Q2 2016 OMV AG Earnings Call
Aug 10, 2016 AM CEST
OMV.VA - OMV AG
Q2 2016 OMV AG Earnings Call
Aug 10, 2016 / 09:30AM GMT
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Corporate Participants
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* Magdalena Moll
OMV AG - Head of IR
* Rainer Seele
OMV AG - CEO
* Reinhard Florey
OMV AG - CFO
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Conference Call Participants
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* Haythem Rashed
Morgan Stanley - Analyst
* Michael Alsford
Citi - Analyst
* Henri Patricot
UBS - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Marc Kofler
Jefferies - Analyst
* Lydia Rainforth
Barclays - Analyst
* Nitin Sharma
JPMorgan - 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 Q2, 2016 results. (Operator Instructions).
You should have received a presentation by e-mail. However, if you do not have a copy of the presentation the slides and the speech can be downloaded at www.omv.com.
At this time, I would also like to refer you to the disclaimer which includes our position on forward looking statements.
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 Magdalena Moll, please go ahead Miss. Moll.
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Magdalena Moll, OMV AG - Head of IR [2]
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Yes, thank you very much, Simone. Good morning, ladies and gentlemen. I'm [Maggie] Moll and this is my first conference call on behalf of OMV. I would therefore like to say a warm welcome to all of you who joined us this morning for the presentation of OMV's second quarter 2016 results.
2016 continues to be a difficult year for the oil and gas industry, in the second-quarter however OMV managed to generate clean CCS net income attributable to stockholders of EUR222 million, and delivered a positive cash flow after dividend of EUR172 million.
With me on the call today to explain the results are Rainer Seele, our Chairman of the Executive Board and our Chief Executive Officer; and Reinhard Florey, our Chief Financial Officer.
Rainer will highlight OMV's performance in the second quarter, as well as discuss important portfolio developments. Then Reinhard will review key aspects of the financial statement, and talk about the segment results in much more detail. Rainer will conclude with the outlook for the full-year 2016, and afterwards both gentlemen will be happy to take your questions.
With this I would already like to hand over to Rainer.
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Rainer Seele, OMV AG - CEO [3]
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Yes, ladies and gentlemen, good morning and thank you for joining us. I'm more than happy to review OMV's second quarter financial results performance together with our CFO, Reinhard Florey, who joined the team at the beginning of July.
Let me start with the key messages. In the second quarter of 2016 OMV delivered a strong cash flow from operations of more than EUR1 billion, and the positive free cash flow after dividend of EUR172 million.
We continued our rigorous CapEx discipline and reduced our CapEx guidance to EUR2.2 billion in 2016.
We are successfully implementing the cost reduction program, and will reach our target of EUR100 million ahead of schedule.
Yesterday, we signed an agreement to sell a 30% stake of the Rosebank field. The transaction is expected to be completed in the fourth quarter of this year. It rebalances our upstream portfolio and it reduces our future investment requirement.
Health, safety, and security is a top priority for OMV and critical to the responsible delivery of energy. This is why we apply stringent corporate regulations, hazard identification and foster a culture of care to ensure that OMV is a healthy, safe, and secure place to work.
In the first half of 2016 the lost-time injury rate unfortunately trended upward. We are deeply concerned that there were more serious incidents.
Senior management investigates and analyzes current high-potential incidents. We have already implemented a major accident prevention policy across the Group and commenced the rollout of specific training programs.
Despite our cost reduction efforts, we do not compromise on health, safety and security.
Now, I would like to briefly talk about OMV's market environment. Let's start with the oil market.
Average oil prices recovered from the $34 per barrel in the first quarter to $46 per barrel in the second quarter 2016. Speculation about the production freeze agreement among major oil producing countries, first signs of weakening US production, and temporary production outages were responsible for this development.
The Central European gas prices were flat in Q2, 2016 compared to Q1, 2016. OMV's realized gas price in upstream was EUR13 per megawatt hour, due to long-term locked-in gas agreements, and pricing in countries not linked to the Central European gas hub price.
A short remark on the refining market, compared to first quarter 2016, the OMV indicator refining margin slightly declined, reaching an average of $4.7 per barrel in the second quarter of 2016. However, the middle distillates recovered slightly, supported by supply disruptions and a modest increase in demand.
Finally, petrochemical margins decreased compared to the same period in 2015. The previous year shutdowns had kept supply in Europe upon a relatively low level.
I will now highlight the key figures of the second quarter and Reinhard will comment on them in greater detail later.
Clean CCS EBIT declined from EUR375 million to EUR214 million, due to lower upstream and downstream oil results. In contrast, the downstream gas business was clearly up, due to successful restructuring efforts, resulting in one-time effects.
Clean CCS net income attributable to stockholders came in to EUR222 million. This was slight higher than the clean CCS EBIT, because of the strong result from Borealis and low taxes on a clean basis.
Clean CCS EPS amounted to EUR0.7 versus EUR1.1 in the same quarter last year.
At EUR1,036 million, cash flow from operations was slightly up versus second quarter 2015 supported by the release of working capital.
Free cash flow before dividends came in at EUR551 million. Driven by the strong operating cash flow, which already reflects the first benefits of our cost saving program and substantially lower cash outflows from investments.
A major accomplishment was that free cash flow after dividends was also positive at EUR172 million, despite making dividend and hybrid coupon payments.
OMV generated a negative EBIT of EUR300 million. We incurred special changes of EUR608 million, mainly as a result of the Rosebank impairment, which I will explain a bit later.
Consequently, the net loss attributable to stockholders amounted to EUR168 million.
Moving on to our financial performance. In the first half of 2016, OMV realized solid operating results, despite the 31% decrease in the oil price. OMV reported clean CCS EBIT of EUR381 million, 46% lower than in the previous year. Both upstream and downstream turned in lower results.
Clean CCS net income, attributable to stockholders, decreased from EUR600 million, in the first half of 2015, to EUR396 million.
Free cash flow before dividend showed a huge improvement from a negative EUR421 million, in the first half of 2015, to a positive EUR406 million this year.
Following dividend and hybrid coupon payments, free cash flow after dividends also came in positive, in line with our strategic target.
In the second quarter of 2016 we continued our negotiations with Gazprom on the asset swap. As you know, OMV has been offered a stake of 24.98% in Achimov IV/V project. In turn, Gazprom will receive a share in an OMV North Sea subsidiary.
We are aiming to reach agreement with Gazprom on the commercial terms in the second half of 20165. Once this happens, the approval process with the authorities will start, which may take one or two years.
As announced on August 8 -- August 9, 2016, we will be selling 30% of our share in the Rosebank project to Suncor Energy, headquartered in Canada.
As you know, Rosebank was part of the Statoil deal in August 2013. At that time, we increased our share, Rosebank, to 50%. Under the terms of the agreement Suncor will make an initial payment of $50 million on closing. The transaction is subject to conditions, including regulatory approval, and it's anticipated to close in the fourth quarter of 2016.
Following the co-venturer's approval of the Rosebank project final investment decision, OMV will receive an additional consideration of up to $165 million.
As a consequence, we have to write-down the book value of the asset by EUR530 million.
The deal will significantly reduce our exposure in the UK deep-water oil field development. At the same time, OMV's related future investment requirement will decrease, in line with our strategy, to focus on low-cost regions.
The divestment of our minority stake in Gas Connect Austria continues to make progress. Due diligence is ongoing and numerous financial and strategic buyers have indicated strong interest in the 49% stake. We are targeting to close the deal in 2016, which will positively impact our cash flow.
OMV is continuing its divestments of efforts of OMV Petrol Ofisi. The recent events in Turkey put stress on the M&A market, no doubt. However, our view is that the specific transaction will not be negatively affected, given the stable performance of Petrol Ofisi in past quarters.
OMV has finished the information memorandum and sent it recently to prospective buyers.
OMV finalized the takeover of the 35.7% share in EconGas at the end of May 2016. We are now streamlining the organization with a major focus of integrating the EconGas field activities into OMV.
In the second quarter, we also started the marketing campaign in Germany. In this market, we ensured a good long-term supply position from increasing equity gas production, as well as from long-term contracts.
This is currently being marketed by hub trading and direct field channels. OMV envisages to achieve a market share in Germany of 10% until 2025.
Well, OMV's objective is to focus on profitable barrels and sustainable reduction of unit CapEx costs. Therefore, OMV has a vigorous CapEx discipline.
At the beginning of 2016, we estimated CapEx to come in at EUR2.4 billion. We made an effort to reduce this amount and, according to our current forecast, we will only spend EUR2.2 billion. This will not impact our production forecast. In the first half of 2016, we spent EUR1 billion, with upstream projects amounting to EUR700 million.
OMV Petrom spent roughly EUR240 million on field redevelopment project, as well as on workovers and drilling, including the Neptun project in the Black Sea.
In the North Sea, the majority of our CapEx has been allocated to the development of the Gullfaks, Schiehallion and Aasta Hasteen fields, as they continue to be rolled out. In Tunisia we have proceeded with the development of the Nawara field.
For 2017, we are again budgeting CapEx of around EUR2.4 billion.
In 2016, we will reduce exploration and appraisal by 26%, to EUR450 million. In the first half we spent EUR166 million, mainly related to the Wisting well in Norway, and exploration and appraisal activities in Romania.
We also started the drilling process at the Polshkov well in Bulgaria, a review of our sub-Saharan Africa position made us decide to cease activities in Gabon, and onshore Madagascar.
In the second half of 2016, we will increase our spending, with the focus on projects in the Middle East, Romania and in the North Sea.
All these strategic targets in 2017 will be to reduce exploration and appraisal expenditure, to EUR300 million. OMV is making good progress implementing the cost reduction and efficiency program.
At our Strategy Day in February, we told you that OMV plans to achieve a cost reduction of EUR100 million, by 2017. The program is ahead of schedule, and we are pleased to inform you that OMV will already reach its target by the yearend of 2016.
In upstream, we optimized field costs; renegotiated with contractors; cut corporate cost; and restructured our operations in Romania. Downstream continued the implementation of its strict cost management program, across all business units.
This all means that for 2017, we can commit to more than EUR150 million in cost savings, compared to 2015. Further cost reduction efforts are ongoing.
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Reinhard Florey, OMV AG - CFO [4]
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Good morning, ladies and gentlemen, this is Reinhard Florey speaking; very warm welcome from my side. I am very pleased to be speaking to you today, and I'm looking forward to meeting many of you, during my upcoming roadshows.
Starting now with a summary of the Q2 income statement. Reported EBIT was negative, at EUR300 million, as a result of the special charges we booked. These were mainly related to the impairment of our 50% stake in the Rosebank field, as well as the upstream licenses in Norway, Madagascar and Romania.
As Rainer already said, the signing of the sale agreement with Suncor for 30% stake in Rosebank, was very recently concluded and, thus, was also not yet included in our trading statement.
The net financial result was EUR72 million, with Borealis again contributing positively with EUR100 million -- EUR111 million; the comparable number in the previous year was EUR127 million.
OMV also recorded EUR111 million in tax income, which is mainly attributable to losses from high tax upstream countries, including the effect from the Rosebank impairment.
Clean tax rate is in the single digit, given the strong contribution from Borealis, and losses from high tax upstream countries.
Non-controlling interests were down, driven by lower contribution from OMV Petrom. This brings us, on a reported basis, to a net loss attributable to our stockholders of EUR168 million, which is equivalent to EUR0.51 per share.
If you clean the results for the special charges, you see that our performance was solid. Clean net income attributable to stockholders in the quarter, on a CCS basis, amounted to EUR222 million.
Let me now turn to our cash flow, which was very strong in Q2, 2016. At EUR1.036 billion, the cash flow from operating activities was significantly stronger than both prior quarter and previous year.
Cash inflow from net working capital amounted to EUR345 million, supported also by the trade financing measures.
Depreciation and impairments amounted to EUR1.157 billion.
We used EUR526 million in cash for investments.
The free cash flow before dividends, came in at EUR551 million, driven by the strong operating cash flow and substantially lower cash outflows for investments.
Major accomplishment was that free cash flow after dividends was also positive at EUR172 million, despite making a EUR326 million dividend payment to OMV stockholders, and a EUR51 million hybrid coupon payment.
But, of course, the current market environment puts pressure on the Q2, 2016 results. Clean CCS EBIT declined from EUR375 million to EUR214 million. Despite the 26% lower oil price, upstream clean EBIT broke even.
Production volumes were up 3%, reaching 316,000 barrels of oil equivalent a day, mainly attributable to higher production in Norway.
The clean CCS EBIT performance has been supported by the successful implementation of our cost reduction program, which resulted in 15% lower OpEx per barrel.
Downstream clean CCS EBIT declined from EUR269 million to EUR250 million. This was a combination of some lower downstream oil, but higher downstream gas results.
The OMV indicator refining margin decreased, mainly due to higher crude prices. In contrast, the downstream gas business was clearly up, also thanks to some one-time effect.
Net corporate costs were at minus EUR12 million.
OMV recorded a negative effect in the consolidation line, of EUR24 million, predominantly in OMV Petrom.
Now, let's look at the reconciliation from clean CCS EBIT to EBIT, as reported. Adding back the inventory effect of EUR94 million, shown as CCS gains, and deducting the special items in the amount of EUR600 million negative, which I explained earlier, EBIT came in a negative value of EUR300 million.
On our next chart, we see that upstream clean EBIT development in Q2 versus previous year. Clean EBIT declined from EUR116 million to zero, as a result of significantly lower oil and gas prices.
The realized crude oil and gas prices dropped by 32%, and 19% respectively. Realization, which also includes hedging and foreign exchange effects on revenues, had a negative impact of EUR273 million on clean EBIT.
Please note that from Q2 2016 onwards the hedging effects are included in the realization figure.
Upstream reported at 3% lower sales volume, compared to last year. But -- [this] situation led to a buildup in stocks. The net effect increased clean EBIT by EUR11 million. Lower clean exploration expenses caused by reduced exploration activities, particular in Romania and the North Sea, positively impacted clean EBIT by EUR69 million.
Lower depreciation as a result of the lower asset base, following the impairment in 2015, contributed EUR28 million to clean EBIT.
Finally, lower production costs, which are reported under the section other, contributed to an improvement in clean EBIT. This reflects the successful implementation of our strict cost reduction program.
Looking now into our upstream key performance indicators. Here you see the quarterly development of two of our key performance indicators: hydrocarbon production and operating expenditure on the unit level.
Production increased by 3% versus last year, with a roughly even split between oil and gas. Several projects in Norway are contributing to this higher production level.
Ramp up at Edvard Grieg, which brought [us] on stream in Q4, 2015, progressed according to plan. Edvard Grieg produced 14,000 barrels of oil equivalent per day.
In addition, gas flow down at Gullfaks also started in Q4, 2015, and contributed 7,000 barrels of oil equivalent per day.
At the Gudrun field, two new wells were brought on stream, producing 3,000 barrels of oil equivalent per day.
On the other hand, OpEx in US dollars per barrel, oil equivalent, decreased by 15%, to $11.5 in Q2, 2016, due to strict cost management coupled with higher production levels.
The cost saving measures included reductions in the cost of materials, personnel and services.
Downstream, clean CCS EBIT decreased from EUR269 million to EUR250 million. This was attributable to the lower refining and petrochemical margins in downstream oil, as well as scheduled turnaround activities at Schwechat and Petrobrazi refineries. The turnaround cost about EUR20 million.
In the retail business, margins improved, driven by a strong recovery in Turkey.
In contrast, downstream gas, clean EBIT was up by EUR89 million, largely driven by restructuring effort, which resulted in one-off effect in the amount of approximately EUR40 million. This included a higher valuation on forward contracts, as well as settlement for a gas storage contract, which resulted in a gain.
Here you see the decrease in refining margin, from $7.8 per barrel, in Q2 2015, to now $4.7 per barrel in Q2 2016. The indicator refining margin for the Western refineries decreased from [$7.4] per barrel to [$4.0] per barrel, driven by lower gasoline and middle distillate spread, jet, diesel and heating oil.
The indicator refining margin east decreased from [$9] per barrel to [$6.8] per barrel. Due to a higher old crude consumption, Petrobras benefited more from lower oil prices than the refineries in the west.
The scheduled turnaround of the fuel units at Schwechat and Petrobras, each lasted for approximately one month. Consequently, the refining utilization rate decreased from 92% to 72%.
At 7.6 million tonnes, total refined product sales were stable. They were not affected by the turnaround, since we have prepared for them by building up stocks.
Sales volumes in the petrochemicals business were flat. Despite network optimization in Turkey, retail sales volumes of 2.6 million tonnes, remain on the high level of the previous year.
Looking at downstream gas, key performance indicators at now 24.4 terawatt hours. Natural gas sales volumes were 6% higher than in the same period of the previous year, mainly due to Austria. OMV Petrom sales to third parties was slightly less because of lower demand from chemical customers. Sales in Turkey was slightly up, due to advantageous supply conditions.
The natural gas sales margin was higher compared to Q2 2015 since we realized positive one-time effect. Due to the regulated tariff the gas transportation business, Gas Connect Austria, showed stable clean EBIT contribution of EUR30 million.
The next slide shows now the development of operating results at the OMV Petrom Group. Clean CCS EBIT decreased significantly from EUR148 million in Q2 2015 to EUR49 million. This was driven by lower results in both upstream and downstream. While the upstream result in OMV Petrom was lower than last year, it still amounted to a positive number of EUR43 million. Downstream also contributed EUR30 million to earning.
At 177,000 barrels of oil equivalent per day, production was also down by 2%.
The cost reduction production at OMV Petrom made significant progress and is reflected in the 8% decrease in upstream production cost to $12.1 per barrel oil equivalent.
Downstream clean CCS EBIT decreased 39% to EUR30 million, due to lower refining margins at the turn around at Petrobras refinery.
Downstream gas clean EBIT improved from minus [EUR19] million in Q2 2015 to minus [EUR7 million].
Benefiting from the strong cash generation of the OMV, of the Group, OMV reported net debt just below EUR4 billion. Despite with the impairment with gearing and equity ratio remains relatively stable at 29% and 45% respectively, thus gearing is in line with our long term target of maximum 30%.
OMV's balance sheet is in a healthy state reflecting a strong liquidity positon with EUR1.3 billion in cash and cash equivalents, and EUR3.6 billion in undrawn credit facilities.
The management team has three financial priorities: focus on cash flow, maintaining a strong balance sheet and improved shareholder return.
Now let's discuss cash flow first. We have to make sure that we generate sufficient cash to finance our investment, enable dividend payments and, at the same time, manage our debt level.
The strength of the balance sheet is very much in focus in order to get good access to the capital market and to ensure that OMV compares well with peers, both regarding its financial stability and its rating.
Finally, we strive to improve shareholder return so that the OMV share is and will remain an attractive investment.
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Rainer Seele, OMV AG - CEO [5]
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Well, ladies and gentlemen, let me finalize now with the outlook for the full-year 2016.
For the full-year 2016, we stay with our oil price assumption of $40 per barrel on average.
Due to persisting over capacity in European markets, refining margins are projected to be below the levels of the first half 2016. Capacity utilization is expected to be above 90% in the second half since we will have no major turnarounds.
The gas market environment in Europe is characterized by oversupply with natural gas margins expected to remain on low levels. Gas prices on European spot markets are expected to remain flat compared to prices at the end of second quarter 2016. Current market forwards, however, show a slight upward trend for the next months.
We updated our production guidance for 2016 to slightly above 300,000 barrels oil equivalent per day, given that we managed a good production performance in the first half.
We continued with our rigorous CapEx discipline and thus reduced our CapEx to EUR2.2 billion in 2016. Approximately 70% of this amount will be spent in upstream.
Exploration and appraisal expenditure guidance remains unchanged at EUR450 million.
In summary, well, 2016 continues to be a difficult year for the entire industry. OMV's integrated business model supports the Group's profitability and cash flow performance and we are well on track to deliver on our promises.
Thank you for your attention. We are now happy to take your questions.
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Questions and Answers
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Magdalena Moll, OMV AG - Head of IR [1]
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Thank you, Rainer and Reinhard. Now, ladies and gentlemen, I would like to open the call for questions. I ask you to please limit your questions to only one at a time, so that we can take as many questions as possible. Of course, you're always welcome to rejoin the queue for a further question and we will definitely take your question.
Haythem Rashed, Morgan Stanley.
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Haythem Rashed, Morgan Stanley - Analyst [2]
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My question really is perhaps a little bit more for Reinhard and his views, just actually on his last area of focus on the slides, around financial priorities. I just wondered if you could talk a little more about how you are looking at balancing shareholder return versus maintaining a strong balance sheet in the current environment over the next six to 12 months.
In particular what I'm really wanting to discuss, or would love to hear your thoughts on is the dividend policy, whether you think the 30% payout ratio is something that is consistent with this, or whether you are looking at from a slightly different perspective. As I say, whether for you gearing is really the priority at the moment, as opposed to shareholder return.
I do appreciate you mentioned the one question, just a very quick follow-up hopefully, is just to understand if there are any working capital tailwinds that we should be expecting in the second half of this year, given you've had a bit of a benefit in the first half, if you don't mind. Thank you very much.
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Reinhard Florey, OMV AG - CFO [3]
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Thanks, Haythem, for your question. Of course, we mean what we say in terms of a financial priorities. That is that the strengthening of the balance sheet is something that is important in the industry as long as there are challenges out there. But our focus on cash flow should very much be targeted at enabling us to provide a significant and appropriate dividend also going forward.
What does that mean? That means that the target and policy that we have in place of 30% is something that we stick to. On the other hand, we have clearly said that we are not going to go in our cash flow after dividend to a negative value.
This means in order to do that our focus on operative cash flow and the ability also to limit on our CapEx, in order to be able to pay the dividend, is the one thing that we are concentrating on.
That is also why we are focusing so much also on the self-help programs with cost savings, where we have no increased our target.
So in order that to be understood rightly, yes, we stick to the policy in place and we are confident that also the target of being at a positive or break-even cash flow after dividend is intact.
Regarding your working capital question. We had in Q2 definitely a positive impact from working capital. We have also to see the seasonality of our business when it comes to gas storage, where we certainly are, again, going down over the summer and picking up before the winter. But working capital will be strongly in the focus of our efforts to optimize and be most efficient.
In that sense, while the working capital will probably not trend positively in the second half, we still would have a positive impact for the full year in total.
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Haythem Rashed, Morgan Stanley - Analyst [4]
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Very clear. Thank you very much.
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Magdalena Moll, OMV AG - Head of IR [5]
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Michael Alsford, Citigroup.
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Michael Alsford, Citi - Analyst [6]
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So I'll keep it to one question. I just wanted to get a sense as to the Gazprom asset swap. I know you say that the negotiations are ongoing, but I don't know if you could provide a bit more color as to what the steps we should think about as to needing to be finalized before, I guess, announcing the deal.
And if it's related at all to the sanctioning of Nord Stream 2 or is it completely independent? Thank you.
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Rainer Seele, OMV AG - CEO [7]
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Well some more details on the asset swap. We had a little bit of delay, because Gazprom needed more time in the data room to make up their mind about the different assets we do have in the North Sea. And, given the complexity of our asset base, they just need more time to finalize their evaluation.
What we have now in our plan is that we now, in September, will start continuing our negotiations with Gazprom. We do have an agreement that we would like to sign a basic agreement until the yearend.
This is going to be the starting point for us to implement the swap transaction, which means that we need something like a year or two for closing the deal. Given the fact that we do have a long list of approvals from different authorities waiting us in Russia as well as in Europe.
As we have explained in our first conversation with you on the asset swap is that we are targeting in our agreements with Gazprom an integrated cooperation along the entire value chain.
We both have an understanding that we don't want to exclusively work in upstream or exclusively working in downstream. We do have both the same kind of understanding that we would like to have both. That's why we have an interest to finalize all deals we do have in the pipeline with Gazprom.
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Michael Alsford, Citi - Analyst [8]
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Okay, that's very helpful. Thank you.
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Magdalena Moll, OMV AG - Head of IR [9]
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Henri Patricot, UBS.
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Henri Patricot, UBS - Analyst [10]
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One question on the cost reductions. Why have you been able to reach your target earlier than expected? Where are the additional reductions of EUR50 million coming from more precisely? Thank you.
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Reinhard Florey, OMV AG - CFO [11]
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The cost reduction efforts have, of course, been taken with a high rigor in OMV and when we go out with a promise, we want to keep it, and we have aligned the organization very much behind this target.
Now, our teams have done fantastic work and we have progressed faster, but also more in depth, and specifically in the area of procurement where, of course, we have a quite significant spend. We see opportunity and we see that the main parts of also the additional savings will come from procurement, but also from the effect of restructuring taking the organization to adequate lean competitiveness that we have, as well as the ability to optimize systems and processes throughout the Company.
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Henri Patricot, UBS - Analyst [12]
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Okay, thank you.
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Magdalena Moll, OMV AG - Head of IR [13]
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Thomas Adolff, Credit Suisse.
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Thomas Adolff, Credit Suisse - Analyst [14]
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Just a question -- I want to start with disposals if you don't mind. You've done 30% in Rosebank. I believe Jaap used to say, when he was at OMV, that he would do 10% to 20%. I wanted to better understand why 30%, so a bit more. And why you still went ahead, despite the fact that your book value was significantly higher than was realized.
But if we continue with disposals, excluding Rosebank, you seem quite confident on Gas Connect; I agree. You seem very confident on Petrol Ofisi; let's see. Turkey looks a bit tricky. But the bottom line is between now and the end of 2017, you will get a lot of cash in from these disposals, and your gearing ratio already is at 29% below your soft ceiling of 30%.
Coming back to the first question, I wanted to better understand also the balance between distribution and reinvestment at some point in the future.
And regarding the latter on reinvestment, what does OMV have to reinvest outside of Achimov? If you can remind me. Thank you.
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Reinhard Florey, OMV AG - CFO [15]
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Very briefly on the disposal, I think the scope of the disposal with 30% is very much in line with what we have in our strategic target. In order to reduce the exposure to quite investment heavy, but on the other hand also strategic exposure. So we are not out of Rosebank, we are still there with 20%.
We think that we received a fair valuation given the current market condition. We received a good structure and also a very good and reliable partner with Suncor in this project.
So in that sense, the write-downs, the impairments were just a consequence of the changes that we see in the environment and in the schedule of this project which was still different in the assumption of what we have in our books.
Just to clarify, of course, the impairment did not only look at 30% but at our remaining 20% as well.
Regarding the other disposals, GCA, Petrol Ofisi; processes are on track. Of course, Turkey has lived through quite difficult times, but our business model in Petrol Ofisi is not impacted by the situation. We are also seeing that the current performance of Petrol Ofisi stays stable. So we are going ahead with the divestment process with good confidence.
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Rainer Seele, OMV AG - CEO [16]
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Thomas, one remark from my side on your questions. First of all, I think it's a good track record that especially in these days where it's not pretty easy to sell a big investment project to the market, that we reached out a 30% stake, being found out then 10% to 20%. So the lifting we do have and the financial flexibility coming with that, supporting our cash flow, is substantial.
Coming back to your question, what do we do with the money. First, let's collect the money, and then we are going to tell you what we are going to do with the money.
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Thomas Adolff, Credit Suisse - Analyst [17]
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Sounds good, thank you.
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Magdalena Moll, OMV AG - Head of IR [18]
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Marc Kofler, Jefferies.
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Marc Kofler, Jefferies - Analyst [19]
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I just wanted to focus on the upstream and the guidance, which I noticed still excludes Yemen and Libya. I think in recent weeks the industry seems to have been warming up a bit more in terms of potentially resolving some of the outages in both countries.
Given your operations there, I was hoping perhaps for an update on the assets themselves. And then, if you saw any possibilities of some listings before yearend in either country. Thank you.
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Rainer Seele, OMV AG - CEO [20]
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Marc, we are still planning with no production from both countries, neither Yemen nor Libya, until yearend. But I share your view that there is some warming up, especially in Libya.
We do see our operations in very good condition, so we don't have any damages in our operations. But we have limitations as far as to speak about the logistics.
Some pipelines are not in good shape and have been destroyed during some military activities in the neighborhood. In one of the two export terminals -- we are exporting via Zueitina and Ras Lanuf. One is also not in operation as we speak about the capability to restart the export terminal capacities. So we would be limited to one terminal the day we can restart our operation.
As we speak about the fields, well, everything is in good shape. We can restart, but it will depend whether or not export capacities in the infrastructure is going to be available for OMV.
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Marc Kofler, Jefferies - Analyst [21]
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Thanks very much.
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Magdalena Moll, OMV AG - Head of IR [22]
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Lydia Rainforth, Barclays.
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Lydia Rainforth, Barclays - Analyst [23]
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I will stick to one question. Coming back to the asset swap with Gazprom, if I could. Given that we are seeing a lot of volatility within the oil market at the moment and that in terms of the views in terms of what the long-run oil price will be, be varied quite significantly across investors and across industry participants. How do you actually protect the value for OMV, in terms of if it's going to take two years to actually close a deal? Are you looking at putting some form of link to the oil price into the deal that you're doing with Gazprom? Thank you.
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Rainer Seele, OMV AG - CEO [24]
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Well, I agree with you that volatility is the natural environment we have to live with our industry right now. But as we speak about the deal, two things are important for us.
First of all, we would like to have a valuation of both assets, based on our long-term oil price scenario, especially as we speak about Achimov IV/V, we expect that first production will start something around 2019. The current volatility is really not impacting or guiding us in our negotiations.
As we are going to speak about the gas production in Russia, I would say 30% of our production is condensate and, therefore, is reflecting the oil price scenario we do have. Of course, we do have a gas production then coming with Achimov IV/V, which is based on our gas price forecast.
I don't see an oil price index as a future pricing model for gas in Europe. As we are targeting in our negotiations that we would like to have a net back to the European gas prices for some gas we are producing, first of all, we have to get that done in our negotiations.
Secondly, I think, the European gas price will more or less, it's a matter of time, de-link from the oil price.
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Lydia Rainforth, Barclays - Analyst [25]
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That's really helpful. Thank you very much.
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Magdalena Moll, OMV AG - Head of IR [26]
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Nitin Sharma, JPMorgan.
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Nitin Sharma, JPMorgan - Analyst [27]
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No, no.
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Magdalena Moll, OMV AG - Head of IR [28]
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You didn't have one? Sorry, it showed up on our list. Is there anybody who still would like to pose a question? On our list, basically, we have answered all the questions, so if this is not the case then, ladies and gentlemen, this would bring us to the end of our conference call.
OMV will next report on its third quarter results on November 9, 2016. At this point, I would like to thank you for joining us this morning. Should you have any further questions, please contact any member of the Investor Relations team and we will be very happy to help you.
With this, we would all like to say goodbye and wish you a nice day.
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Rainer Seele, OMV AG - CEO [29]
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Bye, bye.
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Reinhard Florey, OMV AG - CFO [30]
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Thank you.
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Operator [31]
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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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