Q1 2015 OMV AG Earnings Call
May 18, 2015 AM CEST
OMV.VA - OMV AG
Q1 2015 OMV AG Earnings Call
May 18, 2015 / 09:30AM GMT
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Corporate Participants
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* David Davies
OMV AG - CFO
* Jaap Huijskes
OMV AG - Executive Board Member, Upstream, Exploration & Production
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Conference Call Participants
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* Mehdi Ennebati
Societe Generale - Analyst
* Haythem Rashed
Morgan Stanley - Analyst
* Hamish Clegg
BofA Merrill Lynch - Analyst
* Joshua Stone
Barclays - Analyst
* Henri Patricot
UBS - Analyst
* Alastair Syme
Citi - Analyst
* Tamas Pletser
Erste Bank - Analyst
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Presentation
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Operator [1]
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Welcome to the OMV Group's conference call for the Q1 2015 results. (Operator Instructions).
You should have received the presentation by email. However, if you do not have the 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.
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David Davies, OMV AG - CFO [2]
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Thank you, and good morning, ladies and gentlemen. I have here with me Jaap Huijskes also, who, at the end of my presentation, will give you an update on what's been happening within E&P.
I come to the first slide of my presentation, just a summary of the results highlights of the first quarter 2015. Our clean CCS EBIT was down by 50% to EUR333 million; the predominant reason for this being the oil price being also down by 50% from $108 last year to $54 this year in quarter 1.
Production was also slightly lower, 303,000 barrels a day, down by 3%. And the two major factors here were; Norway, which was 10,000 barrels a day higher, and unfortunately for reasons which are very familiar, Libya, 13,000 barrels a day lower.
In particular this quarter, we had lower oil sales volumes. The difference between what we produced and what we sold was quite significant, particularly in Norway where we had no Gullfaks lifting in quarter 1 this year compared to three in quarter 1, 2014, and that obviously had an impact on the absolute quantum of the result. We also had, obviously, lower liftings in Libya.
The downstream result was much stronger, from EUR85 million up to EUR260 million, due in particular to the very strong refining performance. The refining margin we had in quarter 1 this year was $7.40 against $1.60 per barrel last year, so obviously, a significant improvement there.
Gearing ratio at 35% is actually slightly higher than our long-term target, and I'll come on to say more about that when we come to talk about the cash flow.
The economic environment is shown on the next slide. The oil price is quite clear; a quite significant decline over the last 12 months by 50%. And although we've seen some recovery in the second quarter so far, clearly we are a long way below the levels we were enjoying only a year ago.
This has been partly compensated by the very strong dollar against the euro, but this doesn't cover anything like the hit that we actually suffer under from the reduced oil price.
In the middle, you see a slightly different chart to that which we've previously presented. The yellow line represents the European gas price as priced at the Central European Gas Hub.
This is where the vast majority of our domestic production outside of Romania is priced. Clearly, the Russian contracts are priced here now, the domestic Austrian production is priced here and, of course, the Norwegian gas production is priced at a European level which is very similar to the Central European Gas Hub price.
Our Romanian gas production, of course, is not priced at this hub; it's still in a largely now deregulated market. In the industrial sector, we now have a market price which is slightly below the level of the Central European Gas Hub. But, of course, one-third of our gas is still sold into the regulated sector for private households.
You saw a decline in quarter 1 this year which, in large part, was due to the domestic heating companies in Romania now being classified as part of the private sector rather than the non-regulated sector. Unfortunately, that had a negative impact on the gas price that we realize in Romania and, of course, that fed into this overall realized gas price which is shown by the orange line.
The indicator refining margin is shown on the right-hand side. Clearly, in quarter 3 this year, there was a very strong increase. This was due to our recasting the calculation of the refining margin following the completion of the remodernization of the Petrobras refinery in Romania. This added $1 to our overall refining margin. But even ignoring that, quite frankly, you can see a very significant increase over the last 12 months in refining margins which, so far in quarter 2, has also continued.
Coming now to a summary of the results on the next slide. The EBIT, on a reported level, was down by 66%. Financial result was only minus EUR23 million, compared to minus EUR63 million last year. There's a number of factors which come into play here.
Borealis had a better result by about EUR14 million. There was some interest that we paid on a tax provision, which was about EUR11 million last year which didn't happen this year.
And a factor also which comes into play is that last year, we still had a relatively expensive euro bond which matured in April last year. Clearly, we've refinanced that at a much lower interest rate and that also accounts for approximately EUR8 million of the improvement.
The taxes line is also rather unusual; instead of an expense, we actually have a negative tax rate charge of EUR16 million income. There are a number of reasons behind this and this is going to be a challenge, particularly reporting or calculating and guiding on what the expected tax charge will be this year.
Clearly, the very low upstream profits have a big impact because the tax rate on the upstream is much higher. Our downstream profits are taxed either in Romania, or in Austria, typically, where you have tax rates of respectively 16% and 25%, so that's clearly below our long-term average. And with a poor upstream performance, that also plays a role.
The reason it went negative, however, has a number of factors, the biggest of which, of course, is in the UK, where the ring-fenced expenditure supplement incentive and the tax rate change from 62% to 50% caused us to recalculate certain deferred tax positions in quarter 1 and that led to an amount of income. And also, of course, the level of oil price that we had in quarter 1, we had reported losses in Norway which similarly attract a high tax credit.
So an unusual tax quarter which we don't expect to continue. However, our tax rate this year is certainly going to be a long way below what we would otherwise have guided. With a more normalized oil price, it's going to be somewhere in the 30% range, probably towards the lower end of that.
Minorities and hybrid capital owners, clearly much lower than last year, down to EUR58 million compared to EUR137 million. The vast majority of this is due to Petrom, our share of their -- or rather the minority share of Petrom's profits falling from EUR170 million last year to EUR38 million this year. So that's the biggest reason for this decline here; clearly, Petrom also suffering under the low oil price environment.
This brings us then to net income attributable to stockholders of EUR163 million, 46% down on last year. If you convert that to clean CCS net income attributable to stockholders when you remove the Petrom effect and so on, then you come down to a EUR237 million against EUR302 million, a decline of 22%. Which is also reflected, of course, in the clean CCS earnings per share of EUR0.73 against EUR0.93 a year ago.
On the next page is special items, of which there are few to report. The only item of significance on this chart is the amount of the CCS losses we incurred as the oil price has been declining during the first quarter, compared to last year in particular, and that's been a cost of EUR109 million in quarter 1.
The next page shows the cash flow. Our net income at EUR221 million, down by 49% compared to last year. Depreciation and amortization are rather similar. Other items, minus EUR67 million against EUR35 million; this due mostly to the non-cash items such as the contribution from Borealis. Sources of funds in total, therefore, down by 33%, EUR680 million against EUR1 billion last year.
Net working capital was an outflow of EUR274 million. We have a number of positions here. Tax liabilities at the end of last year which were paid in the beginning of this year. What we also noticed in a much lower oil price environment, the benefits of some of the things that we did in terms of working capital reduction over the last two years do not have as big a benefit at the lower oil price as they previously had. And this, of course, also contributed to the negative swing in working capital in quarter 1.
Cash outflow from investments was over EUR900 million. And clearly, this is the biggest reason, therefore, that we have the EUR517 million net free cash flow after dividends, which is, of course, why the gearing ratio increased to 35% at the end of quarter 1.
The EUR935 million invested during quarter 1 is compared on the next page to the CapEx that was actually spent, EUR707 million what was booked as CapEx. We spent more in cash because of liabilities which existed at the end of December which were paid during quarter 1. Of the amount that we invested of EUR707 million in quarter 1, we stand with EUR754 million with an EBITDA against that.
So our operating performance by and large financed our capital investments, and the lion's share, as ever, has gone into E&P, EUR609 million. You can see the right-hand side the activities that we were investing in, in quarter 1, which led to this level of investment.
Norway was the biggest. The Gullfaks, Aasta Hansteen and Edvard Grieg developments, and our ongoing investment in Gullfaks and Gudrun as well, accounted for just over EUR170 million of the total.
The next biggest area is in work-overs and field redevelopments in Romania, which was about EUR160 million. The next one after this is capitalized exploration, which is approximately EUR90 million in quarter 1, and then other developments in Tunisia, New Zealand and the UK making up the rest.
Downstream investments of EUR91 million are compared against an EBITDA number of EUR378 million, so a particularly strong quarter from the downstream.
The next page shows the performance in upstream. Two reconciliations here, comparing the first quarter this year with the first quarter last year, on the right-hand side. And on the left-hand side, the first quarter this year compared to the previous quarter, i.e., quarter 4 2014.
Prominent on both of them is the realizations, which is down due to the oil price, EUR185 million against quarter 4 last year. Of course, quarter 4 last year already showed a much lower oil price than earlier in the year. But compared to the same quarter last year, the decline on realizations is much higher, EUR426 million. And, clearly, it's the lower oil price by 50% which plays a role here.
Compared to quarter 4 2014, we saw volume also of minus EUR146 million. And in terms of quarter 1 2014 the volume decline was EUR124 million.
I mentioned already the issue with liftings, and Norway and Libya have clearly been the biggest part of this decline. The Norwegian liftings, in particular, we expect to improve quite considerably in quarter 2, so we'll see much of this come back.
Lower depreciation and production costs mainly in Norway and Romania have helped the reconciliation compared to quarter 4, whereas compared to quarter 1 last year, it's by and large lower exploration expenses. We had a number of fields which we wrote off in quarter 1 last year which has not been repeated in the current year.
The next page shows a couple of KPIs. On the upstream side our production, as we mentioned already, is down by 3% compared to quarter 1 last year. Compared to quarter 4, it's down by 5%. The Norway production decreased due to the shut-in in Gudrun which has now come back on stream. Libya production shut-ins have also had a big impact here, whereas Romanian production was actually up slightly by 2,000 boe per day.
The OpEx decreased quite considerably, $13.95 per barrel now OpEx. FX has clearly played a big role here, the strong dollar, given that a lot of our costs are not in dollar, clearly with the Austrian and Romanian activities being the biggest part of this. And clearly, we've also taken measures following the collapse in the oil price [that] service and material costs are much lower due to the lower level of activity generally.
On the next chart you see the same KPIs shown out, however, just for Petrom. Production more or less stable, in fact slightly higher, as we've already mentioned.
The OpEx here has come down really quite considerably and there's a number of factors here. Clearly, the foreign exchange is also playing a role here. And also the reduction of service and material costs generally, a lower level of activity, much stronger focus on costs.
And what we also see as a benefit here is a reduction in the asset tax which was introduced two years ago in Romania, which, thankfully, they've now partly rescinded, and that's obviously helped our operating expenses here in Romania. So very good performance on the OpEx side down in Petrom.
Then the next chart shows the same sort of analysis for the downstream. The downstream business, as from January this year, was consolidated together, so refining and marketing in gas and power are now shown here added together. Last year, we produced in the first quarter EUR85 million of CCS EBIT, of which EUR49 million was in the refining and marketing side and EUR36 million was in gas and power.
Refining margins have, clearly, been much stronger. As I said already, the OMV refining margin up to $7.40 compared to $1.60 in the same quarter last year, and that's added about EUR156 million.
The marketing contribution was broadly neutral. However, this masks a strong performance in all of our markets with the exception of Turkey; the strong performance being something of the order of EUR70 million higher than last year. This, unfortunately, was lost in Turkey where their relative performance went backward following the price ceiling introduced by the energy regulator during the first quarter this year.
Downstream gas had a slightly better quarter than last year. Supply marketing and trading benefited from a better sales performance in both volumes and in margin, whereas the logistics business was also better. But, unfortunately, their performance was offset by a weaker power performance where margins in both Turkey and Romania have adversely impacted the performance of the power plants there.
Key performance indicators. Firstly, on the next slide, the refining utilization at 92% is up by 3% overall, although this masks some movement going on here in Petrom. You see the blue block here is the utilization of the Romanian refinery, very high in quarter 3 and quarter 4 last year. And this was really compensating the very low position in quarter 2 as it went into the turnaround. So clearly had a larger volume of crude on inventory to actually process; hence, the very high levels of utilization which have now declined now to a more normalized level of 86%.
The improvement really, compared to quarter 4, has, therefore, come from the refineries in Burghausen and Schwechat which averaged 94%.
Natural gas sales volumes is shown, clearly Q4 and Q1 being the highest, seasonally driven. And natural gas sales volumes overall are up by 9%, compared to the same period last year.
CapEx is something we've talked about repeatedly so far this year. The guidance that we're now giving is consistent with what we were saying a few months ago. It's EUR2.5 billion to EUR2.8 billion was the guidance then; what we're now saying is we believe this year will be something of the order of EUR2.7 billion, predominantly going into the upstream. But overall, down by approximately 30%, compared to the EUR3.8 billion that was invested in the same period last year.
The exploration and appraisal budget has been similarly cut by EUR200 million. We're looking at reducing our operating costs and overheads by approximately EUR150 million. We have defined and agreed with our union representatives a headcount reduction program again to reduce our costs during this low oil price period. And as we've also said, a number of our non-core assets are currently under review with regard to their potentially exiting the overall portfolio.
So we've responded to the reduced oil price. Clearly, we've had a particularly strong impact, as we've seen already with the average only $54 in quarter 1. But as we look forward into the longer term, our financial priorities are shown on the next slide.
What we aim to achieve is a broadly neutral free cash flow. That will not be the case this year. But as we look forward to 2016 and 2017, there's a lot of major projects starting to come on stream during that period, and our capital expenditure, all things equal, coming in to reflect that those projects are no longer being invested.
That will enable us to continue to pay an attractive dividend, and to achieve a broadly neutral free cash flow position over that medium term period, albeit with some improvement also in the oil price expected, as we've already started to see this year.
The dividend we will propose tomorrow to the annual general meeting is EUR1.25 per share. This has already been announced, clearly, with our quarter 4 results announcement. Our target here is to maintain a dividend policy with a long-term payout ratio of 30% of net income. Clearly, at EUR1.25 we are higher than that.
But as we expect our earnings to improve, following our E&P production increases, as well as an improvement in the oil price over the medium term, we will bring that dividend back into line with this 30% target.
Our credit rating is something which we also place some weight upon, great weight upon; maintaining a strong investment grade credit rating has being the lynchpin of our financial strategy over these last 10 years.
We have a strong balance sheet. Our long-term gearing ratio target remains at or below 30%. And in terms of liquidity position, we're in quite a strong position, as we have been now for quite some time.
Then, before I hand over to Jaap, the outlook for 2015. We expect the oil price to move between $50 and $60, in terms of an average. The gas markets will remain challenging. And as I've said already, the portfolio that we have of gas assets is something that we're currently reviewing.
Refining margins are expected to decline from the highs that we've experienced so far this year. Marketing volumes are expected to be supported by the lower overall oil price, and we've certainly seen that so far this year.
Our production guidance remains intact at around about 300,000 boe per day, with no contribution from Libya or Yemen assumed with that number.
CapEx will be about EUR2.7 billion, and our exploration and appraisal expenditure something of the order of EUR500 million.
So at that point, let me hand over to Jaap, before we speak later on, when we get to the Q&A. So thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [3]
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Thanks, David. A couple of project updates. Let me start with Norway. Norway's come up a couple of times; we've got both production and lifting issues in the first quarter in Norway.
The production issue was related to leakage, a pipe that burst at Gudrun. That's since been repaired, but as a result, there's been an outage at Gudrun for a little bit more than four weeks, which has an impact in the quarter of somewhere between 8,000 and 10,000 barrels a day.
In addition to that, we had a lifting issue in Norway. But in a lot of ways, that's worked out very well for us. We accelerated lifting out of the first quarter into November last year, and thereby, we avoided the very low oil price in January.
And some other liftings have dropped out of the first quarter into the start of the second quarter; again, basically, on a better place in the oil price curve than they otherwise would have been. That's a bit of luck, of course, you don't plan those things, but that's how the liftings have worked out. So we've seen an actual production shortfall, and the lifting shortfall will correct itself in Q2, and will work for us oil price wise.
Other updates. Edvard Grieg is, basically, ready, sitting on the barge, and should be lifted on its jacket sometime in June; really waiting for the lifting barge to turn up now.
In Hyundai, the yard in Korea, both Aasta Hansteen and Schiehallion, making good progress, now that some of the other projects have left the yard. And Schiehallion is looking good for sail away in November this year for installation in the field in 2016.
Maari, we've now finally got a second big producer on stream. In fact, as we speak, a third producer is being put on stream today; it's currently cleaning up.
And in Nawara in Tunisia, we're busy with the gas project. You see a picture there on the right top-hand corner, where we're actually stringing pipe, and starting to weld it. So that's now firmly ongoing.
If you look at exploration, on the next slide, we've had a few successful wells, and this operation's ongoing. In Norway, we had a discovery in [Snefrid Nord], which is really [tied] back potential to Aasta Hansteen.
And in Romania onshore, we've had a success in a well called [Piscori Deep], still being assessed. We're, in fact, getting the well ready for testing later on in this quarter, but looking very promising. It's not a high impact well, because it didn't start out as that sort of site, but it's starting to look very, very nice, subject to test. That's a well that we share 50/50 with our partner, Repsol.
Other high impact drilling, you've seen the news around the Bjaaland well in the Barents Sea, which came up dry. It was an outlier on the block, a different seismic signature from the wells that we've drilled so far, which we wanted to test. Clearly, that didn't work; it does help us define what's in that block. But clearly, a slight reduction from [what the well] could have been.
In the Black Sea, meanwhile, we're continuing to drill, and we expect to be able to give you an update on the resource potential for the block towards the end of the year.
On the next slide, we often talked about the security situation in Libya. Unfortunately, now we also need to update you on the security situation in Yemen. The news won't have escaped you that there is, essentially, a full blown war now going on in the country. We still managed to produce in Yemen, albeit less than planned, in the first quarter, but early April, we've closed in production.
We've had some damage to our office in Yemen, in Sana, but we're managing to run an operational office from a guest house that we got in the field. However, we see no damage, up to this point in time, so we're still able to produce, should the situation improve.
What we have done, though, is we've started demobilizing project-related resources quite aggressively. So we're demobilizing rigs; we'll keep a work-over rig on standby; the drilling rigs are being demobilized; and also, project staff is being demobilized. So we are preparing for a long downturn in activities in Yemen.
Consistent with that, we declared force majeure for operations towards the end of April, a few weeks after we shut the production. And for the now, the force majeure period will, effectively, last for half a year. And I wouldn't expect to be updating you on the financial status of our Yemen operations until that force majeure period runs out somewhere towards Q4.
On CapEx, you've seen the slide before, and the numbers were also highlighted again by David. We are projecting to decrease our spend from this about EUR3 billion in 2014 guidance to now 2015 guidance, EUR2 billion to EUR2.4 billion. In fact, the 2015 CapEx for the first year of that three-year average period we expect to end at around EUR2 billion.
Whereas on exploration -- sorry, on revenue and production costs, the FX helped us. Here, of course, the FX works against us, where all our projects, in dollar terms, are staying the same, but in euro terms becoming more expensive; in particular in, for example, Tunisia, you see CapEx in euro terms well above plan. And that is not because we're not trying to save money, it's because FX rate there works against us. On balance, FX rate helps, but on CapEx, you see one or two locations where it really does work against us.
So that's the first year and three-year average, consistent with that as well. And the main cuts, we've talked about our before, are the drilling and work-over programs in Austria and Romania, deferral of activities in key projects, in particular Rosebank, pushing that further out. But also, assuming the later start of project activity elsewhere in the portfolio, which pushes it towards the end of that three-year period.
Exploration spend; we are struggling to bring expenditure down. I think you'll see that in the rest of the industry as well; there's a lot of rig commitments that have to work their way out. So we will see activity levels dropping further during the year. But difficult to realize the 20% cut in spend.
What, in particular, we're focusing on there is securing the long-term [held] acreage position. So we are still shooting seismic, we are still pursuing further acreage but, in particular, key drilling commitments, we're trying to push further out in time.
On OpEx, you saw the detail in David's slide, the headline numbers that we're looking, for the year, at an OpEx level roughly the same as what you've seen in the first quarter. That's about a $3 drop in OpEx on a dollar per barrel terms.
A rough rule of thumb is that about two-thirds of that comes from FX, but a bit more than one-third actually comes from real underlying cost savings related to personnel levels; among the services that we buy in, but also the cost at which we buy those services in. And, clearly, we're working very hard to lock those savings in, long term.
There's some other shifts in OpEx as well. In 2014, we still had Libya in for about 25%. If Libya is in fully, it drops our total operating cost by about $1 per barrel, and clearly 25% would have been $0.25 and we're missing that this year. If Libya were to come back in, you can expect the OpEx to drop further than the $13.9 that you see there. Of course, our current expectation is that Libya will not return this year.
Getting towards the end, Romania, great production performance in Q1. In fact, when you see Petrom performance going up in the financial slides that David went through earlier, you see the good Q1 performance in Petrom, but also good performance production-wise in Kazakhstan in the first quarter, which, of course, is, at the end of the day, a Petrom operation. That's why you see those numbers coming through there.
What you see in these numbers here is only the Petrom production in the first quarter, [174,300], which is great, very, very good. We are expecting some downturn during the rest of this year, though, first of all because of reduced activity levels, and we say there up to 4% in the midterm decline year on year.
Clearly, we're working very hard to minimize the impact of the savings that we've pushed through. On the other hand, our drilling rig count is reducing significantly. I think I quoted those numbers to you in previous calls, but we are dropping from about 12 to, at the end of the year, about four rigs in Romania. And clearly, an upturn on that is subject to the oil price recovering further.
The other thing you're going to see during the rest of this year is that we have some shutdown activity planned, so not unscheduled, planned shutdown activity in Romania for the rest of this year, both in Totea, which is a 2012 new field exploration success which is currently contributing some 50,000 barrels a day to our total. We'll have to do some major work-overs in some of those production wells in the second half of the year.
We'll time that such that we do those when gas demand in Romania is at its lowest. And we also had some shutdown activity again scheduled, related to project work offshore which will, in particular, affect gas deliverability, again, planned during the summer when gas demand in Romania is at its lowest.
So those are the project high and lowlights. Upstream priorities for 2015, they won't surprise you. They're consistent with what David ran through.
First of all, we want to run an operationally effective and safe operation around the world. We'll manage our cash. And production takes third place instead of where it used to be at second place, really focusing the organization on cash flow.
And what that means in particular in E&P is managing our cash out. Our cash in is managed by production levels. The cash out is, as we said, CapEx, exploration spend and OpEx, and we're focused on all three of those.
On production terms, we've got some shutdown activities planned in the second half of the year which we'll manage as best as we can. Production performance in Q1 was affected by the Gudrun outage. That is back now that the second quarter is up and running but, of course, Yemen was still contributing some 7,000 barrels a day in the first quarter. That, unfortunately, is now out with no outlook of that returning in the very short term, albeit our facilities there are completely intact.
That was it for the project update. With that, I'll hand back to the moderator for Q&A, please.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale - Analyst [2]
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Two questions; the first one regarding your E&P OpEx in dollar per barrel. So you said that you want to decrease your OpEx by EUR150 million; this is your target. I wanted to know how much does this represent in terms of dollars per barrel. And does this EUR150 million take into account any FX impact? And how much of the decrease in construction tax in Romania represents in this EUR150 million? So this is the first question.
The second question regards with the gas and power division, and particularly the supply marketing and trading subdivision. Now you've negotiated fixed margins with Gazprom, could you please guide us on the EBIT you expect from this subdivision on a yearly basis, please? Thank you.
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David Davies, OMV AG - CFO [3]
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Let me take the second part of that question first before I hand over to Jaap to talk about OpEx. We don't give specific guidance on the individual divisions within our gas business. But, clearly, what we now are in a position to do is trade profitably with the volumes that we're purchasing not only from Gazprom -- clearly, predominantly from Gazprom, but also from Statoil and from a number of other smaller suppliers which, of course, a few years ago were causing us some pain because of their oil link. Now that has gone, and they're all based on liquid European hubs, of which [TAG] clearly is one of them.
So we now have a margin above the price from those liquid hubs. As a consequence, we can trade profitably. We haven't provided guidance on the absolute quantum of that profit. What we have said, however, is that clearly, even though this has got the massive headache away that we had from the upside down contracts, the level of profit in this business is clearly now a lot lower than it used to be historically, because of the very intense level of competition in these markets.
Let me hand over to Jaap on the OpEx question.
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [4]
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Yes, Mehdi, there was an awful lot of detail in that question around OpEx, so let me see if I can address some of them and, if necessary, Felix can come back to you with some details. But, first of all, the EUR150 million net saving is a Group target, so it's not only E&P, it's a Group. So a lot of that then turns up in E&P through allocations and part of it is by E&P, of course. So let me put that first.
If you then take the EUR150 million Group, that effectively translates into $13.9 that you see in E&P in dollars per barrel. So an outlook of $13.9 average for the year assumes that EUR150 million have been realized, and so far so good, you can see that in the actual dollar per barrel performance in Q1, I think.
If you then go to the detail of the production tax, I've got a whole table of numbers with me here. But let me take that out and ask Felix to drop you an email with the actual impacts of the construction tax in Romania, which, of course, was significant in Romania. It then reduces when you average it out over the rest of the portfolio, but we'll get you the precise numbers in an email follow-up.
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Mehdi Ennebati, Societe Generale - Analyst [5]
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Okay, thank you. But just to come back on the OpEx in dollar per barrel. So $13.9 is the guidance for the rest of the year, but if we remove the FX effect, and if we remove as well the construction tax decrease, how much are you decreasing your cost?
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [6]
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So I would argue that the construction tax is also something that we manage, Mehdi. We've lobbied very hard to make sure that this was reversed, but even if you leave that out, our actual underlying cost per barrel is down by a little bit more than $1 per barrel. So that's [what we could manage].
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Mehdi Ennebati, Societe Generale - Analyst [7]
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Thank you.
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [8]
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That's in one quarter.
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Operator [9]
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Haythem Rashed, Morgan Stanley.
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Haythem Rashed, Morgan Stanley - Analyst [10]
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Two questions from my side, please. Firstly, just on the fall in sales volume and the impact you mention, obviously, coming from Libya and Norway, could you perhaps give us just a bit of a split there about how much of that fall in sales volume is specifically Norway, just to get a sense of how much that could reverse out in 2Q?
Second question is just regarding your comments around the portfolio reviews and potential disposals as we look ahead. Obviously, in the presentation you highlight gas and power as an area where you are reviewing the portfolio.
Could you give us, perhaps, a sense of what the market is like at the moment? We've heard from some peers that at least in the upstream market bid-ask spreads remain quite wide, but in the gas and power, and perhaps even the downstream areas, what is the market like at the moment? What do you see? Thank you.
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David Davies, OMV AG - CFO [11]
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Just to help you with the liftings, so as to give you some understanding, we produced in quarter 1 303,000 boe per day and our sales were 274,000, so 29,000 apart. In [2004] Q1 we produced 311,000 barrels a day and sold 307,000, and that kind of gap is more typical or more predictable, as it were, because you always produce less than you -- more than you actually sell because of internal consumption and so on.
So it was a particularly poor quarter for liftings and about half of that gap, slightly more than half of that gap, is down to Norway. Norway is quite chunky. As I say, we only had one lifting in quarter1 and we already have scheduled three for quarter 2, so we'll see a lot of that coming back.
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [12]
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Two of which have actually happened already early April.
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David Davies, OMV AG - CFO [13]
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Yes. So we'll see a lot of that come back, if not all of it, in Q2. From our current level of expectation, however, we expect to see Q3 be weak again and then Q4 will come back. So the liftings are quite chunky and have quite an impact on our profit, but certainly Q1 was particularly bad, the impact there.
And as regards disposals, you mentioned the point on E&P; clearly, in terms of gas and power assets the impact that we've seen across the portfolio has, unfortunately, been reflected across the industry. This isn't a unique OMV factor, if you look at LNG positions, look at the power stations, look at the rapid decline in profitability of storage assets now, given the relatively high level of supply in the markets.
We're not alone in this, and clearly, that complicates the potential strategy that you have to engage in to actually either dispose of an asset or find an alternative solution.
So it's not particularly a buyer's market; that needs to be understood. However, we do have interest for certain positions in the assets; it's whether or not that really meets our objectives that we're wrestling with right now.
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Haythem Rashed, Morgan Stanley - Analyst [14]
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Okay. Thank you very much.
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Operator [15]
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Hamish Clegg, Bank of America.
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Hamish Clegg, BofA Merrill Lynch - Analyst [16]
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A couple of questions from me. Just first of all, David, on your CapEx that's booked versus the EUR923 million cash flow used in investment activities. When I think about the cash to cover your dividend at the full year, should I be thinking of that EUR500 million of negative free cash flow that you're talking about, or adjusting it?
I wondered if you could maybe deconstruct the differential between your booked CapEx and your cash flow used, and what available cash you have for spending on the divi.
Second, relating slightly to that, but Jaap might want to take, is on exploration. I know it was fairly flat quarter on quarter, but quite a bit higher year on year. Could you tell us a little bit about what you're expensing versus what you're capitalizing, and what you feel is a sensible run rate to expense? Was this is a particularly high quarter in terms of exploration, and how we can think about that, going forward?
And my final question is just on the downstream. David, you alluded to belief that downstream margins where they are, which have been absolutely brilliant, are not that sustainable. Can you see those being locked in via some sort of hedging program, or do you guys just take spot exposure in your refining business?
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David Davies, OMV AG - CFO [17]
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The CapEx breakdown, you brought the dividend into that question; clearly, there's EUR200 million more cash on our books in quarter 1 than there was booked as capital expenditure. And that really reflects the very high level of activity we were finishing last year with; four major projects under active execution, and a number of other significant projects on which appraisal expenditure is still being [met].
The absolute quantum of activity was a lot higher than it will be this year, and as a consequence, when you do your normal highly disciplined close, you're making sure that you've got everything provided for that you've actually incurred. So you booked a lot of liability last year and, of course, in the quarter 1 this year that we paid it.
As we reduce our level of activity, clearly we've spent EUR900 million in quarter 1, our guidance is for EUR2.7 billion, so we've spent one-third of the year's guidance already in one quarter. Then clearly, the activity in the rest of the year is going to come down, and we have stood quite fiercely on the brakes and you're going to see that in quarter 2, but more particularly in quarter 3, quarter 4.
The thing you also have to note, of course, is the dividend is paid out in quarter 2, so we expect our free cash flow in quarter 2 to be also quite negative. I think the operating cash flow will be higher, particularly if the oil prices recover and we get this lifting unwinding in Norway. But clearly, the dividend going out of the door is going to have an impact.
We stick by our guidance of EUR2.7 billion. You'll really start to see the impact of it, however, more particularly in the second half, and to a lesser degree in quarter 2.
The downstream margins I think is -- there's no insight there in terms of our expectation. The European market remains over-refined; there has been some capacity reduction over the last couple of years, but our fundamental belief is that it remains over-refined.
And as such, although clearly with a lower level of oil price and, indeed, the relatively strong level of demand for product as a consequence of the low oil price, we are still quite cautious that this over-supply in the market will ultimately lead to some pressure on the margins. But as you have said, we haven't seen it yet; even in May we continue to enjoy really quite encouraging margins.
Then as regards hedging, hedging our crack, particularly if you look at our crude mix, you can hedge Brent, but euros is a bit more challenging. Clearly, [in terms of] our margins are using our reference against euros. And then when you get into the product side of the market as well they're not that liquid, quite frankly. They're clearly out there, but they're nothing like as liquid, or as deep or as long term as the crude market clearly is, the Brent market clearly is.
We do look occasionally at locking in specific cracks, and we have done some of that. But a strategic hedge along the lines of what we've done historically occasionally in the upstream is not something we're considering, no.
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Hamish Clegg, BofA Merrill Lynch - Analyst [18]
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Okay.
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [19]
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On exploration, basically we look at the budget and then we look at how much of that we capitalize. And then [the bit that was] capitalized you see turning up on our CapEx budget as well. But if you look at last year's exploration budget, about EUR700 million, and about 35% or so of that was capitalized. And of course, the higher your success rate the more you capitalize.
Long term, we assume some 30%, but for this year we're actually running with about 40%. And that's based on the success rate that we see in Q1, and also on the outlook of some of the other wells that we're drilling this year.
So a little bit higher capitalization than the average. So on a reduced budget of a bit more than EUR500 million, that will lead us to capitalize a bit more than EUR200 million, and that EUR200 million is reflected in our CapEx outlook of EUR2 billion. So that EUR2 billion CapEx outlook is inclusive of that EUR200 million, a little bit more than EUR200 million capitalized exploration spend.
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Hamish Clegg, BofA Merrill Lynch - Analyst [20]
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That's very clear. Thanks, guys.
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Operator [21]
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Joshua Stone, Barclays.
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Joshua Stone, Barclays - Analyst [22]
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I have two question, please. First question on the oil price hedges; I see of the 50,000 barrels a day hedged, only about 15,000 barrels a day corresponds with Petrom. That would imply you've hedged a lower proportion of Petrom volumes than the core business.
I was wondering what that relates to, if that was just due to practical reasons, or if there's something different between the free cash flow profiles you expect off the two businesses.
And then my second questions on Petrol Ofisi; can you update us where the price ceiling is in Turkey today? Do you expect it to be updated, and how you expect profitability to trend through the rest of this year? Thank you.
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David Davies, OMV AG - CFO [23]
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On the split of the hedge, Joshua, there's been nothing as scientific or as clever as that really. We just in terms of pricing -- when you talk about 15,000 and 35,000 you could move 4,000 barrels either way and you get a spot of perfect landing in terms of percentages.
We haven't tried to do anything like that, to be perfectly honest. We simply take a look at where it was appropriate to allocate it. If we do some more later in the year the allocation might well be different. So there's nothing too scientific I would advise you to read into that.
Petrol Ofisi, we've had a number of complications here; I can't give you a precise number in saying the ceiling is here. One of the difficulties we've had is the regulator has taken quite an aggressive view in terms of the profitability structure of the industry. So it goes right through into the refining side as well.
One of the factors which has particularly hurt us is that Turkey, being predominantly served by the Black Sea and Mediterranean market. Historically, it has used Mediterranean countries as their price reference. The regulator, in his wisdom, decided to change that to include markets such as Germany and the UK, which are clearly not part of that market set and have a completely different competitive structure as well. But unfortunately, they have a lower price, and using that as a reference has obviously impacted our profitability.
When we had relatively high prices in quarter 1, this year relatively high margins as the oil price came down, the regulator initially put in a 60 day price freeze. But the current murmurings in the marketplace is that the regulator is actually looking about not just implementing an occasional price freeze, or a margin cap, which he's entitled to do if he feels there's something systemic, non-competitive activity taking place in the market, which is never argued by the way, simply imposed this 60 day cap.
What he's now looking at doing is enshrining this kind of margin control into legislation, which would make our situation far more challenging there, and that's something that we're looking at with considerable trepidation.
It's not yet embodied in [law]; I don't know what the precise status is. But it clearly is something that we're looking at with some considerable interest because it could severely impact the profitability of the market for all competitors, not simply Petrol Ofisi.
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Joshua Stone, Barclays - Analyst [24]
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Thanks very much.
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Operator [25]
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Henri Patricot, UBS.
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Henri Patricot, UBS - Analyst [26]
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A couple of questions. The first one a follow-up on the oil price hedges that you've put in place; I'm just wondering because the cap for the second half of the year, [$68] per barrel is quite close to the current price. I was wondering, if the oil price goes up in the short term, would you be looking to add to these 50,000 barrels a day of oil that you've hedged, what kind of policy can we expect from you?
And second one just on Romania and taxes; obviously, some good news on the construction tax. I was wondering if you could give us an update on your discussions with Romania on the royalties? Thank you.
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David Davies, OMV AG - CFO [27]
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As regards going forward on oil price -- oil hedging, you'll see the common factor that each of the quarters that we've hedged has is that there's a floor protected at $55. So we weren't looking at the oil price rising and seeking to take advantage of that.
Clearly, as the oil price has risen, the pricing available in the zero cost collar structures has changed. But if we always add a sort of precondition we want to protect the floor at $55, hopefully you'll interpret from that that what we've really been trying to achieve is not second-guessing the upside, but it's really protecting the downside, because clearly below $55 the challenges, in terms of cash flow neutrality, are rather stronger.
We've got no strategy in place to do more than what we've done. We don't exclude that clearly, and would look at that as time rolled on and communicate that as appropriately. But at the moment, what we're trying to do is to get us some downside protection below a re-arrival or reentry of oil prices below $60, around $55.
Then as regards Romanian taxes, this is not something we're actively engaged in negotiations. We are, clearly, occasionally engaged with the politicians in terms of putting our point of view across. Our latest understanding has still been that what they want to do is to go into something that would start in January next year.
It would be split between existing activities and future activities. And the statements are also consistent with what we've always argued for, that there needs to be sufficient headroom to allow us to continue to carry out the necessary investments profitably.
But the actual outcome is something that we still have to wait and see; we simply don't know. But clearly, our primary target has been really to secure consistency, predictability into the market, so that you can plan with confidence. We've no confidence, clearly, in terms of what the oil price might deliver, but at least a confidence in terms of what the fiscal regime will actually be.
So we look forward to an ongoing dialog and, ultimately, look forward to a solution being achieve that we can all get on with then probably from January next year.
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Henri Patricot, UBS - Analyst [28]
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Okay. Thank you.
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Operator [29]
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Alastair Syme, Citi.
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Alastair Syme, Citi - Analyst [30]
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David, can you make some observations on refining margins about -- is there anything you see in your business that might explain why you've gone from -- or why the market's gone from trough to peak in the last 12 months?
And then secondly for Jaap; on Rosebank, you mentioned, I think, in your dialog about being pushed further out. Can you update us on what that means around timing and design and what you want to do with your stake? Thank you.
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David Davies, OMV AG - CFO [31]
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On the refining margins, the one factor, Alastair, which is undoubtedly new this year compared to, let's say, 15 months ago, is that the oil price is considerably lower. That does have a direct impact on the reported margins clearly, because [own] oil consumption is correspondingly cheaper. We've also seen strongly supported demand. We've actually seen some growth even in the Western markets in terms of product demand year on year, and that goes even higher when you get into places like Romania and into Turkey.
So of course high demand, lower prices, all of this helps, but the fundamental thing which hasn't really changed is the competitive environment and it's still the case in Europe. We have as much as 10% more capacity than the market can actually absorb, and once you've got a factor like that, even though you're enjoying the current environment you've always got a feel that it can start to change at some point in time.
So we have no insight into where we think and when we think that change is going to come from, but clearly, if you've got that sort of latent threat out there, it pays to be a little bit cautious. No more than that and no more science or insight in that frankly, Alastair.
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Jaap Huijskes, OMV AG - Executive Board Member, Upstream, Exploration & Production [32]
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On Rosebank, what we've done then, this has been in agreement with the operator, Chevron, is we've restricted the budget for this year. And what that does is it delays some of the engineering activity into next year and, therefore, it's pushed a potential FID date into the back end of 2016, and an on-stream date somewhere 2020, 2021, 2022.
Now those scheduled impacts at the moment are the least of my concerns. What has been our key concern, and where we have made good progress, is to drive the costs down., and the current climate gives us more opportunities to drive the costs further down.
There's some agreed cost targets in place with Chevron and it looks like those are achievable. And if indeed they are achieved, then we're looking at a total cost that's going to be below what we assumed when we originally acquired Rosebank. So we're heading in the right direction.
It's important to recognize that Rosebank would come on stream some five, six years from now and, therefore, the current oil price, of course, is helping in respect of the fact that it drives the market costs down. Of course, taking an FID decision to the Board is going to require some prediction what the oil price is going to be in 2021, 2022. That's going to be an interesting discussion and, clearly, one that will be difficult.
The divestment process is up and running. We've got banks mandated; we're doing management presentations, so the divestment process to dilute our share in Rosebank is now up and running.
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Alastair Syme, Citi - Analyst [33]
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Good. Thank you very much.
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Operator [34]
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Tamas Pletser, Erste Bank.
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Tamas Pletser, Erste Bank - Analyst [35]
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I've got two questions. First of all, you mentioned gas and power are the main areas of divestment. Does it include potentially any Austrian assets you consider to divest, or do you rather consider assets outside of Austria? That would be my first question.
And my second question would be regarding your E&P performance in the first quarter. You mentioned already the difference between your liftings and the production. Where would be your results if the lifting would be in line with the production in the first quarter? So what would be the difference compared to the reported figures and the real figures?
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David Davies, OMV AG - CFO [36]
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Let me take that second question. Clearly, one of the big areas of underlift has been in Norway. Clearly, our lifting costs in Norway are amongst the highest in the portfolio, so it wouldn't have been the bonanza that you would have seen had it been in Libya or somewhere like that.
But it, clearly, would have been [bad]. I'm not going to guide in terms of specific amounts, but when you're missing as many barrels as we were missing in quarter 1, then clearly, that would have had a favorable impact.
What was also encouraging as well, of course, is that going back to the statement that we made at the trading statement that the vast majority of our portfolio was profitable at $50. Then clearly, you've seen we had $54 in quarter 1 and despite a poor lifting quarter, still managed to make a EUR33 million operating profit.
So it would have been higher, but at $54 it wouldn't have been as high as particularly it will now be in quarter 2 because this lifting is taking place in an environment where the oil price is closer to $70 rather than closer to $50, so that's also encouraging from that side.
And as I think we said last year, in terms of the assets in gas and power, the assets that are more critically under the microscope, as it were; the more recently acquired assets, more recently acquired positions and by that what we mean is the two power stations that we have. The wind farm that we have in Romania, the storage position that we have in Central Germany and, of course, the Gate position that we have in Rotterdam, that's where the primary focus is actually being placed at the moment.
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Tamas Pletser, Erste Bank - Analyst [37]
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That's clear. Thank you very much.
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Operator [38]
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Thank you. That was the last question. I will now hand back to David Davies for his closing comments. Please go ahead.
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David Davies, OMV AG - CFO [39]
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Once again, thanks for your attention for what's been a challenging first quarter. Hopefully, things will now improve somewhat as the market seems to be showing a little bit more bullishness than we experienced in January to March. But thanks for your attention, as ever, and if you do have any more detailed questions, then don't hesitate to contact Felix and his team in the investor relations group. Thank you.
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Operator [40]
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That concludes today's telephone conference call. 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 replace your handsets.
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