Why did Orlen’s earnings decline? Translated in black and white by consultants.

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Orlen shouldn’t be a monolith and may distinguish between a number of enterprise segments which can be roughly associated to one another. Let me briefly clarify this utilizing the reporting departments utilized by the corporate itself.

The evaluation makes use of the Lifo EBITDA class to explain the corporate’s earnings within the first quarter of 2024. In different phrases, it’s working revenue after deducting depreciation, monetary taxes, and earnings tax bills. It is calculated utilizing the strategy of utilizing the final ton of crude oil getting into the refinery as the premise for calculating the processing value.

Although it could appear sophisticated, it’s a generally used technique to calculate outcomes with out being affected by prices equivalent to depreciation, trade charge fluctuations, and earnings tax deferral and fee. There can be no drawback of getting to find out crude oil processing prices based mostly on the historic value of the reserves every firm should preserve.

These earnings are calculated the identical throughout all intervals, so it’s not essential to know the detailed calculations. Just consider it as comparable. The report launched Wednesday states: In the primary quarter of this yr, Orlen Group recorded Lifo EBITDA of just about PLN 8.4 billion.In the primary quarter of 2023, it amounted to virtually PLN 20 billion. Why this transformation? Let’s take a look at the person segments of Orlen Group’s operations.

Let’s begin with the half that normally evokes essentially the most feelings: the oil refinery.

The refinery’s actions embody buying crude oil and promoting merchandise created from the crude oil to wholesale prospects. I present this definition as a result of I notice that almost all readers know what a refinery does. However, from an accounting perspective, there are some nuances. The refinery’s earnings finish when the product is offered to a business firm (its personal or exterior).

Therefore, whenever you purchase gasoline at a gasoline station, you aren’t shopping for immediately from the refinery, however from a wholesale firm that sells the gasoline to retail shops. This is true regardless that each firms function throughout the identical Orlen Group. This distinction is essential for segmentation, mentioned later.

In the primary quarter of 2024, the corporate earned about PLN 3.2 billion much less in income from processing crude oil into completed merchandise equivalent to gasoline, which is principally defined by macro results.

The macro impact is nothing greater than lowered margins in oil processing. These margins are principally as a result of costs of merchandise provided by different producers, which could be estimated to have decreased by about $2 within the first quarter of 2024, in accordance with quotes on international inventory exchanges. Per barrel. Additionally, adjustments in the best way crude oil was processed, i.e. the disruption of processing Russian uncooked supplies, additionally had a big affect on the decline in earnings. This lowered the outcome by about $5. On the barrel.

A complete lower of $7. Per barrel, the quarterly throughput is roughly 70 million barrels, and the trade charge of PLN 4 per greenback is PLN 1.96 billion (calculation outcome: 7 x 70 million x 4).

In addition, there may be an impact of decreasing manufacturing, which is as follows. Non-Russian oils give barely worse manufacturing outcomes. And the rate of interest difficulty as effectively. Dissension Polish zloty. This is a strategy to perceive why refineries have worse outcomes.

Therefore, it may be assumed that the numerous decline in Russian oil throughput is basically accountable for the more severe outcomes of the refineries (as of early 2023, beforehand contracted crude might be legally processed, however now solely refineries within the Czech Republic can accomplish that ). ) and standardization of gasoline processing margins.

This is essential from a outcomes perspective. Because right here earnings decreased by greater than PLN 6.3 billion. Orlen shows oil and gasoline extraction outcomes and sells them to retail firms at wholesale costs.

The most essential issue within the outcome was the so-called. gasoline allowance, In truth, an establishment that compensates for taxes paid by firms into the Price Difference Payment Fund, i.e. the distinction between power costs and the extent of shopper safety relying on market situations, the so-called defend.

Simply put, it’s a particular tax levied on firms to subsidize their payments, equivalent to electrical energy payments. Total taxes within the first quarter amounted to roughly PLN 7.7 billion, however in comparison with the earlier yr, the distinction amounted to roughly PLN 4.2 billion.

Additionally, because of decrease gasoline costs, the corporate earned about PLN 2.9 billion much less in income.

In whole, including these elements and some different much less essential ones, the indicated distinction turns into PLN 6.4 billion.

Gas bought wholesale from mining firms is offered, for instance, to households, and the earnings from these actions decide the outcomes of this sector. The firm additionally makes a revenue by transmitting this gasoline to its ultimate recipients.

In principle, this phase underperformed by round PLN 1.5 billion, however final yr the corporate settled the PGNiG acquisition deal at round PLN 2.7 billion (a purely accounting transaction). In phrases of actual earnings, the primary three quarters of 2024 achieved outcomes that have been about PLN 1.2 billion higher than a yr in the past.

In this phase, the corporate clearly advantages from the low costs of the gasoline it sells to its prospects, and in reality it’s at present the main phase for the corporate, though the outcomes need to be settled with manufacturing.

The firm distinguishes between a number of completely different segments, however they don’t contribute a lot from an analytical viewpoint.

However, it’s value mentioning that the power sector (electrical energy and warmth manufacturing) recorded a results of roughly PLN 2.4 billion (PLN 2.9 billion a yr in the past) as a result of deteriorating macroeconomic setting.

However, the retail sector (gross sales of gasoline bought from gasoline stations and refineries) achieved a efficiency of roughly 500 million PLN, an enchancment of roughly 270 million PLN in comparison with the earlier yr, whereas the petrochemical manufacturing sector achieved a efficiency of roughly 500 million PLN. A lower of just about PLN 100 million to PLN 4 million.

In abstract, we are able to see that at this time’s Orlen Group is an organization with many various enterprise profiles, typically very loosely associated to one another.

The worsening macroeconomic situations of the oil refinery had a decisive affect on adjustments in efficiency. There has been a big decline in primarily Russian oil imports and mining, which has pressured firms to bear the prices of taxes levied to take care of a “defend” towards electrical energy, warmth and gasoline payments.

The purely accounting occasions associated to the acquisition have been of reasonable significance and amounted to roughly PLN 2 billion. PGNiGIt occurred in 2023 and was not repeated this yr.

But are these components the results of adjustments within the firm’s administration, as former President Orlen claims? I do not assume so. Moreover, what is occurring in Orlen, it’s value noting that within the second half of 2023, when Daniel Obajtek was nonetheless president, the oil sector firm carried out within the third quarter about PLN 300 million worse than earlier than. Currently (and summer time is the height season, the macro scenario is a lot better than within the first quarter of 2024), the fourth quarter (when the macro scenario was barely worse) was about PLN 1.6 billion worse.

Dawid Czopek, Manager at Polaris FIZ