OMV AG Sale of OMV Petrol Ofisi And Acquisition Of 24.99% Stake In Yuzhno Russkoye Gas Field
Mar 06, 2017 AM CET
OMV.VA - OMV AG
OMV AG Sale of OMV Petrol Ofisi And Acquisition Of 24.99% Stake In Yuzhno Russkoye Gas Field
Mar 06, 2017 / 09:30AM GMT
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Corporate Participants
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* Magdalena Moll
OMV AG - Head of IR
* Rainer Seele
OMV AG - Chairman of Executive Board and CEO
* Manfred Leitner
OMV AG - Executive Board Member, Downstream
* Hans Pleininger
OMV AG - Executive Board Member, Upstream
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Conference Call Participants
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* Mehdi Ennebati
Societe Generale - Analyst
* Michael Alsford
Citigroup - Analyst
* Thomas Adolff
Credit Suisse - Analyst
* Marc Kofler
Jefferies - Analyst
* Haythem Rashed
Morgan Stanley - Analyst
* Hamish Clegg
BofA Merrill Lynch - Analyst
* Matt Lofting
JPMorgan - Analyst
* Henri Patricot
UBS - Analyst
* Lydia Rainforth
Barclays - Analyst
* Bertrand Hodee
Kepler Cheuvreux - Analyst
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Presentation
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Operator [1]
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Welcome to the OMV Group's conference call. (Operator Instructions). You should have received a 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.
Simultaneously to this conference call, a live audio webcast is available on OMV's website.
At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on believes, estimates, and assumptions currently held by, and information currently available to, OMV.
By their nature, forward-looking statements are subject to risks and uncertainties that will, or may, occur in the future, and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements.
OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions, and expectations, and future developments and events.
This presentation does not contain any recommendation or invitation to buy or sell securities in OMV.
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. And good morning, ladies and gentlemen; and welcome to OMV's conference call.
As you have seen, over the weekend there was a lot of action at OMV. On Friday evening, we signed the divestment of OMV Petrol Ofisi; and on Sunday evening, we signed the acquisition of a 24.99% share in the Yuzhno Russkoye gas field, one of the largest fields in Russia. With this, OMV shows the ability to deliver on its communicated strategy of value-added growth.
With me on the call today to explain also the transactions are Rainer Seele, our Chairman of the Executive Board and Chief Executive Officer; Hans Pleininger, Executive Board Member, Upstream; and Manfred Leitner, Executive Board Member, Downstream.
Now, I would like to hand the presentation over to Rainer.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [3]
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Good morning, ladies and gentlemen, and welcome to today's conference call. And thank you for joining us.
As Maggie said, over the last days we have successfully delivered on our strategy by completing two major transactions. On March 3, we have signed the divestment of OMV Petrol Ofisi; and yesterday, we have successfully signed the acquisition of a 24.99% share in the Yuzhno Russkoye natural gas field.
First, let me hand you over to Manfred Leitner for the OMV Petrol Ofisi divestment. Manfred.
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Manfred Leitner, OMV AG - Executive Board Member, Downstream [4]
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Thank you, Rainer. Welcome to today's conference call, as well, from my side.
On Friday, we have signed the sale of OMV Petrol Ofisi to Vitol Group. The overall value of the transaction amounts to EUR1.368 billion; thereof, EUR81 million relates to net cash proceeds from a prior carve-out of OMV's Turkish gas entities.
The transaction is subject to conditions, including the relevant regulatory approvals, and is anticipated to close in Q3 2017, at the latest.
The original plan of integrating Petrol Ofisi into the value chain of OMV Group could not be realized; therefore, the decision to sell the company was the right and necessary step in the course of implementing our corporate strategy.
In light of the challenging environment, we are pleased that we successfully concluded the negotiations.
Based on the purchase price, OMV will record a further impairment of EUR186 million in its Q4 2016 financial accounts. This booking is in addition to the impairment of EUR184 million (sic - see slide 5, " EUR148 million") recorded as of December 31, 2016, when OMV reclassified OMV Petrol Ofisi as asset held for sale.
Upon closing of the transaction, a negative foreign exchange rate effect of approximately EUR1.1 billion has to be recorded in OMV Group net income. This stems from the negative development of the Turkish lira against the euro since the acquisition of OMV Petrol Ofisi in 2010. This has no impact on OMV Group equity since corresponding foreign exchange translation effects were directly charged to Group equity in prior periods.
On the next slide, you can see the impact of OMV Petrol Ofisi sale on downstream. In a nutshell, the sale of OMV Petrol Ofisi results in both improved efficiencies and financials of our downstream operations.
Obviously, total refined product sales volumes and the number of filling stations will strongly decline following the divestment. However, the downstream oil operations will not be significantly impacted; and, in some cases, we will see even a positive effect. For example, on the basis of 2016 numbers, the average throughput per filling station increases to 3.6 million liters per station excluding OMV Petrol Ofisi. This is, obviously, due to a lower-than-average throughput per station in Turkey.
Looking at the financials, there will be an approximately EUR100 million negative impact in clean CCS EBIT following the divestment. However, OMV Petrol Ofisi only had a minor impact on the operating cash flow, as well as on the free cash flow, of the downstream oil division.
Operating cash flow and free cash flow excluding OMV Petrol Ofisi only show a decline of 7% and 3%, respectively. Bottom line, the clean CCS return on net assets even increases by 2 percentage points.
And I would like to hand over now back to Rainer for the presentation of our second transaction.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [5]
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Thank you, Manfred. Ladies and gentlemen, I am now very much delighted to announce that OMV signed an agreement to acquire a 24.99% share in the Yuzhno Russkoye natural gas field in Western Siberia from Uniper.
It was a late-night transaction; but although it was very close to midnight, we took the chance to have some champagne, so I will be very fluent, afterwards, to answer your questions.
The purchase price amounts to $1.85 billion plus cash on the balance sheet as of December 31, 2016. It includes $36 million corresponding to part of 2017 transportation costs, which have been paid in advance by the seller.
The transaction will be retroactively effective as of January 1, 2017. Closing is envisaged until year-end 2017.
The implementation of the transaction is subject to further conditions, including co-shareholder consent, as well as merger control and foreign investment control clearance in Russia.
The project gives OMV access to a world-class fully developed and producing natural gas field with a secondary horizon up for a development decision by the end of 2017.
Yuzhno Russkoye's remaining recoverable reserves, net to OMV, are around 580 million barrels of oil equivalent. The gas from the field is the key resource for the Nord Stream pipeline, which supplies Germany directly with gas from Russia.
The operator and owner of the production license is the Russian company Severneftegazprom, SNGP. The license was awarded to SNGP in 1993. Gazprom will continue to hold a 50% stake in SNGP, while Wintershall and OMV each own approximately 25%.
OMV will be entitled to 24.99% of the economic interest of the Yuzhno Russkoye field.
The transaction -- with this transaction, ladies and gentlemen, we built a new core area, Russia, in our upstream portfolio with production of 100,000 barrels per day. This is fully compliant with the execution of our strategy to expand the integrated cooperation with Gazprom.
And now, my colleague, Hans, will give you more insight into the Yuzhno Russkoye field and the financials.
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Hans Pleininger, OMV AG - Executive Board Member, Upstream [6]
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Thank you, Rainer. And welcome from my side, as well.
Let me provide you with more insight to the Yuzhno Russkoye field. The Yuzhno Russkoye field is located in Russia's autonomous region of Yamal Nenets, in Western Siberia, 200 kilometers east of the Urengoy field.
The Yuzhno Russkoye field was discovered in 1969 and extends over approximately 1,100 square kilometers. The license for the field was awarded in 1993 and is valid until the end of 2043.
The gas produced is transported to the central processing facilities in the field, and from there shipped 120 kilometers to the tie-in point of Gazprom's transportation network. After going through various compression stations, the gas is fed into the Nord Stream pipeline. The total distance from the field to the landing point in Germany is close to 4,000 kilometers.
Production started at Yuzhno Russkoye in October 2007. In 2009, Yuzhno Russkoye reached plateau production of 25 billion cubic meters per year, which corresponds to 400,000 barrels of oil equivalent per day. Currently, more than 140 wells are producing.
The production profile shows that the Yuzhno Russkoye project brings net production of 100,000 barrels of oil equivalent per day to OMV right after closing.
The field will add approximately 580 million barrels of oil equivalent of remaining recoverable reserves, going forward.
Yuzhno Russkoye will deliver a 100% reserve replacement rate for around five years, based on OMV's production volumes from 2016.
OMV's share of CapEx is expected to amount to approximately $20 million per year, until license expiry; therefore, only very small investments are needed to realize the production profile. Our participation in Yuzhno Russkoye does not change OMV's CapEx guidance.
Now let me explain you to the subsurface of Yuzhno Russkoye. The field consists of four layers. The first layer is the Turonian reservoir, which lies at 700 meters (sic) depth. Production tests from first wells are ongoing at the Turonian reservoir, and a final investment decision for the development of this layer is planned to be taken in Q4 2017.
The second layer is the Cenomanian at a depth of 850 meters. This is the layer where the current production comes from.
There are two more layers, at a depth of 1,200 meters and 2,800 meters, respectively, which are not yet developed.
Looking at the combined production profile of both our participations in Yuzhno Russkoye and Achimov IV/V, one sees steady production growth.
To date, Yuzhno Russkoye is already producing at plateau. Production will begin to decline at Yuzhno Russkoye in the early 2020s, but then Achimov IV/V will kick in. This ensures a stable and increasing production flow for OMV for a long period of time, reaching around 150,000 barrels of oil equivalent per day in 2025.
Yuzhno Russkoye's production, resulting in an immediate and stable cash flow, will be used to fund the capital needs of Achimov IV/V, which will start producing in 2019. This means that with the acquisition of Yuzhno Russkoye we are creating a self-funding OMV Russia business.
Following this transaction, Russia becomes one of our core regions in our upstream portfolio.
Both projects provide OMV with a sustainable Russia upstream portfolio, boosting OMV's reserves base by more than 1 billion barrels of oil equivalent.
Let me now turn to the organizational structure and the financial impact on OMV.
The gas produced is sold by the operator, Severneftegazprom, pro rata to the three joint venture partners. OMV's 24.99% share in Severneftegazprom's production will be sold by the trader at a cost-plus margin price. The trader will subsequently sell the gas to Gasprom under a take-or-pay agreement. The volumes will be 50% sold domestically at Russian domestic price netback, and 50% at German import price netback.
The trader's result will be fully consolidated into OMV's figures in clean CCS EBIT and net income.
In addition, OMV will consolidate 24.99% of Severneftegazprom's net profit in income from equity-accounted investments.
The trader's and Severneftegazprom's net profit in each financial year will be distributed as dividends. OMV will receive its share of dividends for the results of the financial year 2017, starting in 2018.
Now let me hand back to Rainer for the strategic rational of this transaction.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [7]
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Thanks you, Hans. Ladies and gentlemen, let me now summarize the strategic rational.
By acquiring this stake OMV will provide this take with the opportunity to increase its current production by approximately 100,000 barrels per day. This means that, after closing, OMV will be producing more than 400,000 barrels per day.
Costs in Russian along the entire upstream value chain, from finding to development and production costs, are among the lowest in the world, therefore, production in Russia will improve OMV's cost position.
Unit production costs in Yuzhno Russkoye are expected to be below $2 per barrel, on average, for the contracted period. This translates into average production costs in our upstream portfolio of below $10 per barrel, after closing. This was the target I have announced to you, which we have reached now at OMV, as a cost target.
Yuzho Russkoye will generate attractive cash flows without requiring significant investments. It is expected to generate dividends of approximately $200 million per year mid-term. CapEx needs are projected to amount to only $20 (sic - see slide 19, "$20 million") per year, until license expiry.
Just put the number in the context of our budget, which is $2 billion, and this is 1% of our budget what I'm talking about, so less than the figures I normally discuss with you.
The transaction gives OMV the ability to replenish its reserves. With remaining recoverable reserves of around 580 million barrels, Yuzhno Russkoye becomes a major source of reserve replenishment in OMV's portfolio. Thus, the Yzhno Russkoy volumes will enable OMV to reach its strategic target of 100% reserve-replacement rate for a period of around five years, based on our production in 2016.
OMV has, of course, a long and successful cooperation with Gazprom for almost half a century. Gazprom is a key gas player for Europe, and will remain in this position for decades, and OMV will continue to identify and jointly develop further projects and opportunities with Gazprom.
Thank you, ladies and gentlemen. And now, we are more than 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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(Operator Instructions). Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale - Analyst [2]
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Two very small questions, so not one, but two very small. First one, you provided EUR200 million (sic) cash dividend from the Yuzhno Russkoye project from mid-term, what does mid-term mean? And what gas price do you use to get this EUR200 million (sic) dividend?
And second question, now you have resolved your production decline issue with Achimov IV/V and Yuzhno acquisitions, should we consider that even post 2018 your CapEx will remain at EUR2 billion? Thanks.
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Hans Pleininger, OMV AG - Executive Board Member, Upstream [3]
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Mehdi, I'm more than happy to answer your questions, very short. Mid-term means three-to-five years. The gas price we are using we keep as a secret, but I will give you some guidance that you will look into the forward prices.
The production decline post 2018, we are still committed to the EUR2 billion CapEx guidance we have given to you, so there is no further need to increase our CapEx forecast. As I have said, Yuzhno Russkoye has no real impact on our CapEx numbers.
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Mehdi Ennebati, Societe Generale - Analyst [4]
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Yes, so, post 2018, your CapEx will remain at EUR2 billion?
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Hans Pleininger, OMV AG - Executive Board Member, Upstream [5]
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Correct.
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Magdalena Moll, OMV AG - Head of IR [6]
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Michael Alsford, Citigroup. But please limit it to one question, because there's so many; otherwise, the other colleagues don't have a chance to ask.
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Michael Alsford, Citigroup - Analyst [7]
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Maggie, I'll honor your request, so one question from me. Can you just confirm what the cash-in will be from the Petrol Ofisi deal in third quarter, because there's lots of moving parts? I just wanted to know what you'll receive in terms of incremental cash versus the headline price that you've announced today. Thank you.
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Manfred Leitner, OMV AG - Executive Board Member, Downstream [8]
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The cash coming to the OMV Group will be, as indicated already, EUR1.368 billion, less EUR81 million. The EUR81 million refers to a sales price that will be transferred from OMV gas and power to buy out the gas entities from the Petro Ofisi Holdings. The difference will be the cash into the Group, which is EUR1.287 billion.
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Michael Alsford, Citigroup - Analyst [9]
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Okay. Thank you.
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Magdalena Moll, OMV AG - Head of IR [10]
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Thomas Adolff, Credit Suisse.
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Thomas Adolff, Credit Suisse - Analyst [11]
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Rainer, I think in Russia they drink vodka not champagne. But I do look forward the importance of Russia now to OMV; I look forward to the field trip that you plan on organizing.
The question I had was just overall on the portfolio. I think in the past you said each of the key hubs that you plan on building needs to be at least 50 [kbd] in size and self-sufficient. And, obviously, Russian will represent triple the minimum by 2025. I guess my question is by 2025, as you see the business today, and whatever potential acquisition you're planning for the near term, how much overall -- where do you see production evolve by 2025?
And also, how do you define concentration risk, if there's a definition for that? And how do you think about oil versus gas by 2025? Thank you.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [12]
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Thomas, I have to make a first statement on these nice liquids. I started to drink champagne with Uniper, because it's a German company, but I will continue with vodka with Gasprom when we will close our asset deal.
So, let's talk about 2025. Well, Hans has given you a little bit of an idea where we are going to be in 2025: he was talking about a 450,000 barrels per day company. But do we sit back and do nothing until 2025? I don't think so. We will prepare the Company for value-added growth.
Right now, we do see projects in our pipeline which will bring us 450,000 barrels per day. It's a little bit depending on how much North Africa will kick into our numbers.
But we have now changed our position in Libya, as you may remember. With the large transaction, where we have acquired the shares from Occidental, we have now the potential to build a 50,000 barrels per day production in Libya, which is bringing Libya as a core by itself.
So, as we speak about our production volumes from Russian, right now, if you take the increase from 320 to 420, we are talking about one-fourth of our production which is associated with Russia. That's more or less a pretty good site in our portfolio.
If there are other co-opportunities, let's wait and see how we will outbalance our portfolio. We might grow then also in other regions. But, as an orientation, one-fourth to one-third is more or less the production volume we do have in our mid- to long-term plans right now.
The split oil and gas will be now in favor of gas; slightly, 60% is now gas.
We don't make it a secret that we do like gas, because the long-term outlook for gas looks a bit more positive than for oil. We're talking about the global growth in gas, whereas we are talking, long term, a, globally, decline of oil demand. That's why we have a clear strategy that we would like to go for gas.
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Michael Alsford, Citigroup - Analyst [13]
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Perfect. Thank you very much.
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Magdalena Moll, OMV AG - Head of IR [14]
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Marc Kofler, Jefferies.
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Marc Kofler, Jefferies - Analyst [15]
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I guess this one's a little bit similar to the previous question. Rainer, a lot has changed in the Company since you became CEO, in a relatively short period of time. Given, or rather assuming, successful completion of this transaction, is it fair to say all the big strategic cards which you planned on playing when you first joined the Company will have been played? Thank you.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [16]
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Marc, we have done a lot to restructure our portfolio, absolutely, I fully agree. If you look back, within one year we are talking at least about three big mega deals we have closed with our transactions.
Is there more to come? Well, first of all, we have to finalize our swap transaction, which makes us really busy, which is also a [EUR1 billion] transaction; and we are working hard also to find a solution to participate in the Nord Stream 2 pipeline project; and then, give me some time to think about a new surprise for you.
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Marc Kofler, Jefferies - Analyst [17]
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Great. Thanks very much.
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Magdalena Moll, OMV AG - Head of IR [18]
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Haythem Rashed, Morgan Stanley.
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Haythem Rashed, Morgan Stanley - Analyst [19]
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Thank you for the presentation. Actually, most of my questions have already been answered, actually. But the one question I have is just on the dividend impact, and you talk about it, obviously, coming in from 2018. You've given a medium-term guidance; is there any sense you can give us in terms of what that could be nearer term?
Is there anything around 2018 that we should think about, that it could be quite a bit lower? Or, actually, with 2018 are you likely to get two dividend payments in one? I just wanted to get clarification on that. Because the transaction is dated as of January 1, 2017, so just in terms of understanding the phasing of the cash flow. Thanks.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [20]
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Thank you, Haythem, that you did not repeat what you always say, that our dividend yield is so low. I know that. I'm always thinking about it. So, I have taken your point. And that's the reason why Reinhard, in our last conference call, said that we are working on a progressive dividend. I don't have to explain to you what progressive means.
First of all, what we can say is our cash flow in 2017 is not usually negatively impacted by the two transactions. What we have said, we have closed our deal in January with the Siccar Point, so the first quarter 2017 will have an impact from cash in from this transaction.
As we speak about 2017, and if I remember the face of Reinhard, he still has a smile when we talk about cash flow. So 2017 looks good. 2018 and the dividend, we have to wait how we are going to close 2017, of course. I know that you don't like this answer, but that's the only one I can give to you.
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Haythem Rashed, Morgan Stanley - Analyst [21]
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Sure. Sorry, apologies, I wasn't clear. I actually was referring to the dividend from the acquisition that you have made today. So I'd rather -- the OMV dividend, sorry, I didn't make that clear.
I'm just -- given that you will receive dividends from this entity from 2018 onwards, I just wanted to understand whether the cash flow from that will come in at the start of 2018, or you'll get two dividend payments, effectively, in 2018, which is your 2017 dividend, and 2018.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [22]
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No. No, we only get one dividend. And continuously, you should calculate whether $200 million year by year, by year; that's the dividend inflow.
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Haythem Rashed, Morgan Stanley - Analyst [23]
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Good. Okay, very clear. Thank you.
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Magdalena Moll, OMV AG - Head of IR [24]
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2018 we get the dividend for 2017.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [25]
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And so on.
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Haythem Rashed, Morgan Stanley - Analyst [26]
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Thanks.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [27]
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In 2017, there will be a dividend paid, of course, (inaudible) into the pocket of Uniper for FY2016. So, therefore, the production, the net dividend from the production 2017 we will get in 2018, from January 1, 2017, onwards.
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Haythem Rashed, Morgan Stanley - Analyst [28]
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Very clear. Thank you.
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Magdalena Moll, OMV AG - Head of IR [29]
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Hamish Clegg, Bank of America.
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Hamish Clegg, BofA Merrill Lynch - Analyst [30]
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My question's just on if you could confirm exactly the EV paid for the Russkoye assets, given that in the announcement you talk about the $1.85 billion, plus cash on the balance sheet. If you could confirm that, along with how you reconcile that $200 million dividend you talk about with what Uniper said this morning on their call as EUR175 million of EBITDA?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [31]
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Well, first of all, the $1.85 billion we paid is, more or less, as we have explained, the purchase price. You have to deduct the transportation cost, so you come to the $1.814 billion, which is the repurchase price, deducting the transportation cost.
As we speak about the net cash position, 60 million, but this is left pocket, right pocket. We do have 60 million in the Company, and we will pay them the 60 million, so you are netting it, yes? It has no real impact at all. So we will net it.
And, as we speak about the acquisition price, well, we have asked Lambert Energy to have a look into that; and Lambert Energy has made a calculation, as a consultant company, that we paid something between $3 per barrel and $3.5 per barrel on 2P reserves, which is, more or less, the average price, acquisition price, which have been paid also with transactions you have seen in the Russian market the last two or three years ago.
On a flowing barrel-per basis, we have the $18 per barrel, which is one of the lowest acquisition prices I have seen now, on my slide, from Lambert Energy, if you compare with last transactions we have seen in the Russian market.
So we are not calculating on EBITDA, and on any statement of Uniper. What we can say is we have looked into our numbers and we are going to tell you that the $200 million are the one you should use as dividend payment to calculate our deal.
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Hamish Clegg, BofA Merrill Lynch - Analyst [32]
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Excellent. Well, thanks very much, and congrats, again, on the deal.
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Manfred Leitner, OMV AG - Executive Board Member, Downstream [33]
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I would like to add something, because Rainer mentioned the price. The purchase price is based on what he said, for example, a Lambert Energy based on 2P reserves.
What you should know is that, on the one hand, we have contracted volumes, and around two-thirds, because the Cenomanian layer is developed already, you can consider two-thirds of the reserves as proven reserves; and one-third will be booked over time as [proven] reserves as well. So it's a little bit better than 2P reserves, what you should have in mind.
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Hamish Clegg, BofA Merrill Lynch - Analyst [34]
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Well, so, actually, sorry to follow up on that, because I think that's very interesting. Because the number you talk about in terms of the 580 million barrels of oil equivalent, is that a reserve number, or a 1P reserve number? Just because I noticed it was different, or a bit lower, than what Wood Mackenzie forecast, which is closer to 750 million barrels of 2P.
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Manfred Leitner, OMV AG - Executive Board Member, Downstream [35]
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Where we are deriving from is we have, in contract terms, we have guaranteed 610 bcm. We have been producing already until end -- or end of 2016 215 bcm, so what's left is around 400 bcm. One-fourth, so 25%, is for us, these are 100 bcm, and this is calculated on boe basis, the 580 boe. So that's what we have contracted.
And, as I say, because the Cenomanian layer, which is the producing layer right now, is fully developed you can consider this at least as two-thirds as P90 reserves.
Why I can't give you a clear information on this, because the Russian system, they don't have the P50 and the P90 reserves, as we do, they have different categories of reserves. That's why can't 100% translate it into P50 and P90. But that's why I said the proxy is two-thirds P90 and one-third P50 reserves.
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Hamish Clegg, BofA Merrill Lynch - Analyst [36]
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Got it. Thank you so much.
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Magdalena Moll, OMV AG - Head of IR [37]
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Matt Lofting, JPMorgan.
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Matt Lofting, JPMorgan - Analyst [38]
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Rainer, could you just talk about how you're thinking about the risk management on country-specific capital exposures, and what the right levels for OMV are, going forward.
Russia is obviously now becoming a core hub for the Company, going forward with this deal, following on from the Achimov asset swap. I'm just wondering whether you're now getting towards the limit of the capital exposure that you're comfortable putting into Russia, or whether we should expect you to continue to look to further build out the position, alongside screening opportunities in Iran and UAE, that you've talked about previously. Thanks.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [39]
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Matt, thanks for the question. Well, the reason why I'm so happy that we have closed both deals during the weekend is it tells you the changes on our risk portfolio.
What we have done over the weekend is we have substituted our risk position in Turkey with a new position in Russia. From our judgment point of view, the risk we are associating with Russia is lower than the risk we do see right now in Turkey.
If you read the press, how the relationship, the political relationship, between Europe and Turkey is developing, I see it contrary to the first dynamic, I do see the political European arena, that they are restarting the dialog with Russia.
All the risk we are talking about Russia is the political remaining risk as the conflict all around the Ukraine. So let's wait and see how this is going to develop.
The risks within the country, well, I know that feels since 10 years. I was, with the Wintershall, 20 years in Russia. We have been always paid, we have had always a fair system, and we have had lots of success in Russia. So, as a country by itself, given the framework they operate, it's very, very reliable.
The geological risk, if I listen what [Hunter] said, forget about it. We are talking about a cash cow we have now acquired. And, therefore, we have no CapEx, real big CapEx, commitment towards Russia.
The moment we are going to close the deal with Gazprom on Achimov we will have committed EUR900 million of CapEx for the development of Achimov IV/V, and this is over a period of five to seven years. If we take into account that we have EUR2 billion as a budget for each year, we are not talking about a substantial investment we are dedicating in our portfolio towards Russia.
What we are going to do is we will now close our deal with Gazprom, and then we will wait and see whether or not new opportunities arriving and knocking at the door.
We are very much driven by costs: what is the value if I operate in the country where I have extremely low political risk, but I have production costs of $80 per barrel? So, therefore, we have to take both into account, especially that we are driving our portfolio towards low-cost production.
So what I'm going -- in the long -- in the short version, we have not reached our limit in our portfolio.
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Magdalena Moll, OMV AG - Head of IR [40]
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Good. That was the short version.
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Matt Lofting, JPMorgan - Analyst [41]
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Great. Thanks, Rainer; appreciate it.
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Magdalena Moll, OMV AG - Head of IR [42]
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Henri Patricot, UBS.
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Henri Patricot, UBS - Analyst [43]
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Just one question left for me. On the CapEx profile, I'm trying to reconcile what Uniper was saying about additional CapEx requirement for production in the mid-term with what you've been saying about the $20 million. Should we assume that this is very much front-end loaded as you develop the year, the Turonian layer, and falls down even much lower, the $20 million, later on? Thank you.
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Hans Pleininger, OMV AG - Executive Board Member, Upstream [44]
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Thanks, Henri. For the lifetime, as we said, until expiry of the licenses it will be less than $20 million [per boe]. In the mid-term, meaning the next three-to-five years, we will decide, at the end of this year, we will make the final investment decision for the development of the Turonian.
The Turonian should go onstream with the first economic production in 2021. Until then, we will spend some money for drilling, but it will not be more than$40 million, $50 million per year in this mid-term phase. And then, later on it will go down substantially, so that we arrive at below $20 million per year, average, until expiry of licenses.
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Magdalena Moll, OMV AG - Head of IR [45]
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Lydia Rainforth, Barclays.
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Lydia Rainforth, Barclays - Analyst [46]
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Just one question, if I could. In terms of coming back to the purchase price paid, how are you looking at it in terms of the investment?
Should I be thinking about this being 11% dividend yield and that's the sort of criteria that you were thinking in terms of price? Or is there actually a higher IRR/NPV number that we should be thinking about from a wider reserves and strategic side, so just in terms of the criteria you use when looking at the valuation? Thanks.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [47]
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Lydia, I'm not quite sure what your question is about. The -- are you asking me what is the IRR we might see with the project Yuzhno Russkoye, or?
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Lydia Rainforth, Barclays - Analyst [48]
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Yes, effectively. From OMV's perspective, you're getting what is an 11% yield, and I'm just wondering if that was high enough for you or if there is actually a higher IRR we should be thinking of from the project side?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [49]
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(laughter) Well, Lydia, we don't exclude our IRRs country by country, as you may know. But we only give you one indication, which says that OMV, as a Group, is targeting a double-digit rate of return overall.
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Lydia Rainforth, Barclays - Analyst [50]
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Okay, understood. Thank you.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [51]
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And, of course, every project has to meet our criteria. So all I can say is it's a double-digit percentage, but I don't tell you the number. I can't tell you, I'm sorry, can't tell you the number.
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Magdalena Moll, OMV AG - Head of IR [52]
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I think it is, you know, Lydia, our policy, on individual projects we cannot give you IRRs or NPVs. So hope you understand. But I think what we have tried to do is to give you a lot of information concerning or regarding this transaction so that you can make a good and a reasonable assumption.
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Lydia Rainforth, Barclays - Analyst [53]
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Thank you. I understand, but I have to try. Thank you.
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Magdalena Moll, OMV AG - Head of IR [54]
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Mehdi.
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Mehdi Ennebati, Societe Generale - Analyst [55]
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Just one question. Trying to compare the two [region] project you are involved in, in your view, which one proposes the highest rate of return?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [56]
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You are comparing now Petrol Ofisi with Yuzhno Russkoye?
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Magdalena Moll, OMV AG - Head of IR [57]
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No, I think Achimov -- Achimov (multiple speakers).
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [58]
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(multiple speakers) Achimov and Russkoye?
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Mehdi Ennebati, Societe Generale - Analyst [59]
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Yes.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [60]
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Mehdi, both are excellent (laughter).
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Mehdi Ennebati, Societe Generale - Analyst [61]
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Yes.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [62]
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And I like both, equally. You can't compare it, because the nature of the two projects are totally different, Mehdi.
When we talk about the Yuzhno Russkoye field which we acquired, you will get immediate cash, which I like. Early cash flow makes me happy, you know that. And the second project, we will use the cash we generate from Yuzhno Russkoye to be invested for future production from Achimov. So both, in combination, do make sense.
And, as we speak about Achimov, we are not talking about a dry gas fields, like Yuzhno Russkoye: one-third of the production is, of course, condensate, which is a high-value product. So we do have a split.
What I say, I fall in love with both projects. And don't call me that I have to say only with one and decide for one, that's not fair.
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Mehdi Ennebati, Societe Generale - Analyst [63]
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But does it mean that Achimov IV/V return is higher than the one you've just realized -- done the acquisition -- you've just realized today, however, it's not free cash positive from the first year? Should I understand it like this?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [64]
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No, Mehdi, both returns are excellent. I repeat myself. You don't get anything more than this.
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Magdalena Moll, OMV AG - Head of IR [65]
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Good. So, Mehdi, we move on. Thomas Adolff, Credit Suisse.
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Thomas Adolff, Credit Suisse - Analyst [66]
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Just going back to the question I asked at the start around concentration risk with [net] risk exposure, ultimately, managing relationship is driven by performance as an operator and relationship, good or bad, will be determined by that; but it's also the stability of the fiscal regime. So the performance you can manage is up to you; the latter, you can't, and it's a function of external factors, which can change the fiscal regime, either because you didn't do a good job as an operator, or because the country needs money.
My question, I guess, specific to OMV, is in the eyes Gazprom, or in the eyes of any NOC that you're considering partnering with or deepening your relationship with, can you just remind me what OMV brings to the partnership other than money?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [67]
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Well, I think that what makes us special, Thomas, is that we do build an integrated partnership with Gazprom, that we are creating a partnership where, on the one hand side, we will be invited to work with Gazprom in their country, in Russia. And if you look how many companies are invited to be a partner of Gazprom, we are talking only about a handful, and OMV is one of them.
On the other hand, we are invited Gazprom to partner with OMV in Europe. And in between, we are partnering in all the different elements of the value chain, from upstream towards mid-stream, with the Nord Stream 2 pipeline, until we've reached our customers in the market.
Therefore, I think we should not pick only one project to discuss what kind of value OMV is bringing into the partnership, or Gazprom is bringing into our partnership, when we talk about the North Sea, for example.
What we can say is both parties do like to intensify their cooperation. As we speak about Yuzhno Russkoye, of course, OMV will benefit for being part in an operating company in Siberia where we can expand our technological footprint towards drilling wells in the permafrost regions. We will benefit from that.
But don't underestimate what a reliable partner, a reliable partner from Europe, means for Gazprom. I'm not talking about how much money I put on the table, whether or not I'm going to pay my bills at the right time; I'm talking about a partner who is also a good partner in difficult times. And we are not facing the easiest times, as we speak about the relationship towards Russia; and especially that relationship, we do have, as OMV, towards our partner, Gazprom, is highly valued by them.
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Thomas Adolff, Credit Suisse - Analyst [68]
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Okay. Just to clarify, in essence, technology or asset swap opportunities, Gazprom can pick many companies, to be honest with you; and I guess your expertise might be in more mature place. But, basically, what you're saying is Gazprom, for Gazprom, export of gas is key, and the European market is key, and because you are a fairly European Company that does a lot of gas, and, therefore, you're a reliable partner, that's the most important part for this partnership. Is that a fair summary of how I should think about the relationship (multiple speakers)?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [69]
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I agree with you partly. But as we speak about the technological competence of OMV, I think you see our Company not in the right picture. Hans will give you more insight.
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Hans Pleininger, OMV AG - Executive Board Member, Upstream [70]
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I would like to give you some examples where our technical capability compares with other companies where we are. And I think we are a world-class operator in the oil and gas fields, as you said. But regarding development of new layers, like at Turonian, what's key is our drilling capability.
And just giving you some examples of our capability, we still hold the world record in onshore shallow drilling horizontal wells in Suplacu, which has established a world record from a floating drilling rig in the Barents Sea, horizontal drilling. We are holding several world records and European records in [casing-wise] drilling.
So this is a confidence which we have developed in our core areas and which we will bring to the table with the cooperation with Gasprom. And I think our -- that we are participating as a partner there is also very valuable for Gasprom, not only for us.
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Thomas Adolff, Credit Suisse - Analyst [71]
------------------------------
Great. Thank you very much.
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Magdalena Moll, OMV AG - Head of IR [72]
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Now, ladies and gentlemen, I would like to invite you to bring forward any last interesting questions, or information needs, you may have. Bertrand Hodee. Kepler Cheuvreux.
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Bertrand Hodee, Kepler Cheuvreux - Analyst [73]
------------------------------
One clarification, if I may. On page 9, to understand your structure of the deal, if I understand well, the production will be equity accounted, and then the flows of income, in fact, will come from two different sources. And you've mentioned around $200 million of dividends mid-term.
Can you split or -- the purpose of my question is to understand where is the value in this deal? Is it on the trading side, or is it on the production side? And can you try to split us this $200 million dividend, I would say, between the two streams, as Gasprom or the trader?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [74]
------------------------------
Well, first of all, as we speak about the deal, when we talk about the value, first of all, there is a high value for us that we could acquire cheap reserves with cheap production costs. So it's part of our replenishment strategy.
And if you look back, Bertrand, what we have spent in exploration over the last years, we are talking about EUR600 million to EUR700 million, which we could reduce to half, which is around EUR300 million. So that's, more or less, part of -- that's the value that we could acquire the barrels, in the range of $3 to $3.5 per boe.
Secondly, it will bring down our cost bases. Our cost bases, currently, as we speak about the structure of Yuzhno Russkoye production, we, of course, are more than happy that 50% of the gas we are selling is indexed to the European gas prices, and that we are not heavily depending on one market, especially the Russian gas price.
Thirdly, as we speak about the structure from Yuzhno Russkoye, most of the dollar income is from the trader who sells the production. So the trader is fully consolidated and is really running the numbers.
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Bertrand Hodee, Kepler Cheuvreux - Analyst [75]
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Okay. So, if I understand well, the main inflows, in terms of dividends, will come from the trader.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [76]
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That's right.
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Bertrand Hodee, Kepler Cheuvreux - Analyst [77]
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And as for the -- and then, coming back to your production costs, I totally agree that these are very low production costs, [this] field, but as it is equity accounted we won't see that in terms of production costs, because it is equity accounted, no?
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [78]
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Yes, that's correct. But if you really would like to have the big picture of OMV, you should take it into account.
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Bertrand Hodee, Kepler Cheuvreux - Analyst [79]
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Yes, I agree. Thank you.
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Magdalena Moll, OMV AG - Head of IR [80]
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We have no further questions at the moment. If there anything else to open then please press the button. No? Okay.
Ladies and gentlemen, with that, we are at the end of our conference call. I would like to thank you for joining us this morning. And should you have any other questions then please contact the investor relations team and we will be happy to help you. We all wish you a very nice day, and hope to talk to you soon. Bye-bye.
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Rainer Seele, OMV AG - Chairman of Executive Board and CEO [81]
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Bye-bye.
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Operator [82]
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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. You may now replace your handsets.
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