OMV AG Significant North Sea Investment Conference Call

OMV.VA - OMV AG
OMV AG Significant North Sea Investment Conference Call
Aug 19, 2013 / 08:00AM GMT 

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Corporate Participants
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   *  Gerhard Roiss
      OMV AG - Chairman of the Executive Board & CEO
   *  Jaap Huijskes
      OMV AG - Executive Board Member, Exploration & Production
   *  David Davies
      OMV AG - CFO

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Conference Call Participants
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   *  Thomas Adolff
      Credit Suisse - Analyst
   *  Irene Himona
      Societe Generale - Analyst
   *  Dan Ekstein
      UBS - Analyst
   *  Lydia Rainforth
      Barclays - Analyst
   *  Marc Kofler
      Macquarie Research - Analyst

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Presentation
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 Gerhard Roiss,  OMV AG - Chairman of the Executive Board & CEO   [1]
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 Thank you so much. Good morning from Vienna. We are pleased to inform you about the acquisition we have announced today, in the morning. But before we need to take decision, let me highlight our strategy, very simple; divest in low-margin Downstream business and invest in higher-margin Upstream business. This is key and we have progress so in doing so and it's also time to counterbalance the divestment in Downstream to counterbalance it with Upstream growth.

 Let me summarize the key figures of our deal. First of all, the acquisition price is $2.65 billion. The total volume of barrels to is 320 million boe, which amounts to about 2 billion 2P reserves resource. What does it mean in terms of production barrels per day 2014? About 40,000 barrels per day; we have nowadays about 300,000, so it will go up to 340,000.

 EBIT contribution 2014, of course, depending on the oil price, but assuming oil price of $100 will be about $500 million EBIT contribution per annum; in terms of EBIT per barrel at more than $30 a barrel. And, in terms of oil and gas ratio, what we have now done is showing a rate of 70% oil and 30% gas.

 Key for us in terms of value creation is to manage here to move into double-digit return rates.

 And what is also important for us, this largely self-funding situation allowing us a free cash flow, from 2017 onwards, where we see the growth in the Black Sea area in front of us, therefore, this balance is very important if you want to understand our strategies.

 And on top of it, Norway is not just to buy production; Norway is the portfolio -- a balanced portfolio, which we started to build up by exploration 2006. And when you see this deal, it's also part of it; it's development exploration and technology, which we go further into more detail. But the issue is build up a portfolio. And, we have always said, we will have a critical sized of 25,000 or 30,000 barrels a day production per country. This is what we achieve via this deal.

 Now, let's move into the specifics. First of all, we have in terms of production two assets; one is Gullfaks, a 19% share in this producing field. And then we have Gudrun, a 24% share; production will start in 2014.

 Second part is the development that's in UK. We have Schiehallion that we have already now. It is 5.88% in our portfolio. We can increase it by the same amount. Production will start again in 2016. And Rosebank, where we hold nowadays 20%, we have an increased 30% share. Production will start, as you see, as of the date 2018.

 Exploration, very key for us. We have a strong position in Exploration. Here we have the option to farm into additional licenses offered from Statoil. And key for us is this long-term research cooperation, we start of enhanced oil recovery. We have some hulls, they have some hulls; the combination is very important and we see the long term.

 Funding, the -- you are aware that we have about $2.8 billion out of this net working capital reduction and out of our divestment. This is based for our funding.

 Effective date of the deal will be January 1, 2013.

 If you see our strategy, we have two Upstream growth regions in Europe, one is the North Sea region; the other one is the Black Sea region. In terms of North Sea, in history, we had a production of a few thousand barrels a day, mainly in Central North Sea. We are moving now to north. We did some divestments in Central North Sea and our target is to grow production in the range of 150,000 barrels a day in the year 2021. Again, this is our key area.

 And the second key area is the Black Sea. We grew production as well 'til the year 2021.

 Let's go back where we come from. Norway, as I have mentioned, we entered the country in 2006 already. Again, to balance our portfolio, we did, in 2011, the acquisition of Zidane. We did a swap of Central North Sea assets against West of Shetland area.

 We had in 2012 two major acquisitions in terms of development, which is this Aasta Hansteen; and from Exxon, 15% share in -- to be on-stream 2017. We got five new exploration licenses and we did the acquisition of Edvard Grieg from RWE, a 20% share. Oil starting production 2016.

 This year, we have been awarded eight new exploration licenses and [leading] now to have 65 exploration licenses in the area. You'll see the strategic portfolio position in the area and then we have this acquisition we discuss today.

 If you can see at the end of barrels, the buildup of the barrels, you see the barrels coming out of the projects are, again, leading to above 100,000 barrels a day to about 150,000 barrels a day, in a politically stable area showing us -- giving us sufficient growth out of those exploration and development.

 This is fully in line with our strategy. We have -- when we presented our strategy 2011, we announced an organic growth target of 2% going up to 350,000 barrels a day. And we announced a growth out of acquisitions about 2%, altogether 4%, going up to 400,000 barrels a day. So via -- with this acquisition, as you see it today, we have reached this 4% growth target.

 On top of it, we have announced a reserve replacement rate of 100%. This acquisition gives us again that we can achieve this reserve replacement rate of 100%. Our 2P reserves are boosted to 2 billion barrels 2P reserves by adding this 320 million boe, or 100 million 1P reserves. This equals three years of OMV's production.

 Key for us is when we talk about growth and the balance of the cash income on the one side 2014 to '16, this is largely self-funded. Gudrun is going on-stream beginning of next year, so we have sufficient inflow of cash. And this allows us, 2017 onwards, that we have free cash flow to contribute to our growth in the Black Sea region. This is very important for us when we talk about growth; we're sticking to our growth strategy.

 Again, on top of it, we talk about high-value barrels in stable OECD region. And on top of it, in terms of size, we see leveraging synergies within the existing portfolio.

 Again, it supports our target 2016; growth to 400,000 barrels a day. This means the 4% per annum that we have announced. And it also allows us to have a reserve replacement rate, which is -- was 2010 at 82%, to go up to 100%.

 I would like now to hand over to my colleague, Jaap Huijskes, who is going to go into the details of this acquisition. Thank you.

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 Jaap Huijskes,  OMV AG - Executive Board Member, Exploration & Production   [2]
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 A very good morning from myself as well. And just so we're at the same page, I will take over at page 9 of the presentation that's been forwarded to you. And what we show there is a subset of the funnel. You're very used to seeing our development funnel with about 1 billion barrels in it. What I've illustrated on this page is the development funnel for the North Sea, UK and Norway together. And it's the position after the deal.

 Let me start by saying a few words about Norway, why we're there. And then we'll go into some of the detail for the individual assets that we're acquiring here. Why we're in Norway is quite straightforward, it's a stable part of our portfolio; we like it there. We've been successful since 2006 to build up quite a significant exploration portfolio. Norway's one of these countries where exploration licenses get very much assigned on merit, and the merit is the technical work that you put into the applications that you put into the regulator. And we've been quite successful in that.

 So we like that. We like this in exploration arena, but clearly adding production to it makes for a far more sustainable piece of business in Norway.

 The other bit that we like about Norway is that, of course, if we do discover gas in Norway, we can integrate it through existing infrastructure into Europe, and make it part of our integrated gas portfolio.

 What's happened to our portfolio here is that we're go in from previously about 260 million barrels, or 0.25 billion barrels, to about 410 million barrels. Why does it not go up by the 320 million barrels, which is the headline 2P number that we acquire as part of this deal? That's because not all of it is in the development funnel; part of it's, of course, on production. So the Gullfaks volumes don't count as under development. They come under the on-production volumes, which are not headlined in this particular development slide.

 What you see in this slide is in blue, our previous position; in green what we've added to our portfolio, the assets already listed by Mr. Roiss.

 Key 11 additional licenses, additional volumes under appraisal, projects in waiting, if you want; included in there is the Shetland/Lista discovery at Gullfaks, which we see as volumes under appraisal. And this is part of the conditional payment that we've agreed with Statoil of $6 per boe, as and when that project progresses through the funnel, submits its plan of development and takes FID. Rosebank increased from 20% to 30%; Gudrun new; and then Schiehallion, we've doubled from just under 6% to just under 12%; and then Gullfaks, as mentioned, under production.

 What's all that going to do? It adds about 70,000 barrels a day in 2016, and 150,000 barrels a day to our current portfolio in 2021 -- sorry, to our current production, I should say. And production impact is, of course, a combination of the acquisition, plus the current portfolio, it's the total impact.

 If you look at the total volumes, we are acquiring some 320 million barrels 2P, and if you divide that by the acquisition price, we're paying about $8.3 per barrel. If you look at comparable deals in the last couple of years, you see quite a wide spread between about $4 per barrel and $15 per barrel. Why is that? It's because these deals are a combination of oil and gas deals. And they're a combination of assets that are on stream and not on stream.

 We think our assets are relatively valuable when you compare it to other deals in the past couple of years for two simple reasons. It's quite an oily deal, 70% oil versus only 30% gas, which increases the value; and also, some 40,000 barrels a day on stream in Q1 2014. So a very large part of that portfolio developed right from the start.

 I also realize a lot of you will be comparing what we've done here to [Wood Mac], so just a quick heads up. That the volumes that we see in the deal, and the 320 million barrels that we quote, are about 25% up on the volumes you see at Wood Mac. That mainly comes from the Norwegian asset, which is not surprising; it's simply data related. We've seen a lot of data. Wood Mac doesn't see all of that, of course; not all of that is public data.

 Just to illustrate the standard data for the Gullfaks data room, we looked at 17,000 documents in the data room. And also you see quite a tax effect from the fact that Wood Mac looks at these assets on an individual basis. Clearly, we look at it on a portfolio basis including our assets that we already own. And if you add all that up you see a portfolio tax impact of, in total, some $300 million, in particular coming from the UK. So just keep those two in mind, please, when you compare this deal to what you see in Wood Mac.

 A little bit more color on the individual assets then. I'm going to slide 10 now. Gullfaks, of course, one of the North Sea giants, discovered -- or it's been discovered before, it was producing since 1986. Since 1986, it's produced some 2.7 billion barrels oil equivalent. And we still see a production profile going some 20 years out, starting with a 2014 production of some 26,000 barrels net to us.

 And a lot of ongoing investment in the Gullfaks fields, because it's not a single field, over the next couple of years; a lot of redevelopment, very similar actually to what we do in our assets in Austria and Romania, where our name of the game is to keep production flat. Really what Statoil is doing here is on an offshore basis, which technologically makes it more challenging, of course, doing exactly the same; continuous redevelopment, upping the recovery factor, keeping production flat, to actually a slight increase in the next couple of years, in particular on the gas side of that Gullfaks production.

 Next slide 11, you see Gudrun, the picture there is not the Gudrun platform offshore, that's the Gudrun platform sitting on its load-out barge. It's currently being installed offshore, and should come on stream in the first quarter of 2014; very good project execution, on schedule and below budget. And an expected production contribution in 2014 of 15,000 barrels a day, ramping up during the course of the year to peak production in 2015.

 High pressure, high temperature development, and clearly one in the Norwegian North Sea where we expect to learn from Statoil; and also, where we expect to add further value to our portfolio from the exploration acreage that we're adding as part of this deal. We'll come back to that in the exploration slide.

 Then we move to the UK, on slide 12. UK both assets we know quite well, of course. Schiehallion and Rosebank, we're already partners in. Schiehallion currently going through its redevelopment phase. It started production in '98. It's produced some 300 million barrels, currently producing nothing, because the old vessel has been taken away to be replaced by a new vessel. The picture there you see the new vessel under construction in Korea. And we see some 200 million barrels of oil production to go, and of that we will have some 12% starting with 12,000 barrels a day in 2016.

 The vessel under construction is, actually, the largest FPSO constructed so far, some 260 -- 270 meters long with a storage volume of some 900,000 barrels a day, 106,000 tonnes displacement, quite a big beast.

 If we go to the next one though, Rosebank; Rosebank will top that. The development CapEx 100% basis for Schiehallion is some $8 billion. Rosebank will be closer to $9.5 billion, as and when we take FID; we expect to take that in the first quarter 2014. This thing will be bigger than Schiehallion, only just, 300 meters long and about 1 million barrels storage volume.

 It's also going to be in deeper water than Schiehallion. Schiehallion is some 400 meters water. Rosebank is slightly further out, and the water drops quite fast there, about 1,000 meters water depth.

 And what you see with this deal is that we farm up, if you want, from 20% to 50%, that's quite a big participation for us to be in this project. And in the footnote you will see that we do look at, as and when we close this deal, to farm part of that out. We would be more comfortable with a 35% share in this development, and we will look at farming out somewhere between 10% and 20% of the 50% that we now acquire.

 That's not to mean that we don't like Rosebank. We really like Rosebank, that's why we're buying the 30%, but for comfort we will look at divesting at least part of that in the next half year, or round about the time that we're taking FID on the project.

 So those are the development and producing assets. On slide 14 you see that we go beyond that, there's two parts of a strategic partnership that we're also closing as part of this deal; one is around exploration, the other is around R&D cooperation.

 Starting with exploration, as part of this deal we get options to farm into 11 blocks, the way that works is that at the signing of the deal, so today, we will have the option to farm into 11 blocks. We'll now go and look at the detail of each of these 11 blocks, but the thinking is that most of those we'll look at farming into.

 In particular, the blocks concentrated around the two red circles you see on the slide, around Cambo and Rosebank in the Faroes and in the UK West of Shetlands, where together with Statoil we look at exploring at the Atlantic margin. In particular, we want to share what we know and what Statoil knows about intra-basalt exploration.

 And secondary, we'll be looking at adding exploration acreages around, in fact, the Edvard Grieg infrastructure in the Norwegian North Sea. Most of our exploration acreage is further north than that, but we are interested, of course, in making the most of the infrastructure we've got in place, and we're looking at farming into particularly two blocks around the Edvard Grieg assets.

 All in all, that will result in the 65 licenses you've already seen, which is quite a significant exploration portfolio in the North Sea for us, and should allow us to have a long-term sustainable production base over and above the projects you've just seen.

 On slide 15 you see the second part of the strategic partnership that we're looking at entering into, R&D cooperation with Statoil. What have we got to offer? Well, Statoil is the undisputed champion in higher recovery rates offshore, we see ourselves as very advanced in higher recovery rates onshore. You see Statoil aiming to increase recovery rates in Gullfaks about the 60% mark. We're busy, of course, redeveloping fields in Austria and Romania, in particular Austria, as you see us managing oil rim reservoirs up to the same percentages, 60% -- 62%.

 Clearly, we're driving at the same technologies. Clearly, there's a difference between doing things offshore and onshore; offshore things tend to be more expensive. And part of this R&D partnership we envisage that we will be testing things onshore that we may then take offshore, so quite a nice symbiotic partnership around further developing our EOR capabilities.

 And as we've demonstrated, historically in Austria and Romania, a lot of LU associated with increasing our recovery rates in assets that we're already in. So quite passionate about that partnership, and proud of the fact that we've managed to enter into it.

 Let me wrap up by a slide that, in fact, you've seen, this acquisition really does support our growth strategy. We've got the portfolio already to grow by some 2% a year, which will get us to 350,000 barrels a day in 2016. What this now does it gets us that 4% a year, which we aspire to, and will get us to slightly above 400,000 barrels a day in 2016, a great deal going forward.

 With that let me hand over to David Davies.

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 David Davies,  OMV AG - CFO   [3]
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 Thanks, Jaap. Good morning ladies and gentlemen also from my side. Let me just go through a few slides, just summarizing the financial consequences of this transaction, and how we're going to fund it.

 In particular, if you turn to page 17 in the deck that you've received. You see that the acquisition will be largely funded by the working capital initiatives and the Downstream divestments, which have already been executed. So, in saying that what we mean is that the steps that we've already taken are sufficient to actually finance this acquisition. It doesn't imply any further action that is needed. Although, of course, further action is being worked on, not least of which the disposal of the Bayernoil refinery, which, of course, you are aware is part of the overall $1 billion disposal program from refining and marketing.

 At the end of quarter 2, the results of which we announced last week, we had a net cash position on the balance sheet of a little under EUR2.5 billion, so that's net liquidity to the Group. Clearly, part of that liquidity was going to be used to fund or refinance a part of our debt, which becomes due next year, a little under EUR1 billion becoming due next year. That clearly now will be diverted to fund this transaction.

 And we'll consider how best to then refinance the debt that matures next year, but whichever way we look at it refinancing that debt next year will also be done at a cheaper rate, given that that debt was by and large taken on in 2009 when interest rates, clearly, were a lot higher.

 The acquisition is by and large funded by activities we have already executed. It will take our gearing ratio up by about 16 percentage points to, more or less, our 30% long-term target.

 Going forward the investments that are needed to complete the developments of the assets that we've acquired will be by and large self-funded. I'll also draw your attention here to the comment Jaap made in terms of the farm in -- farm down, rather, of the Rosebank percentages that we now have. And beyond the investment period into 2017 to 2021, the assets that we will then have developed are very much contributing to the cash of the Group.

 The purchase price, as we have discussed, is $2.65 billion, that is subject to adjustments. Those adjustments, however, reflect the fact that the acquisition will be backdated for effective management and ownership to January 1 this year, although, clearly, the expected closing is going to be closer to the end of this year.

 So if you backdate everything to January 1, it means that we will basically take economic ownership of the cash flows that the assets generated. That includes, of course, the economic ownership of the investments that were ongoing this year. So that will be an adjustment to the purchase price that is -- but it has clearly been made closer to the closing date.

 If you look now at page 18, just to summarize some of the divestments that we've executed. You'll be aware that we've sold our marketing operations in Croatia, and in Bosnia. We've sold our lubricants business, a major transaction on top of that was the sale of our stockholding business in quarter 1 this year.

 And the overall reduction in net working capital exceeds EUR1.5 billion now, so if you add that to the disposal proceeds, we've generated comfortably in excess of EUR2 billion of cash from these activities, activities which were generating less than 5% return on assets. And we've now taken that cash and reinvested it back into the E&P business with these assets that we acquire, and these are assets which are capable, in the longer term, of returning between 10% and 20% return on capital employed. So, clearly, we're improving the return basis of the business in the longer term.

 We believe with this transaction on page 19 we create immediate value for OMV. The acquisition price is known to you. We believe in 2014, even in the first year, we will be generating something in excess of $500 million of operating profit, depending on what the oil price is. We've bought 320 million BOE of 2P reserves, with a greater than $30 per barrel.

 EBIT will add to our production in 2014 something like 40,000 BOE per day, and that will raise thereafter as the developments come on stream. And we also have a very oily asset here in this acquisition, some 70% of the total production being oil, and 30% being gas.

 It will be immediately EBIT contributing. It will generate cash quite early in its life. And it will also be immediate EPS accretive, particularly given that the liquidity is already sitting on the balance sheet, as it were, in order to fund it. As I mentioned, the gearing will increase by approximately 16 percentage points, rising from 15% where we currently are, so that takes up to our long-term gearing ratio target of 30%.

 The strong investment grade credit rating is not expected to be impacted by this transaction. And the Group tax rate, given the tax rate in Norway in particular, is likely to increase by 5 to 6 percentage points as a consequence.

 And I'd just refer you then to the final slide, which just reiterates the key financial principles of the Group. The matrix, as it were, we use to manage our financial stability; the gearing ratio around 30%; maintaining the investment grade credit rating; sustaining a dividend policy of approximately 30% of net income; and striving for a return on capital employed of 13% under stable and average market conditions.

 So that summarizes the presentation from us three. What I'd like to do now is just hand back to Gerhard, who will conclude the presentation and then hand over to the moderator for a Q&A session. Thank you.

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 Gerhard Roiss,  OMV AG - Chairman of the Executive Board & CEO   [4]
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 Thank you, David. Just some final sentences again; this is according to our strategy, reduce Downstream and build up Upstream.

 And, to be very clear, it's not our target to buy into production. Our target is to create a balanced portfolio of the exploration, appraisal development and production, and to do this above critical size. Thank you so much.



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Questions and Answers
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Operator   [1]
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 (Operator Instructions). Thomas Adolff, Credit Suisse.

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 Thomas Adolff,  Credit Suisse - Analyst   [2]
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 Three questions please from me. First one, just to get a sense for whether you believe you've established the right balance between inorganic and organic use of the excess cash.

 And the second question may be just on the Lista; just wondering whether you can give, I'm assuming what you've shown on the slide isn't quite specific, just Lista, the expected recoverable gross resource estimates.

 And just finally, just to clarify, once this deal is closed, the net cash outlay is $3.15 billion? Thank you.

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 David Davies,  OMV AG - CFO   [3]
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 Let me just take the first and perhaps the last question. It's a rather difficult one, inorganic/organic. We, clearly both with this portfolio and indeed with other discoveries, which we're developing, still have a substantial program of organic developments to bring to production over the next couple of years.

 What we believe we've done is, however, put this cash that we generated to sensible use. It's entirely consistent with the strategy, which we announced in 2011 and it actually enables us to add to our resource base in a way that actually self-funds, as it were, in terms of the development expenditure.

 Let me hand you over to Jaap in terms of the resource discussion.

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 Jaap Huijskes,  OMV AG - Executive Board Member, Exploration & Production   [4]
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 So, just to strengthen the first point, David. Clearly, you've seen us increase the development funnel from, I think, the first time we published it, some 280 million barrels to 1 billion barrels. A lot of that is organic driven. We've increased our exploration spend significantly and kept discovery rates above 60%. That's all great. But, of course, most of that won't come on stream until towards the end of the decade and later.

 And what we've done here is, of course, done something much earlier than that. That's the balance you should also look at. It's not only volumes and spent, it's also the timing by which it comes on stream.

 On the Shetland/Lista volume, I think all I want to say there is that those volumes are quite uncertain, and that's why we've put a conditional payment in for these volumes. $6 per barrel, we think, is quite a reasonable sum, given that for development costs, of course, as and when it gets developed, it will be off the Gullfaks platform, so relatively low cost.

 But the volume rate, at the moment, is very wide and that's why, for now, we've got this conditional payment. It wouldn't kick in until the final development gets approved, and the earliest we can see that happening is around the 2016 timeframe.

 And the specifics on the range, I don't really want to debate. Clearly, the range is quite wide, that's why the payment is structured the way it is.

 David, back to you for the cash out.

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 David Davies,  OMV AG - CFO   [5]
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 Yes, the cash out, clearly, there's that adjustment for the discovery, that Jaap mentioned, but that's not going to happen by the end of this year; that's obviously going to await the final investment decision on that development.

 The remaining cash out, of course, will depend on what the outcome of this calendar year has been, because as I mentioned earlier on, the transaction is going to be backdated to January 1, 2013. There is no smoke and mirrors involved in that, and when we're closer to know what the final number is we'll disclose it towards the end of the year. But it's, clearly, going to be higher than the $2.7 billion -- or rather $2.65 billon that we disclosed today.

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 Thomas Adolff,  Credit Suisse - Analyst   [6]
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 Okay. Thank you. Just a quick one, because -- just a follow-up; you said self-funded until '17. Are you basing your assumptions on $100 Brent over that time period?

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 David Davies,  OMV AG - CFO   [7]
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 That's correct.

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 Jaap Huijskes,  OMV AG - Executive Board Member, Exploration & Production   [8]
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 Roughly, yes.

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 Thomas Adolff,  Credit Suisse - Analyst   [9]
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 Thank you.

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Operator   [10]
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 Irene Himona, Societe Generale.

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 Irene Himona,  Societe Generale - Analyst   [11]
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 I just had one question please. Statoil has disclosed its share of capital expenditure on the assets sold to you; it's around $5.5 billion pre-2020. I wonder if you can update your guidance for Group capital expenditure from 2014 onwards, please. Thank you.

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 David Davies,  OMV AG - CFO   [12]
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 It's a bit early for us to do that. What I would say is that our current guidance is to be spending approximately EUR2.8 billion a year. That's the guidance that we gave for this year. As we look towards next year, frankly, all things being equal, we wouldn't have seen that changing significantly going forward.

 Now, of course, with this transaction, it will. But we'd rather wait until we get closer to the end of the year before we give too much specific on that, because much will depend also on what the outcome are of any discussions as regards farming out part of the Rosebank development will also produce.

 One thing I would say is, what's likely to be confusing, we'd like to come back to you later in the year on this also, is that production target of 350,000 barrels a day 2016, remains intact. But, clearly, it needs to be now adapted for this transaction. So towards the end of the year we'll come back and explain in more detail what our target is, as the closing of this transaction becomes clearer. But there's certainly nothing in this transaction or anything else going on, which would have lead us to move away from that guidance in terms of our production target.

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 Irene Himona,  Societe Generale - Analyst   [13]
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 Thank you.

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Operator   [14]
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 Dan Ekstein, UBS.

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 Dan Ekstein,  UBS - Analyst   [15]
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 Just thinking about your Norwegian portfolio and your proposition to add shareholder value there; I can understand quite clearly the case for development projects, like Edvard Grieg and Aasta Hansteen, and how your exploration portfolio as well, could be an opportunity for you to add value.

 But could you elaborate on what strategic and shareholder value buying Gullfaks being a mature producing, declining asset, adds? Competition for assets in Norway is very, very fierce, so it seems a tough proposition to add value through acquisition of producing assets?

 And secondly, what is the appropriate hurdle rate for potential transactions in Norway? Presumably, it's lower than the hurdle rate you'd look at in other parts of the world? Thanks.

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 Jaap Huijskes,  OMV AG - Executive Board Member, Exploration & Production   [16]
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 Let me start; I'll pass back to David for the hurdle rate.

 Clearly. Gullfaks is part of a bigger package. What we're buying here is into a package that's got development assets. Gudrun is also, of course, at the moment, still a development asset; will come on stream next year. Schiehallion, and Rosebank and Gullfaks is part of that package. In particular, Gullfaks is, of course, a package where the R&D cooperation between ourselves and Statoil will come into force.

 Really, in a lot of ways, and I've said this before and I'll say it again, what Statoil is doing in Gullfaks very much resembles what we are doing in Austria and Romania; keeping production flat, continuous redevelopment, chasing the last barrels. We think we got something to offer. Clearly, Statoil's got a lot to offer. And, clearly, its therefore an asset where, when we work together, we think we can further the benefit and the value of the rest of our portfolio.

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 David Davies,  OMV AG - CFO   [17]
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 On the hurdle rate, clearly, we run sensitivities as we look at various markets and assets that we evaluate. I wouldn't like to go into too much detail in terms of precisely the rates that we use for various markets, but it would be clear to say that Statoil would be at the lower end of the overall return spectrum, based on the risks in the market. But I would also say that the header rate that we've established with this investment is a double-digit, post-tax internal of rate of return.

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 Dan Ekstein,  UBS - Analyst   [18]
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 Thanks.

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Operator   [19]
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 Lydia Rainforth, Barclays.

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 Lydia Rainforth,  Barclays - Analyst   [20]
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 A couple if I could. The first one, can I just come back to the exploration option? And could you just go through a little bit more detail how that works. How much time do you have to exercise that option? And is there an additional payment that would need to be related to that?

 And then, secondly, just the bigger picture question. It is, clearly, a substantial transaction for you. I'm just wondering what, and this may be something you want to come back to, but what is the ultimate aim for what's the size you think is appropriate for OMV, as a Company as a whole, just in terms of production numbers. Thank you.

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 Jaap Huijskes,  OMV AG - Executive Board Member, Exploration & Production   [21]
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 Let me start with the exploration part of the deal. So, the way this works, of course, is that we've won this acquisition through a relatively tight, but nevertheless, competitive process. So, the way that works is that you'd tell Statoil what you think it's worth and what, in addition, you might like or not like.

 So, what we said quite early in that process is that, as part of the deal, we wanted to have a strategic partnership set up, in which we would cooperate on both exploration and its R&D development. It's become clear, obviously, today that we've won the deal. But it is a competitive process, so as part of that deal what we've agreed, right now, is that we will look farming through these 11 blocks that you see listed in the shares.

 The way it now works is that we're now get a look at the seismic. Clearly, you don't do that before, because they won't show us the seismic and the detailed data on these blocks until it's clear that we've done the deal. And then we'll agree or disagree to farm into each of these individual blocks.

 So there may be one or two blocks that we decide, on further inspections, we do not farm into. Conversely, over time additional blocks may turn up. Clearly, once you establish a partnership neighboring blocks tends to be taken up by the same partnership.

 And then commercially the way this works is that we've agreed, very notionally, the farm-in arrangement. So, there will be some past costs, which tend to be seismic, not terribly expensive. Remember, blocks here are not of the same size that we're looking at the in Black Sea, so seismic tends not to be the same cost. And there will be an uplift on exploration wells where, for example, you get a 20% entry, but you pay 30% of the exploration cost, which is standard farm-in arrangement, where you pay a promote to get in.

 So the outline of those has been agreed, but the detail needs to be worked, once we get access to the detailed data, which we'll do between this time, time of signing, and the time of the closing of the deal.

 On the appropriate size for OMV, clearly, all we can say right now is that this will get to us about 400,000 barrels a day in 2016 timeframe.

 Anything further than that, Mr. Roiss?

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 Gerhard Roiss,  OMV AG - Chairman of the Executive Board & CEO   [22]
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 I understand your question in terms of long-term guidance, in terms of growth in upstream. I think, first of all, yes, 2016 was the target to go up to 400,000 barrels per day, which is quite achievable, as we see it nowadays, already today.

 So the question is what is our next target? We will go out the second half of next year, when there is the first indications of our Black Sea discoveries, with a new guidance for you. This will be, as I mentioned, second half of 2014.

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 Lydia Rainforth,  Barclays - Analyst   [23]
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 That's very helpful, thank you very much.

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Operator   [24]
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 Marc Kofler, Macquarie.

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 Marc Kofler,  Macquarie Research - Analyst   [25]
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 Just two questions. Firstly, in terms of Rosebank and the FID, I saw in the presentation you're talking about early 2014. I was just wondering if you would say if you would look to farm down before or after that event.

 And then secondly, just more holistically, thinking about the Upstream, clearly, a very big transaction announced this morning. I was just wondering if you could just give some rough guidance around potential transactions going forward. And here, really, I'm just trying to think about what the strategy is going forward. Is it now mainly exploration-type bolt-on acquisitions? Thanks.

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 Jaap Huijskes,  OMV AG - Executive Board Member, Exploration & Production   [26]
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 On the farm out for Rosebank, clearly, this is going to happen around about the time of FID. We don't expect this deal to close with all the approvals required until around at the end of the year, with Rosebank FID aiming at somewhere in the first quarter, probably towards the end of the first quarter. The actual farm down may happen just before or just after; around about the same time as FID, therefore.

 On M&A and what's next, clearly, we're not going to do another deal this size very soon. But, clearly, there is the potential for smaller deals going forward, divestments as well as acquisitions. But something of this size, clearly, you can't do twice in a row.

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 Marc Kofler,  Macquarie Research - Analyst   [27]
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 Great, thanks.

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 David Davies,  OMV AG - CFO   [28]
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 I think also just to add to that, if you go back to 2011, when we announced the strategy that we're currently pursuing, there were a number of targets within that. One of which was the aspiration to move our production to 400,000 boe per day by 2016 and to achieve a reserve replacement rate of 100%. This transaction executes that strategy and completes with the organic developments, that we're pursuing, that strategic goal. So, I think to that extent, there's a very substantial box ticked, which has been well flagged in advance.

 We -- clearly, and as Jaap has said, we've been investing heavily in exploration. We've had some success as a consequence of that as well. And that will lead to developments going forward. And, as Gerhard also said, later on in the year, when we've got a clear indication -- or later on next year, rather, when we've got a clear indication after the appraisal program, which we hope to start in the early part of next year in the Black Sea, precisely what the timetable is and production is going to be from that asset, then we can say more. But at this point in time, we're happy that one of the boxes on our strategic goals has been ticked.

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 Marc Kofler,  Macquarie Research - Analyst   [29]
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 Great, thanks very much.

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Operator   [30]
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 (Operator Instructions). There are no further questions, so I will hand back to David Davies for his closing comments.

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 David Davies,  OMV AG - CFO   [31]
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 Okay, well thanks ladies and gentlemen for making yourselves available at such short notice to listen to this program on this major investment program that we announced today; the biggest that we've actually done. So, we're very proud of it and it's a milestone for the Group. Thanks for your time to hear about it.

 If you have any more questions, of course, as ever, contact our Investor Relations team, thank you.

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Operator   [32]
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 That concludes today's telephone conference all. A replay of the call will be available for one week. The numbers are printed on the telephone conference invitation or alternatively, please contact OMV's investor relations department directly to obtain the replay numbers.

 Thank you for joining today's conference call. You may now replacement your handset.




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