Q3 2016 OMV AG Earnings Call
Nov 09, 2016 AM CET
OMV.VA - OMV AG
Q3 2016 OMV AG Earnings Call
Nov 09, 2016 / 10:30AM 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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* Mehdi Ennebati
Societe Generale - Analyst
* Henri Patricot
UBS - Analyst
* Hamish Clegg
BofA Merrill Lynch - Analyst
* Marc Kofler
Jefferies - Analyst
* Josh Stone
Barclays - Analyst
* Tamas Pletser
Erste Bank - Analyst
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Presentation
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Operator [1]
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Welcome to the OMV Group's conference call for the Q3 2016 results. (Operator Instructions). You should have received the presentation by email. 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 Miss Magdalena Moll. Please go ahead, Miss Moll.
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Magdalena Moll, OMV AG - Head of IR [2]
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Thank you very much, Andrea. Good morning, ladies and gentlemen, and welcome to OMV's Q3 2016 conference call.
In the third quarter, OMV continued to deliver on its strategic targets, and turned in a good performance. OMV, again. generated a positive cash flow after dividends of EUR239 million.
In addition, and I'm sure you have seen this, we made an announcement that OMV agreed to sell 100% of the shares in its wholly owned upstream subsidiary, OMV UK, to Siccar Point Energy Limited.
With me on the call today to explain the results are Rainer Seele, our Chairman of the Executive Board and Chief Executive Officer; and Reinhard Florey, our Chief Financial Officer.
Rainer will highlight OMV's performance in the third quarter, as well as discuss important portfolio developments.
Afterwards, Reinhard will review key aspects of the financial statement, and talk about the segment results in more detail.
Rainer then will conclude with the outlook for the full-year 2016, and both gentlemen will then be happy to take your questions.
So, with this, I would like to hand the presentation over to Rainer.
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Rainer Seele, OMV AG - CEO [3]
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Ladies and gentlemen, good morning, and thank you for joining us. I'm happy to review our third-quarter financial performance together with my Board colleague, Reinhard Florey.
Let me start with the key messages. OMV's performance in the third quarter 2016 revealed that the Company is back on a successful path.
OMV again delivered a positive free cash flow after dividends of EUR239 million, demonstrating the strength and focus on cash generation.
In this context, OMV continues with its rigorous CapEx discipline, and will further reduce CapEx to EUR2 billion in 2016. For next year, CapEx of EUR2.2 billion is planned. This is below our previous guidance.
At EUR360 million, the 2016 exploration appraisal expenditure will also come in lower than budget. For 2017, we reconfirm our initial E&A target at EUR300 million.
In addition, we made progress optimizing the portfolio by executing our strategic M&A projects. On September 22, this year, OMV signed the agreement for the sale of its 49% stake in Gas Connect Austria to a consortium composed of Allianz, which is Europe's largest insurer, and Snam, Italy's gas infrastructure operator. We are aiming to close the deal until yearend. Total cash consideration will equal EUR601 million.
We also continued to further optimize our North Sea portfolio. OMV agreed to sell 100% of the shares in its wholly owned upstream subsidiary, OMV UK, to Siccar Point Energy Limited.
Let me give you some more details on this transaction. The transaction has been signed by the parties and has an economic effective date of January 1, 2016. The transaction value amounts up to $1 billion. The transaction value consists of a firm payment of $750 million and a contingent payment related to the Rosebank final investment decision in the amount of up to $125 million.
On top, the parties agreed on a purchase price adjustment with respect to CapEx to the effective date. This results in a further consideration in the amount of approximately $125 million.
Now, let me review OMV's upstream position in the UK. We are partner in 22 licenses in the UK Continental Shelf. Just a few examples: production comes from the Jade gas condensate field in the Central North Sea. The Schiehallion redevelopment project, in which OMV has an 11.8% stake is scheduled to restart production in 2017.
Additionally, OMV holds stakes in several appraisal and development projects, including 20% of Rosebank; 47.5% of the Cambo oil and gas discoveries; and 26% on Jackdaw, a high pressure, high temperature discovery in the central area of the North Sea.
This transaction is subject to conditions, including regulatory approval, and is anticipated to close in the first quarter of 2017. As a consequence, we had to impair the book value of the assets by EUR458 million in the third-quarter 2017.
At closing, we will realize foreign exchange gains, currently estimated at approximately EUR100 million, related to the currency translation of the US dollar subsidiary, OMV UK.
At the same time, OMV's related future investment requirements will decrease.
This transaction is a major step towards the further optimization of our portfolio. OMV plans to use the proceeds for strategic investments in low cost development regions and for strengthening the balance sheet.
One key message is always important, ladies and gentlemen, our HSSE performance. The sustainable management of health, safety, security and environment is top priority for OMV and critical to the responsible delivery of our products and services.
Unfortunately, in the course of 2016, the loss-time injury rate trended upward. We are deeply concerned that there were serious incidents, particularly in our upstream activities. We are undertaking a third-party audit to investigate and analyze these incidents.
In addition, we rolled out the second phase of our safety culture program across the entire Group. This program focuses on observing behavior, intervention and recognition.
Now, I would like to briefly talk about OMV's market environment.
The average oil price has stabilized at a level of $46 per barrel in third-quarter 2016 versus second-quarter 2016. Of course, the OPEC agreement end of September to cap production had a supportive effect on the price level. Saudi Arabia and its Gulf allies have preliminary agreed to cut production by 4%, while Russia said it was prepared to freeze at current production levels.
The OPEC Gulf members are said to be unwilling to give Iraq an exemption from any agreement. Given current developments, OMV arrived at a new oil price assumption of $44 per barrel for 2016 and sticks to the $55 per barrel for next year.
Also, Central European gas prices remained stable in the third-quarter 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.
OMV sees a seasonally upward trend in gas prices for the rest of the year.
A short remark on the refining market. The OMV indicator refining margin declined by $1 per barrel to $3.7 per barrel in the third-quarter 2016, compared to second-quarter 2016, mainly driven by lower gasoline and naphtha cracks.
Seasonally stronger demand during the summer driving season could not compensate for the oversupply. However, the middle distillates recovered slightly, supported by supply disruptions and a modest increase in demand.
For the fourth-quarter 2016 we expect OMV's indicator refining margins to go up, along with an increase in the middle distillates spread.
Finally, petrochemical margins improved compared to second-quarter 2016, supported by higher demand. In the fourth-quarter 2016, petrochemical margins are expected to remain on a similar level, supported by strong demand.
With the next slide, I will highlight the key figures of the third quarter, and Reinhard will comment on them in greater detail later.
Clean CCS EBIT increase from EUR214 million in second-quarter 2016, to EUR415 million in third-quarter 2016, due to higher upstream and downstream results.
Clean CCS net income, attributable to stockholders, came in at EUR447 million. This was higher than clean CCS EBIT because of the strong results from Borealis and lower taxes.
Clean CCS earnings per share increased to EUR1.37 versus EUR0.68.
As mentioned before, free cash flow after dividends was again positive at EUR239 million.
OMV generated an EBIT of EUR63 million, significantly up from the EUR300 million loss in the second-quarter 2016.
In third-quarter 2016, special items amounted to EUR350 million. They included the EUR458 million impairment related to the OMV upstream assets in the UK.
EBIT in the second-quarter 2016 was also significantly impacted by EUR530 million of impairment charges related to the Rosebank field.
Net income attributable to stockholders came in at EUR48 million.
Moving on to our financial performance of the first nine months of 2016, OMV realized solid operating results, despite the decrease in both the oil price and the refining margins.
OMV reported a clean CCS EBIT of EUR796 million, 34% lower than in the previous year. Both upstream and downstream turned in lower results.
Clean CCS net income attributable to stockholders decreased by 13% to EUR842 million.
Free cash flow before dividend showed a significant improvement to EUR645 million. In the same period of the previous year, the free cash flow was only EUR103 million. Free cash flow after dividend came in at EUR266 million.
On the next slide, we have summarized our key portfolio developments.
On September 22, this year, OMV signed the sale agreement for a 49% minority stake in Gas Connect Austria to a consortium of Allianz and Snam. This transaction supports the financial stability and cash flow for the OMV Group, while keeping a majority stake in Gas Connect Austria.
In addition, it advances OMV's strategy to restructure the downstream gas assets and to reduce its exposure to the regulated gas business.
The total cash consideration will equal EUR601 million. The enterprise value is EUR1.4 billion, corresponding to an enterprise value per EBITDA multiple of 8 times.
The closing of the transaction is expected by yearend and is conditional upon merger control clearance by German and Austrian authorities.
On October 6, 2016, OMV closed the sale of a 30% interest in the UK offshore oil and gas project, Rosebank, to Canadian Suncor Energy. Upon closing, Suncor made an initial payment of $50 million.
Following the co-venturer's approval of the Rosebank project final investment decision, OMV will receive an additional consideration of up to $165 million.
On October 10, 2016, OMV Petrol Ofisi agreed to sell the Aliaga Terminal in Turkey to SOCAR. This divestment is fully in line with OMV Petrol Ofisi's strategy to continuously improve the efficiency of its terminal network and supply chain.
OMV Petrol Ofisi will continue to use the fuel and LPG terminal in Aliaga, based on a long-term storage and throughput agreement. Closing of the transaction is expected by yearend 2016, subject to the approval by competition authorities.
As presented before, OMV divests its wholly owned upstream subsidiary in the UK for up to $1 billion to Siccar Point Energy Limited.
During the course of 2016, OMV continued to reduce its CapEx spending. While we projected CapEx to come in at EUR2.4 billion at the beginning of the year, we now estimate that we will only spend EUR2 billion. Investments for Nord Stream 2 will not materialize in 2016, and certain upstream projects were phased. This does not impact our production forecast.
In the first nine months of 2016, we have spent EUR1.4 billion with upstream projects accounting to EUR1 billion. Therefore, the North Sea region accounted for EUR427 million, with the majority of CapEx allocated to the development of the Gullfaks, Schiehallion and Aasta
Hansteen fields.
OMV Petrom spent almost EUR330 million on field redevelopment projects, as well as on workovers and drillings.
In Tunisia, we proceeded with the development of the Nawara gas fields.
For 2017, we are planning a CapEx of EUR2.2 billion. This is below our earlier 2017 guidance because, so far, we have no CapEx planned for Nord Stream 2.
In 2016, we will reduce exploration appraisal expenditures by 41% to EUR360 million. This forecast reflects a EUR90 million reduction from the EUR450 million in exploration appraisal expenditures communicated in August 2016. The main reasons are lower drilling costs and reduced exploration activities, especially in Romania.
In the first nine months of 2016, we spent EUR233 million, mainly related to the Wisting well in Norway, as well as exploration appraisal activities in Romania and Bulgaria. We continued with our evaluation of the Neptun deep field in the Black Sea; the drilling progress at the Polshkov well in Bulgaria has been finished with the exploration resulting in an oil discovery in the Black Sea.
With respect to our sub-Sahara Africa position, we additionally ceased activities in Namibia.
OMV's strategic target in 2017 will be to reduce exploration and appraisal expenditure to EUR300 million.
We also continue to make good progress with the implementation of our cost reduction and efficiency program. We will achieve cost savings of EUR100 million by the end of 2016 and commit to more than EUR150 million by 2017.
Now, I would like to hand over to my colleague, Reinhard, for the discussion of the financials.
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Reinhard Florey, OMV AG - CFO [4]
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Thank you very much, Rainer. Good morning, ladies and gentlemen, also from my side.
On slide 14 you can see the summary of the quarter 3 income statement. My remarks will focus on the comparison mainly between Q3 versus Q2, 2016 figures.
The reported EBIT amounted to EUR63 million, compared to minus EUR300 million in second quarter 2016.
The net financial results slightly increased to EUR75 million versus Q2 2016, due to a strong contribution from our Borealis with EUR110 million and lower net interest expense.
OMV recorded a tax expense of EUR8 million, so the tax effective rate was at 6%. If you would compare, the clean tax rate it was minus 10%.
Non-controlling interest were up, driven by higher contribution from OMV Petrom. This brought us on a reported basis to a net income attributable to our stockholders of EUR48 million, which is equivalent to EUR0.14 -- EUR0.15 per share.
Adjusted for special items, which includes EUR458 million impairment booked for OMV's upstream assets in the UK, clean CCS net income attributable to stockholders amounted to EUR447 million. This was more than double the clean CCS net income generated in Q2, 2016, and even more than the corresponding quarter last year.
The clean CCS earnings per share amounted to EUR1.37 in Q3 2016.
Let me now turn to our cash flow, which was again strong in Q3 2016. Cash flow from operating activities came in at EUR652 million. Depreciation, amortization and impairment, including write-up, amounted to EUR899 million. Cash outflow from net working capital was EUR154 million, primarily related to the seasonal increase of accounts receivables in downstream oil, as well as inventories in downstream gas.
We used EUR469 million in cash for investment, particularly in upstream. This encompassed projects in the North Sea, workovers and field redevelopment at OMV Petrom, and development of the Nawara project in Tunisia.
Free cash flow before and after dividend came in at EUR239 million positive. This shows that we are well on track to deliver on our promise to be free cash flow positive already, 2016. So, this is really free cash flow positive after dividend.
We also substantially increased the result, despite ongoing difficult market environment. Clean CCS EBIT rose from EUR214 million in Q2 to EUR415 million in Q3. In upstream, sales volumes increased by 4%, since part of the Q2 2016 production volumes were sold in Q3 2016. Production decreased by 5% to 301,000 barrels of oil equivalent per day due to planned turnarounds in the Norwegian fields Gullfaks and Gudrun.
Absolute production costs further decreased, mainly as a result of ongoing cost saving initiatives. Upstream earnings increased from break-even to EUR38 million positive, benefiting from a positive hedging result in the amount of roughly EUR26 million.
In downstream the utilization rate of the refineries was back at 97% in Q3 2016 following the turnaround activities in Q2 2016. Higher refined product sales more than offset the lower OMV indicator refining margin.
The retail and commercial business experienced seasonally increased sales volumes. Retail and commercial margins were higher backed by strong customer demands for OMV's products.
OMV Petrol Ofisi's performance was also seasonally strong. The performance of the petrochemical business strongly increased due to the higher sales volumes and improved product spread.
Downstream oil earnings increased substantially to EUR312 million. Downstream gas again performed well and generated a clean EBIT of EUR65 million, this included one-time gain of EUR22 million, mainly related to the clearance of a contract.
Now, let's look at the reconciliation from clean CCS EBIT to EBIT. Our deducting special items and inventory effect from clean CCS EBIT, EBIT came in at EUR63 million. Special items in the amount of minus EUR350 million were mainly related to the impairment of OMV's upstream UK net assets as mentioned, EUR458 million.
On the other hand, the ongoing divestment process for an upstream asset in the Middle East of Africa region triggered a pre-tax write-up of EUR116 million.
On the next slide, you can see the upstream clean EBIT development in Q3 2016 versus Q3 2015. Clean EBIT declined from EUR52 million to EUR38 million, as a result of significantly lower oil and gas prices. The realized crude oil and gas prices dropped by 14% and 20% respectively.
Hedging had a positive impact of some EUR26 million in Q3 2016, this hedging result however was EUR36 million lower than in Q3 2015.
Higher sales volumes as well as reduced costs and lower depreciation almost offset the negative impact of the decline in oil and gas prices.
Production in upstream rose by 3% to 301,000 barrels of oil equivalent per day, sales volumes increased by 8% due to additional listings in Norway and contributed EUR39 million to clean EBIT.
Lower clean exploration expenses, as a result of reduced exploration activities, had a positive impact of EUR36 million. Production costs drove the improvement in clean EBIT on the other category in the amount of EUR20 million.
The OpEx in US dollar per barrel oil equivalent decreased by 13% now to $11.4 in Q3 2016, reflecting our strict cost management coupled with higher production.
Finally, lower deprecation as a result of the lower asset base following impairments in Q4 2015 contributed EUR38 million.
Let me now turn to the downstream performance. Downstream clean CCS EBIT decreased from EUR402 million to EUR377 million. This was attributable to the lower OMV indicator refining margin, which decreased from $7.8 per barrel in Q3 2015 to $3.7 per barrel in Q3 2016.
On the other hand, the refineries utilization rate increased from 93% to 97%. At 8.4 million tonnes total refined product sales were slightly up.
The petrochemical business experienced good demand but margins, while on a good level, were lower than in Q3 2015. In the same period last year, the petrochemical industry was affected by planned and unplanned shutdowns, which drove up prices and margin.
In the retail and commercial business, higher customer demand in Q3 2016 resulted in better margins.
Downstream gas, clean EBIT was up by EUR93 million, largely driven by our restructuring efforts, in addition the result was supported by a higher valuation of forward contracts, as well as a one-off effect in the amount of EUR22 million related to the clearance of a contract.
Now, let's turn to OMV Petrom Group results. Clean CCS EBIT increased from EUR49 million in Q2 2016 to EUR137 million. This was driven by improved results mainly in downstream.
The upstream segment of OMV Petrom reported clean CCS EBIT of EUR45 million. The production decreased to 174,000 barrels of oil equivalent a day due to natural decline.
OMV Petrom successfully decreased unit production costs from $12.1 to $11.3 per barrel, due to lower personnel material and services cost.
Downstream results of OMV Petrom increased from EUR30 million to EUR88 million, the downstream oil performance was supported by the high refinery utilization rate of 97% as well, as seasonal increased sales across all channels.
Despite challenging market conditions, downstream gas reported a better result in both gas and power, while still negative.
Benefiting from the strong cash generation of the Group, OMV decreased both its net debt and its gearing ratio. Net debt declined from EUR4.04 billion, at the end of 2015, to EUR3.74 billion.
The gearing came down and it came in at 27% comfortably below our long-term target of maximum 30%.
OMV's balance sheet is in a healthy state reflecting a strong liquidity position with EUR1.7 billion in cash and cash equivalent, and EUR3.6 billion in undrawn credit facilities. The equity ratio rose up to 45%.
Now, I would like to turn the presentation back to Rainer for outlook.
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Rainer Seele, OMV AG - CEO [5]
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Thanks, Reinhard. Ladies and gentlemen, I now would like to summarize OMV's outlook for you.
For the full-year 2016, we increase our oil price assumption to an average of $44 per barrel. The gas market environment in Europe continues to be characterized by oversupply. However, gas prices on European spot markets are expected to show a seasonally upward trend in fourth quarter 2016.
The OMV's indictor refining margins in the fourth quarter 2016 is projected to be above the third quarter 2016, along with an increase in middle distillate spreads.
Capacity utilization in the fourth quarter is expected to be above 90%. Our production guidance for 2016 is slightly above 300,000 barrels per day.
We reduce our CapEx guidance from EUR2.4 billion to EUR2 billion in 2016 with upstream accounting for 75%.
We reduced the exploration and appraisal expenditure guidance to EUR360 million; and, we will achieve cost reductions of EUR100 million in 2016.
Please note that the fourth-quarter 2016 will see a seasonal decline in downstream oil compared to third-quarter 2016. This previous quarter was supported by a high product demand during the driving season.
In addition, we do not anticipate any one-off gains in clean EBIT of downstream gas in the fourth quarter 2016. As a consequence, we expect fourth quarter 2016 results to be below the strong level of third-quarter 2016.
Thank you very much and 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 would like to ask you to please limit your questions to two at a time so that we can take as many questions as possible. Of course, you are always welcome to rejoin the queue for a follow-up question. We have already several analysts here in line. Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale - Analyst [2]
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So two questions; the first one regarding the asset swap deal with Gazprom. Two weeks ago the Gazprom chairman announced that the asset swap deal has been postponed from H2 2016 to 2017 and that Achimov production startup has been postponed to 2019. I think initially it was 2018.
So, is there a link between the asset swap deal postponement and the delay in the production startup or is it more due to some constraints from Norwegian authorities regarding Gazprom taking a minority stake on wins in Norway?
And don't you think it will finally be easier for you to buy this 25% stake in Achimov in cash rather than doing an asset swap deal?
The second question on Petrol Ofisi disposal process. Bloomberg related you received several initial bids. Can you confirm this news please, and would you consider the appetite is strong on Petrol Ofisi or not?
And when do you expect to receive the final bids on Petrol Ofisi? Will it be more in H1 2017 or more by the end of 2017, maybe 2018 given the turmoil in Turkey?
Just one small final question regarding the CapEx commitment. You said that you reduced your 2017 CapEx by EUR200 million due to Nord Stream 2. Shouldn't we expect an impact from Schiehallion, OMV UK disposal?
And post 2018, after Nawara and Aasta Hansteen start up, can you just remind us your CapEx commitments because it looks like it will be extremely low, meaning that you will have a huge flexibility on CapEx. Thank you.
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Rainer Seele, OMV AG - CEO [3]
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Mehdi, you really make me busy with all the questions, to be honest. But I answer in the same priority you have asked the questions.
Let me start with the asset swap. With the asset swap the timeline has not been postponed. There's a little bit of confusion because there is no clear guidance how we and Gazprom are communicating the numbers. So, that's why I would like to give you the timeline.
We both have planned to come up and to sign a basic agreement determining the economics, which means what is the percentage Gazprom will get in OMV UK. Then after that -- OMV Norway, sorry; today UK is too much in my head, so in OMV Norway. Then, we need I think one to two years for closing the deal.
So, the deputy chairman of Gazprom, Alexander Medvedev, when he said he sees it in 2017, I think he had a very positive outlook for closing the deal. We are fully within the plan schedule, so I still think we are signing a basic agreement until yearend.
It's right that Achimov production start has been postponed. That's re-evaluation of the development concept. We have put that delay of production start into our calculations. That might be one of the reasons why we have to negotiate a bit longer.
That's why -- it has nothing to do with the Norwegian authorities, because there is a misunderstanding of the postponement, which isn't a postponement.
I agree with you; I would love to buy into Achimov 4/5 but Gazprom wants no cash. We have agreed on a swap deal. That's the headline.
One swap component is not cash. But as we are getting liquidity, of course, cash becomes king, also in our thinking. But, as we speak about the asset swap, the headline remains that we are swapping assets, so that will be only if a minor cash component involved.
Petrol Ofisi, yes, we have received initial bids. I wouldn't say that the appetite is strong but we do have a good competitive bidding round. The timeline is that we more will have final bids first half next year than second half.
CapEx for next year, yes, Nord Stream 2 is one major effect for the reduction. But you are right that the sale of OMV UK has the potential to further reduce our CapEx budget, but this has been not anticipated so far.
You are right, Mehdi, that our flexibility post 2018, as we speak about CapEx commitments, is increasing substantially.
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Mehdi Ennebati, Societe Generale - Analyst [4]
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Can you quantify it please, the CapEx commitment in 2018 and 2019?
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Rainer Seele, OMV AG - CEO [5]
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Not at all. Well, I can, but I don't want to, Mehdi.
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Mehdi Ennebati, Societe Generale - Analyst [6]
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Sure. I fully understand. Thank you very much, Rainer.
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Rainer Seele, OMV AG - CEO [7]
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Thanks.
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Magdalena Moll, OMV AG - Head of IR [8]
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Henri Patricot, UBS.
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Henri Patricot, UBS - Analyst [9]
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I just wanted to follow up on the CapEx; could you provide us with an idea of the split in direction between the phasing and the cost deflation in Nord Stream 2? And will it evolve over the following few years?
Also, mention that you produce your activities in Romania, that's another implication on the level of production that you expect over the next few years? Thank you.
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Rainer Seele, OMV AG - CEO [10]
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For Nord Stream 2 we do have a total CapEx number, 100% of the EUR8.5 billion being published by the Company, without financing costs. So, I made reference, now, to the CapEx numbers, excluding any financial cost.
The CapEx will be spent over the next year, mainly until 2019. Peaking in 2018, when the construction of the pipeline is scheduled to start. That's the reason why in 2016 there was only small amount of CapEx spent.
But the Company has not released any information on the phasing of the CapEx. So, that's all I can say about Nord Stream 2, about the CapEx being spent.
The second question on Romania. It's right we are focusing now our investment activities in Romania. Especially on promising workovers so that we can keep the production levels, more or less, on budget, like we have seen in 2016; so we will have only a moderate impact in 2017.
But on a mid to longer term we have to accept that a production decline, if we don't increase our CapEx spending in the region.
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Henri Patricot, UBS - Analyst [11]
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Okay, thank you.
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Magdalena Moll, OMV AG - Head of IR [12]
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Hamish Clegg.
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Hamish Clegg, BofA Merrill Lynch - Analyst [13]
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Just one quick one for me. Fantastic cash flow today, but I just wanted to ask you about Norway. I just noticed, as a country in your volume numbers, it came off quite a bit in the quarter. Was that just a function of maintenance?
Actually, one other. Your employee count is down 7% year on year. Can we expect that trend to continue? And is that one of the core drivers behind your OpEx?
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Magdalena Moll, OMV AG - Head of IR [14]
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Hamish, can you repeat the first question please?
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Hamish Clegg, BofA Merrill Lynch - Analyst [15]
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The first question was on your Norwegian volumes in the quarter. They were down quarter on quarter, 60 kbd from 72 kbd. Could you explain that?
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Rainer Seele, OMV AG - CEO [16]
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It was maintenance shutdown.
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Hamish Clegg, BofA Merrill Lynch - Analyst [17]
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Okay, fine.
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Rainer Seele, OMV AG - CEO [18]
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It was planned maintenance shutdown in Norway; that was the reason.
The reduction of employees, of course, I would guess the reduction of employees will continue. But not on the high level we have seen, especially some five years ago, because in Romania we've reached a certain point where the big headcount cut were more or less the history. But the 5% to 7%, I would say, is not a bad guess.
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Hamish Clegg, BofA Merrill Lynch - Analyst [19]
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Thanks.
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Magdalena Moll, OMV AG - Head of IR [20]
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Marc Kofler, Jefferies.
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Marc Kofler, Jefferies - Analyst [21]
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A couple of quick questions please. Firstly, on the UK North Sea divestments, could you say a few words around any tax implications on that sale?
Then I noticed a commentary around the resumption of volumes from the Sirte Basin Libya. I was hoping you could quantify that impact? But then also perhaps give us an update on some of your assets elsewhere in country? Thanks.
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Reinhard Florey, OMV AG - CFO [22]
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To the first question on tax. Tax implication is that, in general, what we have as a positive tax position in our OMV UK is about EUR150 million.
On the other hand, there is only small part of that tax positive side that we can transfer in terms of Group. So, the other part will be part of the transaction.
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Rainer Seele, OMV AG - CEO [23]
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Let me give you a little bit more our view on Libya. I just have met the CEO for NOC, Mustafa Sanalla a few day ago and he told me that Libya is now producing 600,000 barrels per day, so a strong recovery.
To my regret, OMV cannot participate on such a good development. We are just between 900 to 1,000 barrels per day, so there is another huge upside we can go up to 30,000 barrels per day.
The reason is that the infrastructure from the [El Sharara] field, which is our main field, is blocked. That's the reason why we cannot export the crude. We cannot transport the crude to the export terminals. The good story in Libya is the export terminals are free, and you can really lift the cargoes.
Impact on reserves. I think we have to look a little bit how sustainable is the situation now in Libya. The NOC Chairman is pretty positive that he can further resume production in his country.
I think it's a question of how stable the situation is going to be in Libya. We think that we should be very cautiously go into 2017, so that we might go and plan the current production level with an upside, in case we are going to have the infrastructure available to bring our main asset on-stream.
As far as we speak about reserves. I think the Libyan production will come back. That's something we do have in our plans, and therefore there will be no impact on our reserves.
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Marc Kofler, Jefferies - Analyst [24]
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That's great, thanks very much.
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Magdalena Moll, OMV AG - Head of IR [25]
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Josh Stone, Barclays.
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Josh Stone, Barclays - Analyst [26]
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I've got two questions please. Firstly, on the UK disposal, can you talk a little bit about what the motivation was to sell now? Just trying to look at the very strong free cash flow for the nine months of the year and the impairment you've had to take. Could you talk a little bit about just the motivation of the timing of the transaction?
And then secondly, I think I heard you say that some of the cash will be used for strategic investments in low-cost development areas. Perhaps you can maybe just elaborate just a little bit on that? Thanks.
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Reinhard Florey, OMV AG - CFO [27]
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Just about the motivation to sell now. First of all, it is very much our inclination to change the portfolio towards more-value barrels. As we have seen, there is, of course, higher exploration, higher lifting costs that we generally have in the North Sea, in UK, than in other parts or our portfolio.
We have seen a good opportunity, in spite of the -- in general, a challenging situation for M&A deals these days. This unfolded a very good transaction.
We are very pleased that we found, with Siccar Point, a very good partner, and immediately jumped on that opportunity, while this was still a competitive transaction. This was not just be one-side transaction.
I think we are very satisfied that we were able to close this -- or sign this transaction.
What is it that we will do with the money? Of course, we will strengthen our balance sheet. This allows us to go down in our gearing ratio. This allows us to strengthen the ability of the Company to go forward with the strategic plan.
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Rainer Seele, OMV AG - CEO [28]
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I have one addition. We, of course, also will use the cash to be reinvested to increase our reserve position. Look, Josh, we have reduced our E&A budget from EUR700 million to EUR300 million.
EUR300 million are not sufficient to fully replenish our production. That's clear to me. Therefore, we need to use some liquidity for M&A activities, to fill up our reserve position. We have said -- clearly said that we would like to go for reserves in low cost regions, which we have defined. If we are going to increase our reserve position, it will be in the defined core regions.
I made also clear that I'm a fan of early cash flow and that's the reason why I prefer to acquire producing barrels instead of developing barrels. That's, more or less, what I want to say in the context of our strategy.
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Josh Stone, Barclays - Analyst [29]
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That's very clear. Thank you.
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Magdalena Moll, OMV AG - Head of IR [30]
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Tamas Pletser, Erste Bank.
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Tamas Pletser, Erste Bank - Analyst [31]
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Two questions, I've got. First of all, I think you mentioned in your report that you would like to -- actually, you wrote up some assets in the Middle East and in other regions. I presume that you are preparing to divest some of your assets further.
Can you elaborate a little bit more which assets, or which geographical location, we can expect from when the further divestments?
My second question would be on your retail performance. Do you plan to put some more money into regional retail, like similar to some of your competitors in the region? It seems like from your report that your commercial activities were very profitable. Would you like to expand into this direction?
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Rainer Seele, OMV AG - CEO [32]
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Well, let me start with your last question, Tamas. Well, the regional retail business, if we look into -- when we talk about our regional retail business, we are talking about Europe and European market.
We have clearly said that we are expecting the refining market will come under pressure. We should remember the normal days of refiners in Europe, and we do have that, since more than a decade, that we have overcapacities in the market. I will be very cautious to go for any retail and refining activities in the European market, especially when we're taking into account that we do see a shift of refining capacities towards the wellhead, which is not predominant in Europe.
I would be very much surprised whether OMV would go for investing into new refining capacities or acquiring refining capacities. It would be also not in line, as speak about our divestment program we had, to clean up our refining portfolio.
Tamas, what we are going to do is, of course, we are more investing along the value chain. What is in the main focus of OMV is that we are going to support, especially our petchem activities and our participation in Borealis.
The Borealis management is really top of the class when I see how they have developed the business. You can see it since quite a while how profitable the company is being managed. If I look into the growth perspective and the growth history of the Company, we are well advised that we should look a bit deeper into Borealis and should spend also some more money into that business.
You might not see it in our EBIT numbers, but, at the end of the day, the money counts in your pocket, and the net income is then the right one to look at.
The divestment, I think it's a process that we are going to further optimize our portfolio. We are looking into North African positions, where we would like to optimize our portfolio there regionally, and especially Tunisia was in the focus of our activities. There we are going to challenge a little bit our colleagues.
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Tamas Pletser, Erste Bank - Analyst [33]
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Okay, it's quite clear. What I understood that no retail, no downstream, but rather petrochemicals and upstream, of course.
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Rainer Seele, OMV AG - CEO [34]
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Great summary. (laughter).
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Tamas Pletser, Erste Bank - Analyst [35]
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Okay, good. Thanks very much again.
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Magdalena Moll, OMV AG - Head of IR [36]
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So we started our Q&A session with many questions from Mehdi and we will end it with one question from Mehdi. Is that possible? Go ahead.
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Mehdi Ennebati, Societe Generale - Analyst [37]
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One question please, in three parts. The first part, I just would like to come back to what has been announced by the management in February 2016.
David Davies, previous CFO, said that if the oil price goes back to $53 per barrel it is possible that the dividend, let's say, OMV will increase the dividend to EUR1.25.
Now that your organic free cash flow is very strong, now that you are deliberating, now that you might invest in, let's say, production which is cash generative, reserves which are cash generative, should we still consider that if the oil price goes back to $53 per barrel you will increase your dividend? This is the first question.
Second question, just would like a small update regarding the talks with the Romanian Government on the hydrocarbon taxation change. Do you expect any change for 2017 or no?
And finally, as you were talking about Borealis, which is doing very well, earnings are improving year on year. Is it fair to consider that the dividend that you receive from Borealis should go up again?
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Rainer Seele, OMV AG - CEO [38]
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Okay. Well, David Davies is in pension, but the dividend is not in pension, Mehdi. That's for sure. His commitment on the $53 per barrel, first of all, let's move into 2017 and let's see what the price of oil we'll really get.
What makes us busy now in these days, Mehdi, is more what is the dividend we do have to approve for the year 2016. So, let us close the year 2016 and then let's discuss the dividend on 2017.
What I can indicate, right now, is that the Board of OMV is, right now, discussing our dividend policy. Reinhard is working hard on it. The next year we are going, at latest we are going to give you a new guidance on the dividend policy of OMV. We, first, have to discuss it, of course, with our Supervisory Board.
No changes in Romanian taxation for 2017; a short answer.
Borealis with the dividend, well, this is like in every family, Mehdi. We have to fight for higher dividend as shareholders, and I try to make pressure. I don't know whether I'm going to be successful.
But Borealis is of course performing on a higher level than 2015. If you're performing off a higher level and you have a very high cash flow then, of course, the appetite of shareholders are going up. It's like with you.
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Mehdi Ennebati, Societe Generale - Analyst [39]
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Thank you very much.
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Magdalena Moll, OMV AG - Head of IR [40]
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Good. Ladies and gentlemen, this brings us to the end of our conference call. I would like to inform you that OMV will next report on its fourth-quarter results on February 16, 2017.
I would like to thank both gentlemen, Rainer and Reinhard. I certainly would like to thank you for joining us this morning and would like to encourage you if you have any further questions, please do not hesitate to call us at Investor Relations, we will be very happy to help you.
With this, I wish you all a very successful day. It will be a very busy day today, considering the elections also in the US. But we all wish you a nice day and hope to see you soon.
Thank you. Bye, bye.
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Rainer Seele, OMV AG - CEO [41]
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Thanks, bye.
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Reinhard Florey, OMV AG - CFO [42]
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Thank you.
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Operator [43]
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That concludes today's teleconference call. A replay of the call will be available for one week. The number is printed on the teleconference invitation. Or alternatively, please contact OMV's Investor Relations Department directly to obtain the replay numbers.
You may now replace the handset.
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