Grupa LOTOS S.A. - Integrated Annual Report 2012
Letter from the Vice-President of the Board
2012 proved to be a year of economic slowdown, fluctuations in exchange rates and varying margins on petroleum products. Yet in spite of the difficult external conditions, the EU economies being torn apart by recession and wrecked by financial liquidity problems, moderately sceptical global financial markets and political struggles in various parts of the world that caused oil prices to fluctuate, we managed to achieve a solid net profit of approximately PLN 923m.
In the four quarters of 2012 we generated consolidated sales revenue of PLN 33bn, which represents a 13% increase on the previous year. The reported operating profit of the concern is PLN 301m, whereas the operating profit (once the events distorting it are eliminated and the LIFO effect accounted for) is PLN 1.3bn - 131% higher than in 2011.
The exploration and production segment, whose development is a crucial element of our business strategy, was affected by a number of significant events. We entered into an investment contract with CalEnergy Resources on the common development of our B4 and B6 gas deposits in the Baltic Sea. In Lithuania, we took full control of the UAB Manifoldas extraction company, which belongs to the AB Geonafta Group, the purchase of which we had finalised in 2011.
2012 profit was also charged with, and therefore considerably affected by, an impairment loss of PLN 935m, with respect to the value of Grupa LOTOS' shares in the Yme project on the Norwegian Continental Shelf - the result of a significant delay in its implementation. It is also worth noting that in 2013, the operator of the deposit, Talisman Energy, and the owner the platform, SBM Offshore, concluded a contract for removal of the faulty platform from the field, which opens the possibility for us to further develop this project or sell our shares.
Another essential pillar of our strategy is the downstream segment. Throughout the year Grupa LOTOS used the processing capacity of its modern refinery at a level in excess of 92%. The operational flexibility of the refinery's installations, configured under the 10+ Programme of expansion, enabled us to adapt quickly to the market environment. Crude oil processing then reached another record level of 9.7m tonnes, which is a 6% increase on the previous year. The profit structure was improved again to the advantage of high-margin products, especially gasolines, aviation fuel and LPG. While stressing the significance of the 10+ Programme, it is also worth emphasising our financial security. In spite of the fact that the servicing of debt incurred on the financing of the 10+ Programme is still affecting the Company's finances, the modernisation has earned Grupa LOTOS a leading position among the most technologically advanced and effective European refineries. In 2012, we managed to reduce our debt considerably, which means that our net debt to assets ratio decreased to 68% from 2011's 90%.
Another important factor was the 2012 connection of the Gdańsk refinery to a natural gas power system, which is now the basis for the creation of new initiatives aimed at raising the power efficiency of the plant and the profitability of its crude oil processing.
Additionally, we have consolidated our leading sales channels and are actively searching for new ways to increase sales. In 2012, these activities saw the LOTOS brand’s share in the national fuel market increase to 34.3%.
By the end of 2012, we had expanded the LOTOS service station chain to 405 facilities, including 101 stations under the LOTOS Optima economy brand - doubling of the number of stations in this segment since 2012. Our share in the retail market as at the end of 2012 was 8%. Because the economic situation in Europe is still unstable, the Company decided to introduce the Optimal Expansion Programme for 2012, with plans to launch a number of projects improving the overall efficiency of the concern, while still keeping an eye on the realisation of key strategic projects. By the end of 2012, the programme had realised savings of PLN 446m as a result of pro-efficiency actions, cost savings and other planned investments by the LOTOS Group.
The profit achieved in 2012 together with our stable financial situation will become a safe base for the implementation of ambitious development projects in the years to come, which will contribute to improving the competitiveness of Grupa LOTOS while also consolidating our foundations for creating better value for the Company's shareholders.
Vice-President of the Board
Chief Financial Officer
Grupa LOTOS S.A.