Management’s discussion and analysis of 2021 financial results

The ORLEN Group’s sales revenues for 2021 were PLN 131,341m, having increased by PLN 45,161m year on year. The year-on-year increase was driven by a 2% growth of sales volume (in the Refining and Retail segments, partly offset by lower sales volumes in the Petrochemicals and Upstream segments) and reflected a 69% increase in crude oil prices and, consequently, prices of main products. Year on year, in the 12 months ended December 31st 2021 gasoline prices increased by 75%, diesel oil prices by 58%, jet fuel prices by 69%, heavy fuel oil prices by 69%, ethylene prices by 38% and propylene prices by 50%.

In 2021, earnings before depreciation and amortisation, net of the effect of crude price movements on the value of inventories (LIFO-based EBITDA) and net reversals of impairment losses on non-current assets¹ reached PLN 14,154m.

Drivers of LIFO-based EBTIDA evolution (y/y) [PLN million]

¹Net impairment losses on property, plant and equipment and intangible assets included mainly impairment losses on the ORLEN Upstream Group’s exploration assets:

• 2021: PLN 811m;
• 2020: PLN (1,591)m.

The realised profit was PLN 1,724m higher year on year:

• PLN 3,693m (y/y) – positive effect of macroeconomic factors, mainly on the back of an increase of USD (1.3)/bbl in the Urals/Brent differential and higher margins on light distillates, olefins, polyolefins, PTA, PVC and fertilizers. The ORLEN Group’s results were also supported by a year-on-year PLN 2,807m change in the valuation and settlement of CO₂ futures within a separate trading portfolio. The positive effects were partly offset by lower margins on middle distillates and higher cost of captive consumption due to a USD 29/bbl increase in crude oil prices. In 2020, there was a steep decline in prices of crude oil and petroleum products, which yielded a positive result on hedges recognised in other operating activities, mostly in the first quarter of the year. An increase in crude oil and petroleum product prices in 2021 resulted in a negative effect of the hedges, and their total year-on-year impact, excluding the result on CO₂ futures, was PLN (1,509)m.
• PLN (610)m (y/y) – the impact of higher year-on-year sales volumes at the ORLEN Group in the second, third and fourth quarters of 2021 was positive but it did not offset the negative effect of lower volumes seen in the first quarter of 2021 as compared with sales in the first quarter of 2020, not yet affected by the market constraints resulting from the COVID-19 pandemic. A maintenance shutdown of the Olefins II unit additionally pushed down sales volumes in the Petrochemicals segment.
• PLN (1,359)m (y/y) – negative effect of other factors, including:
  • PLN (4,062)m – absence of gain on bargain purchase of 80% of shares in Energa in 2020;
  • PLN 2,204m (y/y) – positive impact of utilisation of historical inventory layers;
  • PLN 1,522m (y/y) – improved performance of the Energa Group, mainly as a result of non-comparable periods of Energa’s consolidation within the ORLEN Group;
  • PLN 320m (y/y) – positive effect of inventory write-downs to net realisable values. The impact of inventory write-downs for the year ended December 31st 2021 was positive at PLN 211m (2020: PLN (109)m);
  • PLN 184m (y/y) – prescription of liability claims of ORLEN UNIPETROL minority shareholders;
  • PLN 156m (y/y) – positive effect of change in the ownership structure of Baltic Power;
  • (PLN 1,683)m (y/y) – other items, including remeasurement of CO₂ allowance provisions and higher costs of operation of service stations, overheads and labour costs, partially offset by higher wholesale margins relative to the previous year;

After the net effect of impairment reversals of PLN 811m (mainly in respect of ORLEN Upstream’s assets, of PLN 918m), the ORLEN Group’s LIFO-based EBITDA for 2021 totalled PLN 14,965m.

The effect of oil price movements on the value of inventories, reflected in EBITDA, was PLN 4,246m. As a result, the ORLEN Group’s EBITDAfor 2021 came in at PLN 19,211m.

After the net effect of impairment reversals of PLN 811m (mainly in respect of ORLEN Upstream’s assets, of PLN 918m), the ORLEN Group’s LIFO-based EBITDA for 2021 totalled PLN 14,965m.

The effect of oil price movements on the value of inventories, reflected in EBITDA, was PLN 4,246m. As a result, the ORLEN Group’s EBITDA for 2021 came in at PLN 19,211m.

After income tax of PLN (2,495)m, the ORLEN Group posted a net profit of PLN 11,188m for 2021, an increase of PLN 8,363m (y/y).

As at December 31st 2021, equity was PLN 52,578m, having increased by PLN 10,189m year on year, mainly as a result of recognition of a PLN 11,188m net profit for 2021, a PLN (414) negative effect of change in hedging reserve, a PLN (1,497)m payment of dividend from retained earnings to PKN ORLEN shareholders, and PLN 783m of foreign exchange differences on translation of the equity of foreign operations resulting mostly from higher CZK, USD and CAD exchange rates.

Net financial debt of the ORLEN Group as at December 31st 2021 was PLN 12,275m, a decrease of PLN (785)m on year-end 2020, mainly due to net inflows which included proceeds from and repayments of loans and borrowings as well as repurchase and issuance of bonds for a total amount of PLN 460m, a PLN (1,656)m increase in net cash, a PLN 60m increase in short-term deposits, and the net effect of valuation and remeasurement of debt due to exchange differences as well as new acquisitions within the Group for a total amount of PLN 351m.

In 2021, the ORLEN Group’s hiring policy was focused on recruiting top quality specialists for both day-to-day tasks and strategic projects. Acquisition of the Polska Press Group (1,827 people) and ORLEN Transport (180 people) in 2021 and expansion of the ORLEN Group’s power generation, IT and retail areas led to a year-on-year increase in total workforce by 2,047 people, to 35,424 employees.

LIFO-based EBITDA by segment [PLNm]

Change in segment performance [PLNm]

Delivery of investment plans

In 2021, ORLEN Group’s capital expenditure reached PLN 9,890m, up PLN 898m (10.0%) on the 2020 amount of the capex.

Over 30% of the capital expenditure was spent in the Petrochemicals segment, 24% in the Refining segment, 26% in the Power Generation segment, 12% in the Retail segment, and 4% in the Upstream segment.

Increase in non-current assets in 2021 [PLNm]

Change in non-current assets by segment in 2021 [PLNm]

Capital expenditure by market [%]

Major investment projects carried out in 2021 included: