LOTOS 2017-2022: Stability and sustainable growth
LOTOS reveals strategy for 2017-2022 Stability and sustainable growth in key areas of business combined with strong support for innovation lie at the heart of the company’s strategic plans.
According to the strategy document, the company will target doubling its average annual consolidated LIFO-based EBITDA* from approximately PLN 2bn in 2015-2017 to approximately in PLN 4bn 2019-2022. Capital expenditure to be spent by LOTOS over the next six years will reach PLN 9.4bn.
The management board also promises that Grupa LOTOS S.A. will regain its ability to pay dividends.
The strategic objectives are to be pursued within two time frames: 2017-2018 and 2019-2022. The initial years are for achieving economic and financial stability and completing projects currently in progress: EFRA (Effective Refining) and target development of the B8 field on the Baltic Sea. During the latter time frame (2019−2022), the company will focus on growth through new projects both upstream and downstream.
LOTOS has a vision to remain a vertically integrated producer of top quality fuels and chemicals, providing highly specialised logistic services and servicing support. It also aspires to be the national leader of innovation within its core business.
LOTOS is evolving to materialise its new vision in the ever-changing market environment. The company has defined five strategic objectives which, once accomplished, will substantially increase its value for stakeholders:
- Effective use of production licences, further optimisation of refining technologies, launch of new products and alternative fuels, and commitment to quality,
- Consistent and repeatable reduction of operating expenses and optimisation of margins along the value chain,
- Readiness to develop and embrace innovation based on dedicated funding, a new model of cooperation with research institutions and creative engagement of employees,
- Flexible response to risks, perceived through potentially offered business opportunities,
- Greater responsibility for security at large in accordance with Poland’s economic, environmental and energy policies (diversification of feedstock and fuel supplies, OHS, cyber security, social responsibility).
Twofold increase in earnings, debt reduction and new investment projects
Resumption of dividend payments
If effectively implemented, the strategic objectives will enable Grupa LOTOS to double its average annual LIFO-based EBITDA from approximately PLN 2bn in 2015-2017 to approximately PLN 4bn in 2019-2022. The first additional PLN 1bn of LIFO-based EBITDA will come from projects already planned or in progress. The target debt level (for 2019-2022), measured by the ratio of net debt to LIFO-based EBITDA, should not exceed 1.5x, which is a safe market benchmark.
Capital expenditure on projects in the pipeline will exceed PLN 6bn. 50% of that amount will be allocated to upstream projects, 40% to refining (including EFRA) and 10% to retail projects (standardisation and optimisation of the service station chain). This structure of capex is safe, affording operational flexibility the company needs in the rapidly changing market. According to strategic assumptions, final decisions concerning additional capex of PLN 3.3bn will be made in 2018.
The investment plans will be delivered with the help of progressive cost savings as part of the Efficiency Improvement Programme. The main goal is to effectively reduce operating expenses, centralise procurement across the organisation, optimise the Group’s structure and further enhance integrated margin management, which will give the company a tangible commercial advantage thanks to the refinery’s coastal location.
One of the principal objectives of the LOTOS strategy is to maintain its growth momentum and invest in profitable projects while regaining the dividend paying capacity.
LOTOS plans to further expand its upstream segment based on the licences it already holds and potential new additions to the asset portfolio. The geographic focus will remain on the Baltic (full development of the B8 field, development of the B4/B6 fields) and North Sea (Utgard and Frigg Gamma Delta licences). Together with its licence partners, LOTOS is also considering the launch of production from the Yme field.
In Poland, in addition to its offshore operations on the Baltic, LOTOS plans to pursue onshore projects (Górowo Iławeckie, Kamień Pomorski and other licence areas). The company is also contemplating upstream ventures in other countries: offshore in the United Kingdom, Netherlands, Denmark, Black Sea, Caspian Sea, and Adriatic, and onshore in Central and Eastern Europe.
However, new upstream projects will only be pursed if underpinned in each case by sound economic rationale.
According to the strategy, LOTOS expects that by 2022 its daily oil and gas output will range between 30 and 50 thousand boe.
Coastal location, state-of-the-art technologies and new products
Perfectly located, the LOTOS refinery in Gdańsk enjoys a competitive advantage in feedstock and product logistics, but is also naturally placed to constantly develop its trading capabilities. Coastal location supports the company’s economic efficiency and Poland’s energy security.
After completion of EFRA (2018), when the share of high-margin products in total output is expected to grow to approximately 90%, LOTOS plans further projects to improve the complexity of its refinery. The company’s competitive advantage in refining and marketing will be maintained thanks to continued deployment of latest technologies and new products.
The management board of Grupa LOTOS S.A. has named potential directions of the refinery’s development. Decision on which particular development path to follow will be taken by the end of 2018. Four key options under consideration include:
- Building a new olefin complex (with an ETBE unit)
- Increasing the output of motor gasolines, e.g. from naphtha, which is now sold abroad
- Producing Group 2 and 3 base oils (based on internally generated feedstock − hydrowax)
- Building a CHP plant to meet internal needs and ultimately reduce costs and improve the reliability of energy supply
Closer to customers, closer to the market
LOTOS plans to steadily expand its service station chain, albeit at a slower rate than in 2011-2015, when more than 150 new locations were added (324 vs 476). The main reason for that decision is the domestic market’s saturation. Between 2017 and 2022, the company plans to see its chain grow from the current 480 to some 550 stations. Work on further chain standardisation will be continued (for example, the Navigator scheme will be revamped, new quality will be introduced to the food and drink service, and infrastructure will be upgraded) to better meet growing customer expectations of product and service quality that would stand out on the market. LOTOS will also offer alternative fuels.
Innovation and start-ups
LOTOS is looking to new models of cooperation with research institutions and start-ups. It will actively develop joint research agendas to make sure they best meet its development needs, while giving partnering research institutions opportunities to carry out detailed analyses, aligned with actual challenges facing the business.
Another priority is to support and commercialise Polish inventions. To that end, the company plans to establish dedicated funds. LOTOS’s major strength in this respect are its people − experts involved in assessing, adapting and refining innovative solutions. The process and laboratory infrastructure of the company will play a key role here, as it will be used for implementation testing, among other things.
The company aspires to become Poland’s champion in research on second- and third-generation biofuels as well as co-hydrogenation technology (to meet the NIT). Additionally, LOTOS is looking into the viability of hydrocarbon storage and use in road transport. Work is under way on refuelling models and infrastructure development for alternative fuels (LNG and CNG). LOTOS is also involved in developing the electric mobility market, actively participating in research on this new segment.
Safety and CSR
A robust safety culture is crucial in the energy sector. LOTOS has committed to give high priority to OHS across its business. The company seeks to pursue excellence in management processes, including in infrastructure protection, logistics chain and cyber risks.
LOTOS will continue its CSR activity for a broad range of stakeholders in health care, culture, art, education and sports. The company will engage with stakeholders to effectively solve social and environmental issues in its local communities.
Stability and sustainable growth. LOTOS Group strategy 2017 - 2022 EN
Communications Office, Grupa LOTOS S.A., ul. Elbląska 135, 80-718 Gdańsk, Poland, tel. (+48) 58 308 87 31, (+48) 58 308 83 88, e-mail: email@example.com
* LIFO-based EBITDA net of one-off items