Orlen SA
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Ladies and gentlemen, welcome to PKN ORLEN Second Quarter 2018 Consolidated Financial Results Conference Call. I will now hand you over to your host, Ms. Iwona Waksmundzka, IR Director. Madame, please go ahead.
Thank you, operator, and good morning, everybody, and thank you very much for joining us today. Welcome to PKN ORLEN's conference call presenting our financial and operating results for the second quarter of 2018.
Today, the results will be discussed for you by Mr. Rafal Warpechowski, Planning and Reporting Executive Director; Mr. Konrad Wlodarczyk, IR Manager. The presentation, which was mailed to you and is available at our website, will be discussed first, and immediately after, the floor for a Q&A session will be open. Piotr Kearney, Strategy Executive Director, will be available at the Q&A session as well.
With no further delay, I hand over to Mr. Rafal Warpechowski. Sir Rafal, the floor is yours.
Thank you, Iwona. Good morning, ladies and gentlemen. Thank you for your interest in our Q2 financial results. And so let me start with kind of executive summary of challenges we faced in the second quarter. We may say that delivered EBITDA LIFO of PLN 2.1 billion is a very strong Q2 result considering operational challenges we faced. We managed to complete serious shutdown programs in the second quarter, which is reflected in 85% of utilization of our installations. But at the same time, we managed to increase our sales revenue, which confirms that we are really very good at utilizing all market possibilities, and so we are really elastic in terms of trading.
Again, soaring contribution comes from retail. It is PLN 0.7 billion EBITDA LIFO, again, record-high result for the quarter and record-high ever, even. And at the same time, we realized our strategy with further diversified crude oil supplies increasing contracts with Saudi Aramco. We also purchased a portion of crude oil from Iran, so we are in line with strategic assumptions we presented a few years ago.
In the area of investment, we are entering the final stage of Unipetrol minority shares repurchase, it is -- we got the confirmation from National Bank of Trade that we may follow with the transactions. So if everything goes well, we may complete it before the end of this year.
And our financial position. Again, confirmation that it is very strong and stable operating cash flow, PLN 1.9 billion and CapEx, PLN 1.1 billion. So we generated free cash flow that enabled us to increase our net debt to PLN 4.3 billion over the quarter. And gearing this again below 13%, so very safe level.
One more important thing. We completed 1 billion issue of retail bonds on Polish markets, very successfully 800 million in the end of June, last tranche in July. So we are very happy that we refinanced the prior trial program.
And finally, today is a dividend day. And on the third of August will be payment of PLN 3 per share of dividend that was accepted according to management's recommendation by AGM in the end of June.
And now let me move into more details on Q2, and starting from, as usually, from the macro situation. It is on the Slide #5. Everything clear, what happened in Q2 relates to crude oil price impact. And as you can see, it increases very rapidly, especially if you convert it into zloty. This rapid growth in Q2, both year-on-year and quarter-on-quarter, it created quite a significant LIFO effect of PLN 1 billion into our results. And obviously, affected also model downstream margins. It dropped by USD 1.2 per barrel. It is according to our predictions and declaration from the beginning of the year. Obviously, higher crude means higher raw material for petchem. It is visible in drop in petchem margins, and at the same time, higher cost of internal usage, which is visible in lower crack on heavy heating oil.
So all in all, we might say that macro is less favorable, but still it is quite a good level of over USD 12 per barrel of model downstream margin. And definitely, it's not limiting our operations.
Second spot is via some market-oriented data on the next slide, #6. Again, we still enjoy quite good prospects in terms of GDP in regions we are operating. It is followed by consumption, and especially in Poland, we are enjoying very solid and continuous consumption of fuels.
Maybe one comment on German market. We all know that this is a very mature market. We observe kind of stabilization or small slowdown in terms of gasoline consumption for many quarters already. But what maybe kind of surprise is diesel drop, but please indicate that this is based on Q1 and April data only. So we may say this drop is slightly lower than in Q1. We will have to observe the market, but maybe the most important thing is that our sales in Germany is not decreasing, it's stable. So it's not affecting us, if I may say so, as of today.
Now to the next section is Slide #8. Starting from top line revenues. The growth is 16% in the second quarter year-on-year. Obviously it comes from crude oil price and as our products and quotations increased, but also 2% volume increase, which we are very proud of, and especially that it is done in a very challenging situation in terms of our operational availability.
EBITDA LIFO for the second quarter amounted to PLN 2.1 billion. It was PLN 0.9 billion lower year-on-year, but we might say that this decrease comes mainly from negative macro impact of almost PLN 1.4 billion, which then was partially offset by better operational performance that we managed to deliver in the second quarter.
There was also negative impact of another operating activity of PLN 0.2 billion, representing mainly lower positive impact of insurance that we received that I will comment in a second.
As already mentioned, crude oil price grew together with weakening of Polish zloty over second quarter, enhanced our reported EBITDA to over PLN 3 billion. So LIFO effect of PLN 1 billion for the quarter is a significant amount, but it comes from both crude oil and weakening of Polish zloty over the second quarter this year.
Financial costs of PLN 0.1 billion. This is mainly negative foreign exchange differences, offset by net hedge impact of also related mainly to foreign exchange differences and interest costs below PLN 50 million. So not material from the -- in terms of net financial costs from the result perspective. And finally, thanks to higher EBITDA reported, and we managed to deliver PLN 1.8 billion of net profit for the quarter, which is comparable level year-on-year.
On the next slide, we present contribution to EBITDA by each operational segment. And then, again, downstream is a leader in terms of impact, PLN 1.6 billion and PLN 1 billion less year-on-year. And this is where all those changes occurred. So number one, negative macro; number two, still positive, but lower impact of other operating activity. And now we might say that in terms of other operating income, we inform that in Q2, Unipetrol finalized negotiations with the insurers and closed the case related to steam cracker shutdown from 2015. We recognize PLN 264 million of final settlement of the case. In total, over 2 years, we recorded PLN 2 billion out of this insurance. So that's the major element. The second element is also PLN 0.1 billion that we recorded on CCGT port delay.
But confirming to prior year, these insurance payments were even higher by almost PLN 0.2 billion, so that's why negative impact of other operating activity year-on-year.
Better operational performance, so the remaining part, as already mentioned, higher volumes and rotation of inventory. And this is important to mention. During shutdowns period, we were preparing inventory for them before Q2. And during shutdowns, we even consumed some inventory collected, let me say like that, in 2017. And that's why we -- they were built based on lower crude oil price, so they were cheaper than current costs and that's why we recognize this positive effect of rotation.
Retail, as already mentioned, 0.7 billion. Improving results by PLN 0.1 billion year-on-year. And again, this is a better performance in all aspects. So volumes, fuel margin, nonfuel margin, all those 3 elements contributed to increase of segment results.
Upstream EBITDA, stable year-on-year, PLN 82 million, higher volume, better macro, compensated by other elements. And to corporate functions cost, higher year-on-year. This is mainly due to recognition of withholding tax. Some tax regulations have changed, so payments in 2018, we will add withholding tax, 20% on interest from our ORLEN Capital. So company responsible for issue of euro bonds. So that's the impact of this one in majority.
And now let me turn over the presentation to Konrad for info on operational segments.
Thank you, Rafal. Moving on to Slide #10, Downstream. So our biggest segment, delivered in second quarter, almost PLN 1.6 billion EBITDA LIFO, mainly due to higher sales volumes, which increased by 1% year-on-year. Reaching record high level as for the second quarter, almost 8 million tonnes.
We also recorded higher diesel volumes by 2% year-on-year. However in Poland due to the very strong demands, diesel volumes increased by 15%. We also recorded higher sales of petrochemical products like polyolefins, fertilizers, PVC and CTA.
On the other hand, we saw a drop in gasoline, LPG and olefins volumes. Positive impact of sales volumes increase was offset by macro worsening, mainly due to higher cost of internal usage and lower margins on petrochemical products, heavy stock for fuel oil and SN150.
Second quarter was fully packed with planned maintenance shutdowns as we previously announced. Therefore, we recognize the positive effect of utilization of crude oil and products purchased and produced in previous quarters as lower feedstock costs, as Rafal mentioned previously.
Second quarter results is boosted by PLN 400 million one-offs, including PLN 300 million compensation related to steam cracker failure from 2015 and PLN 100 million penalties for delay in CCGT Plock realization.
Slide #11 shows operating data of Downstream segment. So in second quarter, PKN ORLEN processed 7.5 million tonnes of crude oil, lower by 2% year-on-year due to planned maintenance shutdowns in all of the refineries. High utilization in Plock by 15 percentage points achieved mainly due to lack of maintenance shutdowns from second quarter 2017 and the lower utilization of olefin units by 2 percentage points due to unplanned shutdown.
In Unipetrol, utilization was lower by more than 20 percentage points due to cyclical shutdown of refinery in Kralupy, started in mid-May 2018 and completed to mid-May -- mid-March, started in mid-March 2018 and completed mid-May 2018. Also, in ORLEN Lietuva, utilization was lower by 12 percentage points due to cyclical refinery shutdowns.
Despite lower crude oil processed, we recorded spike up in sales volumes. Sales volumes reached almost 8 million tonnes, which is 1% increase year-on-year. Going into detailed spikes in market-by-market, in Poland, we recorded sales, fuel sales increase, due to favorable market situation and higher availability of conversion installation units year-on-year. In the Czech Republic, we recorded lower sales year-on-year, mainly refining products due to cyclical shutdown of Kralupy refinery and the failure of POX unit in Litvinov. And in ORLEN Lietuva, sales volumes remained at comparable levels year-on-year.
Slide #12, Retail, our flagship, delivered again astonishing record high results, PLN 677 million EBITDA LIFO, which is 18% higher year-on-year. Such a great result was achieved due to positive impact of both higher sales volumes and higher retail margins year-on-year, what you can see on the left bottom graph. Significant sales increase by 5% year-on-year in total was recorded on all markets. Similarly, market share.
In terms of margins, higher fuel margins achieved on Polish and German markets at lower margins on Czech market year-on-year. Nonfuel margin increased on all markets year-on-year.
Slide #13 shows operating data of Retail segment. So at the end of second quarter, we had almost 2,800 fuel stations, which means that PKN ORLEN has the largest retail network in central Eastern Europe. Of course, increasing number of fuel stations by 30, year-over-year, and very healthy demand must be reflected in the higher sales volumes. I have already mentioned 5% increase in total sales volumes year-on-year on all markets, however, I would like to focus on the remarkable growth in the Czech Republic, where we recorded 16% year-on-year increase as well as the highest market share increase by almost 3 percentage points year-on-year, exceeding 22% at the end of second quarter.
Such -- a note on the dynamics were achieved mainly due to including implementing the network fuel stations acquired from OMV. In total, all 50 fuel stations were added and rebranded to Benzina.
Please also have a look on dynamic growth of nonfuel offer. Another 32 locations were opened in the second quarter. And at the end of the quarter, we were running more than 1,900 food and beverage corners, including convenience stores under the brand O!SHOP.
Next slide, Slide #14. Upstream delivered in second quarter comparable results year-on-year, PLN 82 million EBITDA LIFO. We see that in the second quarter production significantly increased by 20% year-on-year due to Canadian average performance.
In Canada, average production increased by 3,300 BOE per day. Growth comes mainly from higher crude oil production. Additionally, in the second quarter, we recorded positive macro impact related to increase in crude oil sites, offset by decrease of gas prices in Canada year-on-year.
On Slide #15, you can see more operational details regarding upstream. Recently, we had more than 150 million BOE 2P reserves based on the calculations from the end of 2017. Average production in the second quarter achieved 18,000 BOE per day. In the second quarter, we spent on upstream more than PLN 130 million. So in the first half of the year, we spent almost PLN 400 million. This confirms that we are in line with EBITDA PLN 800 million CapEx plans for the whole year in upstream segment.
In Poland, we started one exploration well in Plotki area, started 3D seismic data acquisition in Karaty and Edge area, as well as we analyzed already obtained seismic data and did some preparation works for the next drillings.
In Canada, we started 1 well, 4 wells were fracked and 3 wells were included in the production. Moreover, we continue work on extension of infrastructure in Canada.
That's all from my side. Thank you very much, and I hand over to Rafal.
Thank you, Konrad. Again, coming back to financials. Slide 17. In Q2, we generated PLN 1.9 billion of free cash -- cash flow from operations. It is based mainly on PLN 2.1 billion EBITDA and decreased by PLN 0.3 million of insurance from steam cracker in Unipetrol that we already mentioned that is recognized, but it will be received in the next months.
As you can see, increasing working capital is mainly related to reevaluation of inventories. That's why LIFO effect offsets more or less the impact.
And in terms of CapEx, PLN 1.1 billion CapEx for the quarter, PLN 1.9 billion for the first half. In terms of investment activity and cash flow, this decreased by 2 major elements, income elements, we may say. Number one is settlement of hedging; number two is dividends from both JV that we received. So based on that, you can see PLN 0.6 billion of net outflow from investments.
And on the bottom, there is a summary of financial activity for the first half. As you can see, we managed to invest, to spend on investment PLN 1.9 billion. We increased net working capital net of LIFO effect, we may say, by PLN 2.1 billion and net of PLN 0.9 billion for LIFO effect. And we spent PLN 4.4 billion on other elements, including PLN 3.5 billion for Unipetrol share purchase. So we may say that all of that was financed from 2 sources. Number one, EBITDA; number two, increase of net debt by PLN 3.5 billion from the beginning of the year.
But if we look into the next slide, it shows that positive free cash flow for the quarter was -- enabled us to decrease net debt and to decrease net gearing to below 13%. And financial covenant, which is at a very safe level, presented on the right hand graph. In terms of composition of our debt, it is the same. So we have the same instruments, but there is a bigger portion of credits, PLN 2.2 billion, which is related mainly to the purchase of Unipetrol shares. And as you can see, retail bonds are representing PLN 800 million of the new issue, PLN 100 million from the prior retail issue on the Polish market.
All parameters are very stable. We still have investment-grade, so it is -- our debt is still long term, maturing on average in '21, so it gives a lot of elasticity in case of market changes, fluctuations. And on the other hand, it secures our investment programs that we think of.
Next slide, 19, dedicated to CapEx. Just as a reminder, on the left-hand side, you can see that predictions for the declaration for the whole year. And on the right graph, we see PLN 1.9 billion of actual for the first half. PLN 1 billion out of that is growth. We may say, over PLN 200 million in retail, PLN 400 million in upstream and PLN 400 million in downstream. It is growth CapEx, remaining PLN 0.9 billion is maintenance. Also related to this, is a set of shutdowns that we planned and completed in the second quarter. We continue with all growing -- growth investments, namely polyethylene, metathesis in Plock, at the same time, we, as I already mentioned, completed these maintenance programs, especially in ORLEN Lietuva and Unipetrol.
CCGT plant in Plock already completed end of June, so it will contribute to our EBITDA from Q3. And in retail, also worth to mention that we direct the CapEx for both new locations, modernizations. But also to nonfuel offers, so Stop Cafes, O!SHOPs, which are so popular on all the markets we are operating.
In upstream, CapEx spend according to schedule. Obviously, in relation to scale of the business, majority is allocated to Canada, where we have producing, big producing assets.
And finally, a few words on market outlook. So in -- just as a summary, we may say we still confirm what we declared or predicted or presented at the beginning of the year. So in terms of crude oil price, it looks like it will be higher than the prior year. Just to remind you, USD 54 per barrel for 2017, now it is at around USD 70, so significantly higher. Two elements, but all of them, it looks like, governed by OPEC and non-OPEC country agreements. So at first, prolongation and prices are higher. Then decision to increase the production to avoid the drop in demand because of prices. So it's now the crude oil price is stabilized and it looks like that's the effective mechanism to keeping them in a certain range.
In terms of model downstream margin. Again, as declared, petrochemicals are lower year-on-year more than downstream margin. Even if fuels are still very strong because of high demand, we have pressure on heavy fractions, and this is again in line in what we predicted. On average, we are close to $12 per barrel for the first half, so it is below last year. But it is again, we may confirm, it is not limiting our operations. So macro is still very supportive of our operations.
In terms of GDP. Forecasts are still very promising, so hopefully, they will be followed by good consumption of our products, especially on the Polish market.
And in terms of regulations, new elements in relation to just protecting or limiting. In terms of the gray zone, the regulations have broadened in a way that also railway transport will be carefully monitored from June this year. And just to remind, from March, we have first and the last Sunday available for trade, but it is not affecting our fuel stations. So it is also supportive for our operation.
Obligatory reserves, nothing is changing from the end of last year, 53 days. So stable situation. And National Targets Index (sic) [ National Index Target ] from 2018, it is more restrictive. We are happy with that because it is to all players on the market. Basically, you have to realize it's not on a yearly basis, but on a quarterly basis, which is monitored. So -- and additionally, this 50% of target has to be realized through -- for blending.
So that's all from my side. Thank you very much, and we are -- I hand over to Iwona.
Thank you, all. Operator, we are ready to take questions.
[Operator Instructions] Our first question from Tamas Pletser, Erste Bank.
I've got 2 questions, and probably 1 comment afterwards. My questions, my first question is about this insurance payment in the Czech Republic. Do you expect this sum to be the final one? And do you see anything which can change this compensation you booked in the second quarter? My second question would be about Unipetrol's results. When do we expect this event to happen? And when do you -- and what are your plans with Unipetrol? Do you plan to delist completely the stock later on, or do you have any other plans? And finally, just to comment. I think you know these compensation issues is pretty important this quarter and somehow, I didn't see this very much highlighted in the presentation. So can you just make, in the future a little bit more highlight on this issue because we have pretty short time in the morning, and I didn't see it the first time?
Thank you. First question, insurance of Unipetrol. Yes, we were at the final stage for a few months already. And we managed in the end of May and to finally conclude it in June, that with all insurance, that the final amount is -- will be agreed. It is final settlement in total. As I said, we will receive PLN 2 billion. Compensation in the quarter, yes, indeed. Sorry, if it was not enough time. We presented it -- this in detail on the Slide #9 in Downstream, presenting on the upper side of the slide what was recorded last year and what was recorded in the quarter this year to make this comparison easier. But yes, I agree that this is really complicated because all quarters are affected by different sum.
And the second question, good morning, Tamas, yes, as you understand from Unipetrol reports, we asked to call extraordinary shareholders' meeting. So we hope it will be -- it will take place by the end of August. So probably, we assume that we will take over 100% by the end of October. And of course, I confirm that our initial plan was to delist Unipetrol.
Our next question is from [indiscernible].
I have 2 questions. The first one is, I would like to ask about the relatively weaker results of the refining segment. Despite lower refining margins, what were the other factors impacting the segment in the year-on-year basis? I'm wondering if margin effect of lower utilization in Unipetrol was significant or not. And what is the amount of additional costs relating to mandatory blending year-on-year? Do we see any transfer part of results from refining to retail segment? And the second question, what is your outlook on crude oil throughput in Q3 and sales dynamics in petrochemicals year-on-year in Q3?
So in terms of refining segment, probably what we are presenting on downstream really a great portion relates to refining. So we may say that 2/3, like 2/3 of macro goes to refining and that's the major element of negative impact. It is like PLN 0.9 billion and part of it is hedging impact. And then it is partially reversed by this rotation of inventory. Because, in fact, the shutdowns in Kralupy and partially also in the [indiscernible] FCC unit. So it affected mainly refinery parts. And also, if you will look into -- on the other hand, into petchem, they were slightly better in terms of volumes. And macro impact, obviously, is not so weak as for refinery because of the scale. In terms of sales and processing for the third quarter, as of today should be better than Q2. Because as we declared, it should be without major shutdowns during that period. So -- and on the other hand, it is seasonally the best quarter. So unless something unpredicted happens, we should be again running over 90% or over 95% during the quarter, especially that as of now, margins are again quite promising. Petchem slightly recovered, refinery is still strong, so it should be okay. So that's the comments I may say about outlook.
And the question about the additional cost of mandatory blending year-on-year in this quarter? And did you translate it on the market or not?
It's just -- from our perspective, this is -- on one hand, this is just operational issue, yes, because on one hand, we have a higher index. On the other hand, we are utilizing decrease of the index because of utilization of at least 70% of Polish producers in terms of bio components. So it has decreased from 75% to roughly 66.5%. Then we are utilizing the opportunity to give this payment instead of realizing national index, so it drops for us to 5.5%. And in fact, the difference comes only from the fact that it is done more equally over the year. So we do not see a major change in terms of cost of national index. It is -- this is not a major change, year-on-year.
Our next question from Henri Patricot from UBS.
I have 2 questions, please. The first one on CapEx. You're talking about the run rate in the first half is running below the target for the full year. So should we expect a major acceleration in the second half? Or do you see downside risk to the CapEx guidance for 2018? I am looking a bit further out. With the recent announcement that you made around petchem investments, should we expect CapEx to stay around this level over the next 2, 3 years? And secondly, a question on retail, which had again a very strong quarter. So I was wondering if this was, in your view, an exceptional performance in the second quarter. Or whether you think you can maintain this sort of improvement in terms of market share and the nonfuel performance as well?
In terms of CapEx, I would say as of now, we do not predict change of our forecast. So as of now, we are targeting 4.8. So yes, exactly as you said, probably the second half should be slightly accelerated in terms of spendings. In terms of Petchem investment, yes, this is a significant program. But let us wait until the presentation of the strategy. So then the full CapEx will be established and presented. And the third question, retail. Yes, we are very happy with retail. Majority of this growth comes from Poland. And based on analysis of the market, based on consumption and growth you see in our presentation, 6% diesel, 5% gasoline. Really, the market is very, very promising. At the same time, this nonfuel, all those nonfuel concepts are very well taken by the market and nonfuel sales portion in gross profit is growing. So I would say, these prospects are still very promising for retail.
Our next question from Igor Kuzmin, Morgan Stanley.
I have 3 questions, please. So can I just follow-up on retail? So it's a great number for second quarter. Just wanted to elaborate a little bit, apart from general optimism around the performance in this sector. So do you expect third quarter and fourth quarter probably around level that you have achieved in the second quarter? Or it's going to normalize a little bit lower or maybe even grow higher? Just maybe, if you can quantify this a little bit more precisely, if possible. That's first question. Second question, I would like to maybe, if possible for you to comment on the -- if plans crystallize for you to potentially get involved in the development of the new nuclear projects or not, if at all, anything is clear. If there is any updates on this, this is very much appreciated. And the third question, more of a forward-looking, in terms of the upcoming International Maritime Organization standards related to the sulfur content of bunker fuel. I was just wondering, given if forward prices are compensating for fuel oil, I was just wondering, what are your plans for sort of sales of fuel oil? What are you going to do with that? Did you start, sort of contracting it to someone, or -- just wanted to understand what's your strategy here?
Thank you. In terms of retail, the only thing we may say, because we do not share the forecast, obviously. But seasonally Q3 should be very good, Q4 should be lower. If nothing extraordinary has happened on the market, like extraordinary change in crude oil price or currencies, et cetera, it really looks well. Because as I said, this is in majority for us, so GDP prospects are still very promising. Consumption of fuels is very solid, and there's non-fuel offers, really a strong, big contributor to the margins. So we are really optimistic in terms of the results. But on the other hand, we see how rapid growth we are delivering. So that's the answer I may say, with no precise declarations in terms of numbers. Nothing of one-off nature occurred in this quarter, so I would say this is a solid base for further development if I may say so. In terms of IMO, yes, we are doing a lot of analysis. You probably perfectly know what big agencies are thinking about it. So basically, they think that sour crude or high refractions will be under pressure in terms of price, and diesel will grow up in terms of margin because it is still in demand. So it looks like a portion of the problem from, let's say, financial perspective, could be -- a portion again, I said, could be solved via macro changes, supporting diesel and decreasing margins on heavy fractions. From operational perspective, we are still contemplating that case because there are different options. Maybe based on lower prices, it will be consumed, or it will be blended. So a lot of options look to be available. And as of now, we do not have the final, very strong decision to communicate, but it is really on the table now.
Igor, it's Piotr again. Thank you for your question. Indeed, of course, we hear statements from the Ministry of Energy regarding they -- they are working hard on power, nuclear power plant project. We can only confirm what was earlier confirmed already, that we are focused, in terms of major strategic projects, we are focused on a lot of acquisition, petrochemicals development project and offshore wind farms. So again, we are not working currently on nuclear project at all.
[Operator Instructions] We'll have our next question from Robert Maj, IPOPEMA Securities.
Yes, could you provide us with newest feedback regarding the LOTOS acquisition? Have you already submitted all the files to the European Commission? And what are the next steps that we should expect in this process?
Okay. I mean, yes, as you understand, it's a very, very complex project and so time-consuming, of course. So indeed, we are working on 2 major streams. First is a lot of due diligence, financial and legal. That's what we are doing to prepare our valuation and offer. And the second, much more even complex, that's the preparation to submit an application to European Commission for -- to get consent for concentration. And it's, according to our plan, we already are of course, in some kind of contact because that's normal with European Commission, that's technical. So we are preparing this application. We hope to have the final ready by the end of this year. But of course, first, there is kind of prenotification process. So perhaps potentially, we will apply for so-called referral in the third quarter. So that's the phase of our project. Nothing has changed. It's all according to schedule, so we are working hard.
[Operator Instructions] Our next question from Lukasz Prokopiuk.
Yes, I would like to ask you, could you please help me understand about your hedging performance in 2Q '18? On Page 10, you've written that the hedging -- the change in hedging was PLN 475 million and I would like to understand how much of the negative hedging was recognized in the second quarter. What's the outlook on hedging in the next quarters? And what was the share like between refining and Petrochem on hedging? And is it currency hedging? Refining margin hedging? Petchem project hedging? Could you please help me understand a bit.
Thank you for the question. Yes, indeed, this quarter, the impact is quite serious. We may say that there was a slight positive impact a year ago, but majority of the change comes from negative impact this year. And in majority, again, it relates to hedging of timing difference. So hedging of vessels, so hedging of supply of crude oil via the sea. Basically speaking, we are buying crude, transportation, blending, production, conversion to products takes few weeks. So we are hedging 100% of such a timing difference. And with decreasing crude oil price, obviously, we have the positive impact of hedge. This year from the beginning of the year, we see growth of crude oil. So this negative impact we may say, is just stabilizing our cost to revenue impact from the profit and loss account perspective. It's -- otherwise speaking, we could say, without debt, we would benefit from the increase of crude oil price and the fact that we bought crude months earlier. This is risk we want to eliminate, not to be exposed for it, especially in times when the crude is going down. And that's the major, major impact of hedging this quarter. And in fact, it relates 90% to refinery.
So if I understand correctly, because this hedging, it is included in the EBITDA LIFO, yes? But it relates to your operations, which -- I mean, it relates to the LIFO effect, which you want to -- like the LIFO effect is eliminated from EBITDA LIFO, but the hedging related to it is included in EBITDA LIFO, Yes?
Yes, you are perfectly right. So in a specific case, there may be certain discrepancy between effect in revenue, and effect in cost of production, exactly as you stated. But this quarter, we do not discuss it in more details because as informed, we also have this rotation of stock. So you may say negative impact from hedging is almost fully eliminated or offset by effect of rotation of stock. So we may say this quarter, it works like it should work. But exactly as you thought, if there is no rotation of stock, so we do not consume the stock bought a month or 2 ago because of LIFO, so we will not consume it then, it will be negative impact of hedging with no positive impact on cost of sale. Exactly as you said, but this quarter, we may say it eliminates.
So just for me to have it clear, like if there were no changes in crude oil prices, and if you wouldn't hedge, like in 3Q '18 and if the margins are -- if the macro environment is similar, would your EBITDA LIFO be higher by the PLN 475 million loss? I mean, would it be higher by this amount?
Yes, we may say that without hedging and without rotation, EBITDA would be not affected. Without hedging, with rotation, the impact to -- the EBITDA would be higher because of growing crude oil prices. We would benefit from this effect.
So if I understand correctly, because like the LIFO effect, is like -- I mean, it affects your cash flow, yes? And it's -- but it is excluded from the EBITDA LIFO because it's in the LIFO effect. But this hedging is also cash, but it is included in the EBITDA LIFO. So what I suggest is that you should like the EBITDA LIFO adjusted, EBITDA should be -- should exclude this PLN 475 million, if I'm correct, if I understand correctly.
We may discuss it yes, in detail probably -- I mean, if I may propose, maybe offline because it is really discussion on concept of LIFO, and I agree with you...
Yes, yes. But it's like it's become...
If we adjust -- EBITDA LIFO is adjusted, yes.
But -- so my last question, if I see like the like, refining EBITDA LIFO performance, which is more or less like 70 million, 50 million -- 750 million. So in fact, the macro environment, without giving this macro environment we had, and without hedging, this would be billion, hundreds million?
Yes, yes, exactly. Please note that the second element, which is not -- which creates a difference from the normal expectation, is rotation of stock, yes? And if there is no rotation of stock, you are fully right. This PLN 500 million is kind of a one-off item that is not reflected in EBITDA. With the rotation, partially, this effect is like EBITDA adjusted, yes? Because what you are proposing, please give me EBITDA adjusted, it would be just a reckless offer of stock. So exactly kind of artificial rotation of stock, yes? That's why I said that in Q2, those 2 elements net off to the certain extent. But I'm very happy to discuss it in details if needed, offline.
[Operator Instructions] We have no other question at this moment. Dear speakers, back to you for the conclusion.
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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.