Last year was the first one covered by the LOTOS Group’s new 2017–2022 strategy. The Group’s consolidated net profit for that year of PLN 1.7bn, up 65% yoy, was the highest on record. Normalised consolidated LIFO-based EBITDA was close to PLN 3.1bn, up 18% yoy. Consolidated revenue topped PLN 24bn.

Key 2017 performance figures

Revenue: more than PLN 24bn
Net profit: approximately PLN 1.7bn (+ 65% yoy)
Normalised LIFO-based EBITDA: PLN 3.1bn (+ 18% yoy)
Cash flow: PLN 3.1bn (+ 18% yoy)
Oil and gas production: 22,900 boe/d (-14% yoy)
Optimum crude throughput: 9.6m tonnes
2P reserves: 88.2 mboe
Product sales: 10.9m tonnes
Number of service stations: 493 (+ 6 yoy)

In 2017, LOTOS generated more than PLN 3.1bn cash flows from operating activities, which represents a close to 18% increase from PLN 2.6bn in 2016. At year end 2017, its net debt fell from PLN 4.8bn to PLN 2.5bn. The ratio of net debt to normalised LIFO-based EBITDA was 0.8x (down from 1.9x in 2016).

Favourable macroeconomic conditions contributed to the LOTOS Group’s strong performance in 2017. The average annual oil and gas prices exceeded the Group’s projections by 8% and 15%, respectively. Diesel oil and light fuel oil crack spreads were also higher than expected – by approximately 15%, whereas motor gasoline crack spread fell 1% short of the strategy’s assumption. In 2017, the average US dollar exchange rate was PLN 3.78/USD 1, below the assumed rate of 4.09.

Upstream segment – larger reserves and reorganisation

In 2017, the LOTOS Group’s 2P recoverable reserves increased to 88.2m barrels, as a result of assigning approximately 5 mboe more to the Sleipner field and upgrading approximately 13 mboe of 2C resources in the Yme field to the 2P category. In 2017, production averaged 22,900 boe/d, contributing to the segment’s normalised EBITDA of PLN 864m, up from PLN 688m in 2016.

All these performance metrics are in line with the LOTOS Group’s strategic targets for the upstream segment in 2017–2022, i.e. production at PLN 22,000 boe/d, 2P reserves at 60 mboe, and annual EBITDA within the range of PLN 0.6-0.7bn.

In 2017, the Group’s total hydrocarbon production was 8.4 mboe, down 14% yoy. The decrease was attributable to natural depletion of Lithuanian and Norwegian reserves, as well as maintenance shutdowns of production facilities on the Norwegian Continental Shelf.

To ensure effective delivery of its upstream strategy, in the first half of 2017 the LOTOS Group decided to restructure the segment by transferring relevant capabilities and assets to LOTOS Upstream, a dedicated holding company. Its main objectives are to effectively manage the Group’s global upstream operations, also through deciding where to direct new investments, and to expand the asset portfolio, while maximising its value. In December 2017, LOTOS Upstream acquired LOTOS Norge and LOTOS Geonafta from LOTOS Petrobaltic, and is currently completing the acquisition of shares in the company carrying out the B4/B6 project. These assets account for 80% of the LOTOS Group’s current production volumes. Most of the upstream expenditure budget set in the LOTOS Group strategy, of at least PLN 3bn, will be allocated to the LOTOS Upstream Group companies.

As part of the Yme project, in October 2017 the licence partners adopted the Plan for Development and Operation (PDO), which on December 19th 2017 was submitted for approval by the Norwegian Ministry of Petroleum and Energy.

In the APA (Awards in Predefined Areas) 2017 licensing round, on January 16th 2018 the Norwegian government granted LOTOS Norge two new exploration and production licences on the Norwegian Continental Shelf: PL918S and PL910. With these two included, the company’s portfolio will comprise 28 licences. At present, the LOTOS Group is the exclusive holder or a partner in 33 offshore (Norwegian Continental Shelf, Baltic Sea) and 10 onshore (Poland, Lithuania) licences.

Downstream segment – strong performance despite maintenance shutdown

In 2017, the LOTOS refinery in Gdańsk processed more than 9.6m tonnes of crude oil. The slightly lower throughput, compared with 10.4m tonnes a year earlier, was attributable to a scheduled six-week long maintenance shutdown. The maintenance works were carried out according to schedule and within budget. The refinery’s capacity utilisation rate continued at optimum levels throughout 2017.

Diversified supply sources are key to ensuring the stability of oil supplies to the LOTOS refinery and improving its processing efficiency, while being also of vital importance to Poland’s energy security. For the first time, the refinery processed crude oil sourced from Canada and the US. In 2017, the share of non-traditional feedstock supply sources was close to 22%. In late 2017, Grupa LOTOS became the first Polish refiner to sign a forward contract for US crude supplies. The contract enabled the refinery to increase the share of crude oil streams imported from sources other than markets east of Poland to 40%.

It is worth noting that 2017 was the second consecutive year when the Polish market enjoyed the positive impact of recent legislative measures to curb the grey market (known as the fuel package). According to the Polish Organisation of Oil Industry and Trade (POPiHN), a three-year downward trend in registered consumption due to the rampant grey market reversed, and in 2017 fuel consumption increased by 12% (2.82m cubic metres) to 26.3m cubic metres, with domestic production at 20.5m cubic metres and imports at 7m cubic metres.

In 2017, the LOTOS Group’s downstream sales volume was 10.9m tonnes. A slight yoy decrease (by 1.3%) in sales volume was mainly attributable to reduced exports and the scheduled maintenance shutdown.

The Group’s domestic sales grew 19% in 2017, primarily on the back of strong sales of motor fuels (diesel oil and gasoline), driven by enhanced sales efforts in the retail and wholesale distribution channels. Both diesel oil and gasoline sales rose 19%. In 2017, the LOTOS Group achieved a 31.6% share in the Polish fuel market.

Bitumen sales also saw a considerable growth, driven by strong domestic demand from the construction industry and reduced output of Polish and foreign refiners alike.

In 2017, LOTOS-Air BP, which operates at Warsaw, Gdańsk, Katowice, Lublin and Olsztyn-Mazury airports, posted a record-high 42% increase in aviation fuel sales.

Retail segment – standardised product and service portfolio plus investment projects

One of the key objectives for the ​​retail segment was to standardise its non-fuel product and service portfolio. Since mid-2017, Navigator rewards programme cards have been accepted across the entire LOTOS retail chain. In addition, premium-quality Dynamic fuels have been made available from selected LOTOS Optima economy stations. In 2017, the LOTOS Group refocused its efforts on developing its premium retail assets – a goal it will continue to pursue in the coming years.

At year end 2017, the Group’s retail chain comprised 493 service stations, including 305 own assets (CODO) and 188 franchise outlets (DOFO), having grown by a total of six stations (5 CODO and 1 DOFO). The average daily fuel sales increased by 6.2%, while the average monthly store sales – by 8.5%. The LOTOS Group’s non-fuel retail sales rose 14%, lifting its retail margin by 23% (thanks to optimised cost management). In 2017, the Group strengthened its position among motorway and expressway service station operators. At the end of 2017, its Motorway Service Area portfolio comprised 20 sites located along the A1, A2, A4 and A6 motorways, as well as S3 and S7 expressways. In 2018–2020, the Group’s retail chain is set to expand by six new service areas along the S3, S7 and S8 expressways.

Since mid-2017, LOTOS Biznes fleet cards have been accepted by Shell Polska service stations, allowing LOTOS business customers to refuel in more than 80 new towns and cities.

The Company is preparing to launch LOTOS Electro Mobility, the pilot rollout of 12 fast electric vehicle charging points at its service stations located along the A1 and A2 motorways connecting Warsaw with Gdańsk, Gdynia and Sopot as well as in the cities of Warsaw, Gdańsk and Gdynia.

EFRA Project

By the end of 2017, close to 90% of the EFRA Project was completed, including upgrade or construction and consequent delivery for commissioning of the following buildings and facilities: the power supply building for new units (GPZ4), dry cooling towers of the cooling water system, diesel oil desulfurisation unit, oxygen generation unit, amine regeneration and sour water stripper unit, sulfur recovery units, compressed air system, and part of interplant pipelines.

Innovation

The LOTOS Group has been consistently increasing its capital expenditure on innovative projects as a means of responding to technology challenges and stimulating growth across the organisation. Apart from key initiatives in electric mobility, the Company has been engaged in research into alternative fuels (biofuels, hydrogen) and has embarked on its first Space3AC accelerator projects in partnership with start-ups. LOTOS is also a co-founder of the Hydrogen and Clean Energy Technologies Cluster and supports the Polish Innovation League. Efforts are also being made by the Group to establish and launch a Corporate Venture Capital fund.

Following a redefinition of its strategy and objectives, including expansion of its activities, LOTOS Lab has assumed the role of the Group’s R&D centre, but also a business unit leading its innovation delivery and commercialisation projects with the use of close to PLN 100m of additional equity, as well as external sources of funding.

LOTOS has also been building a corporate culture which inspires innovation from employees. As part of the LOTOS Inspires programme, in 2017 employees of four Group companies submitted close to 300 innovative projects, of which a few dozens are already being or will be implemented.

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LOTOS is a Polish corporation whose business is of strategic importance to the national and European energy security, as well as to Poland’s economy. It produces natural gas and crude oil in Poland, Norway and Lithuania. The Company owns a refinery in Gdańsk, one of Europe’s most advanced oil refining plants, where crude is processed mainly into high quality fuels, including the LOTOS Dynamic premium brand.

LOTOS also operates a chain of close to 500 service stations conveniently located at motorways and expressways, in all large cities and many other locations across the country. As a retailer and wholesaler of fuels, it has nearly a one-third market share at home. It is also Poland's second-largest rail freight forwarder. LOTOS is a leading manufacturer of road bitumens, engine oils and lubricants used in road vehicles, aeroplanes, trains, ships and even military vehicles.

Communications Office, Grupa LOTOS S.A., ul. Elbląska 135, 80-718 Gdańsk, Poland, tel. (+48) 58 308 87 31, (+48) 58 308 83 88, e-mail: media@grupalotos.pl