Orlen S.A. (PKN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call of PKN ORLEN. At our customer's request, this conference will be recorded. [Operator Instructions] I will now hand over to Konrad Wlodarczyk, who will lead you through this conference. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. Welcome to the conference call regarding ORLEN Group consolidated financials for the third quarter 2021. The presentation will be delivered by me; Michal Perlik, Executive Director for Finance Management; and Marek Golebiewski, IR expert. After the presentation, we will open the Q&A session, during which several Directors from PKN ORLEN will be ready to take your questions. With no further delay, let's move to Slide #3, so executing summary of the first quarter. PLN 4.3 billion EBITDA LIFO, another record-high quarter. We may say that we had a favorable macro environment and higher sales volumes that supported the results. Downstream margin increased by more than 80% to the level of USD 9.8 per barrel, and the higher fuel consumption due to economic recovery as well as holiday season translated into increase in sales volumes by 2% year-on-year and 15% quarter-on-quarter. In Q3, we processed 8.3 million tonnes of crude oil, 1% more than in the previous year, which is 94% utilization ratio. Our financial situation remains still very good. In Q3, we generated PLN 4.3 billion cash flow from operations. We spent PLN 2.5 billion in CapEx, and we paid a dividend, PLN 1.5 billion. As a result, our net debt decreased by PLN 0.1 billion comparing to the last quarter. Covenant. Net debt to EBITDA remains at a safe level, 0.69. In Q3, we realized a number of important things that you see on the slide. Soon in November, production of ecological glycol propylene will start. As a part of this investment, there will be a launch of first hydrogen hub in Poland offering pure quality hydrogen to power fuel cells with a production capacity of over 350 tonnes pure hydrogen per year. We gave a green light to the construction of Bottom of the Barrel installation in Mazeikiu. And as the result, the yield of high-margin products will increase by 12 percentage points, which translates into EBITDA increased by, roughly speaking, PLN 300 million per year. We are planning to finish this investment until the end of 2024. As a part of ORLEN Paczka project, which covers over 6,000 locations across Poland, we launched first 200 automated parcel machines, open 24/7, and it's just the beginning because by the end of the year, there will be 500 APMs. And by the end of the next year, there will be 2,000 APMs throughout the country. We observed a high interest in ORLEN Skylight accelerator, the first corporate acceleration program for technology start-ups in Poland with international reach, and in the first round over 100 start-ups from Poland and abroad applied. 14th of October, EGM of a LOTOS gave a conditional content for partial sale of LOTOS Group assets within the framework of remedies. So this is a very important step in this process till 14th November, PKN ORLEN will choose partner or partners to release -- to realize remedies and ask the European Commission for approval. Additionally, in Q3, we made a decision to build an installation of hydro-generating vegetable oil in Plock. So it is an ecological and innovative solution that will strengthen our position on the biofuel market. We are completing the construction of ecological propylene glycol installation. So this is the largest installation of this type in Europe with a production capacity of 30,000 tonnes per year. We started the main stage of a geotechnical research on the bottom of the Baltic Sea in the area of planned wind farm and the connection route. We analyzed the possibilities of using innovative technology, Hydro-PRTSM, as a part of chemical recycling of plastics. We finished co-branding. So ORLEN brands is on all PKN ORLEN stations abroad. We signed an agreement with GE Renewable Energy to strengthen our competitiveness in applying for new concessions for wind farms in the Baltic Sea. We signed the letter of intent with PKP and PESA on cooperation for the implementation of hydrogen technologies in rail transport. And we are, of course, very proud that we received 9th time in a row The Best Annual Report award. Now I will go to the details of Q3. So let's move to Slide #5, macro environment. In Q3, model downstream margin increased by USD 4.4 per barrel compared to the last year to the level of USD 9.8 per barrel as a result of 5x higher refining margin, higher B/U differential by USD 2.4 per barrel and higher petchem margin by almost 60% year-on-year. Cracks on light and middle distillates as well as olefins, polyolefins, PTA and PVC increased. This is shown in the table on the right-hand side. Cracks on heavy fractions decreased. We recorded higher cost of internal users with the rising crude oil prices and unfavorable price relation between electricity and natural gas. Operating results were supported by weaker Polish zloty versus both the euro and the U.S. dollar. Slide #6, GDP and fuel consumption. In Q3, we recorded increase in fuel consumption year-on-year as a result of higher economic activity on all markets, except Germany. And this is proved by the dynamics on the left-hand side on this slide, the dynamics of GDP. We see that the dynamics in Germany are on the lower end. Now I will present financial and operating results. So let's move to Slide #8. In Q3, revenues increased by more than 50% due to higher quotations of refining and petchem products due to increase in crude oil prices and higher sales volumes. We achieved PLN 4.3 billion EBITDA LIFO, which is higher by PLN 2.3 billion comparing to the previous year. And this is mainly due to positive macro impact; higher sales volumes; higher trade margins in wholesale and nonfuel margins in retail; usage of historical inventory layers of crude oil and products; inventory revaluation, so net realizable value; and limitation of liability for minority shareholders' buyout of ORLEN Unipetrol. Those positive factors were partially limited by negative impact of lower fuel margins in retail, higher cost of provision for CO2 emissions and higher overheads and labor costs. Positive effect of crude oil price change on inventory valuation, so LIFO effect, amounted to PLN 0.9 billion in Q3, and it caused an increase in reported EBITDA to the level of PLN 5.2 billion. Net financials amounted to minus PLN 0.3 billion. So this is the result of the surplus of negative FX differences and net interest cost as positive net impact of settlement and valuation of derivative financial instruments. If we take all into account in Q3, we achieved PLN 2.9 billion net profit and more than PLN 7 billion of net profit after 9 months. Next slide, Slide #9, so presents split of EBITDA LIFO by segments. Refining delivered PLN 1.2 billion, so higher by PLN 1.5 billion year-on-year due to positive macro impact, higher sales volumes, higher trading margins, usage of historical inventory layers and net realizable value, partially offset by negative impact of higher provision for CO2 emissions. Petchem delivered over PLN 1 billion, so PLN 500 million more comparing year-on-year, mainly due to positive macro impact, higher volumes effect despite the drop in sales volumes and higher trade margins at negative impact of usage of historical layers and higher provisions for CO2 emissions. Energy segment also delivered over PLN 1 billion. So let's say, comparable results year-on-year. On 1 hand, we had a positive macro impact and higher volumes effect despite the drop in sales volumes. That was partially limited by negative impact of higher provisions for CO2 emissions and higher overheads. In Retail, PLN 948 million which is a decrease by PLN 87 million due to negative impact of lower sales volumes and lower fuel margins as well as higher overhead and labor costs, partially offset by positive impact of higher nonfuel margins. Upstream delivered record high results, PLN 130 million, increased by PLN 86 million year-on-year. This is due to positive macro impact at lower sales volumes. Corporate functions, lower costs by PLN 231 million year-on-year. This is due to limitation of liability for minority shareholders' buyout of ORLEN Unipetrol as well as lower donations related to COVID 19. Now I hand over to Marek to let you go through the details on each of the segment.

Thank you, Konrad. So next slide, Slide #10, refining segment. In the third quarter, refining recorded, as Konrad has mentioned, PLN 1.2 billion EBITDA LIFO, which is higher by over PLN 1.5 billion compared to the previous year. The main factor of such a good result of the Refining segment is positive macro due to increase in cracks on light and middle distillates, weakening of Polish zloty against the U.S. dollar and valuation and settlement of CO2 contracts as a part of the break in transaction portfolio in the amount of almost PLN 160 million year-on-year. Those positive effects were partially limited by negative impacts of a decrease in cracks on heavy fractions, higher cost of internal usage and cash flow hedging transactions. Also in the first quarter, we recorded an increase in gasoline sales by 11%, diesel by 4%, and JET by 41% and HSFO by 6% at lower sales of LPG by minus 6%. Overall, sales increased by 5% year-on-year. The other position include mainly PLN 0.3 billion of usage of historical layers of inventories, higher trade margins at higher cost of provisions for CO2 emissions. On the next slide, Slide #11, shows -- this slide shows operating data for Refining segment. So we processed 8.3 million tonnes of crude oil, which is 1% more than in the previous year. And in PKN ORLEN, throughput decreased by 0.5 million tons year-on-year, mainly as a result of optimization of crude oil processing to the level of heavy refining fractions inventories from September 2021. Also, the fuel yield was higher by 1 percentage point year-on-year due to higher H-Oil utilization in the third quarter. In Unipetrol, crude oil throughput was at the comparable level year-on-year. Fuel yield increased by 3 percentage points year-on-year due to higher share of low-sulfur types of crude oil and lower scope of maintenance shutdown from the previous year. And in ORLEN Lietuva, the throughput increased by 0.1 million tonnes due to macro improvement since August 2021. Fuel yield increased by 6 percentage points due to higher share of low sulfur types of crude oil and usage of semi products from inventories. In the first quarter, we sold 6.7 million tonnes of refining products, which is higher by 5% than in the last year. Higher sales in Poland by 4% as a result of higher market consumption. Lithuania, by 10%, due to the improvement of macro environment that led to higher capacity utilization. With lower sales in Czech Republic by minus 2% due to limited exports to German market. We had some logistics and market difficulties caused by floods. Slide #12. So we are moving to Petchem segment. In the first quarter, petchem delivered over PLN 1.0 billion of EBITDA LIFO, which means a twofold increase compared to last year and the comparable results quarter-to-quarter. Also, it's worth to mention that ANWIL share in petchem result was almost 25%. So it's quite a good result from the product facility. Undoubtedly, main factors supporting the results were the macro, of course, including high petrochemical margins on olefins, polyolefins, PTA and PVC. Also weaker zloty against euro, and the valuation of settlement of CO2 contracts as a part of the break in transaction portfolio. Despite high margins, we were not able to take full advantage of the market situation due to the implementation of plant maintenance shutdowns and some issues in launching olefins installations after the maintenance in the second quarter. Sales decreased by minus 2% year-on-year, of which lower olefin sales by minus 9%, fertilizers by minus 2% and PVC by minus 3% and PTA by minus 8%, at higher sales of polyolefins by 23%. The next slide, Slide #13, show operational data in Petrochemicals segment. The utilization of petrochemical installations in the third quarter was lower year-on-year in Poland, mainly due to the continuation of planned maintenance shutdowns of olefin unit in -- and BOP in Plock that started in the second quarter 2021. As well, we -- as planned maintenance shutdown of PTA installation in Wloclawek. Planned shutdown of olefin unit caused feedstock limitation on BOP and Metathesis installations in Plock. And in Czech Republic, we faced production limitations related to preparation for maintenance shutdowns of PE3 installation. Petrochemical sales amounted to 1.3 million tonnes and were lower by minus 2% year-on-year, including lower sales in Poland by minus 7% and in Lithuania by minus 5%, at higher sales in Czech Republic by 9% due to improving the operational parameters of PE3 installation and higher availability of products compared to last year. The next slide, Slide #14, shows our Energy segment. Energy as well as Petchem segment generated over PLN 1.0 billion of EBITDA LIFO results in the third quarter, which is comparable to the last year result. ENERGA Group added over PLN 700 million to the results overall, and it's higher by PLN 230 million year-on-year. We recorded a positive macro impact year-on-year as a result of an increase in electricity quotations and the valuation of settlement of CO2 contracts as a part of separate transaction portfolio in the amount of almost PLN 200 million with a negative impact of the increase in gas and CO2 prices. In the third quarter, gas prices increased 5x compared to the previous year and remain on record high levels also in the fourth quarter. The energy industry looking for cheaper substitutes, uses, not only coal, but also petrol fuels, which has significant impact on global crude oil prices. And all of those has an impact on the prices of electricity and fuels in the region as well. So we're looking forward for the fourth quarter and see how it will work out for us. The position orders that is also included on this slide includes higher cost of provisions for CO2 emissions and higher fixed costs. And now we can move to the next slide for the operation data for the Energy segment. In the first quarter, ORLEN Group produced 3.0 terawatt-hours of electricity. 60% of the electricity produced comes from renewable energy sources of gas-fired units. Electricity production increased by 6% year-on-year, including higher production of the Ostroleka power plant due to increased demand from state-owned grid operator, PSE. Higher production of the Wloclawek hydro power plant and an increase in renewables capacity by over 0.1 gigawatts electrical energy. Electricity sales amounted to 6.2 terawatt-hours, and it's a decrease by minus 8% year-on-year as a result of lower sales in both areas of wholesale and retail. Electricity distribution increased by 3% year-on-year to the level of 5.6 terawatt-hours as a result of higher economic activity and higher number of energy connection points. The CO2 emissions of the Energy segment in third quarter amounted to 2.2 million tonnes. The next slide, the retail. The retail generated over -- almost PLN 950 million of EBITDA result, which is lower by minus 8% year-on-year as a result of lower fuel margins, lower sales volumes and higher operating costs. We recorded a decrease in fuel margins on Polish market, increase of those margins on German and Czech markets and a comparable level of margins were visible in the Lithuanian market. Sales volumes decreased by minus 1% year-on-year, of which diesel by minus 2% and LPG by minus 5% with higher gasoline sales by 1%. The nonfuel margin in the third quarter was higher year-on-year in all markets, especially sales of hot snacks and cold beverages. We also expand our capability of alternative fuels. Currently, we have 421 points with alternative fuel points, which is more by 239 compared to the last year. The next one, Retail. Slide #17, operating data of Retail segment. At the end of the third quarter, there were 2,852 fuel stations operating in our retail network. The number of fuel stations increased by 12 year-on-year. There is more stations in Poland, in Czech Republic and in Slovakia, of which somewhere about 80% were equipped with nonfuel concept, Stop Cafe/Star Connect, respectively, which translate to a total of 2,252 nonfuel points of sale, 71 more than last year. Sales volumes decreased by minus 1% year-on-year, mainly as a result of lower sales in Poland due to the high base from the previous year when all mobility restrictions were lifted. Market share increased year-on-year in Czech Republic and in Slovakia, and decreased on all other markets. We systematically developed the network of alternative fuel points, and at the end of third quarter, we had, as I mentioned, 421 of those, which is an increase by 239 year-on-year, of which in Poland by 218, in Czech Republic by 21. And our clients can use 375 EV chargers, of which 321 in Poland, 40 in Czech Republic and 7 in Germany. We also have 2 hydrogen stations in Germany and 44 CNG stations in the Czech Republic. The next slide, the Upstream segment, Slide #18. As Konrad mentioned, this segment generated PLN 130 million EBITDA result, which is the result nearly PLN 90 million higher year-on-year. This is the result of an increase in quotation of all hydrocarbons. So margin impact was higher by almost PLN 100 million compared to the previous year. Average production increased by 0.20 BOE per day year-on-year, basically split half between Poland and in Canada, so 0.1 in each of those countries. And sales decreased by minus 6% year-on-year as a result of unplanned infrastructure shutdowns at the external hydrocarbon consumer in Canada. Slide #19, operational data of Upstream segment. So we have somewhere around 174 million BOE of 2P reserves of crude oil and gas. Average production in the second quarter reached 17,000 BOE per day and CapEx in the third quarter amounted to somewhere around PLN 74 million, of which 60% in Poland and 40% in Canada. In Upstream segment, we focus on the most promising projects. And if you are interested in those, you can see the detailed information about the operating thesis in the first quarter on Miocen, Edge and Plotki projects implemented in Poland and our activities in and Kakwa, Ferrier and Kaybob regions in Canada. Now I'll hand over to Michal, who will get you through the cash flows.

Thank you, Marek. Good morning, everyone. Let's move to Slide #21. Another very strong quarter in terms of cash flows with 5.2 EBITDA generated in third quarter and PLN 0.4 billion of cash settlements on deposits securing our hedging activity, offset by PLN 1.2 million increase in working capital, mainly related to increase of crude oil price, gas price and as a consequence, our products prices. We ended up the quarter with PLN 4.3 billion of net inflow from operations. PLN 2.5 billion was spent on CapEx, which contributes to minus 2.2 net outlook from investment. Over the first 9 months of this year, we have generated PLN 12.8 billion of EBITDA, PLN 1.1 billion of cash was dedicated to increase of working capital. We spent altogether PLN 6.6 billion for CapEx. We paid PLN 1.5 billion of dividend in August. In March, we purchased CO2 emission rights worth PLN 1.5 billion. We also recorded positive settlement -- cash settlement of deposits over the first 3 quarters of $1.5 billion. Minus PLN 2 billion loss of others covers mainly PLN 0.8 billion spending -- cash spending on acquisitions, advanced payments of PLN 0.4 billion, PLN 1 billion of income tax, PLN 0.9 billion for lease payments and interest paid, altogether offset by PLN 0.2 billion received from dividends. The rest are noncash positions, with the biggest influence of adjustments for changes in the balance of reserve of PLN 3.9 billion. This is mainly related to establishment or increase of CO2 reserves and another position in settlement of CO2 subsidies for minus PLN 1.6 billion. The details for those 2 positions, you can see on Slide #32 in the Apendix section. Altogether, a very strong cash flow brought us to a decrease of debt by PLN 1.7 billion as compared to end of last year. So you can see on the next slide that at the end of September, we had PLN 11.4 billion of net debt out, of which PLN 10 billion was debt which we recognized on our balance sheet. As a consequence, our net debt-to-EBITDA covenant is at the level of 0.69x, and this is the lowest level since acquisition of ENERGA. Actually, we returned to the levels pre-acquisition levels. No new debt issuance this quarter. So thank you very much. I hand over back to Konrad.

You, Michal. So let's move to Slide #23. CapEx. We may say that CapEx spendings are according to the plan. During the 9 months, we spent PLN 6.6 billion CapEx at planned annual CapEx at the level of PLN 9.5 billion. So far, we spent the highest CapEx on Petchem and Energy segments of our strategic growth direction as well as Refining. Main growth projects that we were realizing in Q3. In the Refining was the construction of Visbreaking in Plock and propylene glycol installation in ORLEN Poludnie. In Petchem project of capacity extension of olefin unit in Plock as a part of this big petrochemical development program and extension of fertilizers production capacity in ANWIL. In Energy, project of construction of offshore wind farm on the Baltic Sea, modernization of current assets and connection of new clients in ENERGA Group as well as modernization of turbine sets at CHP in Plock. In Retail, we opened in Q3, 8 stations, 10 were closed. We opened 12 nonfuel locations, and we launched 143 alternative fuel points. The last section describes current macro and market outlook. So slides #25 and #26. You see that in Q4, downstream margin decreased quarter-on-quarter by USD 1.2 per barrel to the level of USD 8.6 per barrel, and this is due to skyrocketing natural gas prices and lower petchem margin, which is still on a very high level at 2x higher refining margin and B/U differential quarter-on-quarter. Crude oil price increased by USD 9 per barrel quarter-on-quarter to the level of USD 83 per barrel as an average, and this is mainly due to high demand for crude oil as an alternative to expensive gas. So as we call, gas to oil switch, reactivation of U.S.-China trade talks and concern about insufficient supply of crude oil due to lack of willingness of OPEC+ to increase oil production by more than it was previously declared. So just 400,000 barrels per day from November. Diesel cracks increased by 90% quarter-on-quarter averaged USD 91 per tonne. Here, we've got higher demand as a result of gas substitution for energy production, and we had also some logistic constraints due to low level of the water on the Rhine River. Cracks were partially offset by higher imports from Russia. In terms of gasoline, we see that cracks increased by 9% quarter-on-quarter, averaged more than USD 190 per tonne. This is mainly due to concerns about insufficient supply of fuel due to potential risk of energy crisis, higher gasoline exports from Europe to West Africa, and additional increase in cracks for both diesel and the gasoline resulted from lower supply in ARA region at, let's say, a very stable demand as well as lower stocks in both ARA and the U.S. High-sulfur fuel oil cracks decreased slightly by 4%, averaged minus USD 168 per tonne. So we have a weaker demand in the Mediterranean region. We have improvement of the supply situation in Asia, and we observed the drop in the demand from Saudi Arabia due to lower utilization of air conditioning after the summer. Decrease in HSFO cracks were partially offset by higher demand for -- from energy sector in Asia due to high gas prices. B/U differential is shown on Slide #26. So it increased by USD 0.2 per barrel quarter-on-quarter, averaged USD 2.5 per barrel. And this is mainly due to lower demand for Ural resulting from competitive prices of alternative grades of crude oil from the Middle East. In terms of petchem. Petchem decreased by EUR 131 per tonne quarter-on-quarter. Average currently is 1,187. And this is mainly due to increase in feedstock prices as a result of higher crude oil prices and a decrease in polymer prices, so polyethylene and polypropylene. And we may say that, of course, despite the decrease, petchem margins should remain very strong due to high demand from construction and packaging industry additionally supported by high gas prices, which is used as a feedstock in add-on crackers and keeps margins product pretty high. Last slide, Slide #27. So market outlook. In Q4, we expect crude oil price to remain at the level of USD 85 per barrel until the end of this year as a result of high demand for oil from the energy sector due to high gas prices. We expect refining margins to remain at the level of circa USD 3, USD 4 per barrel as a result of high demand for crude oil and fuels. We expect petrochemical margins to remain at current high levels of circa EUR 1,100 to EUR 1,200 per tonne as a result of strong demand for petrochemicals correlated, of course, with GDP growth at limited import due to increase of freight cost. Of course, rising crude oil and gas prices create some cost pressure on the feedstock side. In terms of gas prices. Gas prices reached record high levels in Europe. Volatility is really huge. It is an effect of limited gas supply, higher demand stimulated by the economic recovery after the pandemic period, of course, the beginning of heating season and low level of stocks in Europe. Stocks has not been recovered before the winter to the level observed in the previous year. So this may cause some worries about assuring deliveries, especially during cold winter period. In terms of electricity prices also hitting record levels from the beginning of the year. Electricity prices increased by more than 80% mainly due to increase in CO2 emission prices and increase in natural gas prices. So worries about the cold winter, high demand for electricity as well as increasing demand from China for coal can be additional factors supporting price increase. Economy. Global economy is still recovering after the pandemic period. GDP forecast for our main markets are optimistic. Therefore, we expect a further increase in the demand for both fuels and petrochemical products. In terms of regulations, nothing has changed since last quarter. So this is all from my side. Thank you very much, and we are ready to take your questions.

[Operator Instructions] We have the first question is from Henri Patricot, UBS.

Yes, I have a couple of questions on energy cost and then one on the retail side. So on the energy cost, I wanted to ask you about the impact of these higher natural gas and electricity prices in the fourth quarter. Are they fully offsetting the increase in refining margins that we're seeing? And secondly, do you have any hedging in place that have reduced the negative impact of higher nat gas prices? And is there something you can do around mitigating that high gas price switching to other fuels that would reduce your sensitivity? And then on the retail side, can you comment on the latest trends around both transport fuel demand in your core regions and also around the fuel margin in this higher oil price environment, whether there's any pressure at this type of price.

Okay. So your question on natural gas is whether we have a hedging policy in place. So the answer is yes, we do have a hedging policy. And we have already secured gas for the coming quarter and for the coming 2 years, of course, not in full but in some part, especially for those segments of our -- of activities that are highly gas intense in general.

Okay. [indiscernible] about the segment that are our gas-fired power plants, as my colleague already said, a majority of that was in fourth quarter actually has -- have got prices that give us a positive margin for the fourth quarter on our gas-fired power plants. So we expect that the result of gas-fired power plants will be it won't be as high as the previous quarter, but it will be positive. But still, we will run our gas-fired power plants at minimum level, so -- and because of lower volumes of [indiscernible], the results will be lower than in the previous quarter. But as I said, as my colleague said, actually the gas has been bought in the past at good prices, so the fourth quarter is secured from that point of view.

For the refinery segment, we also do like demand optimization. So we have some capacity to replace natural gas with heavy oil, and we do it if possible. So this is also a part of protecting ourselves against the high spot prices.

And just for your information, Henri, our CCGT units both in Plock and Wloclawek have generated more than PLN 150 million in Q3. So roughly speaking, they delivered more than 15% to the overall EBITDA of Energy segment. In terms of Retail in Q4, I think that in Q4, we should expect higher fuel sales in Poland year-on-year due to the fact that consumption for fuels is increasing due to economic recovery. Additionally, we have a lower base. So last year, in Q4, we had we again implemented limitations towards, let's say, movement around Poland due to, let's say, second wave of COVID. So what we observed right now in Retail, in October, the sales is higher by 6% year-on-year. Here, we observed both higher sales of gasoline, more than 10%; and diesel, roughly speaking, 5% higher. In terms of fuel margins, in October, we observed a significant decrease in fuel margins comparing to October '20, so roughly speaking, 30% Polish market, 15% Czech market and, let's say, comparable level in Germany. And comparing month-on-month, so comparing to September '21, 25% increase in the Polish market, 20% in Czech Republic and, let's say, 5% in Germany. And this is the reason of, let's say, quite high crude oil price and quite, let's say, weak Polish zloty versus U.S. dollar. And of course, this creates a pressure on margin. Please bear in mind also that, let's say, fuel price on our fuel stations in Poland is very close to PLN 6 per liter. I'm talking about these regular fuels. So this was treated always as a psychological barrier when you are, let's say, breaching round figures. So if you would like to increase fuel prices and, of course, gain some more money on margins, you have to bear in mind that, on the other hand, probably you should expect some pressure on sales volumes. But in my opinion, retail margins should slightly improve in the next month of Q4.

Okay. As a quick follow-up just quickly on the natural gas, I understood that you've recovered for the fourth quarter. And then for the first quarter of next year, I know much of your natural gas consumption is effectively exposed to the spot price?

Yes, we do have a hedging policy that extends beyond the coming quarter, of course. It's as long as the forward curve allows, so to say, taking into account the liquidity on the market, of course. But we do have some exposure on the spot market as well.

Our next question is by Michal Kozak, Trigon.

I have a couple of questions. When should we expect information on the selection of the company that will purchase LOTOS shares with you? And when are you going to present the parity for this transaction of LOTOS?

Robert Sleszynski speaking. In terms of the partner chosen, of course, we are approaching the deadline, and we are approaching the corporate approvals in this regard. So the deadline -- and actually, the deadline is still valid. But before any corporate and promos are taken, we cannot comment on the partner chosen. So it's too early. On the parity, I think that the first quarter 2022 where we will agree on the merger plan and we will announce the merger. So we should rather expect something in the middle of first quarter next year.

The second question, assuming stable prices and expiry of price hedging, should we expect the negative effect on gas cost in the first quarter next year? Or is there a chance that the higher cost will be fully translated to fuel prices?

Could you repeat the first part of the question, Michal?

The first, yes?

Yes, the first part.

Should we expect the negative effect on results due to higher gas costs and expiry of gas hedging until the end of this year?

In what products, in general or in the retail products?

In Refining and Petrochemical segments.

In Refining, still, even though the gas prices are skyrocketing, in general, in OpEx, natural gas cost is not as much as it is in other -- our activities like Petrochemicals. In Petrochemicals, I understand that the price, it cannot be fully -- the natural gas price cannot be fully translated and passed through on the market in general. There are some limitations. But we can also see that like petrochemicals installations in Europe in general, like fertilizers, are being closed or shut down. And it will decrease the supply and will give the potential to increase prices in general. But for the coming year, the gas prices are not as high as they are for the coming quarters. We see a huge drop, prices cut in half basically from the quarter 1 2022 to quarter 2 2022. So the average price for the coming calendar 2022 is not as high as it is for the coming quarters.

Okay. But do you agree that you have quite attractive hedging, quite attractive price of gas that is hedged until the end of this year?

No comment.

Okay. And the third question, assuming that the current CO2 prices remain stable, when should we expect negative effects on net debt and EBITDA due to buying more expensive allowances?

Well, we can already see the effect of the increase of CO2 emission rights on our costs. So you can see in -- on tax position in cost structure. So you can see it, for example, on Slide #33 when we present the evolution of the CO2 provision. So last quarter, we have created a CO2 provision of almost PLN 1.4 billion. Of course, it was partially offset by a release of provision related to free allowance which company was granted. But you can see that this increase of provision was significantly higher as compared, for example, to first quarter, when the price was much lower and the provision was half of it what we have at the moment. So if the prices will stay at a similar level as we observe right now, then in the forthcoming quarter, we will have a very similar level of new provision, very small level of it related to free allowances, but we will not observe profit realized on the settlement of the future transactions. So partially, it's already reflected in the prices. If there will be no increase in CO2 prices, then we can eliminate this PLN 0.5 billion effect from the future results.

Yes, understood. And the final question, the last question, what was the EBITDA effect comparing to the previous quarter on gasoline inland premium and replacing gas with light fuel oil in downstream?

No, we do not provide exact impact of those 2. I'm assuming that you are asking about the trading margins, yes?

Yes.

So generally, what you can say, if you look on the Refining segment, the positive impact of trading margins overall comparing year-on-year was at the level of almost PLN 0.2 billion.

The next question is by Piotr Dzieciolowski, Citi Bank.

Congratulations on the good results. I have a couple of questions for you. So I wanted to come back to this gas and CO2 costs because you say you had some of the cost elements before and you had some hedging policy in place. But let's say on the 2-year view, what is the wall you have to climb, how much cost will go if you were to take the current forward curves versus what is more or less in the books for 2021? In other words, what is the realized price going to increase as a delta? And the same for CO2, so we can do the maths and understand the impact of it. And second, can you please tell us anything about this platform story from the morning that you are interested in acquiring upstream assets in Romania and I think you can add on just a few speculation. And finally, as a third question, I wanted to ask you on the inland premiums because that seems to become a quite -- the gasoline price seems to become quite a political subject in Poland, even with your CEO commenting why it is at the level that it is. So when you look at the inland premiums, how do they compare currently versus the historical run rate? Are they higher, lower? If they are higher, by how much they are higher versus an average over the last kind of couple of years?

So I take the question about the inland premium. So we may say that in Q4, IP on the wholesale level is on the comparable level in terms of gasoline. If we are talking about the diesel is 30% lower year-on-year. In terms of quarter, in terms of gasoline, we observed drops by 30%; and in terms of diesel, roughly speaking, by 5%. So you may say that generally, we had the highest, so record-high inland premium last year. And now we have observed that inland premium is normalizing in Q4 comparing to the last year.

Okay. That's fair enough.

Second question on the Romanian market, so I was as surprised as you when reading the article. So there is nothing on the table.

Okay. That's fair enough as well. But I think people -- there was a visit of PKN officials into Romania at some point in the past. I just wonder, directionally, why would you buy upstream assets in Romania. Is that -- would that be the price? Do you think this would fit your portfolio? You want to have and integrate domestically? Or is there any logic why you would want to buy these assets?

Well, from the geographical perspective and in terms of the market potential, the Romanian market was always interesting for us, so we are looking at the market and the potential opportunities. But in terms of upstream business, there is nothing which can be of our interest, frankly speaking. We are not starting to OMV about this business case at all. And that's it. We are visiting many different countries to understand opportunities in our geography. And that's it at this stage. As I said, we are not talking to OMV about the assets at all.

And I'll take the question on natural gas again. First, it's important to understand what the gas prices means and how it extends on the time line. Basically, the gas prices are very high in the short term. They are very high when delivered tomorrow, when delivered next quarter, when delivered in Q1 2022. And then from quarter 2 2022, they drop sharply. And the drop continues later in the third, fourth quarter and also in 2023. So the impact of current spot prices is short term, and we assume it will be short term in general. And we see the market is very volatile. So even today, after the yesterday's news on gas storage being fulfilled in Germany, the price -- the gas prices dropped very rapidly. So the market is volatile, but it's volatile in the short term, not that much in the long term. In the long term, the gas prices are supposed to get back to whatever normal -- to lower levels in general.

As said that in the Energy business, we are already monetizing the good outlook for 2023. We are signing [indiscernible] buying gas and CO2. And we're doing a good margin for this year. So not only the outlook is looking good, but also we are acting on this. On the last [ 2 terms ], we are selling -- securing margin for our [indiscernible] for our benefit.

Apologies, the line is really, really bad. I couldn't get the second answer. But if I may, maybe give a little bit more detail. I was asking, I can see and I observed daily forward curve on the gas prices. But I still would say the end of the curve moved up by a good EUR 8, EUR 10. And therefore, I ask you, do you see on the 2-year forward basis a EUR 10 per megawatt hour pressure? And what does it translate into the numbers? And the same for CO2. So how much are you going to book on CO2 costs in kind of 2021 and how that cost on a mark-to-market basis, so beyond your hedges, is going to look like in 2 years from now?

[Operator Instructions]

Two things. I think I have already mentioned it. For the gas intense activities, we have a very conservative hedging policy in place, we secure margins, and we do most hedging in the -- more hedging in the short term than in the long term. So the coming quarter 4 or quarter 1 of 2022, it's not such a big deal as you would think when you observe gas prices. For the activities that we do less hedging like for refinery business, gas cost, it does not weigh as much in general outcome, in general cost. It's still very low compared to crude oil, for instance. So even the curve would move up EUR 8, EUR 10, it wouldn't -- you wouldn't see it that much in the general cost of refinery products in general.

Our model downstream margin has only 2.4% of the gas costs included. And of course, if it doubled, it may go to 4%, maybe 5% of the total cost, but still it's insignificant in terms of what this segment can achieve.

And in terms of CO2, where generally our approach is to secure our position at least over the next 24 months. As you might remember, we have around 16 million tonnes of total emission in the group yearly, out of which around 40%, 45% is covered with free allowance. So our exposure is between 8 million and 9 million tonnes yearly, which means that EUR 1 movement on the price is translating to EUR 8 million, EUR 9 million influence on the EBITDA. However, we have -- at the moment, we have over 19 million tonnes of contracts open, which means that we are secured for more or less years right now, as I mentioned at the beginning. And we are gradually increasing our exposure to keep this period, 24-month period, fixed. But of course, our average price on the secured position is slowly, slowly growing. Previously, it was closer to EUR 25. Now it's around EUR 30 per tonne. But it's still significantly lower as compared to the current market price. If you have a look over the last 12 months, due to this activity, we have gained PLN 2.5 billion, so we saved PLN 2.5 billion on the CO2 cost.

The next question is by [ Aarsh Desai ].

Forgive me, I may be not as informed as much as the next -- some other people on the call. I have 2 questions. And again, apologies if I missed it. If -- going to Retail, if I dig a bit deeper into what you said, is it really just wages that is the problem? And if you could talk moving forward on the nonfuel retail side in your petrol stations business, how does that look in terms of inflation? And is that a business that might be more hampered? Or is that a business where you can have quite strong pricing power because it's a captive audience, and you can help grow that business, as I say, on nonfuel retail sales within Retail? And that could be something that will be improving that trend in that business? Or is that something where it could have headwinds both on wages and just cost of buying products, et cetera? And my second question is, if I look at working capital and cash flow, and again, I appreciate the group has changed a lot in recent years. It looks like you have built inventories a little bit, typically, after you've, I think, released inventories in this quarter historically. Could you dig a little bit deeper into where -- if you were to break down the businesses, where that's happened? And I appreciate market prices impact the value of inventories. And if there's any segment where you build inventories perhaps more significantly, that doesn't come out in the consolidated numbers but we could make our own assumptions and read across for where you, at the end of September, were seeing perhaps very elevated strong demand going into Q4 if we wanted to make those assumptions. I'm not saying that is guidance or anything you would be saying.

Thank you for the question, Konrad Wlodarczyk, speaking. Yes, indeed, so nonfuel definitely is a very important part of the Retail business because it's, roughly speaking, 30% of the gross retail margin. So if you look only on the results of the retail segment in Q3, so this is presented on the Slide #16, you see that only nonfuel margin increased comparing year-on-year. So we are investing a lot. So we are opening new locations. So currently, of course, the pace is not as dynamic as it was a few years ago. But roughly speaking, 80% of our fuel stations is equipped in some kind of concepts, Star Connect or Stop Cafe. Of course, majority is located in Poland. We have almost 1,700 fuel stations equipped with Stop Cafe, 320 in the Czech Republic, 116 in Germany, 29 in Lithuania and 14 in Slovakia. So we are developing very dynamically nonfuel sales. Please also bear in mind that what I've mentioned at the beginning, we had a lot of ideas how to, let's say, increase the EBITDA in the coming quarters and years, so one of such an element, as I've mentioned at the beginning, is opening first 200 APMs, so automated parcel lockers, yes, on the Polish market. This number will increase significantly. So we observe a huge opportunity in, let's say, purchasing online by our customers. So we've got a lot of ideas how to develop the retail generally, and we put a lot of focus on the development of nonfuel part of the Retail business. And currently, as I said, only this nonfuel margin, so mainly sales of hot beverages, hot snacks, brings a lot of money and, let's say, improves the results year-on-year.

And just to give you some more details about the parcel machines that Konrad spoke about because those 100 parcel machines does not give the full scope of the operations that we have here. The project is called ORLEN Paczka, and it's quite popular here in Poland. We currently have over 6,000 locations, of which over 1,100 on our own stations, over 1,000 of kiosks that we acquired from RUCH company and also 4,000 partnership points. And those packaging machines that automated parcel stations that Konrad talked about, 200 of them already; 500 till the end of this year; and until the end of the next year, 2,000 of those across Poland. So we still work on increasing the nonfuel margin on our Retail segment by implementing new business models that our clients require and ask for.

Sorry, could I just ask a follow-up on that one before going on to the to the cash flow question? I mean based on what you just said, if you look at the older vintage of stores, that you would call the mature, the ones opened quite a long time ago, I know going back before the crisis 2019, I saw you investing heavily in adding the cafes and the shops into these petrol stations. And then obviously, they have a ramp-up period in terms of nonfuel to mature and stuff or just in general, including fuel. Is it safe to say there is a vintage of stores that were opened, say, in 2019, maybe even 2018, where then because of the lockdowns in 2020 and also partially this year, they have still not ramped up to maturity in retail sales and obviously the higher-margin nonfuel retail? So there is a kind of a lift-up we should see there as they transition towards what mature stores within the retail network look like. Is that a fair read across from what you've said or not?

I guess it's quite fair because you will have to wait for the implementation of some of services in many of those points. We also work on changing some of our costs, for example, into automated convenience stores, for example. Also, we see a big trend of shortening the last-mile delivery that is visible across the Europe and the globe actually. And you can imagine that if you have like all those well-placed kiosks across the high streets and high-mobility streets, that also have a possibility to add some, for example, EV chargers next to them. Those might be quite an interesting point of interest from the perspective of our clients that they could come up with the EV, charge it up, get their parcel and so on. And also, this shortening of the time of the delivery, now it's like 2 or 3 days -- working days to deliver a package here in Poland, in most cases. But if you -- for example, we are still thinking about it. But if you, for example, approach it as to a small and diversified and well-placed storage, so small storages, small warehouses, you could call it, you could even shorten that period to like minutes, for example. So we could say an instant delivery. We will see how it goes in the future, but we can -- we see a potential in all those retail activities. Also, this is why we acquired a company that had a large portfolio of online clients to introduce e-commerce to our Retail segment and towards the last-mile delivery as short as possible. So we'll see what the future will bring. But yes, the Retail segment isn't just like it was 10 years ago. And also, when you look at the Europe and the approach of other players to the Retail segment, their perspective is that somewhere between 50% even up to 70%, maybe 80% of fuel stations will have to be closed because, if you look at most of the stations on the West part of the Europe, you'll see those small stations with just a roof over the distributor. And if you look at our customers' approach and what they do on our stations, they basically stay for up to 20 minutes not because they are filling their cars, but they would like to use our beverage of nonfuel stores and so on. If you add some other services, then charging your EV in the future on the fuel station will be as good as charging it at work or at home as well because you will have something to do there. So our fuel stations are more complex, then we have a lot of other services that fit our clients' needs. And I guess that our Retail should be stronger and stronger within each next -- considering the nonfuel a lot, yes.

And in terms of working capital, we are observing right now, it's mainly driven by the price of the products. We do not observe very significant changes in rotation numbers. As regards to inventory rotation, we are usually around 50 days, plus/minus a couple of days, not more than 5. We saw some slight decrease at the end of this quarter, but that's nothing extraordinary, I would say. So the major change that we are observing is, as I said at the beginning, driven by the price change on the crude oil and as a consequence on the products.

The next question is by Gumas Pletser (sic) [ Tamas Pletser ] of Erste Bank.

It's Tamas Pletser from Erste Bank. Just 2 very short follow-up questions. First of all, you mentioned the refinery gas stake. How much is it per year, a normal year? So how much gas do your refineries need to operate? That would be my first question. And second question, you mentioned the CO2 allowance and the free allowance you still have. Did I understand correctly that, that was some 19 million tonnes which you have as a free allowance for the next years? Was it the right number?

Gas consumptions for refinery, it depends. It's approximately between 1.0 to 1.2 bcm annually.

In terms of free allowance, it's not exactly like you said. We are granted with the free allowance every year. It's more or less 7.5 million till the end of '25. So under the current ETS scheme, the 19 million is actually our hedging. So it's the volume of our contract position opened on the [ ICE ].

7.5 million until 2025 and 19 million which is hedged, that's what you said?

Correct.

For the moment, there are no further questions, so I hand back to you.

Thank you very much. If there are no more questions, I think that this concludes our conference call. Thank you for the participation, and have a nice day. Bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.