INTRODUCTION
Unipetrol is a vertically integrated group, with its production chain starting at refining and ending with sales of fuels, accompanied by chemical, petrochemical and agricultural production, specialty chemicals and plastics processing, feedstock supplies, specialised transportation and research and development services.
The current document presents some amendments to the main strategic objectives and key targets within long-term activity plan of Unipetrol.
REASONS FOR UPDATE
Introduced modifications result mainly from the dynamic development of the company’s environment in the areas of both macroeconomics and oil and chemical industries at the international level as well as local one. In 2005 the privatisation process of Unipetrol was completed and consequently the company became a crucial part of one of the largest refinery and petrochemical groups in the Central Europe, ORLEN GROUP. Consolidation of oil sector in the CEE, together with progressive liberalisation of the oil sector within the European Union and its gradual globalisation imposed the obligations to take new steps in order to face prospect market developments, increasing competition and more strict regulations being implemented related to environmental protection and enhancing effectiveness in employing of energy resources.
The latest developments in oil and petrochemical industry with rising oil prices and refining margins have significantly impacted Unipetrol’s financial results and made the year 2004 the record one in terms of both revenues and profits. However, the anticipated changes in oil sector, liberalisation of European market, increasing competition and consolidation processes both at the regional and global level require even more effort in maximising effectiveness of company’s currents assets and strengthening Unipetrol’s position in the primary business segments in the Czech Republic and abroad, according to shareholders’ and contractors’ expectations.
The acquisition of 62.99% of the company’s shares by PKN ORLEN has opened new opportunities for Unipetrol Group. New strategic objectives assume exploitation of all the potential synergy effects coming from the operational and business integration with the majority shareholder and an increase in efficiency of economic processes within Unipetrol Group. One of the first steps towards exploiting the opportunities is launching of the Partnership Program, intended to maximise effectiveness in the core business areas and consequently to maximise the shareholders’ value.
It is assumed that restructuring and integration efforts started, among others, with the Partnership Program, will lead to improvement in the operational activities of Unipetrol subsidiaries, independently of possible future decisions regarding sales of assets, described below. Assuming the macroeconomic conditions remain at 2004 level it is expected that the company’s forecasted consolidated EBITDA will equal ca CZK 14.100 [1] million in 2008 as compared to ca CZK 9.698 [2] reached in 2004 which translates into about 45% increase. Potential divestments regarding Unipetrol’s assets portfolio, mentioned below, were not taken into account when calculating the EBITDA.
Taking into account the company’s current market position and economic situation as well as the anticipated market developments, Unipetrol’s Board of Directors has performed an analysis of prospective development opportunities of the capital group and redefined the company’s business strategy with oil and petrochemical segments as key business areas.
CORE BUSINESS OPTIMISATION
Having in mind the reasons described above, there have been various analyses performed on some asset reorganisation and optimisation within individual business segments. Unipetrol will remain a vertically integrated Group, concentrating accordingly on main areas aligned with shareholders’ targets regarding rate of return and value creation. Hence, it is planned to focus on and to perform up to the highest European standards in sectors of Unipetrol’s core business. At the same time the goal is to find optimal ways of utilising the sectors in which the scale/product range/production process does not allow the Group to be at least as efficient as its competitors, where Unipetrol’s control is limited or where the predicted market conditions cannot assure the growth rate required. The main directions in relation to the newly defined crucial business areas are proposed as follows:
The focus has been made on crude oil processing, retail and wholesale of fuels and on petrochemical sectors.
REFINING
The processing of crude oil, being of great importance to the Group, has been defined as the primary one to be kept and successively expanded. Relationships with Unipetrol’s majority shareholder, PKN ORLEN, will add value to this through, among others, joint crude purchases, future potential cooperation in bitumen and lubricant business and shutdown optimisation. Cooperation with PKN ORLEN in order to create a joint wholesale department organised by product (diesel/gasoline, bitumen, oils, lubricants) is considered as a way for margins increase and strengthening of pricing power. Long-term strategy regarding heavy distillates processing needs to be determined further. Different scenarios, including among others disposal of assets or cooperation with ORLEN in selected business areas, are to be analyzed, leading to recommendation of the optimal approach.
FUEL & NON-FUEL RETAILING
The importance of efficient and profit-generating distribution of fuels is believed to become one of Unipetrol’s main objectives. A remedying program has been launched in retail sector, focused on fuel margins stimulation and asset restructuring. Among further steps considered are integration of all profitable petrol stations within one legal entity, together with shutting down the unprofitable subscale stations. In the opinion of management these steps are likely to contribute to efficiency improvement and cost reductions. Apart from planned restructuring of current retail assets, potential acquisitions of other networks tendered for sale in the region are presumed means to achieve scale in retailing. Cooperation with other operators on the market, in commercial or capital form, is also not impossible at this stage. The non-fuel business is seen as a growth area, both in volume and margin potential, as well as in scale synergies possible to achieve in cooperation with PKN ORLEN.
PETROCHEMICALS & CHEMICALS
Production of petrochemicals, especially the focus towards olefins and polyolefins production and sale, is considered as being in the deep interest of the Group, from the point of view of value creation. A broad room for alternative solutions, including cooperation with potential business partners, is analyzed in this area regarding the maximisation of the company’s value. The solutions fulfilling this criterion will be implemented.
Because of complexity of the chemicals segment, there is a need for differentiated approach towards solutions for various product groups.
Unipetrol intends to keep control over its petrochemical business. However the analyses concluded that there is no significant value creation potential in styrenes and polystyrenes. There is an opportunity for adding value to Unipetrol through engagement of a strategic investor in these areas. Possibilities of co-operation in 2006 are to be analysed in detail.
Another sector of chemical production, which includes production of PVC and caprolactam, was confirmed in the course of analyses as being too subscale and undercapitalised to assure required rate of return after proper modernisation program is launched. Therefore cooperation with a strategic partner is seen as a solution assuring further development for this business area as well as adds value to Unipetrol itself.
SPECIALTY CHEMICALS, PLASTICS AND AGRO PRODUCTS
Specialty chemicals, plastics and agricultural products are deemed to be areas for restructuring. The non-core character of the assets, together with their not unified corporate structure, supports the view on their further development outside of the Unipetrol Group. In the opinion of management, their disposal to external strategic investors is one of the ways the strategic targets assigned to them can be achieved.
LOGISTICS
Investments in the logistical network for feedstock, fuels and petrochemical products as well as the optimisation of the logistic assets are also within interests of the Unipetrol Group. These plans can be realised by cooperation with logistic operators, including also capital cooperation as well as acquisitions in this area.
RESEARCH AND DEVELOPMENT
Maintaining and increasing research potential in refinery and petrochemical area is regarded as one of the important factors for ensuring Unipetrol’s competitiveness and development possibilities. Therefore the plans include maintaining the research assets important from the point of view of strategic activities as well as their development by activities optimization within the entire ORLEN GROUP. At the same time disposing of research assets in the area of Unipetrol’s activity defined as non-core is planned.
OTHER ASSETS
Due to the analyses performed, some assets not mentioned above are believed to need restructuring, demerger or divestment, because of their:
- low efficiency
- old technology
- high CAPEX needs not guaranteeing the required return
- subscale
On the other hand the analyses resulted in identification of some assets, perceived as non-core, whose substantial commercial linkages with the rest of the Group make the decision of their sale or spin-off more complicated.
To focus on core business Unipetrol should not only mean the development and operational improvement of currently owned units. It is in the Group’s best interest, in the view of management, to make use of opportunities appearing on the market which would allow expansion in the areas of oil processing, fuel retailing and wholesale. Acquisition of other petrol stations networks, cooperation through all means, including capital ones, with the key logistics chain in Czech Republic as well as synergy implementation, stemming from new business environment after privatisation, are among the main ways how the targets can be obtained.
Assumed restructuring and optimisation of the current structure of the Unipetrol Group with the focus on strengthening and expanding core businesses and gradual asset effectiveness improvement will ensure long-term value creation for the company’s shareholders and strengthening of Unipetrol’s position in these core areas as one of the major players in the Czech Republic and Central Europe as a whole.
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[1] Predicted EBITDA calculated in steady macroeconomic conditions of 2004: Brent crude oil price: 38,2 USD/b, difference between Brent crude oil and Ural CIF 4,1 USB/b, refinery margin 3,5 USD/b, exchange rate 1 EUR = 31,90 CZK
[2] Corrected for one-time costs as well as extraordinary and non-operational spendings.
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