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

Thank you very much, Konrad. Welcome, everyone. Good day. Thank you for joining the conference call today. We have an important update to you because we have achieved a very significant milestone in creating the multi-energy company. And I'm happy to announce that today, the management teams of ORLEN and PGNiG have agreed and signed a merger plan, which was published early morning to the public domain. The combination of the businesses is a natural step in creating an integrated and diverse multi-energy company and follows the previously announced mergers with LOTOS and ANWIL. So as I noted before, the transaction will be a share-for-share merger with an agreed exchange ratio and will be registered all in voting at the general assemblies. So according to the agreed exchange ratio, every share of PGNiG, the shareholders will receive 0.0925 new shares of PKN ORLEN. So from our perspective, the merger, which we are discussing right now, will assume the provisional security, especially given current macroeconomic and geopolitical headwinds, but at the same time, will deliver significant synergies. A couple of details behind the sales ratio. So as far as the premiums are concerned, so premium paid to the spot price, which we calculate based on yesterday's closing, is at the level of 15.4%. Premium paid on 3-month VWAP we calculate at 13.4%. As far as the methodologies applied to agreed exchange ratio, we used commonly accepted valuation methodologies. So we used price quotation of the shares of both companies. We used market multiples of traded peers on a global basis. And our respective segments, we used also some of the part calculations. And we used, of course, and we verified the approach provided by the brokers. So we analyzed all that available reports provided by the analysts covering both companies. Maybe just a comment on the valuation. Of course, we are right now living in an extraordinary macroeconomic and geopolitical environment. And actually, we are facing a huge market volatility so that there were a lot of challenges when discussing the exchange ratio. Nonetheless, we think that the number, which was agreed between the management teams of ORLEN and PGNiG in the first proposal for all the shareholders book of PGNiG and PKN ORLEN. On the next slide, there is an illustrative shareholding structure, which is in [ everyone ]. So we are showing here the State Treasury at the end is expected to hold the majority stake in the combined group, which is not a surprise for anyone. And then as for the existing shareholders of all 3 companies, ORLEN, PGNiG and LOTOS, will retain significant influence in the combined business. It's something very important from the perspective of the shareholders, the group, going forward. So if you take a look, there is one important information, which is an implication of the exchange parity right now is the part that the State Treasury will exceed 50% in the shareholding. But in general, while this is an independent decision of the State Treasury, State Treasury has the time from today and to the registration of the merger, which is expected to happen in October, November this year, to manage their stake in the combined entity based on all the information in the public domain. So I cannot speak for the State Treasury. Nonetheless, I would assume with a high probability that within that period between today and the registration of the merger by appropriate court that State Treasury will handle the situation with a stake of at least 2.5% in the shareholding of the combined. On the next slide, we are presenting the time line of the transaction. So ahead of us, there are quite significant steps. So first of all, we do expect that there will be a published opinion on the merger from this particular weekend. We expect that in September this year, there will be a general assembly of PKN ORLEN. Then the publication of the prospectus will take place, which following the confirmation received from KNF, which is the financial authority. Following this clearance received from the financial authority, there will be a general assembly of PGNiG. And our goal is to have the merger registered by the end of October, beginning of November this year. I will give the floor right now to Karol Wolff, who is Head of the Strategic Projects in PKN ORLEN, to give you more color on the strategic rationale, the expected synergies going forward, and in general, a better understanding of the challenges which we're facing right now given the macro and geopolitical situation from the perspective for PGNiG, PKN ORLEN and the policy core.

Thank you, [ Kobert ]. Good afternoon, everybody. Yes. I would like, first, to describe a bit more the strategic alignment of this transaction so to PKN ORLEN's strategy. And next, I would like to discuss the key value creation lever of this transaction to the value of the group in the future. So going to Slide #7. We, as many times before, depicts the key challenges that our group are facing right now. And as our merger project started, we treated energy transformation as our main challenge. And we decided the energy transformation as larger challenge for our group. Now another aspect is important and this is the change in supply on oil and gas market due to war in the Ukraine. Geopolitical events are driving the need to rethink supply chain and the pressure to be self-sufficient in terms of oil and gas production. And this is additional factor that drives the merger right now. So going into Slide #8. We, as ORLEN Group, in response to market challenges, have adopted and implemented a strategy that is complemented by the merger of PGNiG. And let me describe our approach to the strategy, which is kind of portfolio management of several business lines. We want to maximize results in our core business. We want to develop our strategic projects. And we want to invest in future business lines. And in all those 3 areas, we see potential where PGNiG may foster our development and may speed up the strategy implementation. Let me focus your attention on maybe some few examples that in terms results maximization, we see huge importance of Upstream segment of PGNiG, which is the largest of our big group, PGNiG, ORLEN and LOTOS, and which will be the key competence center of upstream in the combined entity. In terms of strategic development, we see large potential in incorporation between power generation, especially gas power generation plant and gas distribution. And in terms in the future investment or future project, hydrogen technology -- implementation of hydrogen, both in industry and transport, will be beneficial for both PGNiG and ORLEN in the combined number. And going to next slide, Slide #9. We -- as I described, we see the merger as it's going to accelerate the strategy implementation, and the merger contributes to faster achievement of our strategic goals. And most important here, which I think is scale because after the merger, we will be the largest company in Central Europe. We'll exceed other competitors' few times. And we will be European-scale energy player with oil and gas and energy segment together with petrochemicals and new investments. So the scale will -- it's one of the most important factors that will drive to other aspects of the strategy. So the energy transition and to the customer implication, as a large company, we will be able to invest heavily in renewable power and other low- and zero-emission energy sources as well as we will be able to offer the integrated services of oil and gas and power to our customers. At the same time, we will be able to invest heavily in sustainable growth and in other new kind of projects that will form our company. And finally, we should keep our stable position of a source of attractive return for our shareholders. We are in the process of updating our strategy, and we will update our dividend policy together with our strategy by the end of the year. Turning to Slide #10. The key lever of our value-creation and transformation, we see 4 main areas of them. So the first area, as I said, is the possibility of faster and stronger transformation. Second area is about security of energy supply. Third area is about operational synergies that we see as a direct potential of the merger. And fourth area are value chain upside that we see from integration of different segments within one company. Going to the first area, so the enhanced transformation potential. We, in a few details, show here what I just discussed in the previous slide. So due to our diversity, stability and strong financial position, we should be able to accelerate the development of low and zero-emission power generation projects as well as petrochemical projects in the latest -- the new technology. And we should be able to smooth our business cycle exposure and we should be able to develop gas fire and -- power plant as the source -- additional source of energy in the power system. All of them should sum up to ensuring long-term sustainable growth of the company and this should keep up the economic resilience to economic shocks that we experience right now. And let me pass the floor over to Jacek Ciborski, Head of the Strategy in PGNiG, who describes the second aspect of the value creation there.

Thank you, Karol. Good morning and good afternoon, ladies and gentlemen. Let me give you a few words how organic this part of multi-energy group contribution to the fulfillment strategic of strategic core of Polish energy sector arising from the energy transformation. First of all, we all observe the demanding and challenging environment that's currently on the market. And we as a company face long-term challenges in transformation and total need for security of energy supply. We can see on Slide #12 that there is an increasing demand for electricity for Polish industry and transport in the near future. And it is of national importance to have a key dependable supply in the Polish economy. Natural gas is expected to increase and be a part of transition [indiscernible]. Okay. Sorry, I will try to speak a little bit louder still. I hope that I'm better hearable right now. So natural gas demand is increasing, and natural gas is expected to be the transition fuel within the transformation of Polish energy economy. This is why ORLEN is expected to be more self-reliant and self-sufficient over time to be -- as we believe that the merger of PKN ORLEN together with PGNiG will accelerate this process. However, we are facing also some challenges on the market. And as you can see on the first chart on this slide, since the second half of previous year, we can observe the Russian activity in the gas market that is aimed at disturbing European energy market. We currently see that this is a part of the wider [ plan ] of Russia is the [ fact ] of Ukraine. And as a result of such activity, we can see the increase of natural gas prices on the market. It started in the half of last year, but it's still very influencing the market. Currently, after the limitation of natural gas supply under the pretext of maintenance models on the Nord Stream gas pipeline, we face the gas price rise and the quotation of European exchange markets fly to the level of around or even above EUR 200 per megawatt-hour. This is why ORLEN is actually making the progress to make less dependent on Russian resources and plenty of development projects were implemented in the market. But extension of pipeline allows new partners to supply natural gas resource in the country, which will increase the security and reinforce Poland's negotiation power. However, we believe that the combined entity will have the right -- that only the combined entity will have the right [indiscernible] to help form energy transition on Russian supplies. And this is crucial for the future and for the Polish economy. Okay, Karol?

So continuing and maybe going just into Slide #15, where we show the next area of our value creation from the merger, value creation, in other words is -- are the synergies. And we have identified several areas of synergies between our companies. Most important of them are located in a few business segments, which I want to underline right now. The first aspect are the synergies of organizational efficiencies in Upstream segment. As a combined group, we will combine upstream activities of PGNiG, ORLEN and LOTOS in one organization. We should generate the scale effects on exploration and production of hydrocarbon. So here, we see the large upside potential for the group. Another, our Retail segment where, as I said, we want to combine activities in energy and gas distribution as well as heat production where we have heat generation units or CHP, both in ENERGA and PGNiG. In the future, we see potential by combining those assets into our organization. And finally, synergies that we identified and want to utilize are connected with the storage of gas and fuels, especially the underground storage in covering both ORLEN fuels and PGNiG possess the cover... [Technical Difficulty]

Sorry for some delays. We had a technical problem. So I hope that everyone hear us now clearly.

Okay. Shall I repeat the synergy slide or...

Yes, please.

Okay. So going to Slide #15. Here, we show the main synergies that we have identified and want to utilize as the effect of the merger. Let me describe most important of them, which we see as crucial for the merged company. The first area is Upstream segment. We -- in combined scope, we'll combine upstream activities of ORLEN, PGNiG and LOTOS. And with such active organization, we will be able to utilize synergies and efficiencies all in exploration and production area as well as all the upstream services that are now conducted by our entity. The second area where we see is synergies is its Retail segment. As I said before, we want to offer integrated customers to our -- integrated services to our customer. And here, we see potential in combining gas and energy distribution as well as the possibility of offering other products to our customer. Next area where we identified and see the potential for other optimization is heat distribution. We possess CHP assets in ENERGA and PGNiG Termika. So the combination of those assets in one organization may be beneficial for the [ core structure ] and may be good for further development of the [ bigger plan ]. And finally, where we -- the final area where we have identified significant synergy potential is storage, especially underground storage of gas, oil and fuel in underground caverns. All ORLEN fuel and PGNiG possess those assets, which are even located close to each other. So joint operation or combining operations in terms of fuel and gas caverns of our companies may be making us significant better. But not only cost synergies are important to the merger. On Slide #16, we show upside potential that we think it may be unlocked by combining different segments within the same one organization. So we have a vision that we will be able to generate additional revenue synergies due to combination of big strong business segment of oil and fuel, PGNiG, LOTOS and ENERGA, especially the whole value chain of energy from Upstream to Retail customers. We see potential in current businesses and new business development and new business projects that may be developed based on the portfolio of those assets. So some of the projects are already identified. Some may be identified in the future after the merger. As integration, we believe, keeps value for the company and will be the important driver for the future development. So this is from my side and going back to [ Kobert ] for the last few words on the future sector.

Yes. Thank you very much. This is the summary slide actually, and maybe a general comment at the beginning. As I said at the beginning of our presentation, which is this merger is natural step in creating the multi-energy company, a significant footprint in the region and the potential to expand as well. This is important because ORLEN in the surrounding countries are already small, But the combined entity -- and the combined entity will have a strong balance sheet and the potential to expand its footprint in a broader perspective. As you can see on the left-hand side on the slide, the combined entity actually ticks all the boxes for a diversified energy player. And our goal right now is to deliver the value following the merger. So thanks to our track record of M&A and integration processes, we already have a road map to have the full integration in place. And these work streams have been progressing already in cooperation with PGNiG and LOTOS. So we are preparing the companies for the day 1 and to post-merger integration with the main focus on value-creation process in order to deliver value for the shareholders. And this is our key perspective going forward. So thank you very much for listening to the presentation. This is it from our side, and we are happy to answer any questions you may have.

So now we open a Q&A session. [Operator Instructions]

Michal Kozak, Trigon. Can I ask questions?

Yes.

So may be the first part of my questions, will all upstream licenses of PGNiG be transferred to ORLEN without tender procedures and without extra payments?

Hello, Artur Cieslik speaking from PGNiG. According to the amendment of the law, we have new possibilities. The new law of [Foreign Language] as I would say in Polish will give a new opportunity to file a motion of the emerging company, and it's resolving this problem.

So actually, you have general succession and we have no any difficulties in terms of the merger to benefit from the change of the law. So actually, there are no outstanding issues with regards to the licenses in our Upstream business.

Okay. Understood. The next question, could you please present synergies calculation with PGNiG? In which areas and what is the scale?

Of course, we have a calculation, but the problem, which we are facing is more or less the same, which we have in case of LOTOS actually, the macro environment is so challenging that given the synergies are going up and down at this stage of the process, and I cannot confirm what will happen in the future. But at this stage of the process, we are not presenting the absolute numbers.

Okay. The next question, after the merger, State Treasury will exceed 50% as a shareholder. How do you see avoiding risk of 100% tender offer for PKN by the state? Do you think that selling this 2% stake to, for example, PERN will mitigate this risk?

It's difficult to say on behalf of State Treasury. Nonetheless, I think that I'm not wrong when saying that they are not going to announce a tender offer of 100%. And actually, we don't know to whom they will sell, what the procedure will be. But at the end, the optimum goal is not to exceed the 50% in the respective of the State Treasury. But we need to give a floor to the State Treasury to decide on the mechanism, how they would like to do it. But I'm pretty sure that they are not willing at all to announce a tender offer. So we won't mitigate the risk.

The next one, is there a risk of contractual penalties between PGNiG and its customers in the scenario that PGNiG cannot deliver gas to its clients due to high gas price environment or lack of gas in Europe? Would it be possible to apply force majeure clause?

[indiscernible]. We cannot disclose the contractual provisions. This case will be investigated when we'll be in a position to do it. Thank you.

Understood. Okay. So maybe the last one, do you think about changing the dividend policy in the merged entity? Is the minimum goal of PLN 3.5 per share policy still valid, taking into account the increase in the number of shares in the combined entity?

So as I said, we had the same when presenting the LOTOS-ORLEN merger. We are updating the strategy, and the works are in progress actually. So in the middle -- well, at the end of the year, beginning of the next year, we'll announce the strategy. But the key pillar behind the update of the strategy is to stay as a dividend-paying company. But in terms of the value, you need to give us some time to be able to present it to the public domain. But our goal is to be an attractive company for the shareholders. At this stage, this is something we cannot disclose. And these are only a couple of months when we'll be ready to update the strategy and present the dividend policy. But I just want to assure you that the fundamental pillar behind is to really stay the dividend in company and be an attractive company for the shareholders.

Okay. Sorry for this, it will be my last question. What valuation methods were used to calculate the PGNiG value? In what form the potential risk scenarios were priced? And considering risk scenarios, I mean, deterioration of situation with gas consumers and its clients and potential problems with financing the working capital in case of potentially full stop of gas flow by Nord Stream 1. Did you, for example, increase PGNiG in the WACC rate?

So of course, we'll not disclose the details of the valuation methodologies. But actually, we went through all of the brokers' report and actually, Michal, we analyzed portfolios. So we put into the consideration different scenarios going forward. And I think that the fundamental thing is that the transaction is not for the 1 year only. Yes, PGNiG is facing the challenges in terms of the working cost. But on the other hand, if the situation stabilizes, the situation changes then and it becomes much more positive for PGNiG. But when discussing the ultimate estimate share swap parity between the management teams, yes, we discussed the risks, we discussed the different scenarios, different methodologies in terms of valuation. And yes, we apply the risk factors to the calculation. But -- forgive me, but we'll not disclose the details. But I should note that the management of companies took into consideration the risks going forward.

Any other question? [Operator Instructions]

So maybe if there are no questions, I have a couple of ones.

Go ahead.

Okay. How much may the WACC rate increase in the merged ORLEN after the acquisition of PGNiG in relation to the pre-transaction structure?

Yes. Very challenging question, but I think that both companies are more or less in the same sectors. And actually, I would say we've got stable capital structure. I think that the balance sheet of the combined entities will be stronger altogether. Of course, we understand the challenges with regards to the working capital. But in the long run, we would rather expect the financial firepower of both companies will be rather stronger. So my perspective is that it should be rather neutral or at least neutral.

Okay. Do you assume 0 Urals import in the merged entity from the beginning of next year, which means cancellation of Rosneft and Tatneft long-term contracts?

Yes. Okay. So let me answer it this way. First issue is the contractual provision and expiry date, right? And we do not foresee as of today extension on one of these contracts. Second expires a couple more years. So depending on sanctions imposed or not, we will continue or not. However, as of today, we -- ORLEN is not buying, not importing any seaborne cargoes. So this is -- we are consistent, and we are working together with all participants of the European market with this respect. Thank you.

And the last question, could you please present import structure of diesel and the other line in Poland in the first half of this year? What is the percent of Russian diesel import to Poland? Do you think that Russian refining products, for example, diesel, will be fully bound from the beginning of the next year by European Commission?

There was no Russian diesel import by PKN ORLEN in the last months. So we have stopped importing gas and diesel. The market -- we know that the market does it, but it's not done like in ORLEN. But I cannot say more because we haven't prepared ourselves in terms of hedging topic. We have prepared ourselves for the merger conference today and we aren't able to discuss that case topic in more detail.

If you would like, we will check, let's say the details and we will come back to you off-line. But recently, definitely what you look on the market, we see some deterioration in [ trucks ] of the diesel. And as we said, recently, we observed a higher import of the diesel to Europe from Asia, Middle East, Russia and U.S. So that means this makes some pressure on diesel [ trucks ].

Just a quick addition as for the imports that are being realized for the diesel, these are less than 30% in total. But as my colleagues said, we do not know what are the other regions they are importing from. I guess that the best information you would have -- for the best information, you'll have to wait for the importing report.

Kamil Kliszcz, mBanku. Can you hear me?

Yes, Kamil.

I have one question actually regarding a lot of transaction. Could you please give some more color on the schedule of closing these remedies transactions, I mean especially the transaction on the Refining business? What will be the schedule of closing this Saudi Aramco regarding these adjustments of net debt and the current profit that LOTOS is generating that will be still on your balance sheet after the transaction. I'm just wondering whether it is the end of Q3. Or what schedule can be expected here?

It's rather closer to the end of Q4 rather than sooner. So we should benefit quite significantly from the adjustments to net debt.

Can you hear me?

Yes, we can hear you.

Raphaël DuBois, Societe Generale. Just a couple of questions, please. Can you say what sort of gearing you would like to operate under once the merger is finalized? And also just going back to the synergies, can you state how costly will that be to achieve them? And maybe quantify and give us an idea of the phasing of those synergies?

So as of today, PKN ORLEN will have gearing -- in our strategy, we have gearing at the level of 30%. And actually, it will be the target, actually the maximum target, in our updated strategy. And as of today, nothing is changing with regards to this approach. But as I said in our updated strategy at the end of the year, beginning of the next year, we'll provide the assumptions behind financial gearing to you. But as of today, I wouldn't expect any significant changes. As far as the synergies are concerned, I have to recognize to our divisions also. We are not providing the data behind the synergies at this stage. So it means that we are not providing the data related to the positive and negative results about the merger. But what I can say, actually, because we have the calculations here, of course, positive, and there is a significant potential going forward.

Any other questions? Okay. So if there are no more questions, I would like to thank you for participating in the conference call. So this concludes our conf call. So have a nice day, and goodbye.

Goodbye.