Market environment

The oil and gas markets and the refining industry remain heavily affected by the COVID-19 pandemic and measures taken to contain its extent and spread. The pandemic is also significantly affecting the business environment of Grupa LOTOS. Although the macro landscape is gradually improving, it continues to be more challenging than before the pandemic.

The scale and pace of recovery varies by country, sector and product category. As regards key refinery products, crack spreads for motor gasoline have recovered fairly quickly. The continued weak international air traffic is pushing down crack spreads for jet fuel, prompting global refiners to increase the share of diesel oil in middle distillate yields at the expense of jet fuel. A surplus of diesel oil and subdued demand for the product, led by the economic recession, are eroding profit margins on diesel sales.

Financial results

The LOTOS Group reported operating profit of PLN 664.3m for the first quarter of 2021, comprising operating profit of the Refining & Marketing segment of PLN 554.8m, operating profit of the Exploration & Production segment of PLN 107.1m and consolidation adjustments of PLN +2.4m. The company generated PLN 5.9bn in revenue, with adjusted consolidated LIFO-based EBITDA at PLN 615m. The Group reported consolidated net profit of PLN 353.3m for the three months to March 31st 2021.

Exploration & Production

In the first quarter of 2021, LOTOS Petrobaltic continued to produce crude oil and natural gas from the B3 field in the Baltic Sea at an average rate of ca. 2 thousand boe/d (up +83% year on year and up +6% quarter on quarter). The output increased as a result of a successful well workover programme that covered eight wells on the B3 field in 2020.

The interventions undertaken on the Utgard field to halt a strong decline in production also proved successful, as stable production increased at the end of March to 2.5 thousand boe/d, up over 50% compared with the average output of 1.6 thousand boe/d in the fourth quarter of 2020.

The Group’s hydrocarbon production in the first quarter of 2021 totalled 18.6 thousand boe/d. A sharp rebound of natural gas prices (+115.6% year on year and +28.2% quarter on quarter) combined with a marked rise in oil prices (+20.8% year on year and 37.7% quarter on quarter) supported the segment’s adjusted EBITDA of PLN 167.9m.

Refining & Marketing

In the first quarter of 2021, the LOTOS refinery operations were affected by a planned maintenance shutdown. As the main part of maintenance work was executed in March 2021, crude throughput was in the region of 2 million tonnes, which translated into a reduced capacity utilisation rate of 88.4%.

For the first time, maintenance work at the LOTOS refinery is being performed as a partial shutdown (with the second part due to be executed in spring 2022), with only some units taken offline in the first quarter of 2021, including the EFRA Programme’s delayed coking unit (DCU).  This allowed the company to keep processing crude oil and dispatch and sell products throughout the entire maintenance period.  As per the maintenance schedule, 16 out of over 60 units were taken offline in March 2021 and brought back online in early April. The second and last phase of this year’s shutdown is the maintenance of three systems of the oil unit (starting from April 7th). All maintenance work will be completed by May 1st 2021.

During the maintenance shutdown, the company sold product inventories built up during 2020 and imported nine seaborne cargos of diesel oil (ca. 270 thousand tonnes) to benefit from strong profitability of diesel imports. The company also increased sales of light fuel oil to take advantage of a surge in demand driven by low air temperatures. The profitability of seaborne exports of naphtha increased in the first quarter of 2021, and the company leveraged the coastal location of its refinery to quickly and flexibly respond to increased demand. The prices of base oils, generating margins at historical highs, also proved a major market opportunity.  The Refining & Marketing segment’s adjusted LIFO-based EBITDA for the first quarter of 2021 came in at PLN 444.7m.

At the end of the first quarter of 2021, 514 service stations operated under the LOTOS brand, 1 more than at the end of 2020.

CAPEX projects

In the first quarter of 2021, Grupa LOTOS was implementing a number of growth projects. Seeking to expand its capacity to dispatch fuels from the refinery extended to include EFRA units, the company was completing the project to construct a fourth railway loading facility with an annual capacity of 2.2 million tonnes. In the first quarter of 2021, LOTOS gave the go-ahead for an LPG loading and storage capacity expansion project. 

Having completed the EFRA Programme, the company is making preparations for another expansion project called HBO (hydrocracked base oils). The project is economically viable and will help diversify the company’s business into second- and third-generation base oils, a global market niche. 

The company launched the Pure H2 project involving the construction of a hydrogen purification unit and a system for supplying hydrogen to tube trailers (vehicles used to haul compressed hydrogen). 

Acquisition by PKN Orlen

On March 12th 2021, the Management Board of Grupa LOTOS gave general approval for internal organisational measures aimed at optimising the Group’s structure and preparing it for implementation of the model whereby the remedies necessary to go ahead with the intended acquisition of control over the company by PKN Orlen S.A. are to be carried out.

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For more information on financial results of the LOTOS Group in the first quarter of 2021, visit www.inwestor.lotos.pl.