LOTOS ended the second quarter of 2021 with success. Having flexibly managed its product slate and sales directions and having leveraged market opportunities that came its way, LOTOS delivered a net profit of PLN 1.06bn. The Gdańsk refinery operated at full capacity.
The LOTOS Group delivered adjusted LIFO-based EBITDA of PLN 0.98bn for the second quarter of 2021, driven by the effect of ‘cheap crude inventories’, among other factors. According to company estimates, this effect lifted adjusted LIFO-based EBITDA by around PLN 0.09bn. The effect of ‘cheap crude inventories’ reflects a shortcoming of the adopted inventory valuation model, which (in an environment marked by significant oil price fluctuations), distorted the LIFO-based result and has no impact on cash flows from operating activities. These amounted to PLN 1.84bn in the reporting period (up +27% year on year). Revenue stood at PLN 7.4bn (up +75% year on year). The company has a stable financial position, as demonstrated by its net debt to LIFO-based EBITDA ratio of 0.8x at the end of the second quarter of 2021 (significantly above the strategic target), attesting to its ability to repay debt.
The company’s and the sector’s performance largely reflected global market conditions. In the exploration and production segment, the first half of the year saw a marked rebound and rise of crude oil prices. The average price of Brent crude reached USD 68.96/bbl, having increased 13% quarter on quarter and 132% year on year in the second quarter of 2021. UK National Balancing Point prices of natural gas rose 32% quarter on quarter and 463% year on year, having hit multi-year highs.
The refining and marketing segment’s results were supported mainly by record-high prices of base oils. Crack spreads for base oils significantly widened both year on year and quarter on quarter during the reporting period as availability was limited due to low refining capacity utilisation globally. Seaborne exports of naphtha continued to be profitable in the second quarter of 2021, therefore LOTOS leveraged the location of its refinery on the Baltic coast to quickly and flexibly respond to increased demand and export opportunities. The second quarter of 2021 saw a recovery in the road construction industry associated with commencement of the infrastructure construction season and favourable weather conditions, with continued attractive prices of bitumens. Therefore, bitumens greatly outweighed HSFO in LOTOS’ heavy products portfolio.
Domestic fuel consumption began to gradually recover in early 2021, as COVID-19 restrictions were lifted, with demand for gasoline and diesel oil in Poland up +10% and +8% respectively in the first six months of the year. The market recovery was attributable chiefly to increased mobility of people related to the gradual easing of pandemic restrictions in Poland, the May long weekend and the start of the summer holiday season. In the second quarter of 2021, domestic terms of sale were favourable compared with import parity, which supported premiums achieved on wholesale of gasolines.
Exploration & Production
In the second quarter of 2021, daily oil and gas output in Poland, Norway and Lithuania was 19.4 thousand boe/d. Production totalled 1.76 mboe, with 1.76 mboe of crude oil and natural gas sold by the Group in the quarter. It should be noted that interventions undertaken on the Utgard field in Norway increased average production from the field (attributable to LOTOS’ interest) by +26% quarter on quarter to 3.2 thousand boe/day.
The revenue growth posted by the segment in the second quarter of 2021 (up +79% year on year and up +22% quarter on quarter) was primarily driven by higher prices of natural gas and Brent Dtd. Adjusted EBITDA came in at PLN 214.7m, up 28% quarter on quarter and up 362% year on year.
In the second quarter of 2021, the company carried out the start-up of the offshore production platform on the YME field. Production start-up from the field is expected in the fourth quarter of 2021.
Refining & Marketing
The Refining & Marketing segment delivered solid adjusted LIFO-based EBITDA of PLN 761.9m in the second quarter of 2021. Grupa LOTOS completed a partial maintenance shutdown of its refinery in April as scheduled. The company smoothly normalised its crude throughput at 2.7m tonnes (+33% quarter on quarter and +3% year on year), reaching full capacity utilisation.
In the second quarter of 2021, the company was rebuilding stocks of products sold during the maintenance shutdown and benefited from the strong profitability of gasoline sales. The gradual widening of the spread between crack spreads for diesel oil and heavy fuel oil supported the marginal refining margin generated by the EFRA Project, which was close to USD 2.5/bbl in the second quarter of 2021.
At the end of the previous quarter, LOTOS operated a retail chain comprising 515 service stations, with eight new sites added to the network from the end of June 2020. Retail generated EBITDA of PLN 73.5m, an increase both quarter on quarter and year on year driven by higher sales volumes of motor gasoline, diesel oil and non-fuel products resulting from the easing of pandemic-related movement restrictions, a gradual recovery in domestic demand, and wider retail margins on key products sold by the segment.
Ongoing capex projects and key developments
In the second quarter of 2021, Grupa LOTOS was finalising a number of growth projects, including the hydrogen recovery unit, designed to increase the share of hydrogen, LPG and naphtha in the refinery’s product slate. The unit was handed over for commercial operation in May 2021. Another facility placed in operation in May 2021 was rail loading station No. 4. The infrastructure has increased the capacity to dispatch fuels from the refinery after it has been expanded with EFRA Project units by 2.2m tonnes of diesel oil and gasoline a year.
In early 2021, 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). In the second quarter of 2021, design work was under way on a hydrogen purification system and hydrogen compression and distribution station. The company also researched the market of tube trailer suppliers.
In the case of the HBO (oil hydrocracker) project, documents needed to secure a final investment decision are being prepared, and financing is being arranged for the project.
In addition to the maintenance shutdown mentioned before, other important developments in the second quarter of the year included the signing on May 12th of a cooperation agreement between PKN ORLEN, PGNiG, Grupa LOTOS and the State Treasury concerning the recommended scenario for consolidation of the three companies. The document stipulates that, as a result of a merger or mergers, as the case may be, the shareholders of Grupa LOTOS and PGNiG will acquire new shares in the increased share capital of PKN ORLEN in exchange for their shares in Grupa LOTOS and PGNiG, and will become shareholders in PKN ORLEN as of the date of the merger(s).
On June 21st 2021, the company prepaid the credit facility contracted to implement the EFRA Project. The prepayment is to reduce the average borrowing costs (once a new final external financing agreement is signed by LOTOS Asfalt) and to facilitate the reorganisation measures necessary for the implementation of the remedies agreed in connection with the merger with PKN ORLEN.
For more information on the second-quarter 2021 financial results of the LOTOS Group, visit www.inwestor.lotos.pl.