions stated in the law explaining what that cash offer should be and when it has to be offered, et cetera. So if you're saying that there are scenarios under which you can bypass those requirements, then I think it will be very important for us to know what those scenarios are. -------------------------------------------------------------------------------- Michal Perlik, [42] -------------------------------------------------------------------------------- Yes. And as I said, everything will be realized according to the provisions of the law. Of course, minority shareholders should be protected. I mean this is clear. But as I said, we are giving ourselves like 18 months to finalize both transactions. And to be frank, it's very early to comment on that. And by that time, the shareholders should not be afraid of any transaction structure which will, in the end, diminish their role in the company. So as you said, and I fully agree with that, everything will be realized according to the provisions of the law. But as of today, and given the fact that we are giving ourselves like 18 months, it's too early to comment on the ultimate structure. So I will not go... -------------------------------------------------------------------------------- Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [43] -------------------------------------------------------------------------------- Can you give me an example, please? Can you give me an example of a structure that would work, that would fall under the provisions of the law and that would allow you not to make a cash offer for PGNiG or LOTOS minorities? What will be an example? Maybe I'm not familiar with the law and that's why I'm not seeing... -------------------------------------------------------------------------------- Unidentified Company Representative, [44] -------------------------------------------------------------------------------- It's very easy. You don't have to buy all of the shares of PGNiG. -------------------------------------------------------------------------------- Alexander Burgansky, Renaissance Capital, Research Division - MD and Head of Oil & Gas Research [45] -------------------------------------------------------------------------------- You mean not buy all of the treasury shares of PGNiG? -------------------------------------------------------------------------------- Unidentified Company Representative, [46] -------------------------------------------------------------------------------- For example, for example, so this is what I'm saying. There are many, many different scenarios. And really we will need the time to understand precisely what the ultimate structure might be and which is the more beneficial for all the companies and the shareholders. So -- and technically, I just gave you 1 example which is very easy to understand, and actually there are many of them. So I don't want to multiply them because we will have a lot of rumors. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Our next question comes in from Oleg Galbur of Raiffeisen. -------------------------------------------------------------------------------- Oleg Galbur, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [48] -------------------------------------------------------------------------------- This is Oleg Galbur from Raiffeisen. I have 2 questions. My first question refer to the performance of the refining segment. I'm looking at the segment's EBITDA, excluding one-offs, as presented on Slide 13, and I see a decline of almost PLN 1.4 billion for refining EBITDA from PLN 890 million in the second quarter last year, to a loss of PLN 554 million this year second quarter. At the same time, PKN's model refining margins decreased by -- from 6.5% to 3.3%. So a decline of a bit more than USD 3 per barrel. On Slide 10, you can see negative -- we can see a negative impact of PLN 150 million due to macro factors when showing the EBITDA evolution. So when looking, again, at the clean EBITDA number, excluding one-offs and LIFO NRV impact, would you agree that the additional decline, in addition to what you show on Slide #10, PLN 1.2 billion, would be totally attributable to the worse macro environment in the second quarter this year? Or there were other factors that could explain the significant weakening of segment performance? That would be my first question. And the second one is very short. What is the level of capacity utilization that you expect in the second half of this year in refining and petrochemicals? -------------------------------------------------------------------------------- Unidentified Company Representative, [49] -------------------------------------------------------------------------------- So looking -- it depends how you clean the results, yes? So we presented PLN 600 million as a refining result. This definitely includes net realizable at the level of almost PLN 1.2 billion. So if you exclude net realizable value, you will end up almost minus PLN 0.6 billion. But also please bear in mind that we underlined that we utilized a historic of inventory layers, we did the shutdowns in Unipetrol and PKN ORLEN. So this negatively impacted by minus PLN 0.8 billion. So if you extract from this, you will end up at PLN 0.2 billion. So it depends how you clean the results, yes. So our approach to cleaning the results is only, let's say, showing the results before impairment of assets, yes? So that was our usual approach to the results. Just for your information, because we've got a lot of questions about net realizable value. And of course, when the crude oil price moves up and down significantly, this net realizable value could be positive or negative significant. Therefore, we just wanted to make your life easier, and we provided you with [light] number first, which includes only net realizable value, yes? So this is what you said from the slides, so the refining, let's say, cleaned out of net realizable value was at the level of minus PLN 0.6 billion. In terms of utilization, as you're asking in the first quarter, you may assume that definitely utilization should increase comparing to the second quarter, and we are assuming to process up to 8 million tonnes of crude oil. So almost full capacity utilization in PKN ORLEN despite the fact that we are planning some maintenance shutdowns. So in terms of shutdowns in PKN ORLEN, we have hydrocracking, H-Oil and hydrogen units, as well as we've got some maintenance of petrochemical units like olefins, PTA and PVC. In terms of ORLEN Lietuva and Unipetrol, probably those 2 refineries will be running around 80% of utilization ratio, of course depending on the macro situation. So throughput higher than in second quarter, also due to the fact that we have less maintenance, plant maintenance shutdowns, but also due to the fact that I've mentioned during the presentation that we are observing a pickup in the demand, yes, from month-to-month. So that is of fuels increase, but the dynamics still are negative. What we observe right now, so the total [days] of fuels in Poland is lower by 10% year-on-year, including wholesale, minus 15%; and the retail, minus 5%. In terms of wholesale, we observed a drop in both gasoline and the diesel by roughly speaking 10%, and still jet minus 70% year-on-year. In terms of retail, we observed a drop in diesel sales by 5%. However, we observed a positive dynamic year-on-year on the gasoline by 5% plus. -------------------------------------------------------------------------------- Oleg Galbur, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [50] -------------------------------------------------------------------------------- Konrad, if I just make 1 follow-up question on my first question on Refining segment results. So please help us understand, in order to have a better comparability of the results and also to look at the results, which are closer to cash earnings generation, would you recommend looking at the figures presented on Slide #30 or on Slide #10? -------------------------------------------------------------------------------- Konrad Wlodarczyk, [51] -------------------------------------------------------------------------------- From, let's say, analyst's perspective, I would rather stick to #30, but it depends what kind of one-offs you take off from the result. Because we have a bunch of analysts and each of you, let's say, withdraw totally different elements. Some of you withdraw only net realizable values, some of them withdraw hedging in margin, some of them withdraw hedging from other operating profitability. So there are a lot of, let's say, items that could be withdraw and clean the results. So it depends on you, yes? So this is the approach, general approach that you've taken that we are showing without a net realizable value. So this is what we've shown is minus PLN 600 million in the refining segment. That's a clean result. -------------------------------------------------------------------------------- Oleg Galbur, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [52] -------------------------------------------------------------------------------- Okay. So looking at this clean result, again, I'm coming back to my initial question. The difference between this second quarter this year versus last year, this is mainly attributable to unfavorable macro environment? Or there were other factors that had an impact? -------------------------------------------------------------------------------- Konrad Wlodarczyk, [53] -------------------------------------------------------------------------------- Macro environment as well as volumes, yes. So the volumes impacted more negatively than macro. So volumes were minus, let's say, 237, and macro also the margins and be a differential as well as negative hedging, partially offset by weakening of Polish zloty versus the U.S. dollar, impacted negatively minus 151. So more volumes, less macro, but both of those factors, you can add up, up to minus PLN 400 million. And also, there is also the difference on the net realizable value year-on-year, yes? So the delta is PLN 1.2 billion because net realizable value in second quarter '19 was almost 0. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- Our next question comes in again from Michal Kozak of Trigon. -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [55] -------------------------------------------------------------------------------- My last question, if I may. It is -- why PKN and LOTOS don't make synergies on joint purchasing cost crude oil? Why you need to get rid of refining assets and to joint margin to foreign competitor in order to make synergies? And finally, do you see risk that the government can block that transaction due to the need to sell strategy infrastructure? -------------------------------------------------------------------------------- Michal Perlik, [56] -------------------------------------------------------------------------------- [So on joint purchase of] crude oil. There are a couple of factors which makes it not -- okay, it's technically possible, but not wise and feasible because one of it is, let's just say, credibility. We have speaking on different ratings than those for other company in this scheme or potential scheme. And why we, as the higher-rated company, are to take risk for the other company, right, the second company. So we take advantage of our open credit line. And it is not possible to share with this to the other company. So that's why we will take advantage in case of purchasing crude, right after merging and taking over operations on LOTOS with this respect. There's your answer. -------------------------------------------------------------------------------- Michal Kozak, Trigon Dom Maklerski S.A., Research Division - Senior Analyst [57] -------------------------------------------------------------------------------- Okay. So what is the minimum amount of synergies, joint synergies on purchasing crude oil? Because we have heard PLN 2 billion or PLN 3 billion annually because -- I don't ... -------------------------------------------------------------------------------- Robert Sleszynski, [58] -------------------------------------------------------------------------------- So Robert speaking. Yes, we heard that in the public domain. Nonetheless, these are not our assumptions actually. We have our own internal calculations, but it's too sensitive to share. But we are not confirming that calculations which were available in public domain. With regards... -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Our next question comes -- sorry, please go ahead. -------------------------------------------------------------------------------- Robert Sleszynski, [60] -------------------------------------------------------------------------------- Second question on the risk, whether the government is able to block the transaction. I would say that at the end, once all parameters with remedy takers are negotiated, the government, as the major shareholder, will need to take the decision. So then, there is a time to decide whether the main shareholder is ready to sell their shares or not. So as of today, we are not aware of any that kind of a risk. Nonetheless, in some time, there will be required formal decision, and then there will be a time to decide on the side of the government. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Our next question comes in from Tamas Pletser of Erste Bank. -------------------------------------------------------------------------------- Tamas Pletser, Erste Group Bank AG, Research Division - Oil and Gas Analyst [62] -------------------------------------------------------------------------------- I have 2 questions. First of all, on your presentation on Page 22, you show of the net debt of EBITDA LIFO of PKN ORLEN. My question is, is this the ratio which usually your financers or the credit rating agencies are watching? Because I presume that you have including in this ratio or this positive one-off -- positive one-off items you had in the second quarter, I mean, the valuation bargain on ENERGA. So is this the ratio that usually your bankers and financers and credit rating agencies are watching? That will be my first question. And my second question would be regarding ORLEN Lietuva. I remember, back in 2015, you wrote down completely the assets of this company, and if I remember correctly, you had some asset write-back. Can we expect a similar action like in 2015 in the future if the environment in refining is not changing? -------------------------------------------------------------------------------- Michal Perlik, [63] -------------------------------------------------------------------------------- Okay. So referring to your first question, yes, this ratio is the one that actually our bankers are following. And yes, it includes, as I mentioned during the presentation, the gain on the bargain purchase. However, even excluding this gain on the bargain purchase, it is still below 1.5. Rating agencies, they have their own way of calculation of this kind of ratios. Every single agency has its own methodology. So they calculate it on their own, based on the publicly available data. As regards to your second question, so far, we were able to defend the value of all our assets except the upstream. It will all depend also on the weighted average cost of capital. It will [on] depend on the CapEx. It's too early to say whether there is a risk of write-off. -------------------------------------------------------------------------------- Tamas Pletser, Erste Group Bank AG, Research Division - Oil and Gas Analyst [64] -------------------------------------------------------------------------------- Okay. Just 1 follow-up for the first question. What is the usually level of banking covenants when you would [breach] your banking covenants on net debt to EBITDA? Because I know in the case of other companies, it's usually 2, 2.5 or 3x. Can you tell us a little bit more what is this level in your case? -------------------------------------------------------------------------------- Michal Perlik, [65] -------------------------------------------------------------------------------- The maximum level we have? -------------------------------------------------------------------------------- Tamas Pletser, Erste Group Bank AG, Research Division - Oil and Gas Analyst [66] -------------------------------------------------------------------------------- No. I mean, the one where you would [breach] your banking covenants, that the bankers require you not to exceed. -------------------------------------------------------------------------------- Michal Perlik, [67] -------------------------------------------------------------------------------- The maximum one is 3.5. And the one that we are using to calculate our cost of debt is the one that you can see on the slide. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Ladies and gentlemen, there are no further questions in the queue. With that, I will hand it back to Mr. Konrad Wlodarczyk, IR Director, for his closing remarks. -------------------------------------------------------------------------------- Konrad Wlodarczyk, [69] -------------------------------------------------------------------------------- Okay. So thank you, operator. If there are no more questions, I think that this concludes our presentation. So thank you for joining us today, and goodbye. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. The call has been concluded. You may now disconnect.