Q3 2015 OMV AG Earnings Call
Nov 05, 2015 AM CET
OMV.VA - OMV AG
Q3 2015 OMV AG Earnings Call
Nov 05, 2015 / 10:30AM GMT
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Corporate Participants
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* Rainer Seele
OMV AG - CEO
* Felix Rusch
OMV AG - Head of IR
* David Davies
OMV AG - CFO
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Conference Call Participants
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* Mehdi Ennebati
Societe Generale - Analyst
* Nitin Sharma
JPMorgan - Analyst
* Henri Patricot
UBS - Analyst
* Matt Lofting
Nomura - Analyst
* Lydia Rainforth
Barclays - Analyst
* Hamish Clegg
BofA Merrill Lynch - Analyst
* Marc Kofler
Jefferies - Analyst
* Haythem Rashed
Morgan Stanley - 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 Q3 2015 results. There will be a presentation of the results followed by a question-and-answer session. (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. Rusch. Please go ahead Mr. Rusch.
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Felix Rusch, OMV AG - Head of IR [2]
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Hello and welcome also from my side to this Q3 results conference call of OMV. My name is Felix Rusch; I'm the Head of Investor Relations at OMV.
Let me quickly inform you about the slightly changed structure of this call today. I have with me Mr. Rainer Seele, CEO of OMV; and Mr. David Davies, CFO of OMV.
Since Mr. Seele has to leave in about half an hour, we will start with his presentation and then follow with sort of interim Q&A session for you have a chance to also direct questions to Rainer Seele. Thereafter, David Davies will be so kind to continue with his presentation and in the end there will be a second Q&A session for your questions towards David Davies. Thanks for this and let me now hand over to Rainer Seele.
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Rainer Seele, OMV AG - CEO [3]
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Yes. Thanks, Felix. Hello, everybody. Before I go into start to make any comments on the Q3 results, I would like to start with the top priority, which is HSSE. And on the first chart, you can see that we managed to decrease our rate of work-related lost-time injuries even further in Q3, due to the continued efforts to reduce accidents and increased awareness of employees. With this result, we are comfortably below peer benchmarks for both upstream and downstream.
So let's talk now about our business environment, and I will concentrate myself, a little bit, to make some remarks on the key fundamental twists which honestly haven't changed from Q2 to Q3.
What you can see on the slide is that we still have a challenging oil price, which is fluctuating around the $50 per barrel. There's still the oversupply in the market, a weak discipline of OPEC. If OPEC would be in full compliance with their target of 30 million barrels per day, all the problems in the oil market would disappear, but we have to wait and see how the oil price demand and supply is reacting in the next months to come.
We are not very optimistic as we speak about the rest of the year. We are calculating 2015, with an oil price in the range of $50 to $60 per barrel.
The same situation we see in the European gas markets. The oversupply situation has not disappeared. We have a gas price in Q2, which was something around above EUR20 per megawatt hours and we are now down to EUR19 per megawatt hours.
Well, I would say we do hope for any icy cold winter, which could change the pictures, but we haven't seen winter prices at the European hubs so far. So, looking outside the window, yes, I can't see any winter knocking at the door. So, shortly in November, the picture would change.
What you can see is that we have, of course, still the OMV indicator refining margins continued to increase for the third consecutive quarter this year to $7.8 per barrel. However, the quarterly average marked a significant drop in margins from August to September, 2015 by 25%, the strongest month-on-month reduction this year, a clear indication that the unusually long refinery margin rally in Europe this year is coming to an end.
We have been able to slightly increase our refinery utilization in Q3 to 93% so that we could participate on a higher utilization rate, the high-margin situation in Q3.
Given the current oil price market environment, we have decided to lower our assumptions for Brent crudes to $55 per barrel next year, $70 in 2017, $80 in 2018 and $85 from 2019 onwards.
These revised assumptions have led to impairments which we have announced already of approximately EUR1 billion, recognized in Q3 2015 in the upstream business, covering both assets under production and development, as well as exploration assets. The impairments have been recorded in 11 different countries across our entire portfolio.
Well, let's have a quick look on our financial performance. As you can see, the EBIT has improved from EUR375 million in Q2 to EUR495 million in Q3, reflecting higher refining margins, as I have mentioned, with high EBIT contribution from the downstream business. So the same picture, more or less, like we have explained to all of you, in Q2 results structure.
The low oil price is now visible in the EBIT upstream. You can see that this went down from EUR110 million (sic - see slide 5, "EUR116 million") to EUR52 million in our EBIT structure.
And we have seen not only the low oil price in our EBIT performance in upstream, also the reduced volumes; we produced 292,000 barrels per day. This was not an unscheduled surprise; this was regularly shut down for maintenance work, for work that was mainly in Romania.
So the petrochemical business was also very strong in Q3 as Borealis sees very good polyolefin margins. And if you look to the most interesting numbers for our shareholders, which is the bottom line, and here we can also present a very positive development on a clean basis, clean CCS earnings per share in Q3 2015 reached EUR1.13. This represents an improvement compared to Q2, as well as compared to Q3 2014. So we have outperformed previous quarter and previous year's quarter.
First of all, this is a result of a solid operating performance, as we have just discussed. The second driver was, again, a strong quarter of Borealis which benefited from the favorable margin environment, as mentioned.
One of my main priorities for OMV, in this environment, is the cash flow. As you'll remember, it was the main topic also in our Q2 statement, and I'm pleased to show you here a further improvement.
We managed to improve our free cash flow before dividends for the quarter to EUR522 million (sic - see slide 5, "EUR524 million"). I have discussed that very intensively with David. It's very clear we cannot repeat such a number in Q4, but we will do our best to convince you that cash flow management is the key driver of our acting in OMV.
Clearly, the ramping down the investment program needs time, but the success of our efforts is reflecting in this improvement.
In addition, the downstream business delivered a very strong operating cash flow and the upstream cash flow proves to be more resilient to the oil price drop than to the operating profit.
We are working on all fronts, such as improving our profitability and cash flow, reducing costs and investments in optimizing the portfolio, to manage our performance in a low oil-price environment.
The next chart is a little bit underlying what I have said, that cash flow management is really the main priority. The chart shows you the sources of funds, meaning the operating cash flow before working capital movements, with sources of funds of approximately EUR2.6 billion in the first nine months 2015. We almost reached the level of the same period of last year, in spite of a significantly lower oil price.
Our downstream business delivered a very strong operating cash flow, benefitting from the increased refining and petrochemical margins, as well as from a higher product demand.
Though upstream cash flow were, of course, impacted by the substantially lower oil price, we still saw a resilient cash flow contribution from upstream, supported by lower cash costs, as well as the monetization of our hedges.
So let me come to the highlights, the recent highlights, if I look back to the quarter Q3. And I will start with the real highlight in the downstream business segment because we could sign a long-term cooperation between OMV and Borealis.
We have prolonged our contract with Borealis. So both refineries, as we speak about the C2, C3, components are booked out and sold out for the next -- until the year 2028, which gives me some comfort, to be honest, that this is a very safe underlying of the refining performance we are going to see also mid and long term.
On the other hand, there was, in September, a very important event between Gazprom and OMV, because we could sign the term sheet between OMV and Gazprom for our participation in the project Achimov IV/V.
Based on an asset swap, we agreed on a strict time line how we would like to proceed with our asset swap transaction. We have, so far, opened the data room for OMV, and it will take the rest of the year for us to determine the value of the asset Achimov IV/V. And we have agreed on a shortlist with Gazprom of our assets from OMV, which will kick into the swap agreement.
This short list, I keep confidential, as we have agreed with Gazprom a strict confidentiality, but it tells you that we are speeding up the process. We are speeding up the process as we speak about the definition of the assets OMV will discuss with Gazprom. And therefore, I think you are going to get new information from Gazprom and OMV beginning of next year.
The third highlight I would like to mention here is a little bit an outcome of our new strategy in gas downstream. We have published two very important transactions. One is that we are going to sell up to 49% in our regulated transportation business, the Gas Connect Austria company, which tells you our main headline in the transportation business, that OMV is going to invest in non-regulated transit infrastructure, like the North Stream 2 project which has a main priority.
And, on the other hand, we are going to minimize our exposure in regulated business, as we can generate a higher rate of return in non-regulated transportation business. And, of course, it's also an initiative to improve our cash flow performance and we are expecting to close the deal within the next year, 2016.
The other activity in the gas downstream is the takeover of the minority shares in the company EconGas. EconGas is a gas trading company and EconGas is a company which we are using also to optimize our gas downstream business, the sales, marketing and trading business in OMV.
This is an ongoing discussion how we are going to do that. I have to ask for patience that I don't run here into more information. I know that you are altogether hungry to get more data on how we are going to develop the gas trading business.
Just give me some more time. We have scheduled a meeting to get you to know and to present our new strategy on February 18. It will be a very intensive program I'm going to make with my colleagues and then you will get each strategy presented.
And I can tell you, as I have discussed this, we did it within our Board. We have not asked anybody from outside to support us. It is a strategy made and written by the Board of OMV. That's the reason why we do have a high commitment to meet our strategic targets.
On the last slide, you see that it hasn't changed, as we speak, about my priority thinking in strategic terms. On short term, we will improve cash flow and profitability, to further improve and strengthen our balance sheet.
So the cost-cutting program will be continued until the end of the year. In 2016, we have to look where the oil price is going to be. But we will continue with all our efforts to strengthen OMV for better cost competitiveness.
We will continue to have our integrated business model, so you won't be surprised to see that each business segment will be reflected also in our strategy.
And we are going to explain that we are going to have some growth. That growth we are just discussing in a way that we do have some priorities and the priorities headlined that we like euros over barrels. So, at the end of the day, profitability will also give us the ink to write a good strategy.
Thank you very much.
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Felix Rusch, OMV AG - Head of IR [4]
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At that point, ladies and gentlemen, having said earlier on that Mr. Seele has to leave, unfortunately, now for another meeting or rather not immediately but shortly, if you do have any questions that you'd like to directly address to him then now is your opportunity.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Mehdi Ennebati, Societe Generale, Paris.
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Mehdi Ennebati, Societe Generale - Analyst [2]
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Two very quick questions. The first one regarding your Romanian/Austrian hydrocarbon production. You've guided on an average production of 200/210 kilo barrel per day this year, meaning roughly in line with last year level; whereas in February this year, you've guided on the production decline of up to 4% per year on those, let's say, mature areas because of the CapEx cut.
So I just wanted to know if you have been positively surprised by the decline rate on those mature areas, despite the CapEx cut. Or if it was just too early to feel the consequences of your CapEx cut on this major production, meaning that next year, it would start declining materially.
The second question regards with the dividend. David Davies said in February this year that if the oil price at the end of the year remains roughly around $50 per barrel, there will be no way to keep the dividend at the same level. Now that you have oil assumptions next year of $55 per barrel, does it mean that the dividend needs to be cut? Thank you.
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Rainer Seele, OMV AG - CEO [3]
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Well, I will leave the dividend question for David, as you have quoted David. It's his problem now to get a good answer for you (laughter).
So I shall speak about the mature asset base. The decline you have seen now in Q3 has nothing to do with the mature asset base. We have to go for workovers that, as we speak about Romania and Austria, so both together, we do have a mature asset base, but we will continue to invest also in 2016, especially into the two regions to keep the production on the current level as much as possible.
So I wouldn't say that there will be a sharp decline. We might see a little bit of a reduction but not a very strong decline coming with the asset basis.
At the end of the day, we are driven by the decision how much do we have to spend for what additional production. And then, we do have an internal competition in our portfolio and that's guiding our investment spending. David?
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David Davies, OMV AG - CFO [4]
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Mehdi, on the dividend, congratulations on your powers of recollection. I do remember that statement. And in the panic of the first quarter, of course, when you were really in the teeth of the oil price going down from $100 per barrel to a very low level, clearly, we were looking forward with some degree of caution to the rest of the year.
We are at $50 and next year, we're not planning for it to be much higher. But as we've said right consistently throughout the year, we've taken no decision on the dividend. The dividend we'll decide at the beginning of next year.
But as we've also said right throughout this year, we haven't set up any of our internal financial planning, which assume the dividend level will be reduced. And that remains the case and clearly, we're deeper into financial planning right now, getting ready for the budget next year.
The decision hasn't been taken, but we haven't produced any internal targets which suggest we're going to cut it.
If we have $50 forever or for a prolonged period of time, then I think then the question really has to be seriously asked. But on the basis that even though we've taken a more cautious view on the oil price, we still expect it to recover in the medium term, we'll wait until we complete the analysis at the beginning of the year. That's when we'll take a decision.
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Mehdi Ennebati, Societe Generale - Analyst [5]
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Thank you very much.
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Operator [6]
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Nitin Sharma, JPMorgan, London.
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Nitin Sharma, JPMorgan - Analyst [7]
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Two questions from my side. First one on Borealis. How do you think about the stake, this non-controlling stake, in Borealis? Is it core, is it non-core from your perspective? And either way, why?
And the second one is on Romania. Could you broadly update us on your ongoing discussions on the fiscal terms in Romania please? It's almost been one year since the previous stack stabilization agreement expired. Thank you.
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Rainer Seele, OMV AG - CEO [8]
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Well, a short comment on Borealis. If you look in our Q2/Q3 results, what nicely contribution we could get from Borealis is reflected in the earnings per share numbers. It's in the net income where you can see that there is a real strong support from Borealis, especially in times where we have a downturn in the oil price.
I do see this hatching element, especially when we talk about net profit structure of OMV. So, therefore, we currently enjoy our stake in Borealis and we are not discussing any divestment of a single promille of our participation in Borealis.
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David Davies, OMV AG - CFO [9]
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On the Romania situation, Nitin, until last week, I would have said what the latest information that we had had was; that from the beginning of 2017, the government was intending to introduce its regime, so not next year, but rather the year after.
Unfortunately, following the tragic events in Bucharest over the weekend, there's been quite some political turmoil and, in fact, yesterday, the Prime Minister resigned.
So, given that there's clearly going to be a change in the Prime Minister at the very least, but who knows what the constituents of the new government might end up being, it's really rather hard to say. So we remain in the same position, unfortunately, as we were at the beginning of the year.
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Nitin Sharma, JPMorgan - Analyst [10]
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Thank you.
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Operator [11]
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Henri Patricot, UBS, London.
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Henri Patricot, UBS - Analyst [12]
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Just one question for me. On the comments that you've made on the CapEx side and for next year is in the press release, you said it shouldn't be materially different from the one you gave at the beginning of the year, EUR2.5 billion to EUR3 billion.
But at the same time, you seem to have a more cautious view on the oil price going forward. So I'm just wondering where you think you can make up the shortfall from a lower oil price and keeping the CapEx unchanged? Do you think you're going to cut cost further in the upstream or maybe better performance elsewhere in the business? Thank you.
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David Davies, OMV AG - CFO [13]
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Well, can I just remind -- I'll answer the question, but you're getting into the financial areas. If you really want to take advantage of the time that Mr. Seele's still here, then I would urge you to do that because there will be time at the end to hit me with the financial questions. But I will take that one.
The CapEx guidance, as we've said, will remain broadly the same. What remains also very high priority is trying to achieve this balanced free cash flow. So, after dividends, and by that we mean without reducing the dividend, actually having a broadly neutral free cash flow.
This year's going to be a challenge, despite the very strong performance in the third quarter. But next year, that's very much in our focus. And with the announcement of the disposal proceeds from the Gas Connect Austria transaction, which we announced a few weeks ago, that's certainly going to be part of our target and will enable us to continue to spend at that level.
And, of course, during that period, as the oil price is expected to recover, albeit very slightly, we will have some new project coming on stream which will add to our production as well, which will also improve the cash flow position somewhat.
Neutral free cash flow over this period is the key and highest financial priority that we're setting.
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Henri Patricot, UBS - Analyst [14]
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Okay, thank you.
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Operator [15]
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Matt Lofting, Nomura, London.
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Matt Lofting, Nomura - Analyst [16]
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Rainer, I just wanted to come back to your comments on EconGas. I appreciate you can't give us too much detail at the moment, pending further strategic planning. But I just wondered if you could conceptually talk about the opportunities you see from buying out the minorities and taking 100% of that stake.
It was obviously an asset that's struggled in recent years. What operational key changes can you make with 100% that you can't make with the majority ownership you have today?
I'm just wondering also what the incentive for your existing partners is to exit their stakes at or near the bottom of the cycle? Thanks.
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Rainer Seele, OMV AG - CEO [17]
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Well, if you look to our minority partners, you can find out that we do have three Austrian companies as partners sitting with us together in one boat.
As we speak about EconGas, I think it's a success model as we speak about the Austrian gas market. We do have a very strong position together in EconGas in Austria, but as OMV is more an internationally active and thinking company, I think EconGas could be more a company which supports a European expansion strategy. Is that enough for your fantasies (laughter)?
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David Davies, OMV AG - CFO [18]
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I think also one of the complications was that EconGas was established with its ownership structure in an environment where the gas market was completely different to that which we have today. And clearly, what we hope now with 100% ownership, is that the clear need to restructure the Company, following the dramatic change in the environment over the last two or three years, is going to be something we're more able to do, more able to execute with clear ownership.
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Matt Lofting, Nomura - Analyst [19]
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Okay, great. Thanks, guys.
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Operator [20]
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Lydia Rainforth, Barclays, London.
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Lydia Rainforth, Barclays - Analyst [21]
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I was just wondering if I could ask for your reflections on the three months -- I suppose closer to five months since you actually took over the CEO role. Have you had to -- in terms of has it been in line with what you expected so far or have there had to be changes in terms of your own priorities? Thank you.
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Rainer Seele, OMV AG - CEO [22]
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Well, nothing has changed during -- I have been nominated the new CEO of OMV. I really met a highly motivated and very professional team. As we speak about my Board colleagues, I think we are driving the Company with a very good team spirit.
When we talk about our employees, we do have really very good experts on board and we do have now a spirit with a high dynamic. You could see it if you look back in the last months what we have published, what we have -- what we did. We have signed contracts, lots of activity. We are already in the execution modus, although the strategy is not fully written.
So what I can say, all -- every second I have been with OMV have met my expectations and I am delighted to see that everybody enjoys working in OMV.
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Lydia Rainforth, Barclays - Analyst [23]
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That's helpful. Thank you.
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Operator [24]
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Hamish Clegg, Merrill Lynch, London.
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Hamish Clegg, BofA Merrill Lynch - Analyst [25]
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Just two questions on the Russian MoU for Mr. Seele. First of all, just being aware that your reserve life is somewhat below the peers, could you comment on what you think the Achimov deal could potentially have a net effect on your reserve life, especially if you're swapping assets? Can we see an enhancement from that deal?
And the second question is regarding North Stream 2. Can you give us some color on how much money you will be required to invest in the pipeline and how -- where you propose to find the cash for that from?
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Rainer Seele, OMV AG - CEO [26]
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All right. I try to make it short. We will see an enhancement on our reserve base coming with the asset swap with Achimov IV/V. Please understand that I don't give you a number right now, because we haven't finished our data room visit.
What I can say is we are going to enter in a more comfortable situation with Achimov IV/V in our portfolio, as we speak about reserve replenishment. And this gives us the room that we can go for a reduction of our exploration activities to discover new reserves. Because it's going to be a real substantial reserve position coming with Achimov IV/V.
North Stream. Well, North Stream, there are some published figures I would like to make reference to. North Stream 2, as we speak about the offshore investment, is something in the order of EUR10 billion. Including financing costs, our share is EUR1 billion. We expect to have a 70%/30% financing structure, 30% equity capital.
Of course, there will be an interim period where project financing will be not in place, where we might have a higher share than 30% of equity capital in the project.
What we do see is that there is a strong interest in the banking sector to participate in the North Stream, to finance the North Stream 2 project. It will be done by the project company. And we will start as early as possible with the discussions.
And what I do see is that the time-determining factor when project management will be in place is when we are going to get all the construction permits from the three countries, Finland, Denmark and Germany; and, of course, Russia. But Russia, I would make a question mark. I think that's, more or less, a construction permit with very high probability coming in on the table.
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Hamish Clegg, BofA Merrill Lynch - Analyst [27]
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Just to add on that. Why do you want to swap -- are you swapping gas for gas, or are you swapping oil for gas? Because why do you want to increase gas at a time where we see quite a lot of supply of gas coming to Europe? Can we expect an oil gas swap, or a gas to gas swap?
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Rainer Seele, OMV AG - CEO [28]
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Well, I don't give you an idea what I'm going to swap, yes. That's because I signed a confidentiality agreement. So please understand that I cannot do it right now. And I don't want to break a confidentiality agreement.
What I can say is that we, right now, have a 50%/50% split oil and gas production in our portfolio. We think that this is a very reliable split also for the future.
Do we have some deviation from that? Yes, okay. With Achimov IV/V, we will get 70% gas and 30% liquids coming with the assets. So it's not a 100% pure gas asset.
And as we speak about the North Stream project, I don't care about the asset swap. The North Stream project is a pure transportation investment, where we do have a safe guaranteed rate of return coming with that project, which is a state bond in our portfolio, with a little bit higher return of rate or interest rate you can get in the financial markets.
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Hamish Clegg, BofA Merrill Lynch - Analyst [29]
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Very clear. Thank you.
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Operator [30]
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Marc Kofler, Jefferies, London.
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Marc Kofler, Jefferies - Analyst [31]
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Just one remaining please. Clearly, the strategy is that going forward looks to be a lot more focused on Russia. I was just wondering if you could frame that in the context of the EU sanctions, and any material headwinds that could possibly arise regarding those sanctions. Thank you.
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Rainer Seele, OMV AG - CEO [32]
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Well, there is one clear statement. We are in full compliance with the sanctions. The sanctions are not limiting us as we speak about the asset swap transaction and activities in Russia.
You know we are following BASF. BASF just has finalized an asset swap, and they have chosen the same assets like OMV is doing. And they have got clearings from all authorities. That's why I think we are in safe waters as we speak about the sanctions.
The headwinds I see a little bit from the EU Commission in Brussels. I think we have to intensify our dialog as we speak about the necessary support from the EU Commission for the North Stream 2 project, as we speak about the good arguments we do have.
Because we are going to increase the security of supply, and especially the security of transit of Russian gas for the European markets, I think we have a very good chance to convince the Commission that they also will support our project.
It's in the interest of Europe, and we do have a very, very interesting and supportive European investor structure coming with the project. The investors are coming from important European members like Germany, Austria, like the Netherlands and France. And I think that this is already a very good commitment from very important EU member states.
So headwinds are coming from the EU Commission, not as we speak about an asset swap; I think it's more coming from the acceptance of our North Stream 2 project.
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Marc Kofler, Jefferies - Analyst [33]
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Great. Thanks very much.
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David Davies, OMV AG - CFO [34]
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Good. Well, thank you, ladies and gentlemen. At that point, Mr. Seele has to leave us, unfortunately. But I'll try to kick on rather quickly with the financial side of the presentation, and we'll kick in with the Q&A again at the end of that.
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Rainer Seele, OMV AG - CEO [35]
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Thank you. And thanks for your questions. Bye.
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Presentation
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David Davies, OMV AG - CFO [1]
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Thanks, Rainer. If you go to, please, the first part of my presentation, the highlights of Q3 2015.
Clearly, you see the strong decline in the upstream profitability, with the Brent price down by 50%. Production's also down by 6% at 292,000 boe per day, mostly due to Libya, comparing to last year; partly offset by higher production in Norway and in New Zealand.
The downstream, on the other hand, has not fully compensated, clearly, but made a major impact in getting us back to a closer level to last year's number, EUR182 million positive impact from downstream.
And then, we have a EUR60 million impact from the other and consolidation line, which is, basically, a consequence of the declining oil price during the quarter, has meant that the unrealized profit that we have booked as a provision in Petrom, partly reversed. And as a consequence, that added also to our profitability.
The gearing ratio at 38% is down slightly versus Q2 and this is despite actually making impairments of approximately EUR1 billion during the course and predominantly, is a consequence of the reduced oil price.
The next page is the chart I always show in terms of the environment. The one on the left, clearly, the oil price in particular, despite the recovery in the second quarter, which gave us some optimism that our $75 assumption for next year may be achievable.
Clearly, you've seen, in quarter 3, a decline which, of course, has continued in quarter 4, which has made the environment more challenging.
On the right-hand side, the refining margins, on the other hand, are very strong. Particularly high during quarter 3, although as Rainer mentioned in his discussion, they have started to soften towards the end of quarter 3 and that's continued into quarter 4.
On the next page, breakdown of the profit and loss account. The loss of EUR744 million on a reported basis, compares to EUR570 million, the profit last year.
The taxes. Clearly, there's a tax income as a consequence of the losses that we've booked; those provisions that we booked would be tax deductible predominantly. And that means that the effective tax rate on a reported basis, albeit a tax credit rather than tax hit, is about the same as last year.
On a clean basis, on the other hand, when you take out the special items of the just over EUR1 billion that I mentioned, our tax rate was about 10% during quarter 3. Very low, as we've said repeatedly, given the particularly low oil price and relatively strong contribution from the downstream busies, which is typically in relatively low tax territory, such as Austria and Romania.
Minorities were clearly substantially lower than last year and this, of course, is a consequence of the much lower level of profitability in Petrom, which is predominantly an upstream business. And, if you take into account the one-offs that I've mentioned, the special items, our clean CCS EBIT was EUR495 million, 25% down on last year as I said at the beginning of the presentation.
Taking into account net income attributable to stockholders, on the other hand, we're actually 31% ahead. And this is predominantly due -- this turnaround between being down at EBIT but up on net income, is due to the very low minority deduction because of Petrom.
Taking that into account, that gives us a clean CCS EPS during the quarter alone of EUR1.13, which is very encouraging.
The next page shows you the unscheduled depreciations, EUR1,088 million. Rather than dwell on that page too long, if you go to the next page, you can see where they've come from.
Clearly, the lion's share is in upstream. Something like EUR734 million relating to producing and assets under development; EUR734 million related to tangibles and goodwill of about EUR15 million; and we also took a provision based on the lower oil price and one or two other more geologically driven things, in terms of reserve expectations to make a provision against some of our capitalized exploration expenses also of EUR272 million.
The downstream provision that we took was a further EUR67 million, predominantly relating to Etzel, the storage asset that we own in Germany.
You see the graph on the right-hand side showing the previous assumptions that we had had in dotted lines, both in terms of the US dollar. Where we had assumed the euro strengthening against the dollar in the medium term, we've now simply held the dollar rate constant now at $1.15.
The oil price, which we had seen rising relatively quickly, up to a level in excess of $100 again, we've now taken that down to $80 and $85 in the last two years, albeit that in euro terms, it's stronger because we've now assumed a relatively flat dollar/euro rate.
So not only is the long-term oil price now lower; the route then in terms of how we get there is also hurting us and that's led to such a large provision having been necessary against the E&P assets.
Cash flow is very encouraging. If you look here, the chart on the left-hand side, the graphs or the blocks, rather, you see the top half is the cumulative position after nine months. This lower part is the quarter in question.
And if you look at the quarter in question, you see that we've generated a very strong free cash flow; over EUR500 million, which has enabled us to reduce the deficit now for nine months to only EUR426 million. We were close to EUR1 billion three months ago.
Clearly, some of the things have really started to impact now. The working capital is now improved. Some of the measures that we had introduced, which we said in the beginning of this year became more difficult because of the collapsing oil price.
The EMEA may have actually secured measures around the barrels, but the impact of those barrels was a lot lower, of course, because the value of those barrels was reduced.
We've also seen the level of capital expenditure now come down substantially. So cash outflow cumulatively is EUR2.3 billion; whereas, in the quarter in question, the outflow was only EUR612 million.
If you take into account the clean operating performance as well, which we've shown was quite an improvement versus previous quarters, then we've -- if you add all of those together, that's contributed to a very encouraging free cash flow for the quarter.
Quarter 4 will not be as strong. Clearly, the refining margins have softened or are softening and the oil price remains very low. And we've also, of course, in quarter 3, released the -- sold out the hedges that we had, which has also helped the performance, both in cash and profit terms.
And not all of those things are going to be repeated in quarter 4 clearly, although the focus, clearly, on cost and CapEx will remain intense.
We're always spending on CapEx, you can see on the next chart. As you would expect, the lion's share is going into the upstream. Our EBITDA from upstream is also quite strong. So despite the level of investments, we still are generating a substantial amount of EBITDA in the business.
But the most profitable EBITDA, of course, because of the tax rate, which clearly isn't in the EBITDA, is lower, is in the downstream, which is the green block.
So booked, in terms of CapEx, EUR1,997 million, so around about EUR2 billion. we stay with our guidance of about EUR2.7 billion at this level for the year. And after three quarters, I think that guidance is starting to look relatively credible now.
Then coming to the business performances, so coming to the upstream. On the left, you see the reconciliation of the profit from the previous quarter. And on the right, you see the reconciliation compared to the same quarter last year.
We're down against the previous quarter. Realizations, EUR 163 million, clearly, predominantly the price reduction.
The volume impact is particularly in Norway and Romania, where we had planned maintenance outages, which have now being reversed and production is now, in quarter 4, back to where we were seeing it in the first half of the year. So our guidance for 300,000 in total for the year remains intact.
Exploration expenses were slightly better than Q2 and produces, all told, following the others at EUR139 million, which includes the hedging gains, that produces a profit of EUR52 million from E&P.
Comparing it to the same quarter last year, however, the movements are far more dramatic, particularly the realizations, EUR374 million loss from the oil price and gas price.
Volume's down by EUR148 million, of which the lion's share is Libya and Yemen, partly compensated by Norway. And then, once again, the other is predominantly the hedging gains. And there, again, you land at the EUR52 million.
Coming to KPIs, the Group as a whole, the quarter's production was down to 292,000. As we said, Romania and Norway planned workovers were the biggest causes of this and they've now being completed, and production, as a consequence, is now back to where it was previously.
In terms of OpEx, despite the reduced production, OpEx has actually gone down, in part helped by the fact that Gullfaks was out and clearly, the OpEx in the Norwegian activities is higher.
But encouraging is, if you go to the next page, and you see the Petrom group where production is down, clearly because of the maintenance stops that I mentioned. But you see also that OpEx continues to be very well controlled.
And it's stayed more or less the same as the previous quarter despite having 7,000 barrels less production. So that focus on cost is beginning to really show benefits, both at the Group level and particularly in Petrom.
Then downstream, the benefit compared to last year has clearly all come out of the oil side. We've got higher refinery margins. We've got very strong marketing results. We've got very strong petrochemical results as well and they've really driven the profitability of the downstream business.
Downstream gas is actually worse by EUR42 million compared to the same period last year. The supplier/marketing business remains under pressure; very thin margins indeed in our marketplace.
And similarly, gas logistics is down by about EUR20 million, this being predominantly due to the fact that last year, we had a relatively strong performance from the storage business with a winter/summer spread, which sadly, hasn't been available this year to us.
The refinery utilization is shown on the next chart. The blip that you see in the East in the last quarter, really down to the maintenance stop coming back on.
Now we have 94% utilization in the East and 93% in the West. So a very high level of utilization, able to take benefit of the very strong refining margin environment.
Retail sales volumes, up by 7%, obviously helped by the very low product price. The Borealis contribution remains very strong although, unfortunately, also here, we're starting to see the lower petrochemical margins feed through into their performance in quarter 4.
Natural gas sales volumes, increased by 4%, although clearly, quarter 3 lower than the prior two quarters, based on the seasonality of the business. And we'll see what happens in quarter 4 and whether the winter, to which Rainer alluded, actually kicks in at some point soon.
The outlook for the year. The oil price will be between $50 and $60. We're expecting refining margins to decline. We've had this guidance in since the beginning of the year and it's happening now, starting to prove itself true.
Retail volumes will be supported by lower product prices. Gas markets are clearly challenging. Our production target of 300,000 remains intact. CapEx of EUR2.7 billion and E&A expenditure of approximately EUR600 million for the year.
So that was a whirlwind run through the financial side of the presentation. Ladies and gentlemen, if you have any questions you'd like to address directly to me, now is your opportunity. Thank you.
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Questions and Answers
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Operator [1]
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Thank you. (Operator Instructions). Mehdi Ennebati, Societe Generale, Paris.
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Mehdi Ennebati, Societe Generale - Analyst [2]
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Two questions please, David. The first one, I just wanted your view regarding the fact that a credit agency, credit rating agency just decided to decline, let's say, the impact of a hybrid bond issue or the share in the equity of a hybrid bond issue.
I just wanted to know if you think that your potential hybrid bond issue could be impacted by this new policy? And I wanted to know, as well, if you absolutely need to issue some hybrid bonds to keep your credit rating unchanged?
The second question regards with the DD&A from the upstream division. I'm not sure if you can answer, but given that you've made material impairments in the upstream division, could you please try to give us a guidance regarding the DD&A to come in from the upstream division?
Since the beginning of the year, it has been roughly EUR400 million per quarter. What could it be post-impairment? Thank you.
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David Davies, OMV AG - CFO [3]
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I think I'll let Felix get back to you on that. But just as a very rough calculation, if you take a 10-year reserve life and we've written off something like EUR900 million in E&P, that would suggest that on average, your depreciation is going to get better by EUR90 million; although some of the write-offs that we took were on assets, exploration assets, which weren't being depreciated and assets under development, which, of course, are not being depreciated yet.
So that would be really at the upside of the calculation, but I'll let Felix perhaps call you after that and you can talk about it.
First then, on the hybrid, absolutely needed is not the case. We're doing this really ahead of the curve. The agencies have started to take their oil price expectations down. We rather expected that they might at some point.
And, of course, this being the case, you can never exclude that the environment becomes such that the whole industry comes under more intense scrutiny in terms of ratings.
What we wanted to do is really be ahead of the curve and we still are in that position, but there was no absolute we've clearly got to do this, otherwise there's a rating event imminent.
Clearly, doing it is helpful to maintaining the rating but it isn't as though it was going to rescue the situation because there was a threatened downgrade. We remain on stable outlook from both of the agencies that rate us.
And then the point that you raised earlier on, this technical question has been raised by Standard & Poor's who don't cover us in fairness. So we would not have been directly affected per se; although clearly their guidance creates the risks that the other agencies pick it up.
What they have decided is that included in the contract of these hybrid bonds is a clause which allows the issuer the right to call the bond at a 100 basis points premium, so at 101%.
If the rest of the business is downgraded, the issuer raising is downgraded and the hybrid might lose its investment-grade status, it gave the rights for the issuers to actually call the bond at 101%.
We have had that in our outstanding hybrid, the one that we issued in 2011, and the solution seems to be that the issuers are now basically going to speak to the investors and cancel that clause, which the investors should like because it's to their benefit.
Of course, as we look at issuing potentially the hybrid for ourselves this year, then clearly, we're considering whether or not we actually have that clause in the contract.
But it doesn't affect the rating -- the equity credit that's given to it; it's just one of the clauses that might be something that we have to adapt before we go ahead with the issue.
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Mehdi Ennebati, Societe Generale - Analyst [4]
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Thank you very much.
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Operator [5]
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Lydia Rainforth, Barclays, London.
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Lydia Rainforth, Barclays - Analyst [6]
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David, can I ask a couple of questions around the downstream performance at the moment? And just, if I'm looking at what you have was an indicator margin broadly flat quarter-on-quarter. Can you go through some of the moving parts within the EBIT number a little bit more?
And particularly, just if I look at the change in the organizational structure that you've had in the downstream business, what benefit are you actually seeing from that?
And then could I just ask you to talk through, probably in relation to that, what you're seeing in terms of the current downstream environment? Because I suspect that it's partly the inland premium that you get on the refining side has played a part in that and just where we are on that sort of number? Thank you.
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David Davies, OMV AG - CFO [7]
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What we're seeing, and what we were particularly seeing during the particularly high refining margins of the last two quarters, was that gasoline in particular was attracting a very attractive crack, and the middle distillates less so.
We benefited nevertheless even though most of our -- we've got a very high middle distillate crack percentage, but the issues really were that what you're now starting to see, particularly with the driving season, of course, ending in the United States, more refining capacity has come back on stream in Asia, in Russia as well to a certain degree, and it's simply more supply coming in which is starting to depress European margins.
I noticed the last few days actually, they've recovered quite strongly, but certainly if you look at our experience from September and October, refining margins were several dollars below where they were in quarter 3.
The breakdown of the profit within the downstream, just let me look at this chart here for you, was that we had a contribution of EUR110 million from the petrochemicals business, which compares to the same period last year of EUR46 million, so more than doubling in that particular case.
The total retail business was a profit of about EUR100 million, which again, compares very strongly with last year which was about EUR65 million. And then the refining business, this was really where most of the improvement took place, was EUR329 million profit contribution, and that plays against EUR141 million which was earned last year.
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Lydia Rainforth, Barclays - Analyst [8]
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Great. Thank you very much.
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Operator [9]
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Nitin Sharma, JPMorgan, London.
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Nitin Sharma, JPMorgan - Analyst [10]
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Two questions please. First one on the CapEx guidance. I'm slightly surprised that you're guiding to no material deviation 2015-2017 in February 2016 update.
The reason for that is the general deflation benefit that I expect would flow through. So maybe you could comment how you look at deflation and probably what sort of impact that would have on the future guidance that you'll have in February?
And finally, on tax rate. This has been exceptionally low nine-months 2015. How should we be thinking about next year?
Is there any impact on the tax rate of OMV from refining tax losses that have been carried forward from the past? And if so, how long these will last, or how much of these losses are you still carrying in your books? Thank you.
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David Davies, OMV AG - CFO [11]
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The impact of deflation, although clearly present is not really so significant as to cause us to consider it within the guidance that we give quite frankly, Nitin.
So much of the CapEx that we're spending is on projects which were in execution already last year as it were, where most of the contracts within that were actually given and, as a consequence the impact really of any changes in the environment are not going to be significant.
Clearly, for field redevelopments and things of that nature, and if we do it, obviously, if we were doing things like seismic or exploration, there have been incidents where we've been able to take account of distressed assets available on the market and do things really at extremely low prices.
But for them to be of such a volume and have such an impact, that it really causes us to consider it in the guidance is not really the case.
To be frank, I think to a certain degree, as we've looked forward with a more depressed oil price for the next two or three years, despite production rising and helping in that matter, helping two ways really that production comes in from the assets that come on stream.
Plus we stop spending money on those assets. As well, they become cash generators rather than cash consumers. We've really defined a parameter in terms of okay, again, if we want to maintain the dividend, if we want to maintain the credit rating, if we want to achieve a free cash flow which is broadly neutral, how much should we really be expecting to spend. And that's really what we've been backing into to be perfectly honest.
And clearly, within that, particularly in the shorter term, we've looked at a couple of asset disposals, the most significant of which, of course, is the one we announced a couple of weeks ago with the 49% proposed sale of the Gas Connect Austria business.
The tax rate is relatively simple quite frankly. It's so low because so much of the profit has been from the downstream and that's obviously in countries such as Austria and Romania, with a 25% and a 16% tax rate respectively. And, of course, so little of the profit has been in the upstream where the average tax rate is considerably higher.
The tax losses situation that you mentioned is quite an interesting one and causes us some complications here, because we clearly have to be prudent in terms of losses that we've booked.
For example, the impairments, both this quarter and also in previous quarters, have created losses in the local entities which we need to consider when can we recover them; if we don't believe we can recover them within a reasonable period of time, then you can't recognize the asset.
And also, to a certain degree, given the tax allowances that the Austrian state gives you if you have international activities held by an Austrian parent, has created a situation where we also have losses at the Austrian level, generated from overseas activities, but which can be offset against your cash liability here in Austria. So, again, we have to be careful precisely how much we recognize there.
We do have significant losses, in fact, not reflected as assets on the balance sheet because we're being prudent in terms of when we can recover them, which means, in fact, that the effective cash tax rate in Austria is also going to be quite low for some period of time.
But the real reason it's low right now is downstream is high, upstream is down.
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Nitin Sharma, JPMorgan - Analyst [12]
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Thanks, David.
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Operator [13]
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Haythem Rashed, Morgan Stanley, London.
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Haythem Rashed, Morgan Stanley - Analyst [14]
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I wanted to clarify one or two things actually, just from a number of questions you've already had actually, and then one other question on the upstream.
But firstly, just to come back to Lydia's question about the downstream. Could you just, specifically on the inland premium and how that's helped your premium over the benchmark margin that you provide us, how has that evolved in Q4 so far?
So, as we sort of look in October, is it materially down on Q3 or actually, is the overall refining margin reduction being partially offset or cushioned by still obtaining somewhat of a premium there?
The second point is just, again, coming back on the tax rate question. So, given your comments, should we be assuming, in a $55 assumption for the oil price for next year that you have in your guidance, something like a low-double digit, potentially even single-digit tax rate for next year as well? Is that something to be considered? And that would be the second question.
And then, finally, could you just provide an update on Yemen? I know things continue to be very challenging there, but any sense that you're seeing that you might see production or activities resume in the near term? Thank you.
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David Davies, OMV AG - CFO [15]
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Okay, yes. In fact, I missed those answers both for Nitin and for Lydia, actually. The inland differential, there's been no real significant change in quarter 4; it's really the reference margin in Rotterdam that's been depressed. We've still been earning a not dissimilar inland differential compared to what we were earning in the previous quarter.
The 2016 tax rate, if we have a $55 oil price; of course, if the refining margins soften, that will complicate it to a certain degree. But I think the general expectation should be that it would be relatively low; and I think, indeed, low-double digit, perhaps even high-single digit.
We will see. It's incredibly complicated clearly with the lower absolute level of profits, a few million here or there, to actually move a couple of points up or down on the tax rate. But it's certainly going to be way lower than we would certainly have been expecting in a much more buoyant oil price environment.
And then in Yemen, unfortunately, we have nothing really to report. The situation remains very fraught and we have no activities there. In fact, one of the provisions that we took in the write-down that we took was there were three areas outside of our security perimeter where we decided, given the security situation, that we would write them off. Because, even if peace resumed, that we would start working outside of our security perimeter, which is quite a substantial area, is a relatively low probability.
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Haythem Rashed, Morgan Stanley - Analyst [16]
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Very clear. Thank you very much, David.
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Operator [17]
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Hamish Clegg, Merrill Lynch, London.
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Hamish Clegg, BofA Merrill Lynch - Analyst [18]
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Great cash flow in the nine months; very, very good. I wondered if you could just clarify what sort of split that cash flow is made up of between upstream and downstream, this year versus last year, is my first question.
Second one is just sticking on cash flow. Thinking about CapEx, your guidance is to 80% of CapEx going towards the upstream. So far this year, you're more like the low 70%s. Can we see that changing next year? So comment on that.
Third question and I'll make it the last one for you, just as a technical point. In your refining and marketing output, as opposed to the margins, you guided us at the beginning of the year to 17.8 million tonnes of capacity.
Given that you've been running at a very high capacity this year, it implies quite a big dip in Q4 if we were to annualize, well -- or take your annual number and split it four ways. Could you comment if there's going to be some material maintenance in the fourth quarter in the refining side of things?
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David Davies, OMV AG - CFO [19]
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I may ask again for Felix to get back to you in terms of that volume one. I can't remember precisely what level of utilization we were expecting for this year, but I think we're probably above it, quite frankly, given the strong demand and the refining margins associated with that. So it might well be that the guidance that we gave earlier in year is something that we need to kick up.
There are certainly no planned maintenance stops of any significance which would have an impact on that in any of the refineries.
The CapEx, I mean it may be down a little bit now but it's sort of roundings to a certain degree, Hamish. The primary focus remains, as it always was going to be, the investments in the upstream.
You may have well seen a little bit of a peak in the downstream in investments this year because there has been quite a cycle of contract renewals at Petrol Ofisi which is a five-year cycle. And there's been quite some investment going on in there to renew the franchise situation that we have there.
So that, to a certain degree, may have complicated that calculation. But 80% broadly would be where we would see our spend going.
And then cash flow, I think probably the best chart to look at is the EBITDA one which was earlier in my presentation. You see they're not dissimilar quite frankly.
And also, particularly if you look at some of the -- obviously, clearly, EBITDA doesn't include the tax rate and the tax rate would normally be higher in E&P.
We're actually generating cash in areas like Norway, for example, where because of the very high depreciation, the cash tax is really very low indeed because of obviously the assets that we purchased.
So, in terms of cash flow, broadly similar I would suggest to be perfectly honest, although clearly, most of the CapEx going into the upstream; that the cash flow after CapEx is quite a different picture. Most of the pre-cash flow is coming from downstream. The operating cash flow is more balanced in terms of where it comes from.
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Hamish Clegg, BofA Merrill Lynch - Analyst [20]
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Thanks.
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Operator [21]
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Matt Lofting, Nomura, London.
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Matt Lofting, Nomura - Analyst [22]
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Thanks, David. Two quick questions if I could. First, just coming back to the downstream. I wondered within the big uplift year on year that you talked about on the refining side, if you had any sort of breakdown on the product yield side of things.
I was just wondering during the quarter, obviously, gasoline led the industry in terms of the margin, how much you were able to tweak the product yield at OMV towards gasoline, against the backdrop of traditionally being more middle distillate biased.
And then secondly, I think the exploration budget for this year is about EUR600 million. I just wondered how much you think that comes down in 2016 with some of the higher-cost programs like the Black Sea potentially rolling off. Thanks.
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David Davies, OMV AG - CFO [23]
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There's been -- clearly, as you rightly said and I think I said myself in the presentation, the gasoline crack has been leading the very high refining margins.
There's been really no real discernible shift. Clearly, you tweak it as much as you can obviously to optimize the yield from the barrel, but the refineries have a limit in terms of the flexibility that they have. So there has been no change in split between middle distillate and another to really have a big impact.
Of course, what does have a big impact is at $50, the cost of crude that you're burning yourself is a lot lower and although we've, made in improvements in Petrobrazi it's still a relatively high energy cost activity refinery. So at $50 a barrel, that cost has obviously also come in to help the refining margin.
Then we will be targeting, and Rainer will talk about more of this in February when we talk about the strategy, to bring our E&P investments over the next two or three years down.
We're clearly still working off some commitments, which is one of the reasons that we had to tweak our guidance up slightly this year. Even at EUR600 million, there's a risk that that may even be slightly higher than that by the time we close the books this year.
Next year, we'll be a little bit lower, but the year after and the year after that, you'll start to see the bigger savings as those commitments that we entered into during a different environment start to be actually worked off.
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Matt Lofting, Nomura - Analyst [24]
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Okay, great. Thanks a lot.
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Operator [25]
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Marc Kofler, Jefferies, London.
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Marc Kofler, Jefferies - Analyst [26]
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David, two questions please, both on the upstream. Firstly, in Romania, I was wondering if you could offer any more color in terms of where you are now at on the rig count and any implications that might have for production in the medium term.
And then secondly, in the past, I think you've referenced looking to divest some of your more immature assets in the upstream, some of your exploration assets. I was wondering if there's any sign that the A&D market there might be starting to thaw? Thank you.
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David Davies, OMV AG - CFO [27]
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There is still a market out there, but it's not a very thick market; it's quite a thin market, I think it would be fair to say. Any of the assets that we have on the portfolio, you clearly enter into a dialog to actually find a buyer.
But where there may be buyers out there, there's not a lot of enthusiasm accompanying them, so it is a difficult market it would be fair to say for most aspects of proposed upstream disposals.
The rig count, I'm going to have to get back to you on that one. I'll get Felix to give you a call; he's busily ferreting away here trying to find the answer, but without success (laughter), so I'll ask him to get back to you on that one, if that's okay.
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Marc Kofler, Jefferies - Analyst [28]
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Great. Thanks very much.
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Operator [29]
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Tamas Pletser, Erste Bank, Budapest.
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Tamas Pletser, Erste Bank - Analyst [30]
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David, I've just got two questions. The first one is regarding the gas price exposure. So what part of your production has an exposure to the declining CE gas prices? Can you just give us a comment on this please?
And my second question is your maximum gearing. Based on your assumptions, it seems to me that you can reach this cash-flow neutrality you mention. I just wonder if the environment turns to be more nasty, what is the maximum gearing you can imagine and maintaining the dividend payment at the same time? What doesn't endanger your credit-rating positions, which can be excelled based on your credit lines?
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David Davies, OMV AG - CFO [31]
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Well, I think the challenge in terms of the second question is that you have to live with the environment you have, rather than the one that you'd wish for. If the environment becomes dramatically more negative, then you have to take the appropriate measures.
This is why, for example, we are looking at something like the hybrid instruments ahead of the curve. Issuing a hybrid and the equity credit associated with that doesn't solve the oil price situation, but it does give you time to do something if the oil price situation requires further action.
And you will take that action. Clearly, the lower the oil price gets, the more difficult the actions need to be, be it the dividend, be it CapEx, be it costs or whatever. But at the end of the day, you simply have to make sure you've got the flexibility in your structure, which we're clearly trying to ensure that we do have, to make sure that you can take the appropriate action so that you don't get into the situation where you really have a big difficulty.
I can't exclude if the oil price plummets to a level much below where we are right now and looks -- gives every indication they're going to stay there, that the rating agencies take a view that the whole sector needs to come under review. And clearly, I can't exclude that we get sucked into that.
What I need to make sure I exclude is that an OMV-specific factor is what causes that and that's what we're working very hard to avoid.
The question in terms of the gas price, although something like 50% of our production is gas, slightly less than that overall, if you take out the areas which aren't really reflective of a European market price, all you're left with really are the gas volumes in Austria and the gas volumes that would reduce in Norway.
They're sold into Europe at a European market price. The remaining gas, which is the biggest single country selling gas and producing gas, is clearly still sold at a quasi-regulated price to a certain degree. It's at a discount of the market, but it's not really been going down as the market price -- the market price is coming down to get closer to it in fact.
And of course, we have gas activities in places like New Zealand and Pakistan, which are also quite independent of what might be going in Europe.
So our exposure to the volatility of the European gas price in terms of our E&P production is relatively low within the overall gas-producing portfolio.
Where we're more exposed to it of course is in the supply and trading side where, of course, we're selling gas that's purchased from Gazprom and other suppliers. And those margins because of the depressed price have come under tremendous pressure, hence the EconGas discussion that we've had repeatedly.
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Tamas Pletser, Erste Bank - Analyst [32]
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Okay, that's very clear. Thank you very much.
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Operator [33]
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That was the last question. I will now hand back to David Davies for his closing comments.
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David Davies, OMV AG - CFO [34]
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Well I'd like to thank you for your patience in this quite marathon session with two Q&A sessions in the middle and at the end. And as ever, if you do have any further questions which we weren't able to resolve, by all means, call the Investor Relations team. Thank you. Bye-bye.
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Operator [35]
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That concludes today's conference call. A replay of the call will be available for one week. The number is printed on the teleconference 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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