Q1 2016 OMV AG Earnings Call
May 11, 2016 AM CEST
OMV.VA - OMV AG
Q1 2016 OMV AG Earnings Call
May 11, 2016 / 09:30AM GMT
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Corporate Participants
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* 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
* Josh Stone
Barclays - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Henri Patricot
UBS - Analyst
* Hamish Clegg
BofA Merrill Lynch - Analyst
* Marc Kofler
Jefferies - Analyst
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Presentation
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Editor [1]
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Converted flash audio
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Operator [2]
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Welcome to the OMV Group's conference call for the Q1, 2016 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. In addition, simultaneous to this conference call, a live audio webcast is available on OMV's website.
I would now like to hand the conference call over to Mr. David Davies. Please go ahead, Mr. Davies.
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David Davies, OMV AG - CFO [3]
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Thank you and good morning, ladies and gentlemen. Thank you for dialing in to this conference call.
May I start with two announcements? Unfortunately, Mr. Seele, who was scheduled to actually introduce this meeting, has had to attend an unexpected and urgent meeting in relation to the development of one of our strategic business projects, so I'm sure you'll forgive him for having to step out, unfortunately. He's asked me, obviously, to take over his part of the presentation, which, of course I will do.
And the second thing is, equally as significant, this is the 57th and final presentation you will hear from me. The next time we do a quarterly presentation, my successor, Mr. Florey will lead the presentation.
And similarly, Mr. Felix Rusch, who's coordinated these meetings for quite some time, this is also his last meeting. And Mrs. Moll, who joins us shortly, will be the new voice of Investor Relations in the future.
That said; let me start with the presentation. Clearly, as ever in the industry and for OMV, health and safety remains our top priority. And our record, as you can see from the graph, is commendable in terms of the improvements that we've made. But, of course, one can never relax and unfortunately, although not reflected on this chart, an incident that we've had in April will cause a deterioration of this otherwise very favorable trend. And is further evidence of how one needs to continue to stay very focused on ensuring your operations are safe.
Our strategy in a nutshell on the next slide. Clearly, this is not unique to OMV in this current, very low commodity price environment, focusing on cash and costs is absolutely critical.
Similarly, through the portfolio realignment in our upstream business, achieving a sustainable position in a low-price environment is clearly a major point of focus.
Our downstream gas business, given the very challenging environment in the European market, and restructuring that business is clearly an area to continue to focus upon.
And, of course, the downstream oil business, which both last year and also into this year has helped compensate for the very low oil and gas price, is something clearly where the strengthening of its competitive position needs continuing focus.
We have a leading position here in a very cost-competitive market and, of course, the announcement recently of the intention to sell our investment in Petrol Ofisi in Turkey is further evidence of how we are focusing and refining the business in downstream oil.
On the next slide, some recent highlights. Recently, Gazprom and OMV signed documents to develop the strategic cooperation. A further term sheet was signed regarding the long-publicized asset swap which we are proposing. We also signed a further cooperation agreement in terms of oil supply, technology swapping and indeed, in terms of cross-cultural support.
In the United Arab Emirates, we've signed with ADNOC a technical evaluation agreement. Here, we have several fields in the northwest offshore of the country, including Ghasha and Hail areas. And what we've agreed is a four-year work program for seismic drilling and initial engineering studies.
In Iran, recently we signed a memorandum of understanding regarding future projects.
And in terms of downstream portfolio optimization, we have a number of projects which are being completed or are strongly underway. In the Austrian market, we purchased a number of unmanned filling stations during the year, which strengthens our market position and secures the supply for our refinery.
We also received merger control clearance for the sale of a number of relatively low-margin Czech filling stations, which, of course, helps improve the average profitability of the overall estate.
In terms of gas sales, we received merger control for the full takeover of EconGas and clearly, once that is completed, that will give us the opportunity to continue to integrate and restructure that business more directly.
In terms of the disposal we have announced of a 49% stake in the Gas Connect Austria business, we have received indicative bids and they confirm, as we expected, a strong market interest in this asset. So that process will continue in the remainder of the year.
We've announced the Petrol Ofisi divestment. We've appointed investment banks and mandated them to actually assist us with the program. And we are now preparing to approach potential buyers, a number of them having already expressed interest in looking at the asset.
The next slide just outlines the asset swap and the status between Gazprom and OMV. What we've indicated recently is that the asset that we're looking at swapping is a share in an OMV North Sea subsidiary. This is under negotiation for the consideration for the 24.98% stake in Achimov IV and V.
We expect to sign the contract for the asset swap in the second half of this year and to close the transaction during 2017. And you can see on the graphic, although there's no scale against it, particularly attractive is a very long-term stabilized production, which will occur for many years in this asset, and be helpful in achieving a stable reserve replacement rate also for the Group.
Let me turn now to the part of the presentation concerning the financials. Slide number 7, the highlights for the first quarter this year.
EUR333 million last year, down by 50% to EUR167 million this year. You can see clearly the decline is predominantly in the upstream, EUR130 million. 37% drop in the average Brent price to $34 per barrel has clearly been the primary driver of this.
Production was actually slightly higher, 312,000 barrels per day, up by 3%, predominantly due to increased production in Norway, somewhat offset by lower production in Romania and Austria. Higher sales volumes also occurred, mainly in Norway.
In the downstream business, the decline of EUR35 million is essentially due to a weaker gas market environment, particularly compared to the first quarter last year, which was also helped by one or two one-offs, which didn't occur this year.
We must also report that the refining margins, although still attractive, have weakened compared to where we were a year ago, although this was largely compensated by a stronger petrochemicals business.
The gearing ratio at the end of the first quarter improved versus last year to 29%. And this is clearly a consequence of the hybrid bond of EUR1.5 billion that we issued in quarter 4.
Then on the next slide, we talk about the economic environment. The left-hand chart is rather self-explanatory. Clearly, we've seen successive quarters since Q2 last year of the oil price declining, and an average for the first quarter of this year was, as I said, $34.
What's been a relatively recent occurrence, you see in the middle, has been the strong decline recently in the Central European Gas Hub natural gas price, as an index for the natural gas price across the whole of the European market. You can see where we are now, at about EUR14 per megawatt hour, compares only two quarters ago to something in excess of EUR20.
And this clearly has also been quite detrimental to us, although not as detrimental as for others, who are wholly exposed to the European market. Because, of course, we have a large number of our gas assets where the price is either regulated or fixed contractually.
You can see, in fact, that our realized gas price, with the orange line, is in fact slightly above the Central European Gas Hub price, which is the first time that I'm certainly been aware -- been around that that's actually happened.
On the right-hand side, the indicator refining margin. As you can see, the very high levels that we experienced for the first three quarters of last year, we already saw a decline in quarter 4, and that has unfortunately continued. We are 32% down at $5.10 per barrel compared to the same quarter last year; and 14% down compared to quarter 4.
So that is the environment that we've had, and what kind of results did that produce? You see on the next slide that our clean CCS net income attributable to stockholders is down by 27%, from EUR237 million to EUR174 million.
On the right-hand side, you can see the constituent parts of that. Our EBIT, at the top, clearly, this isn't clean or CCS, was down by 79%. Our clean CCS EBIT was down by 50%, from EUR333 million to EUR167 million. Clearly, the negative CCS effect, given the lower oil price, has been eliminated in that number.
And our clean CCS net income attributable to stockholders is only down by 27%. So it's got progressively better, in this case, in particular due to the lower deduction for minorities.
Financial result was also a major swing compared to last year; EUR41 million contribution versus minus EUR23 million last year. And this is in large part due to a much stronger performance from Borealis, which posted a contribution of EUR92 million for the quarter this year, versus EUR50 million last year. One or two other things have also contributed to the turnaround, but that's been the biggest part.
Of interest also is what's happening on the tax line. Clearly, we are trading at a loss in quarter 1 in the E&P business. So we're generating losses in a business where the very high tax rate in the upstream business will give you a high value in terms of the tax relief on those losses; and where we're making profit is in the downstream business, which is markets such as Romania, with a 16% tax rate, and Austria with a 25% tax rate.
So we're making profits in low-tax areas and losses in high-tax areas. And that produces the rather curious result that our effective tax rate for the quarter was minus 54%. So we actually have a profit, as it were, from tax of EUR47 million for the quarter.
Minorities of EUR41 million compared to EUR58 million last year; minorities and hybrid capital owners here. Clearly, the hybrid capital owners' stake has increased now that we've doubled, in fact, the size of the hybrids that we had. We had EUR750 million last year and we issued a further EUR1.5 billion this year, so the total hybrid owners' share has actually increased, as one would expect.
But the lower level of profit in Petrom has also had an impact here, so the share of that profit that goes to the minority shareholders is also, as a consequence, lower.
And that feeds right down through the income statement, to a position where, as I said earlier on, clean CCS net income attributable to stockholders at EUR174 million, is a decline of 27% versus last year.
Then to the special items and particularly, the CCS effect. You can see here, CCS losses of EUR104 million as a consequence of the collapsing oil price in quarter 1 was the biggest reconciling item between the clean CCS EBIT and the reported EBIT.
In terms of special items, the only thing of merit to warrant report is a further increase in the provision against our Gate LNG obligation and the associated transportation commitments, which arose for the very simple reason that the change in the interest policy at the European Central Bank led to the long-term interest rate declining. And clearly, that's a constituent part of our calculation of the weighted average cost of capital.
And the accounting rules are quite strict. If you actually see a reduction in your weighted average cost of capital, that clearly has an impact on your valuation, and that has required us to book a further net provision on that line.
Now, coming to cash flow on the next chart. You can see that our free cash flow after dividends at EUR145 million is a significant improvement versus the negative cash flow of EUR517 million last year.
Why is that? Our profit of EUR136 million is clearly not as high; Depreciation is rather similar, EUR538 million against EUR526 million the year before. And this, in fact, would have been higher, of course, had we not had the write-offs during last year, which, of course, lowers the depreciation burden going forward. And that's probably had an impact of about EUR50 million in the first quarter compared to the same quarter last year.
Of course, the reason it's slightly higher as a consequence, despite that EUR50 million benefit, is of course, that we now have Edvard Grieg fully producing, whereas in quarter 1 last year, it was not yet on stream.
The other position eliminates those items in profit which are not cash-effective. Usually, what we have in here is the share of our profit from Borealis. Because it doesn't pay a dividend every quarter clearly, we book our share of the profit, but it's not cash-affected. This quarter, in fact, it's the opposite: they paid a dividend of EUR153 million during quarter 1, whereas the contribution of profit was only EUR92 million.
So that actually went the other way, as it were in Borealis. The cash contribution was greater than the profit contribution in quarter 1. That would clearly not be the case for the rest of the year.
And what you're actually seeing leading to this negative position is really simply the valuation of a number of foreign exchange positions in derivatives, which were in the profit.
Change in net working capital at minus EUR73 million compares to minus EUR274 million last year. So that is clearly an improvement; was not as negative as it was a year earlier.
And what you see here, in particular, is that the biggest reason for the increase and clearly there's always a lot of plusses and minuses in it, but the single biggest effect is the fact that we had a lifting in Norway, very close to the end of the quarter, which, of course, went into receivables at the end of the quarter -- rather into cash and that's probably more than half of the EUR73 million change.
What also is an improvement on last year and clearly is a help to improve the cash flow, is the much lower level of investments. Cash flow used in investments, EUR745 million is 20% down on the same position last year.
You will see in a moment, however, that the cash invested is not the same as the amount of CapEx that we actually capitalized and booked.
What you see here is that we're a couple of hundred million actually higher than what we booked in quarter 1, which relates really to, in large part, a number of contract renewals in Petrol Ofisi, which were completed in quarter 4 last year and capitalized as a consequence, but where payments were only made in the first quarter this year and that, of course, means that the cash flow CapEx is higher than the accounting CapEx, as it were.
That then produces the free cash flow of EUR145 million, which as you can see, compares to over EUR500 million negative a year earlier.
Coming now to CapEx and, as I mentioned, as you saw on the previous slide, the cash flow CapEx was minus EUR724 million, but here the accounting booked CapEx is EUR467 million, so quite a significant difference. The majority of which, as I said, is due to contract renewals in Petrol Ofisi right at the end of the year.
The EUR467 million, where we've been spending money, where almost one-quarter of it went in workovers, drilling and field redevelopments in Romania, clearly continuing to invest in Norway, in Gullfaks and Aasta Hansteen, as those developments continue to be rolled out.
Exploration and appraisal activities were EUR79 million during the quarter. And further contract renewals in Petrol Ofisi were EUR45 million and that's clearly in the downstream part. So that's the lion's share of where we've been spending our CapEx.
Coming now to the divisions and the profits that we generated. If you look at the upstream clean EBIT on the left-hand side, you see the bridge between the first quarter last year and the first quarter this year. On the right, on the other hand, you see the reconciliation -- sorry on the left, you see the reconciliation between the fourth quarter last year and the first quarter this year.
On the right-hand side, you see the reconciliation between the first quarter this year and the first quarter last year.
So looking on the left, clearly, the biggest reason for the change in profit was lower realizations, clearly lower oil price, lower natural gas price, contribute in total minus EUR155 million.
Volumes were also slightly lower versus Q4 in this first quarter. Exploration expenses, on the other hand, were better by EUR93 million.
And depreciation was also better, of which some EUR33 million of the EUR 47 million again is due to the write-downs that we took in quarter 4 last year, which, of course, you don't depreciate going forward because you've written the value of the asset down.
That brings us then to the minus EUR97 million that we actually showed in the quarter, versus the same period last year when we actually made a small profit of EUR33 million, in the upstream realizations, the impact here was clearly even more dramatic, EUR184 million.
Volumes, on the other hand, versus the same quarter last year were actually higher by EUR10 million in terms of EBIT contribution. The largest part of which is the production in Edvard Grieg, although also in Gudrun and Gullfaks our production was also slightly higher.
Exploration expenses, again more favorable and DD&A, depreciation here, actually higher than the same quarter last year and what you have here is that although you have a EUR48 million improvement due to the asset write-down, you clearly have the depreciation of the Norwegian assets which are now fully producing.
That was only partly the case in the reconciliation between Q1 this year and Q4 last year. But compared to the same quarter last year, Q1/Q1, as it were, clearly you've got a full quarter's depreciation, whereas last year, you didn't have it particularly for the Edvard Grieg asset.
Other items, there's a variation of things there. Foreign exchange, hedging, change of the residual hedging gains from the hedges that we closed last year, produces a EUR97 million loss in total for this quarter.
Key performance indicators in the upstream. Clearly, production overall has improved somewhat, 312 kboe/d against 303 kboe/d, clearly helped here from the contribution of Edvard Grieg which started in November 2015. And for the first quarter this year was fully on stream.
This one unfortunately somewhat compensated by lower gas volumes from Romania and from Austria, which, to some degree, is due to the level of natural decline, of course, which we're experiencing in both of these markets.
You see on the bottom left, OpEx in US dollars per barrel clearly continues to decline, which is very encouraging. We are certainly seeing the benefit of lower levels of service activity clearly as we cut back. But also external service costs are clearly also cheaper than they were a year ago and that's all starting to contribute favorably to the overall profit.
If you turn to the next page, the position on costs in Petrom is not dissimilar, although we actually saw a slight increase Q1 on Q2. And, of course, this is really a reflection, as you look above, to what's been happening with production, which is now 175,000 boe per day compares to 184,000 boe. And clearly, the level of natural decline is contributing to this.
So if you have a lower level of production, clearly you have to run even more quickly to keep your unit costs in line. And clearly we weren't quite able to do that in this quarter, compared to Q4. But, of course, we are still substantially lower than where we were a year ago.
In Petrom, the clean EBIT was a loss of EUR16 million, which is an improvement on the loss we had last year, which is clearly helpful. And what explains that in particular was the lower exploration expenses and depreciation, partly due to the write-offs that we booked last year, as regards the depreciation, but the oil price and sales volumes clearly more than compensated that. Production decreased by 1% in total. And the OpEx position, I've already talked about.
Turning now to the downstream. The decline in profit Q1 this year versus Q1 last year, is almost essentially in the downstream gas business. The gas business in terms of the lower commodity prices, more of a challenge in the upstream clearly.
What you see here is the margin side of the businesses it sold to end customers, which clearly also is under considerable pressure in the European market.
It should be said, however, that the same quarter last year did include one or two one-offs: for example, payments from Gazprom because they weren't delivering full volumes; the fact that we had reached a solution in terms of some of our power customers, which produced a one-off gain last year. The non-occurrence of that this year was also a big contributor to this relative decline in the downstream gas profitability.
Downstream oil, as I've mentioned already, the indicator refining margin was, in fact, down and that's hurt our bulk refining business somewhat, but the petrochemicals business, an improved performance in Petrol Ofisi has helped claw that back, so that the downstream oil business is more or less flat on where it was a year earlier.
Some KPIs for the downstream business. Our level of utilization remains quite high at 90%, although West, you see it actually decline from 94% to 89%. The Romanian refinery actually increased from 92% to 94%. And part of the reason for the decline in utilization in the first quarter was an unscheduled external power outage in the Schwechat refinery which caused production to stop for quite some time.
What of course you don't yet see is the planned maintenance shutdown which just started right at the end of Q1, but of course, will have a bigger impact in Q2.
The Schwechat refinery, of course, now is back on stream, having completed the planned turnaround.
The natural gas sales volumes, clearly you see the seasonal improvement as you go through from Q3, Q4 and into Q1, but as you look from Q1 2016 back at Q1 2015, you see that our natural sales gas volumes have decreased by 14% and this is in very large part due to the unusually warm weather that we had during this recent winter.
And of course, also in Romania, where we are seeing some of the large industrial customers, particularly in the fertilizer space, not being as active as they had been previously.
Then finally to the last slide; our expectations for the current year. We've not changed our oil price assumption. Clearly, we were below the $40 in Q1, but thankfully, the oil price has improved somewhat during Q2 and we're currently operating above that average of $40. Let's hope that it continues for the balance of the year.
Refining margins, we expect, as we've said repeatedly, to be below the 2015 levels and this is certainly coming about and, in more recent weeks, also burdened by the fact that the oil price has been relatively strong. So an improved position in the upstream has hurt the downstream somewhat.
Retail volumes are being supported by lower product prices; clearly we're most definitely seeing that. No question also that the gas markets are going to remain challenging.
Our overall production will be around the 300,000 barrel level. We're clearly higher than that right now, but we have a number of expected shutdowns in the balance of the year which we think will bring us in round about the 300,000 level.
Capital expenditure, EUR2.4 billion in total, of which clearly the majority will continue to be spent in upstream; and our exploration and appraisal expenditure, something of the order of EUR450 million, so lower as we've said repeatedly, than we've done previously, as we clearly seek to reduce our level of activity in that area in the current very difficult environment.
So that, ladies and gentlemen, is the presentation. If you have any questions you'd like to ask, then clearly, we're at your disposal. Thank you.
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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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First, just would like to say thank you very much, David, for all those years of explanations, understanding of all the business. And I wish you all the best during your retirement.
And I will ask two questions, first, regarding your CapEx. So, David, you highlighted that accounting CapEx in Q1 were EUR467 million. Cash flow statement, in the cash flow statement, CapEx were above EUR700 million.
So you explained this; that's fine. I just wanted to know if, for the rest of the year, the accounting CapEx should be more in line with the CapEx accounted in the cash flow statement, meaning that we should have on a quarter-on-quarter basis a material decrease.
Second question regards with your organic free cash flow. So you've had a Q1 organic free cash flow of minus EUR138 million. Given that oil price is improving and given that normally your cash flow CapEx should decline, is it fair to consider that we should observe a material improvement in your organic free cash flow? Maybe not in Q2 because you have some maintenance but from Q3?
And you highlighted during the strategic meeting in February that paradoxically, when the oil price will start going up, you will have some working capital release. So is it still -- do you still -- do you confirm this what you've said during the strategic meeting?
And finally, so you said that you are doing maintenance at Petrobrazi in May. If I remember well, most of your Romanian oil production goes to your refinery. So what will be the impact on your oil production or maybe on your Petrom oil sales in Q2? Should we expect a material impact thereon? Thank you.
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David Davies, OMV AG - CFO [3]
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Thank you, Mehdi, and I think it's the 57th time that you've actually got in with the first question, so congratulations on that.
At the end of the year, our guidance, as we've said just a moment ago, was EUR2.4 billion for capital expenditure and by the end of the year, I think the cash and the accounting CapEx, they're not going to be materially apart, quite frankly. And if we hit that number of EUR2.4 billion, clearly on a cash basis, having spent over EUR700 million in Q1, then you'd expect to see the cash side actually, yes indeed come down.
But given that the accounting side, as it were, was only just under EUR500 million, you may actually see some increases in that. So that's what's going to bring them broadly into line.
But cash flow-wise, yes, I think that would be a fair point and in fact, it was the case last year. We had a strong cash flow negative in Q1, over EUR900 million in CapEx last year and clearly, you saw Q2, Q3 and Q4 come down.
The free cash flow of EUR130 million, I should point out of course is after dividend and of couse we don't pay the OMV dividend during Q1; we pay during Q2. So as in every Q2, we clearly will have the cash outflow of the dividend which is going to be something around EUR330 million, which we're going to have to absorb. So that obviously needs to be baked into your expectations.
But clearly as the oil price improves, we will see some benefit potentially in working capital because we saw some negatives from that because we had a number of structured financing programs around our working capital which were based on barrels and clearly, if the value of the barrel goes down, then the benefit of that program goes down; similarly, if the value of the barrel goes up, then clearly, we'll also be able to take advantage of that as that improves.
But the real improvement of the cash flow from an improving oil price is, clearly hopefully, going to come from an improving level of cash contribution from the operations in the upstream.
It may impact negatively on the downstream. As we clearly see during times of rising oil prices, it's more challenging to actually get the prices through into the marketplace, so the downstream tends to suffer, but clearly the upstream would benefit more from that.
Then you're right, absolutely, in terms of our production of oil in Romania. The vast majority of it goes into our refinery in Petrobrazi for processing. And, of course, what we do ahead of a stop is work feverishly on the logistics to make sure that we can continue to produce.
The crude is stored. During the stop period, clearly it's not being consumed. What we then start to do is work down the stock of product that we've generated ahead of the stop to make sure that we can keep the market satisfied.
And, of course, once the stop is then over, we work very quickly on building our stock levels back up of product, and of course getting the crude level of inventory down in the refinery. So it should not have an impact on production during the quarter; it never has had so far.
Where it can have an impact, of course, is as the valuation of -- the volume and values of inventories move up and down, we clearly have to get clever with the calculation of the interdivisional profit elimination in Romania which is always something of a challenge.
But given that it should be back on stream in May, by the end June, hopefully, we'll have reached the more stable position in terms of a total working capital so that shouldn't have a significant impact, I would hope.
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Mehdi Ennebati, Societe Generale - Analyst [4]
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Thank you very much for this, David.
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Operator [5]
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Nitin Sharma, JPMorgan.
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Nitin Sharma, JPMorgan - Analyst [6]
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Morning, David. Thanks for the presentations. Two questions from my side. First one on taxes, please. So you touched on negative tax rate and the driver being the earnings mix. But could you maybe explain the implications of that negative back trade on operating cash flow if it were to carry on?
The second question is more around the Brent euros differential, and the outlook statement suggesting that you expect this differential to remain wider compared to some prior years.
Correct me if I'm wrong, but I think a wider discount is a negative for Petrom upstream earnings, but is a positive for your downstream oils business. So could you maybe give us some color on the earnings sensitivity from this wider differential?
And finally, best wishes to you and Felix for your future endeavors. Thanks.
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David Davies, OMV AG - CFO [7]
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Thanks for the latter, Nitin, much appreciated from both of us. In terms of your questions, the tax benefit that was recorded in Q1 was a non-cash tax benefit. It was all deferred taxes, which is basically recognized in the losses which were predominantly in the UK and in Norway, and expecting the recovery of those losses in tax terms when profits start to rise in the future.
And clearly, you have to make a conservative, cautious assessment of when you expect the businesses to return to profit, and based on the expectations we do have in the medium term of the oil price rising, as profits will then start to be earned in those markets, the losses that you booked prior to that, you can offset against those.
So the tax benefit in terms of cash will only start to show up in the future once the businesses generate profits to absorb these losses, and it would show up in cash to the extent that the tax that you book, you will not be paying in cash because you've set it off against the losses that you've made.
So they are non-cash effective tax incomes that we've booked and they're purely a function of the deferred tax asset that we've created as a consequence of the losses.
The Brent/euros, you're absolutely correct. The reference price for the crude transferred from upstream into the refinery in Romania is euros and the reason, of course, we do that is that is basically the benchmark crude that's processed in Romania and obviously impacts the downstream prices, margins as well, so negative, yes, to the upstream, positive to the downstream.
But I think it really rather depends on the absolute amount of the thing. If it's a dollar, what's our capacity of the Petrobrazi refinery? 4.5 million tonnes. 7 barrels in a tonne, so if it was a $1 difference, all things being equal, you'd probably have a $30 million difference between upstream profit and downstream profit. All things being equal, assuming of course that the downstream margins were able to pass it through.
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Nitin Sharma, JPMorgan - Analyst [8]
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Understood. Thank you.
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Operator [9]
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Josh Stone, Barclays.
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Josh Stone, Barclays - Analyst [10]
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David, thanks for the presentation. I've got two questions, please. One on the indicator refining margin. If I look at the breakup between East and West, I notice that East is quite a large premium to West and has been for the best part of a year.
I suspect part of it's related to the Petrobrazi upgrade, but also, the outages you've experienced at the West parts. But, for the rest of this year, is there something structural there and do you expect that premium between West and East to continue for the rest of this year?
And then secondly, a small one on the corporate charge; came in quite low at around EUR4 million. Is there anything going on there, and how do you expect that to trend? Thank you (technical difficulty).
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David Davies, OMV AG - CFO [11]
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Hopefully, I'm back in again. I'm sorry; I don't know what happened then. I apologize for that, Josh. I don't know whether you heard my answer.
I mentioned that the refining margins in Petrobrazi clearly do now reflect the fully completed turnaround program. And of course, the product yield, as a consequence, is a premium compared to what it was previously. This is clearly a major driver of the improved refining margin situation.
Also of course to the question of Nitin, although the spread is quite volatile, the crude that's going into the Petrobrazi refinery is being basically priced against euros, which clearly still is at a discount to Brent and that helps also.
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Operator [12]
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Thomas Adolff, Credit Suisse.
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Thomas Adolff, Credit Suisse - Analyst [13]
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Hi David, an attempt for early retirement, I guess. A few questions -- oh actually, before the questions, I always wanted to say I appreciated your transparency. And I don't want to be harsh to other CFOs, but sometimes, I always felt other CFOs have been too promotional and you've been always very, very transparent, so thank you for that.
Questions looking out maybe one or two years when you've completed your disposal of Petrol Ofisi and [Gastech] as well. How should I think about the capital allocation, assuming the oil price will continue to reset, given that your balance sheet will look quite healthy then?
Staying on with the question on Petrol Ofisi, you said you've hired investment bankers, and you're now approaching potential buyers. I wondered whether it's fair to assume that potential buyers have to be Turkish entities, or at least a Turkish entity has to be part of a consortium.
My final question, I guess, is on Iran, where you've signed an MoU. I was a bit surprised because, okay, it's only an MoU, but still we haven't seen the IPC being finalized. So on what basis was this done? Thank you.
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David Davies, OMV AG - CFO [14]
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Thank you, Thomas, and thank you also for the kind words you mentioned at the beginning.
As I said at the strategy presentation we did earlier in the year in London, clearly with the disposal program, if it's successfully executed and, of course, also if our expectations come to fruition that the oil price will improve, albeit slowly, but improve nevertheless as we go into next year and the year after, then the cash flow position, and as a consequence, the balance sheet, will clearly become stronger.
At that point in time, of course, we will also have -- we'll be up to our necks in executing the investment in Russia, and hoping for production to come on stream a year or two thereafter. That's really going to help us start to be able to address what is a challenge for us, particularly in this environment where we're cutting back on investments of profitably replacing the reserves that you're consuming, which, as you are well aware, more recently in particular, has been quite a challenge for us.
Clearly, in the long term, I'm not going to be around in any case. But the structure of the balance sheet, as you rightly say, would improve, given the disposal program being successfully executed. And of course, how the new management then chooses to structure that, I'd really rather leave it to them. But it's important that we have the opportunity, through this program, to make sure that the balance sheet strength improves from a relatively strong position today.
In terms of Petrol Ofisi, we have had expressions of interest already from both Turkish entities and non-Turkish entities. It certainly wouldn't be ourselves who would set any criteria in terms of what kind of structure the buying consortium or the buying individual needed to have.
Clearly, historically, and this was also the case for our first investment in Petrol Ofisi itself, it has not been unusual for non-Turkish partners to partner up with Turkish players. But frankly, we'll see what the process throws forward.
As I say, we have had interest expressed, preliminary inquiries of course at this stage, from both Turkish entities and non-Turkish entities.
The MoU on Iran, it's clearly extremely early stages. There will certainly be a lot of water to flow under the bridge in terms of determining how the profitability could actually work there. And inclusion of an agreement, which actually gives you some degree of comfort and certainty that you can invest there profitably, is clearly going to be a prerequisite for any projects that we ultimately get involved in.
It's in a very early stage MoU. We hope that things will progress to enable us to actually invest, but the precondition is clearly going to be that we can generate profits there.
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Thomas Adolff, Credit Suisse - Analyst [15]
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Thank you. Can I cheekily ask another question, very straightforward one?
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David Davies, OMV AG - CFO [16]
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Go ahead.
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Thomas Adolff, Credit Suisse - Analyst [17]
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Nord Stream 2, you seem in the press release very, very confident that you can take FID later this year, despite the fact the EU Parliament having its doubts around this project. I just wanted to better understand where this confidence is coming from.
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David Davies, OMV AG - CFO [18]
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Well I think Rainer clearly would be a better person to speak to on that. But his experience with the Nord Stream 1 project and the fact that the transit countries involved in Nord Stream 2 are politically very strongly aligned to facilitate this project, leads to that confidence.
There's clearly a political process which any project like this would need to go through, and that support needs to be shown for the project to happen. But the strong support of the nations that are actually hosting the pipeline investments is a fairly good starting point.
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Thomas Adolff, Credit Suisse - Analyst [19]
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Perfect. Thank you very much, David.
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Operator [20]
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Henri Patrico, UBS.
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Henri Patricot, UBS - Analyst [21]
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Hi, David. Thank you for the presentation. Just a couple of quick questions from me. The first one just on the clean tax rate; where do you see that moving over the next few quarters? Assuming that the oil price remains fairly close to the current level of $45 per barrel.
And then secondly, just want to go back to Joshua's question on the corporate charge in the first quarter, which was very low at EUR4 million. Was there anything special going on there? Thank you.
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David Davies, OMV AG - CFO [22]
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On the corporate charge, I mentioned it a moment ago, it's going to be about EUR40 million this year. Instead of EUR4 million in quarter 1, it should have been EUR10 million. And the EUR6 million that isn't there is basically stuck in the businesses. That will be addressed during the course of the year. So it's not materially different in absolute quantum although percentage-wise, it does look at bit unusual.
Then what was the other question?
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Henri Patricot, UBS - Analyst [23]
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On the clean tax rate.
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David Davies, OMV AG - CFO [24]
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Yes, the clean tax rate, sorry, yes. Particularly from such a high negative tax rate in quarter 1, albeit the level of profit was quite low, it's hard to really see how it's going to be significantly positive and an actual expense by the time we get to the end of this year, even with an improving oil price environment.
So I would expect it not to be as dramatically high as it was quarter 1. Hopefully, we will see in quarter 2 a higher level of profit, or indeed, a level of profit from the upstream business which should change that picture somewhat as well. But I rather suspect it's going to be negative by the end of the year. But certainly nothing like as high as we currently have, I don't believe. It's very unusual.
It's very challenging also because, of course, you have to be cautious in booking deferred tax assets because you have to have a degree of confidence that you can recover them in the foreseeable future. And that, of course, makes the whole calculation very much subject to judgment.
Clearly, all the deferred tax assets that we have as a Group are not recognized; we have not fully recognized them. There are assets which are not booked as it were because, of course, the future environment is so uncertain.
But we believe those that we book, particularly in Norway and the UK, will be recoverable as the price of oil improves, and of course in the UK, as our production in Schiehallion comes back on stream in the medium term as well.
But it makes it very challenging to actually give clear, sensible guidance on what our tax rate is going to be at the moment. Basically, making losses in upstream and profits in downstream complicates the tax rate quite considerably for our integrated business.
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Henri Patricot, UBS - Analyst [25]
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Okay, thank you. And all the best for the future.
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David Davies, OMV AG - CFO [26]
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Thank you very much.
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Operator [27]
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Hamish Clegg, Bank of America.
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Hamish Clegg, BofA Merrill Lynch - Analyst [28]
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A few quick questions from me. Just first of all, I wondered if you could elaborate on the North Sea swap now. We seem to have moved from potentially gas assets back into upstream assets for the swap. Could you tell us maybe how that could be shaped? Would it be a spinout co?
Secondly, within that, would you consider using cash from the Ofisi sale to contribute towards that asset swap to balance it in any sort of way? Or will that cash be used to pay down debt?
My second question is just on upstream volumes. You guided us quite clearly that Romania and Austria would see declines with lower CapEx. On my numbers, it looks like year on year minus 5% and minus 10% respectively. Can we see this trend continuing with the current CapEx outlook or accelerating or stabilizing?
Third question, still in upstream, sorry, this is a big one, I know it's your last call, so making the most of you. Exploration; the expenses are at quite low levels in terms of exploration expense this quarter, 30%. Could you maybe suggest what the risk is within the exploration portfolio? I know it's much lower than it was previously. And what we're looking forward to?
Also, and this is the final one, I promise; elaborating more on what Thomas was asking about Nord Stream 2. I've been reading that the US have been [opposing] the project. I wondered what OMV would say in terms of how much political influence do you feel the US has over a project like this. And obviously, thanks a million for all yours and Felix's help over the years.
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David Davies, OMV AG - CFO [29]
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Thanks for that, Hamish. Let's see if I can finish this by the end of business today (laughter). In terms of the assets moving from gas and downstream, we never actually said anything about the assets. There's been a lot of speculation and we simply haven't commented upon that. So what's moved, frankly, has really been the speculation rather than anything that we were feeding into.
I don't want to go into too much detail in terms of the particular asset, because I think we've been sufficiently circumspect by saying a North Sea subsidiary and not which particular one. So I'd really rather leave it at that.
But clearly, what we're talking about is selling a stake in that subsidiary. So we would actually find that Gazprom would become a co-owner of that subsidiary. We're not talking about assets being spun out of any of the subsidiaries.
Then the decline in upstream production, particularly in Romania and to a degree in Austria, is clearly being impacted negatively by the reduced level of CapEx. But in fairness, what we're also doing and having to do, of course, in a very low oil price environment, is really filter through loss-making wells. And if we have wells which at these low prices are cash negative, then clearly we have to be aggressive and cut the production as a consequence.
We've said fairly consistently that the natural decline rate could be around about the 5% and that clearly is more or less where we are right now. Of course, there is a risk, of course, with this lower level of CapEx, and also the contribution from the low oil price, that that actually comes to fruition in those core markets.
Then the exploration risk in the portfolio, clearly, there's always risk until you actually reach the final investment decision, given what you've capitalized. But given where most of our CapEx has been actually going in exploration over the last couple of years has really been into the Black Sea activity with Exxon, I think that's relatively low risk.
Of course, clearly we haven't taken any investment decisions there, but we're very encouraged by the results of the drillings that we did, the exploration wells that we've drilled; the majority of them were discoveries. So that gives us a degree of confidence. But of course, until you've actually taken a final investment decision, there's always a risk that there's a write-off associated with it.
And then I'm not a politician. Clearly, the US has something it's going to have, they're going to get engaged in it, but I can't really quantify what impact that would have. I think the primary impact is always going to be the host nations of the pipeline, quite frankly.
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Hamish Clegg, BofA Merrill Lynch - Analyst [30]
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Brilliant, thanks. You covered it all. Appreciate everything.
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Operator [31]
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Marc Kofler, Jefferies.
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Marc Kofler, Jefferies - Analyst [32]
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Thanks for taking my questions; two remaining, please. Just coming back to Nord Stream and the transition of the strategy towards Russia, is it right to think of Nord Stream 2 FID and the Achimov asset swap as two mutually exclusive events? Or should we be thinking about them as in some way related?
And then, secondly, just on the downstream. I was hoping you could give us any line of sight on the indicator refining margin into the second quarter, and perhaps if you have any observations around trading opportunities in the second quarter and as we head into the summer, based on the crude and the product side. That would be especially helpful.
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David Davies, OMV AG - CFO [33]
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When the first LOI was signed, as regards to Nord Stream 2, which I think was in June last year, it was announced simultaneously not only that we would engage in the Nord Stream 2 project, but that we were also signing an agreement with Gazprom to actually swap and acquire a stake in the Achimov field.
There's no physical relationship between the two projects. Clearly, gas will be produced in the Achimov field and much of that gas will find its way into Europe, potentially, through the Nord Stream pipelines.
But there's no the pipeline has to be built to enable the development of Achimov to take place; that isn't the case. But clearly, our interest in one was also in parallel with our interest in the other, so to that degree, there's clearly a relationship between the two.
Downstream margins in quarter 2 have been a little weaker, and that's also impacted by the fact that the oil price is recovering. As I mentioned earlier on, clearly, that puts pressure on refining margins and marketing margins as well. The market, although very efficient, is not quite as effective at getting the prices through instantaneously; as they go up and down for that matter. But it's clearly having some impact on downstream margins.
And as regards trading opportunities, we clearly are involved in trading, but the vast majority of our trading activities is, basically, ensuring a functioning and efficient supply of crude into our refineries, basically, in terms of open positions and suchlike. That's really not what the business is about.
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Marc Kofler, Jefferies - Analyst [34]
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That's great. Thanks very much, and all the best for the future.
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David Davies, OMV AG - CFO [35]
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Thank you very much.
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Operator [36]
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Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale - Analyst [37]
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Just a follow-up question on Borealis. So you said, David, that Borealis paid EUR133 million in Q1 related to 2015. That represents roughly one-third of the profits that you booked from Borealis in 2015.
Should we then consider for the future that the dividend you will receive from Borealis every year will be around one-third of the profits that you book from this company? Meaning, there is a kind of different policy here, or no?
Second question related to Borealis again. Last year, you made very strong earnings from Borealis. Should we consider that this year should be even higher than that, given that versus Q1 last year, you are almost doubling your earnings from Borealis?
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David Davies, OMV AG - CFO [38]
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One-third of the profits is roughly equivalent to our share in the Company clearly, so that means it distributed close to 100% of the profits that it's made, and in the long term, you wouldn't really expect the Company to be able to sustain that level of distribution.
The situation with Borealis, however, is a little different in that it has the investment in Borouge, of course, which it's booking its share of the profits but it's not receiving cash dividends from Borouge yet because clearly Borouge is paying down its debt.
Borouge is very profitable, even at low oil prices, and, clearly as oil prices improve, its profitability will also improve. But once cash starts to flow out from Borouge into Borealis, there is the potential that the dividend paid out from Borealis starts to lose a direct relationship with the profit it's earning because, of course, it will be receiving, finally, dividends from Borouge, which it wasn't receiving previously.
It only gets relatively low dividends at the moment from Borouge, and the capacity for Borouge to pay dividends at a much higher level in the future, clearly, is growing as its debt position improves and also as the oil price improves.
We have seen strong petrochemical margins and, as a consequence, an improved performance, a continuing strong performance from Borealis in Q1. It's very impressive. And not just in Borouge, but also the European petrochemicals business is also relatively strong.
The outlook for the year is rather more difficult to project. I think it would be fairly aggressive to suggest that we'll have a better year this year than last year there, because last year was very good, but we'll see.
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Mehdi Ennebati, Societe Generale - Analyst [39]
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Okay. Just one clarification. So the EUR133 million dividend --
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David Davies, OMV AG - CFO [40]
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It was EUR153 million, by the way, Mehdi.
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Mehdi Ennebati, Societe Generale - Analyst [41]
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Okay, EUR153 million, this is for 100% of Borealis or your share?
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David Davies, OMV AG - CFO [42]
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No, no. That's the cash we received, so it represents a 36% share of Borealis as a dividend.
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Mehdi Ennebati, Societe Generale - Analyst [43]
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Okay. Okay, thank you very much.
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Operator [44]
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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 [45]
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Well, as again, I said at the beginning, it's been a tremendous honor and privilege to have the opportunity to represent the Company vis-a-vis the investors and the analysts.
All good things come to an end, and I'd like to thank you for your support. It's been great dealing with you and your predecessors, which of course have been many over the last 14 years. Thanks very much.
And, as ever, if you do have any questions in the interim, call Felix and the Investor Relations team. And from June 1, Mrs. Moll will be with us and she'll be able to take over. Thank you very much. Bye-bye.
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Operator [46]
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That concludes today's telephone conference call. A replay of the call will be available for one week. The number is printed on the telephone conference invitation. Or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers.
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