LOTOS Group. Proposed Rights Issue. 1 September LOTOS Group

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1 Proposed Rights Issue 1 September 2014

2 Disclaimer Not for release, publication or distribution, directly or indirectly, in or into the United States of America, Australia, Canada or Japan. This presentation has been prepared by Grupa LOTOS S.A. (the Company ), is for informational purposes only and under no circumstances shall constitute an offer or invitation to make an offer, or form the basis for a decision, to invest in the securities of the Company. This presentation does not constitute marketing or advertising material within the meaning of Art. 53 of the Act on Public Offerings, the Conditions for Introducing Financial Instruments to an Organized Trading System, and Public Companies. A decision as to whether to increase the share capital of the Company has not been made yet. The extraordinary general meeting of the shareholders of the Company the agenda of which includes a resolution on the share capital increase has been convened to be held on 8 September 2014 (the EGM ). The announcement regarding the convocation of the EGM was published on 12 August 2014 by means of current report No. 13/2014. On the same date, the draft resolution of the EGM regarding the share capital increase was published on the Company s website ( In case of the adoption by the EGM of the resolution on the share capital increase by way of the issuance of new shares (the Shares ) in the Company subject to pre-emptive rights, the Company intends to file with the Polish Financial Supervision Authority (the PFSA ) a motion for the approval of a prospectus (the Prospectus ) which will be the sole legally binding document containing information about the Company and the offering of its Shares in Poland (the Offering ). The Company will be authorized to carry out the Offering only after the EGM has adopted the above-mentioned resolution and the Prospectus has been approved by the PFSA. The Company will make the Prospectus available pursuant to applicable law. This presentation does not constitute a recommendation within the meaning of the Regulation of the Polish Minister of Finance Regarding Information Constituting Recommendations Concerning Financial Instruments or Issuers Thereof dated 19 October This presentation (and the information contained herein) does not contain or constitute an offer of securities for sale, or solicitation of an offer to purchase securities, in the United States, Australia, Canada or Japan, or any other jurisdiction. The securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the Securities Act ), and may not be offered or sold in the United States of America, unless registered under the Securities Act or unless an exemption from the registration requirements set forth in the Securities Act applies to them. No public offering of the securities will be made in the United States of America. To the maximum extent permitted under the applicable provisions of law, no representation, warranty or undertaking, expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. The information, opinions and forward-looking statements contained in this presentation are subject to change without notice. The forward-looking statements included in this presentation involve a number of known and unknown risks, uncertainties and other factors that could cause the Company s or its industry s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. The Company does not undertake publicly to update or revise any forward-looking statement that may be made herein, whether as a result of new information, future events or otherwise. The information included in this presentation being the refining or exploration targets or other business outlook information shall be read as the internal targets of the Company and shall not be construed as financial projections or forecasts. These targets may or may not prove to be accurate. Neither the Company nor any of its subsidiaries or any other related entities shall be held accountable for any damage resulting from the use of this presentation or a part thereof, or its contents or in any other manner in connection with this presentation. 2

3 TODAY Background of the proposed capital increase upstream downstream Upstream diversification: development of a balanced asset portfolio The 10+ Program created one of the most complex refineries in Europe Expansion of the wholesale and retail market shares Challenging refining environment in Europe calls for disciplined investment plans to enhance configuration and further development of a balanced portfolio with greater exposure to E&P 3

4 On September 8th, 2014 the EGM will decide on the proposed capital increase Basic parameters of the capital increase set out in draft resolution Proposed issue of up to 55m new shares Proceeds from the issue expected at around PLN 1 bn Offer directed to existing shareholders of Grupa LOTOS S.A. having pre-emptive rights (closed offering) Proposed capital increase subject to State Treasury retaining of a controlling stake in Grupa LOTOS (1) Proposed record day 18 November 2014 (1) Offer will be subject to Grupa LOTOS and the State Treasury entering into an agreement concerning the use of resources from the fund defined in art of the Commercialisation and Privatisation Act 4

5 Economic rationale for the transaction Proceeds from capital increase of ca. PLN 1 bn are to finance the Company's attractive investment projects, in particular Delayed Coking Unit (DCU) and the development of gas fields B4 / B6 Without equity issuance the Company may have to postpone the attractive development program given current leverage New projects should generate additional cash flow, which is not taken into account by majority of analysts who believe the company does not have sources of financing for these projects. Additional cash flows from new projects should enable faster reduction of the debt The effects of the investment program should enable to service the future stream of dividends 5

6 Grupa LOTOS: key success factors 1 Strategically located highly sophisticated refinery One of two refineries supplying the largest fuels market in Eastern Europe with long term growth prospects Coastal position in the Baltic provides flexibility to optimize crude supply and product sales Past capital investment left the refinery in good position to compete in challenging markets 2 Well structured and focused upstream investments based on a combination of organic and non-organic growth Focus on areas of competitive advantage and geological expertise Well received strategic acquisition of Centrica assets in Norway (Heimdal package) Building portfolio with opportunity for further organic growth 3 Focused, disciplined and defensive investment plan in Downstream to deal with adverse macro environment Delayed Coker Unit (DCU) Hydrogen separation unit (HRU) Strengthening of marketing channels to provide an enhanced market for the refinery output 4 Asset portfolio balanced between E&P and Downstream to provide a more stable growth profile Future benefits to be derived from Heimdal acquisition Competitively advantaged refining position (DCU) Strengthening of marketing channels 5 Management and board credibility supported by coherent strategy and good execution A disciplined approach to investment and capital allocation Successful track record in executing growth strategy (e.g. 10+ Program) 6

7 FINANCIALS DOWNSTREAM UPSTREAM Current status Milestone for B8 Project development (financing) Planned development of B4 & B6 gas fields Evaluating further acquisition opportunities on the Norwegian Continental Shelf following Heimdal package acquisition Outperforming in challenging macro environment Operational excellence confirmed by Solomon Associates Study Coker unit (DCU) project Over 400 service stations in Poland 9.1% market share in retail (as at 30 June 2014, according to POPiHN) Steadily decreasing level of indebtedness net debt down to PLN 6.5bn as at 30 June % gearing ratio (net debt / equity) as at 30 June 2014 New CAPEX solely focused on the core business areas 7

8 FUTURE PAST Successful execution of strategy Downstream: LOTOS refinery s capacity extension in 2011 by 75% (up to 10.5m tpa) 34% domestic overall fuel market share as at 30 June 2014 (1) Retail: over 400 service stations in Poland (9.2% market share) as at 30 June 2014 (1) Value creation: over PLN 1bn worth of brand (2) Key strategic focus: value-creation in well balanced portfolio between upstream and downstream Increasing significance of exploration & production activity: acquisitions and organic growth in regions of competitive advantage, enhancing operational capabilities and technical expertise (1) Source: Polish Organisation of Oil Industry and Trade (Polska Organizacja Przemysłu i Handlu Naftowego POPiHN) (2) Source: The Most Valuable Polish Brands Ranking, Rzeczpospolita, December

9 DOWNSTREAM Key elements of strategy 9

10 DCU Further efficiency upgrade of the rafinery Post completion of the 10+ Program, Grupa LOTOS S.A. still produces ~2 mtpa of heavy products (bitumens, high sulphur fuel oil) Produced heating oil contains on average 20% of middle fractions from oil distillation Long term forecasts assuming negative cracks for heavy products Market for bottom of barrel diminishing Delayed Coking Unit (DCU) Project: Planned CAPEX of up to EUR 500m Attractive IRR ~ 20% Increased refining margin by ~ USD 2/bbl Expected completion of the project by mid

11 DCU Significant Improvement of Products Yield Product yield following implementation of DCU (% product) pp pp Light products Middle distilates Heavy products Coke Other Notes: Light products: Gasoline + Naphtha + LPG Middle distilates: Diesel + Jet Fuel + Light heating oil Heavy products: High Sulfur Fuel Oil + Bitumens + Slacks Decrease of the heavy products share in the total output Increased level of middle distillates Residual Coke appearing following the finalization of the project 11

12 Hydrogen Recovery Unit (HRU) Additional annual production from HRU (k tons) +50% % 25 +7% 9 LPG Naphta Hydrogen Increase of hydrogen available in the refinery by recovery from refining gases - increase of refining margin Replacing high margin products (used in refinery fuel gas) with natural gas CAPEX ~ EUR 25m NPV EUR m Product sales volume increase thanks to HRU 12

13 Marketing Main achievements Future goals Retail market share increase Domestic market development in fuels and lubricants Strong position in domestic bitumen market, with an attractive export business Further petrol station network expansion in domestic market 10% share in retail market to be achieved 2015 Sustainable sales growth in all products LOTOS Tank and Air BP joint venture in jet fuel (LOTOS Air BP) Investments in domestic logistical infrastructure 13

14 UPSTREAM Key elements of strategy

15 E&P Strategy Poland: Trondheim offshore: development of existing fields and fully exploit exploration potential of the Baltic Sea onshore: aiming at gaining control over new assets Bergen Helsinki Norway: offshore: exploration, development and production activities monitoring the market for potential new acquisitions Oslo Stockholm Göteborg Malmö Tallinn Riga Lithuania: onshore: full development of the licenses held Gdańsk Gdańsk 2015 TARGETED PRODUCTION POTENTIAL: 24 KBOE/D 15

16 Poland: Intensification of works in the Baltic Sea in order to fully exploit exploration potential B8 field development, first oil scheduled for in Q4 2015, production potential: 3.5 million t, cooperation with PIR (Polish Investments for Development fund) B4/B6 gas fields preparation and launching the development together with CalEnergy, production potential: 4 billion m3 of gas Drilling exploration campaign Seismic to be performed on licence Exploiting exploration potential Drilling rig purchased in December 2013 Operation to a water depth of <120 m Implementation of horizontal wells New drilling rig to be used for exploration and production activities Licenses to a water depth > 90 m EXPLORATION TARGET: PROSPECTIVE RESOURCES OF 30 MILLION TOE 16

17 Norway: Heimdal Acquisition December 2013 Heimdal acqusition 3 producing, 3 development fields, 1 hub boe/d production net 14 licenses / operator in Fulla development USD 175.8m acquisition price USD 80m (45%) of the acquisition costs financed on a non-cash basis (using the tax shield) Transaction results 2/3 of the tax assets to be unlocked in Recovery of acquisition cost by late 2014/early 2015 Cooperation with experienced partners: Statoil, Centrica, Total Risk diversification Building up strong E&P position within Norwegian Continental Shelf Access to areas with high upstream potential Doubling of production Reserves and net resources 9 mn boe 31 mn boe 100 mn boe+ 2P 2C Prospective resources 17

18 Daily production (k tons boe/day) 2015 Planned potential production: 24 k tons boe/day Strategy implementation plan TOTAL CAPEX FOR UPSTREAM IN : 3.9 BN PLN 18

19 Summary Advantaged refinery exposed to growing market with investment plans to enhance configuration and complexity developing a better balanced portfolio with greater exposure to E&P Proposed capital increase to provide Grupa LOTOS with financial flexibility...allowing for execution of the capex plan to create a stronger CEE integrated player 19

20 Appendix 1. DCU project 20

21 DCU Key benefits of the project and its status Estimated CAPEX ~ EUR 500 m Key benefits: attractive economics compliance with the strategic goal of improvement of competitiveness of increase in value of high resistance to changes in the fuel market Boosting of economic activity of the region The project is currently under detailed structuring, both in terms of concept implementation and financing arrangements: finalization of the funding model, commercial and financial structure of the Project advanced process of releasing of land lots for the Project, which are currently pledged as collateral for 10+ program financing tenders are carried out for EPC contractors, insurance advisor and advisors for financial institutions (market, technical and legal) informational package for financial institutions is in preparation Entry into force of the EPC contracts and financial closing of the project is planned for end of

22 DCU Project structure Due to the structure of the balance sheet, Grupa LOTOS S.A. limitations arising from 10+ Program financing and investment risks, a substantial part of the Project will be executed by LOTOS Asphalt, with auxilliary investments completed directly by Grupa Lotos SA This will leave attractive financing conditions of 10+ Program intact allowing to raise debt financing necessary for the Project LOTOS Asfalt Asphalt Production GL S.A. Existing Refinery DCU Project DCU + CNHT + tanks + a part of supporting infrastructure Coke Logistics HGU HVDU connections between installations, pipelines, supporting infrastructure 22

23 % 5.0 DCU rationale Growing environmental requirements towards heavy fractions Reduction of sulphur content in bunker fuels to 0.5% from 2020/25 in EU waters beyond SECA Decision on the choice of scenario 2018 Scenario with derogation till 2025 r Limit of the current technological capabilities in Gdansk Refinery Scenario without derogation SECA areas (Sulphur Emission Control Area) Reduction of sulphur content in bunker fuels to 1% in 2010 and 0,1% in 2015 Further expansion of SECA areas (Mediterranean Sea and The Gulf of Mexico) Since 2003 max content of sulphur in HSFO used on land has been set at 1% (previously 3.5%) SCOPE OF BUYERS AND DEMAND FOR HSFO IS INCREASINGLY LIMITED 23

24 DCU 100% benefits for the issuer Due to the limited financial capacity of, in the absence of the capital increase, attracting of external JV investors will be necessary The investors' participation in the project, however, would mean giving up a substantial part of very attractive financial benefits of the Project In case of difficulties with finding JV partners some parts of the Project would have to be carved out and implemented entirely by third parties. In this case, the entire margin associated with the separated part of the Project would be retained by such third parties In addition, contribution of Grupa LOTOS S.A. equity should also help to reduce the cost of debt financing IN CURRENT, COMPLEX SITUATION, TAKING INTO ACCOUNT ATTRACTIVE ECONOMICS OF THE PROJECT, FINANCING OF THE DCU VIA SHARE ISSUE, AND THEREFORE KEEPING 100% OF CONTROL AND BENEFITS FROM THE PROJECT WILL BE AN OPTIMAL SOLUTION FOR THE FUTURE VALUE OF GRUPA LOTOS AND IT S SHAREHOLDERS 24

25 Appendix 2. B4/B6 field development 25

26 Gas fields B4&B6 Project Fields development and exploitation together with an experienced partner(cal Energy) Expected output B4/B6 (LOTOS Petrobaltic share, 51%) : ca. 200 m m3 / year (eq. 3.5 thous. boe/d) Assumed financing structure Estimated CAPEX for LOTOS Petrobaltic ~ PLN 800 m Own contribution min. PLN 450 m (to be spent in ) Remaining financing: bank loans Effect of issue of shares on the project Allowing the execution of the project according to schedule without the constraints of access to capital over the next three years : B8 : own capital contribution by Grupa LOTOS S.A. and the need to raise additional debt for the project, Purchase of an exploration platform, Heimdal transaction: by 2016 most of the cash generated is spent on existing debt repayment Safety of the project, ensuring the continuity of works 26

27 Basic information and business rationale B4 B6 B3 B8 Business rationale for the project Additional upstream margin on gas projects Economies of scale in the Baltic Sea Support for Polish energy security The diversification of gas supply sources Realising the potential of the Pomeranian region (shipyards, local gas customers) Diversification of projects and sources of income of Cooperation with an experienced partner, CalEnergy Realising the potential of Energobaltic Basic information 51 % 49 % Proven reserves of B4 / B6: ca. 4 bn m3 of gas (100% of the project) Deposits discovered in the 80 s 5 wells completed ( ) B4 production license since 2007 B6 production license since 2006 Implementation of the project by the SPV Baltic Gas 27

28 B4&B6 timetable B6 field B4 field Project schedule (1) development concept approved 1Q 2014 (2) engineering project (FEED) (1) 2Q Q 2015 (3) investment decision (FID) (2) 1Q 2015 (4) implementation of development (5) launch of production ( First gas ) 2017/2018 Concept FID First gas Luzino Development concept FEED Development Financing schedule (1) FEED Front End Engineering & Design (2) FID - Final Investment Decision, Cal Energy provides financing for the project until the investment decision - FID(1Q 2015) After 1Q 2015, the implementation of development financed in proportion to the shareholding structure (51% / 49%) Investments in (PLN 450 m) will be financed from own funds because of the lack of ability to raise debt 28

29 Appendix 3. Other key development projects 29

30 Other key development projects upstream downstream Development of the B8 field First production expected in 4Q 2015 Total production capacity according to 2P 3,5 mln tons of oil Estimated production 5-6 k barrels/day Total CAPEX ~ PLN 1.8 bn: ~PLN 0.8 bn own contribution ~PLN 1.0 bn external financing (including PIR Polskie Inwestycje Rozwojowe 333m PLN under the Subordinated Note Programme Agreement) Hydrogen Recovery Unit Additional production of LPG, naphta and hydrogen Replacement of own consumption of high-margin products with natural gas Total CAPEX ~ EUR 25 m Project NPV EUR m 30

31 Thank You