Q4 2014 OMV AG Business Update and Trading Statement Call
Jan 29, 2015 AM CET
OMV.VA - OMV AG
Q4 2014 OMV AG Business Update and Trading Statement Call
Jan 29, 2015 / 10:00AM GMT
==============================
Corporate Participants
==============================
* David Davies
OMV AG - CFO
* Gerhard Roiss
OMV AG - CEO
* Jaap Huijskes
OMV AG - Executive Board Member, Upstream
==============================
Conference Call Participants
==============================
* Mehdi Ennebati
Societe Generale - Analyst
* Nitin Sharma
JPMorgan - Analyst
* Haythem Rashed
Morgan Stanley - Analyst
* Joshua Stone
Barclays - Analyst
* Matt Lofting
Nomura - Analyst
* Henri Patricot
UBS - Analyst
* Marc Kofler
Jefferies & Co. - Analyst
* Alastair Syme
Citi - Analyst
* Bertrand Hodee
Raymond James - Analyst
* Mark Bloomfield
Deutsche Bank Research - Analyst
* Adrian Cighi
Franklin Templeton - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Welcome to the OMV Group's conference call for the Q4 2014 trading statement and business update. (Operator Instructions).
You should have received a presentation by email. However, if you do not have a copy of the presentation, the slides can be downloaded at www.omv.com. Additionally, simultaneous to this conference call, a live audio webcast is available on OMV's website.
I would now like to hand the conference over to Mr. Davies. Please go ahead, Mr. Davies.
------------------------------
David Davies, OMV AG - CFO [2]
------------------------------
Thank you; and good morning, ladies and gentlemen. Thank you also for taking the time, at this point, to dial into this conference call.
Before I hand over to Gerhard Roiss to start the presentation, I just wanted to set a little backdrop to why we're having this.
Clearly, the publication of the trading statement is normally a matter which is dealt with by our investor relations team. But we felt, however, that the environment had changed so dramatically in the last few months that it was appropriate to give the market an update on how we're reacting and what we're actually now expecting in the medium term, as early as possible, as we in fact indicated in Q3.
So that's the reason we're having this. This is not the quarter 4 conference call, so there will be some detailed questions we're simply not in a position to answer at this point in time. That time will come in three weeks' time when we publish the Q4 results. But just wanted to set the background for why we're having this discussion.
So at that point, I'll hand over to Gerhard, who will kick off the presentation. Thank you.
------------------------------
Gerhard Roiss, OMV AG - CEO [3]
------------------------------
Thank you, David. Good morning from Vienna; thank you for joining us. Let's start with the market environment.
As you know, Q4 was extremely difficult, but the outlook in 2015 is even tougher. The oil price, we had these four years of relative stability and the volatility is back with a vengeance. We had, in 2014, an average crude price of $1.06; we now see quite a weak demand and quite a good supply.
Gas price, again, weak; as you know, is it a gas price of EUR20 per megawatt on NCG. But it failed to recover after this record low price we have seen in the first half 2014, because of this extremely mild winter.
The operating environment, or this operating environment, is impacted on the upstream by the instability in the Middle East and North Africa, means Libya. Libya, this situation is not changing; it's deteriorating further. And Jaap will give you more details about our situation nowadays in Libya.
Downstream, on the one hand we have deteriorating market conditions in Romania in the power sector. We also have some issues in Turkey where we have a regulator situation that is impacting our fuel margins. I will come back to this topic.
On the positive side, we have quite some uplift in the margins, of course, in this crude price environment. And, which is OMV-specific, we have the effect of the Petrobrazi modernization in our books. Refining margins went up from $1.16 to $5.19 quarter 4, compared to quarter 4 2013.
We also have a strong position in our two petrochemical refineries, in terms of petrochemical margins going up from [356] a year ago to [470] in the fourth quarter of 2014.
That's about the market. Let's come now to reaction on today's price environment.
Our key target is to be cash flow neutral over the midterm over 2015/2016/2017; this is our key target. This means we have to attract -- to see going to CapEx exploration, appraisal cost reduction and divestment topics. Let's start with CapEx.
CapEx, as you know, we had a guideline of EUR3.9 billion per annum. This was mainly coming out of upstream; reduction here is 20% to 35%. In this time period going down to EUR2.5 billion, to a range of EUR2.5 billion to EUR3 billion. This is quite a severe cutback, but we think this is what we need to do in this environment. The more it's in the 50% range, the more it's then going down to EUR2.5 billion; the more it's going up, it's more EUR3 billion.
Exploration, here is just 2015 we see a cut by 25% from EUR700 million to about EUR500 million. On top of it -- or included, let me say, a unit CapEx reduction through optimization, or contract renegotiations. The Czech securitization of our investment; we are re-phrasing them. We have deferrals; we have cancellation of wells. This is all under investigation, our plan. And we have further reduction under review in terms of if the oil price stays down to $50.
Coming to cost reduction and, again, tighter contractor management; purchasing cost reduction; tight personnel policy. If you see OMV's personnel policy, and you see over the last five years, the average reduction of headcount is 6%, 6% per annum, where on the other hand, you have seen a growth in production. This is in terms of headcount.
Then we have rigorous prioritization of further discretionary spend, which means [consulting] the costs going down, other spending, training costs and so on. There is also room that you have to address. And a further downstream optimization, as we have decided last year that we merge the two divisions, oil refining and marketing and gas and power, into one division; there are also some effects in terms of costs coming out of this measurement.
On top of it, but not as our first priority is to look into divestment options.
Then we look into our strategy, we stick to our target of 400,000 barrels. But whatever we have just said has, of course, an impact in the speed of our upstream growth, and we have to prioritize cash flow instead of growth for the time being. This means again our strategic priorities remain, but at different pace.
This means our target is to grow upstream out of a self-funded cash situation. We want to restructure downstream, again, as I mentioned gas and power/R&M merger; and also, we have to look into the divestment issue of gas and power and downstream assets, and we see some room there.
In terms of the growth, 400,000 barrels, the project to deliver the growth are in the pipeline and are in both [FID] situation; this is Edvard Grieg, Schiehallion, Nawara and Habban.
When you look into our production figures, you have to be aware that 50% share is of gas, of OMV's portfolio is coming out of gas.
There is, at least temporary, a buffer against oil price slump, as 80% are in isolated non-oil-linked markets, this is Romania, [they have] 60% in such a position; that's Pakistan and New Zealand. This is providing a shield against gas price in liberalized connected markets being dragged down by the oil price.
Again, we want to stay focused, integrated and profitable.
In terms of downstream, this is key for us, helping us to stabilizing our result, our business out of this integration. You see here the impact from our -- the change in our refinery margins, you see the impact in fourth quarter 2013, and fourth quarter 2014 going up from $1.2 to $5.2 per barrel, not only out of crude, also coming out of the investment we have finalized in Petrobras refinery.
Then you see the strong impact of our two petrochemical refineries, which is Burghausen and Schwechat. Here you see they are benefitting from the petrochemical margin, the ethylene and propylene margin going up from EUR356 to EUR474.
At the same time, you see the weakening of the crude price.
So again, the stabilizing factors are the strong business integration that we have developed; the petrochemical integration creating additional value out of these two petrochemical refineries; and, to add this large share of gas sales in our non-oil-linked not connected market, this is equity gas that we produce ourselves.
Allow me now to hand over to David.
------------------------------
David Davies, OMV AG - CFO [4]
------------------------------
Thank you, Gerhard. Let me take you through a couple of slides showing some of the KPIs over the last periods, and also how we responded to quite a -- the quite dramatic changes in the oil price in particular.
On the first slide here you see, on the left-hand side, what's happened to the oil price and the US dollar, which is very important to us as a euro-reporting Company, and also having substantial part of our costs in euro or euro-tracking currencies.
The collapse in the oil price is well known to you; of course, it's continued into quarter 1 this year, currently trading below $50. The much stronger US dollar has well so continued beyond the strengthening of quarter 4. Currently, we're something close to $1.12, which helps us somewhat, but clearly doesn't compensate us for the scale of the decline that we've seen in the oil price.
Our E&P production was strong in quarter 4; continued a trend, which started in quarter 2, and this is despite a lower level of production in Q4 versus Q3 from Libya, some 6,000 barrels a day less than Libya.
Libya as a whole on average for the year was round about 8,000 barrels a day and, in fact, had we had the full year's production from Libya through all of this we would have been in excess of 340,000 barrels a day production on that basis.
On the right-hand side, you see the refining margins, which have clearly improved quite dramatically in quarter 3 and quarter 4. Part of that increase, of course, was due to our recasting the calculation of the refining margins in Romania following the completion of the Brazi -- Petrobrazi development.
You see here what they would have been had we not done that recalculation, the blue line at $3.7/$4.2 here. So even without that we saw quite a big step up in quarter 3, and that's been increased still further in quarter 4.
So this has also helped us somewhat. But again, can't compensate for the scale of the decline that we have seen in the oil price.
On the next slide you see as we reported this morning, we have decided to book in quarter 4 a preliminary amount of something approximating EUR700 million special provisions. The largest part of this relates to asset impairments.
In particular we've taken a EUR340 million write-down against the Petrol Ofisi carrying value in Turkey. The largest part of which is due to the margins that are being regulated, a cap being introduced during the current year in quarter 2, which has substantially impacted the profitability of the business. The expectation is this will continue, and has led us to book the provision as a consequence.
The power plant in Samsun in Turkey has performed quite well.
The plant however in Brazi, in Romania has not performed well. We were expecting something of improvement during the current year, that's not manifested itself. On that basis we've decided to take a provision against that asset as well of EUR140 million.
We've taken a further provision against the Gate LNG terminal in Rotterdam. And we've taken one or two minor provisions, about which we'll say more in the quarter 4 statement.
But one point I would like to make here is that there have been no significant E&P impairments. I think we booked something approximating to EUR60 million within this overall total relating to E&P, and the reason for that you see on the next page.
It's clearly a big challenge when you see such a dramatic change in the commodity price environment, and your profitability is so dependent on that to actually determine what impact that has on the carrying values of the assets that you have in the middle of this storm, as it were.
We've looked at a range of different scenarios; both in terms of planning our cash flow and battening down the hatches, as it were, and you see them set out on the left-hand side of this chart.
On the more-optimistic side, we actually went into the planning cycle about five or six months ago with the $75/$90/$90 environments, and back then we regarded that as relatively prudent.
Clearly, events have overtaken that and we've actually decided to look at more dramatic scenarios as a contingency, and what would the world look like if they're $50/$50/$50 for the next three years.
So that defines really the upper end and the lower end of the scenarios we've examined in detail. But, of course, in terms of booking the asset values what you have to do is base maybe your best estimates of what you expect to actually happen.
You can see that with the dotted line here, both for the US dollar, as well as the oil price where, for 2015, we're expecting an average of $55 per barrel. For 2016, our expectation is that that will strengthen to $75 and then, by 2017, it will have recovered to $90.
You notice above, however, that we've expected the dollar to weaken during that period by about -- by more than 10%, which if you were to basically say that $90, based at today's dollar exchange rate, that would be something closer to $80 rather than $90; so just to put that into context.
These have been the assumptions that we've used in terms of determining the asset values.
Clearly, as the future unfolds we will monitor that very carefully. If that proves not to be the case, on the upside, then the risk of further provisions is diminished. However, should it be the case that the oil price stays lower for longer, then clearly this is going to be something we potentially need to return to and this could lead, of course, to provisions being necessary.
But on the basis of the assumptions that we've made, given this is a relatively recent scenario, we're not throwing the baby out with the bath water as it were, and we're being cautious, we believe but, nevertheless, expecting some recovery over the next two years rising back to $80 approximately at today's exchange rate, but with a weakening dollar that would equate to about $90 in 2017.
Based on this we've, clearly, to protect our cash flow, taken appropriate action as regards to our capital expenditure.
We'd previously guided the market to a spending of about EUR3.9 billion over the three-year period 2014 to 2016; 2014 is not going to be materially far away from that.
As we look forward now to 2015 and 2017 you see we've taken quite a bit out of that CapEx already, down to EUR3 billion; it's more or less consistent with the $75/$90/$90 scenario.
But in preparation for a more dramatic scenario over that three-year period, we would be looking to average something closer to EUR2.5 billion; so between 20% and 35% out of our CapEx, which is clearly a significant amount indeed.
It amounts to between EUR0.9 billion and EUR1.4 billion. That's obviously essential to protect our cash flow during this period.
We will also look at other areas, as Gerhard has mentioned. Operating cost is clearing one. Along with the rest of the industry, clearly, we're having a number of conversations with our suppliers, because they clearly also need to respond to this changed environment.
We mentioned already in quarter 3 that there a number of E&P assets were currently under review and that remains the case, and divestment might well be an option that we examine with those. All of those are under review with the overall goal in the medium term to maintain cash flow neutrality after paying dividends. I'll come on to the dividend in a second, because I know that's something you're very interested in.
We want to maintain our dividend policy. What does that mean? Our policy had been to distribute 30% of net income. During the previous year we distributed more than that, because our expectation was that our cash flow would recover. Clearly, our cash flow has not recovered, given the very weak oil price.
I must say, however, right at the outset, that a review of our current dividend, that is the EUR1.25 that we paid last year, has not been something we've even remotely discussed. So a reduction of the current dividend at this juncture is not something we're currently considering proposing to the Supervisory Board in a couple of weeks' time when we meet with them.
However, clearly at $50 per barrel going forward, which is the downside case scenario that we've evaluated, that would equate to a level of our net income being distributed which is clearly not going to be sustainable in the long term.
So we need to look how the oil price develops, what that means to our cash flow and what that means to our profitability. Clearly, if the oil price recovers we recognize the importance of the dividend and maintaining the dividend does have a very high priority. But if the $50 world for the next three years is what we have to live with as a reality, then that clearly -- that assumption will come under some pressure.
We will end the year with a gearing ratio not significantly far away from our 30% target. We have a very comfortable liquidity position at the end of 2014, with something like EUR3 billion of unused committed credit lines.
We have a very strong investment grade credit rating that enables us to access the capital markets very comfortably.
And, as a Group, we don't have a material maturity in any of our debt for the next three years; so nothing before 2018. In fact, the bond that matures in 2018 is one that we issued only a few weeks ago, in December 2014, and that had a rather unusual maturity pitched at four years, relatively short.
That's because with the growing production of these developments, which we continue to pursue will come on stream, clearly, our expectation is that the cash flow that they will generate would enable us to repay that bond. And hopefully, as the oil price recovers then that will continue to be the case.
On the next page I think something which is also of interest to you, but clearly of great interest to us. We clearly ran through this $50 stress case and worked out what that actually means for us, in particular looking at the current level of E&P projects. I can say that at $50, comfortably more than 80% of our current production generates a positive operating profit at that level.
I can also say that substantially all of our current production generates operating cash flow at $50 per barrel. That's the -- substantially oil is to be interpreted as that; there's very little that doesn't generate cash at that level of price.
Also of importance, the developments that we're currently executing. By that I mean the two assets in Norway, Edvard Grieg and Aasta Hansteen. Nawara and Schiehallion in the UK remain value creating going forward at $50. So that is also very important, so there's no -- we're not destroying value by continuing to execute the developments.
The pre-FID projects, however, which are under appraisal, clearly would require substantial reengineering of their cost, if they would need to be executed in a $50 environment. So there clearly is more pressure on the development pipeline, or rather the appraisal pipeline than on the current executed portfolio, as it were.
One point I need to make, by definition however, is, as I said about the current projects under execution create value going forward. But if we were to have a $50 environment, and to settle the business down into that kind of environment on a long-term basis that clearly would mean the risk of impairment was much higher.
That's not what we currently book, not what we've currently reflected. I've told you already what the assumptions were. But clearly if we do start to plan more towards a $50 environment, that is clearly going to have some implications for the carrying value of some of our assets.
I must also say that in a $50 environment the level of CapEx that we would be reducing down to is likely to mean some of the development CapEx in our core market is also going to need to be reviewed quite aggressively, which may lead to our production here not being as stable as we would have liked it to have been. Here I'm thinking particularly of Austria and Romania.
To that extent, although the development projects will come on stream, and there's no reason to expect that they will deliver any less than when we previously projected, the overall target may be adversely impacted by our production coming down slightly in those mature markets.
So the overall total may be put at risk if we have this $50 environment. But the development projects themselves add value going forward and will continue to be executed.
At that point, I'll hand over to Jaap who'll give you a bit more flavor on the upstream business. Thank you.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [5]
------------------------------
Thanks, David. Now, a lot's been said already, so what you see here instead of the Group CapEx guidance, you see the E&P guidance and it was ever EUR3.1 billion a year for the period 2014 to 2016.
For the period 2015 to 2017 we now show a range; in fact, we've got firm plans to have an average of EUR2.4 billion. Given that the oil price is currently around $50, we're looking at adjusting that further down to in the order of EUR2 billion average for those three years.
The CapEx is even more significant than what you see there, because, of course, the period's different and previously the year's plan had an up-kick in expenditure in 2017. So this picture is still slightly understates what we've done in terms of taking CapEx out of the program.
Where's it come from? From a couple of things. We've cancelled or stopped one or two projects. The first of those you saw last year when we stopped the Zidane development in Norway. Not ad infinitum, but it's definitely back to the drawing board and a long way off FID.
We've, in this CapEx guidance, delayed a lot of the pre-FID projects, basically back to the drawing board; cut your capital; make use of the market, where costs are clearly dropping; and then we'll see what happens to the oil price before we bring these projects back to FID.
The other thing that we've done is slowed down one or two projects that are in execution. Without being too specific as to which ones where, we are clearly looking at managing costs rather than throwing money at contractors to try and get them to mobilize early. You're accepting things as they come, which does mean some of these projects are going to delay. But it does also mean that CapEx outlay in the immediate term is reducing.
And finally, a very big chunk is coming out of our mature core operations in Austria and Romania. Just to put a number on that, last year in our core assets, so Austria and Romania combined, the rig count varied, but we had between 14 and 18 rigs operating at any point in time in Austria and Romania combined.
At the moment, that's down to 11 and our current plan to see that dropping to between six and eight over the course of 2015. So a very significant drop in activity. That clearly has an impact on production too, we'll come to that in the next slide.
The other area of expenditure where we've clearly pushed expenditure down is in exploration and appraisal budgets. We've deferred, in particular, some wells. Clearly what we're trying to do at this point in time is avoid losing licenses.
Clearly, if the oil price stays low then eventually that's going to happen. But, for now, what we've deferred, for example, is a production test in [Tambo], which we pushed into 2016; Wisting, a second Wisting appraisal well, which we pushed out; and a well in the Middle East, where we're again pushing out a second appraisal well 'til 2016.
The other thing high focus on reducing cost base. That secret speak for saying we're giving the operating costs a good kick. Depending which country you're looking at, you're looking at between 5% and 10% cut in OpEx. Overall, currently, we're looking at about 8%, but clearly we're looking at pushing that down further.
It comes from a whole variety of things, all which were mentioned by David already; less travel, etc., etc. But also, very clearly reopening negotiations with contractors that are working for us. What we were charged at $110 a barrel clearly isn't what we want to be charged when the oil price is $50 and you clearly see that across the industry including with us.
On the next slide at a very high level what that does to the production. I know this doesn't tell you much. Clearly, with the quarterly result we'll give you a little bit more guidance.
Typically, what we are seeing is two things. You see a drop in production in our mature core assets. How much really depends on how long we push our activity levels down for. If the oil price recovers and we start increasing our rig count in our mature core assets, then that drop will be limited. Clearly, the longer it continues, the steeper that drop's going to be.
So you're going to see a slight drop in production in our mature core assets, Austria and Romania. And then in parallel with that you see a deferment of some of the key projects. You see us pushing those out in time.
You still see a ramp up over the next couple of years. Slower and slightly less than was previously envisaged, but clearly projects like Nawara, Edvard Grieg, Schiehallion, etc., they're still coming.
As David remarked, they're clearly profitable at $50 a barrel. Therefore, there's no question whether or not we would stop any of those. They're coming and therefore production will increase, but less than what was previously planned.
We still expect to achieve in the order of 400,000 barrels a day. 400,000 barrels a day, clearly that's no longer a target; it's an outcome of what we got in the portfolio. The target, at the moment, is to make sure that we manage our business in a cash neutral fashion or better.
With that, I'd like to hand over to the operator for the start of our Q&A session.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions). Mehdi Ennebati, Societe Generale.
------------------------------
Mehdi Ennebati, Societe Generale - Analyst [2]
------------------------------
I will ask two questions, please. The first one regarding your CapEx. So you cut it by EUR1.15 billion per year on average versus your previous guidance. However, due to the flexibility on the CapEx, which is generally lower in the very short term, should we consider that you might have CapEx level of around EUR3 billion in 2015, despite your $55 per barrel assumption; and going down to EUR2.5 billion by 2017, if that price remains at the current level?
The second question is just to be sure I understood what you said regarding dividend. So there is -- there should be no dividend cut announcement in February, so in February 19.
However, if oil price remains at $50 per barrel in 2016 and 2017 there might be some dividend cut. So just sure that you would confirm this.
And maybe another additional question. Do you draw up as well your 100% reserve-replacement ratio target by 2016? Thank you.
------------------------------
David Davies, OMV AG - CFO [3]
------------------------------
Let me take the first two. The first one's going to be a bit difficult to answer really, Mehdi. What we're going to do is give you a bit more input into that in three weeks' time. As I say, this is a trading statement rather than a detailed review, but the statement that we're trying to average that over the three years is a reasonable one.
Your interpretation of the dividend statement was correct, at this point in time. Clearly, there's still three weeks to go. As we've seen a lot happen in the last three weeks, who knows what's going to what happens in the next three weeks. But as I sit here today, I can say with total candor and honesty that we have not had one single discussion around the Board table, which has even mooted that we cut the current level of dividend.
But at a prolonged scenario of $50 then the current level of dividend would be the best part of 100% of our net income potentially. So clearly, that's not something which would be sustainable in the long term and we would have to look at that.
We would like to maintain the current level of dividend and see it as a priority. But the primary priority, of course, is to keep the Company on a stable financial footing and paying out all of its earnings in dividends is not something which is going to be sustainable in the long term.
I'll hand over to Jaap on the reserve replacement rate.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [4]
------------------------------
Yes, it's very straightforward, Mehdi. If we don't take FID on some of our major pre-FID projects then clearly you're not going to see the reserves turn up, as proven reserves in the books either. So the 100% reserves-replacement target is being pushed out as a result of the CapEx reductions. Whether or not it eventually mature, it depends clearly on an oil price recovery as well.
------------------------------
Mehdi Ennebati, Societe Generale - Analyst [5]
------------------------------
All right. Thank you very much.
------------------------------
David Davies, OMV AG - CFO [6]
------------------------------
Thank you.
------------------------------
Operator [7]
------------------------------
Nitin Sharma, JPMorgan.
------------------------------
Nitin Sharma, JPMorgan - Analyst [8]
------------------------------
Two questions from me. First one on divestments. I look here and you flagged that as a potential source of cash flow and I'm thinking does it relate to further restructuring in downstream or does it mean selling upstream assets? Maybe some flavor on the type of assets that you're considering to sell.
Then second one on working capital. In past it's been a key source of cash release contributing to the cash flow. David, maybe some guidance on how Q4 and maybe 2015 -- there'll be obviously some relief coming through, because of lower oil price, but is there a concerted effort like last time around to salvage some cash from there?
And finally on Petrol Ofisi. Now, I'm slightly perplexed with what I hear because the cap that was introduced, if my understanding is correct, in Turkey, was largely in relation to higher oil price. So if oil price is falling then is that not a positive, in terms of the margins that you realize in Petrol Ofisi? Maybe you could clarify on that front, please? Thank you.
------------------------------
David Davies, OMV AG - CFO [9]
------------------------------
Let me try and take all of them, actually. The divestments, what we have said as regards divestments as being in quarter 3 we indicated that a vast number of the gas and power assets were clearly under review. That remains the case, and clearly divestiture may be something that we look at as the ultimate outcome of that.
We also said, and we've said quite consistently for quite some time now, that our stake of 50% in the potential Rosebank development is a stake that we would like to reduce somewhat. But we're not in fire-sale mode here and, clearly, we would be cautious in terms of looking at exact timing of that. But we have indicated that that was an asset that we would be prepared to reduce.
Other downstream restructuring are of the nature of what we've just completed now, the disposal of the Bayernoil refinery and the exit of a number of marketing countries, that's not something that's on the agenda. But downstream assets, to the extent that they are now in the new downstream division from gas and power is clearly something that we are looking at.
Working capital, as you quite rightly pointed out, over the last couple of years we've generated a lot of surplus cash from really being far more aggressive in this area with a number of excellent initiatives to actually sell part of our working -- capital exposure.
The impact of those programs is likely to be less of course, because the barrels of whatever it was that you ended up effectively moving away from are clearly less now in value in terms of cash terms. So their absolute impact will not be as significant as it was.
And in terms of future cash flow improvements, as you suggested, the lower oil price environment, generally, is usually benign for working capital, but the scale of the programs that we've had over the last couple of years has, by and large, taken the lower hanging fruit and anything we do from here on out is going to be much more at the margin rather than significant.
And then as regards the margin cap in Petrol Ofisi in Turkey, although you're right there was a high oil price environment at that point in time. What's actually been capped is not the absolute level of the product price; it's the margin that the retail operators actually earn.
So irrespective of the oil price, if the regulator believes the margin to be exceeding his cap, his recommended cap, but it's a cap in all but name, then that's when he will begin to take action and force the price down, regulate the price down, as he did during the year just ended.
So you're right, the oil price was high when it was first implemented, but there's no indication that because the oil price is lower it's going to be relaxed and that's led us to actually take this provision.
------------------------------
Gerhard Roiss, OMV AG - CEO [10]
------------------------------
The change to regulate -- the change to recommendations, the orientation from before having a Mediterranean benchmark more to a benchmark, including markets like UK or Germany as a benchmark and this has quite a severe impact in the margin.
------------------------------
Nitin Sharma, JPMorgan - Analyst [11]
------------------------------
Thank you.
------------------------------
Operator [12]
------------------------------
Haythem Rashed, Morgan Stanley.
------------------------------
Haythem Rashed, Morgan Stanley - Analyst [13]
------------------------------
Two questions from my side. Firstly, just a question on underlying assumptions that you have in your plan, at the moment, for Libya, in particular, when you talk about the CapEx range of EUR2.5 billion to EUR3 billion and also, your various oil price scenarios that you have, is there a variation in how you think Libya recovers over the next one to three years?
And second question is just in relation to Romania and whether you have had any further discussions with the government? And particularly given the oil price decline, is there a sense that you may find renegotiation around fiscal terms perhaps somewhat easier, given obviously the potential slowdown in activity there a bit? Perhaps some color around maybe some of the discussions that are being had, that would be very helpful. Thank you.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [14]
------------------------------
So let me take the Libya question. So for 2015 we carry an uptime in Libya of, in the order of 25% which is roughly equal to what you saw in 2014.
Now clearly, that's a guess, because there's very little we can influence there. But we've been conservative in our projection of production there.
------------------------------
Gerhard Roiss, OMV AG - CEO [15]
------------------------------
In terms of Romania, of course we are in discussion with the government. The government is aware that there is a huge impact out of the today's oil price scenario in terms of further investment in the country in the sector. On one side, the target for change has now moved to 2016. On the other hand that they are in close contact with industry and International Monetary Fund and some other consultants to take decisions in a way that would not lead to a negative impact on the investment frame here in Romania.
------------------------------
Haythem Rashed, Morgan Stanley - Analyst [16]
------------------------------
Thank you very much.
------------------------------
Operator [17]
------------------------------
Joshua Stone, Barclays.
------------------------------
Joshua Stone, Barclays - Analyst [18]
------------------------------
Two questions, please. You talked about your gearing ratio, and I understand at the end of 3Q it was slightly above the 30% target. If the oil price stays at these levels, I suspect, and you talked about the asset impairments are up, how high are you willing, as a management team, to let that gearing ratio get in the near term?
Secondly, on the impairments. You have your long term oil price assumptions, which you've clearly laid out. How long has the oil price got to stay at this $50 barrel range for you to consider changing those assumptions? Or is it a case of revaluing assets on a year-by-year basis from here? Just some clarity there would be helpful. Thank you.
------------------------------
David Davies, OMV AG - CFO [19]
------------------------------
As regards the gearing, it's not really a question of how high we would let it go. We clearly have capacity. We've had it in the high 40s before.
It's really a question of the priority within the Group is to maintain a neutral free cash flow, so the level of net debt doesn't increase significantly during this difficult period. And that's the absolute priority.
As regards the oil price, I wish there was some light that went on and off to indicate precisely which way the market was going to move. If so, six or nine months ago we may have been doing some different things, frankly, as would the rest of the world, which was cheerfully predicting a much higher oil price forever.
You simply don't know, quite frankly. It's really a rather intuitive process that you continue to go through. We're clearly not going to allow ourselves to get in a position where the asset values that are carried on the balance sheet are hopelessly inconsistent with any broadly reasonable expectation of what the market might deliver in the future.
But a precise timetable is impossible to say. It's clearly something we're going to have to keep under review continuously, and we, frankly, can't do better than that.
What we're not going to do is panic react and, as I said, throw the baby out with the bathwater. We understand the events that have triggered this. We understand events that are likely to lead to the situation correcting somewhat.
When that precisely kicks in, and to what extent the correction will actually manifest itself, is something we're just going to have to stay close to the markets for, really.
------------------------------
Joshua Stone, Barclays - Analyst [20]
------------------------------
Yes, that's -- thank you.
------------------------------
Operator [21]
------------------------------
Matt Lofting, Nomura.
------------------------------
Matt Lofting, Nomura - Analyst [22]
------------------------------
Two quick questions, please. Firstly, just a clarification point on CapEx. When you talked about EUR2.5 billion to EUR3 billion for the next few years, how much of the EUR500 million or so exploration budget is included in that balance? I just wondered if you could confirm if it's all in there or if you're making an assumption on how much of that spend would be capitalized. And therefore, the actual cash flow outflow would be higher than the guidance range under the latter scenario.
Secondly, just coming back to E&A more specifically, if you could just talk a little bit about where you see the priorities for the near term, in terms of exploration. And therefore, at a high level, what nature of prospects or activity you're looking to take out in order to bring that budget down? Thanks.
------------------------------
David Davies, OMV AG - CFO [23]
------------------------------
I'll let Jaap answer the second part. But the first part, Matt, we'll give a bit more color on that in three weeks' time. We'll also talk -- give a bit more color on what the 2015 CapEx number is likely to be within the overall three-year average that we're aiming for. But the CapEx guidance that we've given will include an element, clearly, of the capitalized E&A. It's not as though there's something on top of that already in there.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [24]
------------------------------
On the E&A, what you're seeing us do is two things. We're trying to defer the high risk/high reward-type exploration, but still drill the new field opportunities, which we can put on stream relatively quick, are generally lower risk, and also lower cost, clearly.
But what we're doing on the high risk/high reward is we're trying to concentrate on things like shooting seismic, which has become a lot cheaper recently, and make sure that we retain the licenses for as long as we possibly can, waiting an upsurge in the oil price.
------------------------------
Matt Lofting, Nomura - Analyst [25]
------------------------------
Okay, thanks.
------------------------------
Operator [26]
------------------------------
Henri Patricot, UBS.
------------------------------
Henri Patricot, UBS - Analyst [27]
------------------------------
Just one question on the upstream. Jaap, you mentioned on the OpEx a possible cut-off between 5% to 10%, and the 8% on average. I was wondering if that's for the first year, for 2015. And how much room there is to increase that in the following year, or if it was for the next three years? Thank you.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [28]
------------------------------
Can I park that, Henri? With the 5% to 10%, the 8% average is clearly a 2015 number. Now, for all intents and purposes, that should extend over the next two years, but my expectation is, actually, that the percentage increases a bit in year 2016 and 2017.
But that really is work in progress. That's maybe a discussion we can have when we hit the road with the Q4 results. We'll have a bit more color on that.
------------------------------
Henri Patricot, UBS - Analyst [29]
------------------------------
Okay, thank you.
------------------------------
Operator [30]
------------------------------
(Operator Instructions). Marc Kofler, Jefferies, London.
------------------------------
Marc Kofler, Jefferies & Co. - Analyst [31]
------------------------------
I just have two hopefully quite brief questions, please. Firstly, in terms of 2015. I was wondering if you could give some production guidance, given where we're at today.
And then, secondly, one for Jaap, I suspect. Could you remind me what the natural decline rates are in Romania and Austria? Thank you.
------------------------------
David Davies, OMV AG - CFO [32]
------------------------------
2015 guidance we'll leave 'til Q4, if you don't mind. Again, we're trying to add a bit of flavor to the reactions that we've made to the oil price. I know there're a lot of questions that you've still got out there, but we're not really in a position to answer all of them just yet. We'll say a little bit more about that in three weeks' time.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [33]
------------------------------
On a natural decline, it wouldn't be a reminder, it would be the first time I mentioned the number, I think, so I'm going to resist the temptation.
The reason is very simple. Some of the fields that we've got in operation in Romania have been in production for more than 100 years. A true no-further activity decline rate in some of these fields is in the order of 100% in a couple of weeks. If you don't touch these fields, leave them alone, then they will decline very, very rapidly.
So, the definition of a true no-further activity decline rate in some of these very old mature assets, I think, is a difficult thing. And therefore, generally, I've resisted quoting that.
------------------------------
Marc Kofler, Jefferies & Co. - Analyst [34]
------------------------------
Right, okay. Thanks very much.
------------------------------
Operator [35]
------------------------------
Alastair Syme, Citi, London.
------------------------------
Alastair Syme, Citi - Analyst [36]
------------------------------
Firstly, slightly more on that theme. If you look at the EUR3 billion that you spent in the upstream in 2014, could you give us some sort of flavor about how that splits between greenfield and brownfield, for want of better terms? I'm assuming that most of the brownfield is Austria and Romania. But any granularity on how that looks would be helpful.
------------------------------
David Davies, OMV AG - CFO [37]
------------------------------
You're going to have to wait for three weeks on that one, Alastair.
------------------------------
Alastair Syme, Citi - Analyst [38]
------------------------------
Okay. I guess I'm just trying to get an understanding relating back to the question on decline rates about the creaming curve and as you dial down brownfield spend.
------------------------------
David Davies, OMV AG - CFO [39]
------------------------------
Just track our spending that we've done over the last couple of years and you'll see the increase was, clearly, a lot of it, down to the developments which have gone to stream. So a lot of it was going into new production. Obviously, we increased the E&A, so there's a bigger chunk of that was capitalized.
But again, this is really down to the industry's had a shock; you need to know precisely what we've done to react to it. But, in terms of more flavor on what the 2014 numbers were like, going to have to ask you to wait for a couple of weeks.
------------------------------
Alastair Syme, Citi - Analyst [40]
------------------------------
But even -- am I right to assume that where you're dialing down spend, a lot of it is in the brownfield bucket where the paybacks are, typically, a lot quicker? You're using spot oil prices to --
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [41]
------------------------------
I think that's a fair assumption; plus, of course, the delay in projects that are flagged up as well. Don't ignore that either. And, of course, it's fast payback but there are also more marginal barrels. Clearly, with some of these fast payback wells, it's drill, hook up, produce. Not dissimilar, actually, to what some of the shale operators are doing, if you look at the cycle times.
But that also means that those barrels are a lot more marginal, and, therefore, on simple creaming curve economics, those are the first ones that you cut out.
------------------------------
David Davies, OMV AG - CFO [42]
------------------------------
And some of the fast payback isn't quite as fast as it was at $50 either.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [43]
------------------------------
Clearly not, no; if any.
------------------------------
Alastair Syme, Citi - Analyst [44]
------------------------------
Okay, I'm just surprised that you'd get a lot of CapEx leverage from slowing greenfield projects. I think that's what I'm getting at, but maybe I'm wrong.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [45]
------------------------------
No, it's clearly both. I've given you a heads up on the total rig count that we've got onshore Europe, so you see the rig count dropping by more than 50% there.
------------------------------
David Davies, OMV AG - CFO [46]
------------------------------
We've said, also, the CapEx we've guided to in Romania has been best part of EUR1 billion a year. So there's a lot of CapEx in there as well.
------------------------------
Alastair Syme, Citi - Analyst [47]
------------------------------
Okay, thank you very much.
------------------------------
Operator [48]
------------------------------
Bertrand Hodee, Raymond James.
------------------------------
Bertrand Hodee, Raymond James - Analyst [49]
------------------------------
One quick follow up on CapEx. Can you give us the overall number of CapEx that was devoted in 2014, to Romania, plus Austria? And how do you see that going forward, on average, 2015/2017?
------------------------------
David Davies, OMV AG - CFO [50]
------------------------------
That's something I'm afraid I'm going to have to ask you to wait for a couple of weeks on that. This is not a Q4 results number. We're -- again, some of the numbers we're still looking at are preliminary, and you're going to have to wait a couple of weeks for that I'm afraid Bernard -- Bertrand, sorry.
------------------------------
Bertrand Hodee, Raymond James - Analyst [51]
------------------------------
Okay.
------------------------------
Operator [52]
------------------------------
Mark Bloomfield, Deutsche Bank.
------------------------------
Mark Bloomfield, Deutsche Bank Research - Analyst [53]
------------------------------
Three questions please. First of all, coming back to the topic of decline rates, I think you've previously spoken about holding Romanian and Austrian production flat, through to 2016.
So I guess, given the assumptions that you've talked about, with respect to rig count, can you perhaps give us some sense of where the range of production from Romania and Austria might be, come 2017, now?
The second question's on Rosebank. I wondered if you could give us a sense of how much CapEx for this project was in your prior CapEx plan. And whether at this stage, you're including any CapEx at all for this, at the tail end of your 2015 to 2017, CapEx program?
And the third question just relates to one of your slides. You talk about slowing projects in execution and list three of your projects. Just wonder if you can give us a sense of whether all three of those projects are being slightly deferred and maybe talk to the amended startup schedules, if that's the case? Thanks.
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [54]
------------------------------
Yes, so on the purchasing guidance for Austria and Romania, I'm going to stay away from that. But clearly, we expect those to slightly drop in the next one or two years, if the rig count stays as low as we're currently projecting it to go for this year.
Clearly, if the oil price recovers, those would be some of the first activities you'd put back in the plan as well.
On Rosebank, we did have some serious gap, we had a little bit of CapEx in 2016, but that's insignificant. The major CapEx in the previous schedule was kicking in in 2017, so you did not see that in the average 2014/2016 guidance, because it was kicking in, in 2017.
You still see it in the 2015/2017 guidance that we now provide, and it's kicking in 2017 in particular.
On the slowing of projects, clearly all of these projects have got host governments and partners involved. So again, I would prefer not to give you new startup dates at the moment. Again, in the Q4 results, we'll give you a bit more guidance.
But you know how these projects normally do get executed. You get the projects towards the end, you throw money at them to get them finished. Projects at the start, you throw money at, to get your contractors mobilized. You're simply not doing that right now, and you're accepting the schedule results that you get, as a result of that.
------------------------------
Mark Bloomfield, Deutsche Bank Research - Analyst [55]
------------------------------
Thanks, could I ask a follow up, if possible, please?
------------------------------
David Davies, OMV AG - CFO [56]
------------------------------
Go ahead.
------------------------------
Mark Bloomfield, Deutsche Bank Research - Analyst [57]
------------------------------
Just relating to the CapEx cut in E&P, if I look at your numbers, you're talking broadly a EUR700 million to EUR1.1 billion range for the potential CapEx cut in E&P.
I guess you assigned about EUR200 million of that to exploration. That leaves somewhere, I guess, between EUR500 million and EUR900 million left. For that remainder, can you break that down at all for us, between what relates to deferral of projects, and what relates to lower spend on base or brown field assets, if you will?
------------------------------
David Davies, OMV AG - CFO [58]
------------------------------
A bit more in three weeks' time, not now.
------------------------------
Mark Bloomfield, Deutsche Bank Research - Analyst [59]
------------------------------
Okay, thanks.
------------------------------
David Davies, OMV AG - CFO [60]
------------------------------
I'm sorry if we appear evasive, we're not trying to be, genuinely. But as you can imagine we run a range a bit from scenarios, given the quite dramatic change in the environment, and we don't have all the i's dotted and t's crossed on all of our answers.
We know broadly what we're working to; we've got 95% of the way there, but wouldn't like to suggest that we've got everything laid out that we can say, look, this project, that project, whatever. There's a number of things that we'd be able to give a bit more color to in a few weeks' time.
------------------------------
Operator [61]
------------------------------
Mehdi Ennebati, Societe Generale.
------------------------------
Mehdi Ennebati, Societe Generale - Analyst [62]
------------------------------
Sorry, I had a question on Rosebank, but you'd already answered. Sorry about that.
------------------------------
Operator [63]
------------------------------
Adrian Cighi, Franklin Templeton.
------------------------------
Adrian Cighi, Franklin Templeton - Analyst [64]
------------------------------
Just one question from me. You guided on the dividend policy for OMV, can you give us any color on the policy for Petrom, what you're looking this year?
------------------------------
David Davies, OMV AG - CFO [65]
------------------------------
I'd leave that to the management of Petrom, that's their responsibility. You have three members of the -- or two members of the Supervisory Board, the non-members of the Executive Board, so we have to be a bit cautious.
The one thing I think I would say, however, that the economic reality $50 is equally as relevant in Romania as it is Austria. So --
------------------------------
Adrian Cighi, Franklin Templeton - Analyst [66]
------------------------------
Okay, thank you.
------------------------------
Operator [67]
------------------------------
Bertrand Hodee, Raymond James.
------------------------------
Bertrand Hodee, Raymond James - Analyst [68]
------------------------------
One follow-up on Rosebank. So Rosebank is still on the design phase. Obviously, with the lower oil price environment, this project it was already being challenged in terms of economics, at [100], and -- whereas I think here, development costs were over $10 billion.
What do you think is needed in terms of deflation or redesign, and in terms of in development costs savings for that project, should be able to fly, let's say, at $70 or at $50?
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [69]
------------------------------
So in the current climate, clearly both Chevron and ourselves are going to take our time, and re-engineer and drive the cost down.
And in a horrible way, the current oil price scenario is actually helpful, because you're going to be tendering this project in a $50 a barrel environment. It's going to come on stream at the end of the decade, and it remains to be seen what the oil price environment is at that point in time.
So clearly, the current environment gives you scope for further cuts, and we're going to take that.
------------------------------
Bertrand Hodee, Raymond James - Analyst [70]
------------------------------
And can you give us some quantification by how much you think --?
------------------------------
Jaap Huijskes, OMV AG - Executive Board Member, Upstream [71]
------------------------------
No, no, I'm afraid not, no.
------------------------------
Bertrand Hodee, Raymond James - Analyst [72]
------------------------------
Okay, fair enough. Thank you.
------------------------------
Operator [73]
------------------------------
That was the last question. I will now hand back to David Davies, for his closing comments.
------------------------------
David Davies, OMV AG - CFO [74]
------------------------------
Thank you, ladies and gentlemen, for your interesting questions.
Once again, I apologize if we've appeared evasive on one or two of them, that's not been the intention. As I said this is a trading statement update, updating in a quite challenging environment. We will be as open as we ever are, when we meet in three weeks' time, to go through the Q4 results. Thanks very much.
------------------------------
Operator [75]
------------------------------
That concludes today's conference call. A replay of the call will be available for one week. Please contact OMV's Investor Relations department directly, to obtain the replay number.
Thank you for joining today's conference call. You may now replace your handsets.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------