Q3 2017 OMV AG Earnings Call
Nov 09, 2017 AM CET
OMV.VA - OMV AG
Q3 2017 OMV AG Earnings Call
Nov 09, 2017 / 10:30AM GMT
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Corporate Participants
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* Florian Greger
* Reinhard Florey
OMV Aktiengesellschaft - CFO and Member of Executive Board
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Conference Call Participants
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* Giacomo Romeo
Macquarie Research - Analyst
* Hamish William George Clegg
BofA Merrill Lynch, Research Division - Director and Senior Analyst
* Henri Jerome Dieudonne Marie Patricot
UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst
* Joshua Eliot Dweck Stone
Barclays PLC, Research Division - Analyst
* Marc B. Kofler
Jefferies LLC, Research Division - Equity Analyst
* Matthew Peter Charles Lofting
JP Morgan Chase & Co, Research Division - VP
* Mehdi Ennebati
Societe Generale Cross Asset Research - Equity Analyst
* Michael J Alsford
Citigroup Inc, Research Division - Director
* Oleg Galbur
Raiffeisen CENTROBANK AG, Research Division - Financial Analyst
* Tristan de Jerphanion
Kepler Cheuvreux, Research Division - Oil and Gas Equity 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 belief, 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 Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.
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Florian Greger, [2]
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Thanks a lot, Stephy. Good morning, ladies and gentlemen, and welcome to OMV's earnings call for the third quarter of 2017. Thank you for joining us.
With me on the call today is Reinhard Florey, our CFO. Reinhard will walk you through the highlights of the quarter and discuss OMV's financials performance. Afterwards, he will be available to answer your questions.
Without further ado, I would like to hand it over to Reinhard.
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [3]
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Thank you. Ladies and gentlemen, good morning from my side as well and thank you for joining us. After a very good first half year, OMV was able to deliver strong operational performance once again in Q3 2017.
Let me start by reviewing the economic environment. The macro environment in the third quarter was supported by more favorable developments. The Brent oil price strengthened to USD 52 per barrel, an improvement over the previous quarter as well as the prior year's quarter. Increased demand and OPEC compliance above 100% led to a much better sentiment in the market.
Gas traded through the traditionally weak summer months at healthier prices than last year. European demand rose in the third quarter supported by higher demand from the power business. Gas storage injections were higher as gas stocks were almost completely depleted after the cold winter. Gas prices rose by 19% year-over-year due to a number of unforeseen outages in Norway and the U.K. as well as the planned maintenance of the Nord Stream 1 pipeline in September.
The refining indicator margin averaged at USD 7 per barrel in the quarter, 17% higher than the previous quarter and almost double than the same quarter last year. Light and middle distillate products recorded considerable increases, influenced by unplanned outages in Europe and the U.S. Gulf Coast. Nearly 20% of the U.S. refinery capacity and 50% of the U.S. ethylene production went offline due to the Hurricane Harvey. Despite an increased level recorded in September, ethylene and propylene margins declined on average compared to the previous quarter on the back of increased naphtha feedstock costs. As the Asian and U.S. supply issues were solved and the demand in Asia was weaker than expected, butadiene margin dropped compared to the previous quarter, but on average remained on a higher level than the same quarter last year.
Before I come to the details of our business performance, let me briefly point out the highlights from the last quarter. At 341,000 barrels per day, OMV's hydrocarbon production remained strong, once again reaching a record high. This was mainly due to the ramp-up in Libyan production and the increase in Norway.
Coming out of the refinery maintenance season, capacity utilization in Downstream was high. We were able to capture the very favorable market environment of refining margins and spark spreads. The Downstream result represented a 5-year quarterly high, more than offsetting in Q3 2017 the effect of having divested OMV Petrol Ofisi in June this year. Regarding our cash flow, in the first 9 months of 2017, the free cash flow after dividends increased eightfold to EUR 2.5 billion as compared to the same period of last year.
We also made further progress in our efforts to optimize the Upstream portfolio. In August 2017, OMV divested its 50% stake in the Ashtart oil field, an offshore field in Tunisia. OMV's net average production from Ashtart was about 3,000 barrels per day in 2016. In the same month, OMV Petrom finalized the transfer of 19 marginal fields to Mazarine Energy in Romania. The announced Russian transactions are progressing as planned. The acquisition of an approximately 25% interest in the Yuzhno Russkoye gas field for the value of EUR 1.75 billion is on track. As announced, we received approval from the relevant Russian regulatory bodies and anticipate closing of the deal by the end of 2017 at the latest. We've also continued to work on our cost competitiveness. We maintained our Upstream production cost below USD 9 per barrel, and we are well on track with our cost savings target of more than EUR 250 million in 2017 compared to the base in 2015.
Let's now turn to our financial performance in the third quarter 2017. We were able to increase our clean CCS operating result by approximately 50% to EUR 804 million compared to the same quarter in the previous year mainly due to a significantly higher Upstream result. Clean CCS net income attributable to stockholders rose from EUR 447 million in Q3 last year to EUR 472 million in the same quarter this year. The clean tax rate amounted to 19%, roughly 16 percentage points lower than in Q2 2017. The decline was driven by increased earnings in both Downstream Oil and Gas, which are coming from comparatively lower tax countries. In addition, OMV's net impact from the Pearl Petroleum settlement with the Kurdistan region of Iraq of EUR 90 million is consolidated at equity as after-tax result, impacting the clean tax rate positively.
Clean CCS earnings per share were up from EUR 1.37 in the prior year's quarter to EUR 1.45.
OMV's group reported operating result came in at EUR 758 million, significantly above the previous year's quarter. Net special items were minus EUR 55 million compared to minus EUR 350 million in the third quarter of 2016. The second quarter of this year was negatively impacted by significant one-off foreign exchange effects from the divestment of OMV Petrol Ofisi.
Reported net income attributable to stockholders rose from EUR 48 million in the third quarter of 2016 to EUR 439 million. Earnings per share increased in line with net income from EUR 0.15 in Q3 2016 to EUR 1.35 in the third quarter of this year.
Let me now come to the performance of our 2 business segments. In Upstream, the clean operating result substantially increased from EUR 41 million to EUR 300 million. This was primarily driven by a strong operational performance and by the Pearl Petroleum settlement payment.
Market effects contributed EUR 32 million, a higher -- a result of higher realized oil and gas prices partially offset by weaker U.S. dollar. OMV's realized oil price rose by 9%, and the OMV realized gas price in Europe per megawatt-hour increased by 11%. In Q3 2017, we recorded a hedging gain of EUR 10 million, EUR 17 million lower than the third quarter of 2016.
The improvement in our operations contributed EUR 116 million compared to the same quarter last year, including lower exploration expenses. Hydrocarbon production went up by 40,000 barrels per day, reaching 341,000 barrels per day. Libya contributed 28,000 barrels per day in Q3 2017, whereas in the same period last year, the oil fields were still shut in.
Production in Norway rose by 22,000 barrels per day due to planned maintenance in the Gullfaks field in last year's quarter as well as an increase in the production of Edvard Grieg. The additional production more than compensated for the natural decline and the sale of marginal fields in Romania as well as divestment of the Ashtart field in Tunisia. Hydrocarbon sales volumes amounted to 28.4 million barrels, slightly higher than the third quarter last year mainly attributable to liftings from Libya.
Depreciation went down by EUR 21 million, reflecting a decreased asset base and positive reserves revision in the fourth quarter of 2016. Overall, costs were significantly lower.
On 30 of August 2017, the Kurdistan Regional Government of Iraq and Dana Gas, Crescent Petroleum and Pearl Petroleum Company reached a settlement over a dispute concerning certain matters under the Heads of Agreement on the Khor Mor and Chemchemal fields. OMV holds a 10% share in Pearl Petroleum and consequently, our Upstream clean operating result was positively impacted by EUR 90 million in Q3 2017. OMV received EUR 50 million in the form of a dividend from Pearl, while the remainder was put into a dedicated account for future investment in the Khor Mor field.
Now to Downstream. The Downstream business continues to be a key contributor to group earnings and cash flow. The clean CCS operating result of Downstream improved from EUR 488 million in Q3 2016 to EUR 510 million, marking a new quarterly high.
The clean CCS operating result of Downstream Oil increased by EUR 28 million to EUR 450 million. We observed the positive effect mainly attributable to significantly higher refining margin in the amount of EUR 142 million compared to the previous year's quarter. And OMV's indicator refining margin rose from USD 3.70 to USD 7 per barrel in Q3 2017. Ethylene and propylene margins improved slightly. The market effects more than offset the negative impact from the divestments of OMV Petrol Ofisi. The third quarter results no longer reflected OMV Petrol Ofisi's corresponding depreciation and contribution to earnings.
On the operational side, excluding the Turkish market, retail sales volumes increased, whereas margins slightly declined. Commercial sales volumes and margins came down compared to the third quarter of 2016, and we also recorded an unrealized hedging loss. Borealis contributed EUR 98 million, still on high level, but EUR 11 million lower than in the third quarter last year mainly due to lower polyolefin margins.
In Downstream Gas, the clean CCS operating result slightly declined from EUR 66 million to EUR 60 million. The previous year's quarter included a one-off effect of EUR 22 million. The contribution of Gas Connect Austria decreased to EUR 24 million mainly because of the change in regulated tariffs. Natural gas sales volumes rose from 22 to 24 terawatt hours as we managed to increase the sales volumes in Germany and Turkey.
The power business recorded a significant improvement due to higher output and significantly improved spark spreads. In addition, the result reflects the booking of insurance revenue related to an outage at the Brazi power plant in the amount of EUR 17 million.
In general, the good performance of our business segments is accompanied by a continued strict cost discipline. At USD 8.80 per barrel, production costs were down 13% compared to last year's quarter as a result of higher production coupled with the successful implementation of our cost reduction program. The abolishment of the infrastructure tax in Romania also contributed to lower cost.
In the third quarter of 2017, capital expenditures amounted to EUR 388 million, leading to a total spending in the first 3 quarters of EUR 1.1 billion. Around 65% of the investments were in Upstream. We updated our 2017 CapEx guidance and now expect expenditures of around EUR 1.7 billion mainly due to fewer drilling activities primarily in Romania and Norway, including some postponements to 2018.
Now let's continue with cash flow. In the third quarter of 2017, free cash flow doubled to EUR 478 million compared to the same quarter last year. Cash flow from operating activities increased to EUR 792 million in the third quarter this year driven by OMV's strong operational performance. Changes in net working capital resulted in net cash outflow of approximately EUR 200 million mainly related to a buildup of inventories in gas storage and the lower trade receivables. In addition, OMV received cash in the amount of EUR 75 million from minor divestments. The cash inflow was partly offset by another drawdown under the financing agreement for the Nord Stream 2 pipeline project in the amount of approximately EUR 65 million in Q3 2017.
This means, ladies and gentlemen, that in the first 9 months of 2017, the free cash flow after dividends, including noncontrolling interest changes, rose substantially to EUR 2.5 billion compared to EUR 302 million in the same period of last year. This marks a record high free cash flow after dividends for OMV in a mid-USD 50 per barrel oil price environment.
Thanks to the strong free cash flow generation, OMV has managed to further reduce its net debt from EUR 3 billion at the end of 2016 to EUR 0.4 billion at the end of September 2017. OMV's balance sheet is very healthy and shows strong liquidity. Cash and cash equivalents further increased to EUR 4.6 billion. The cash will be used according to our strategic capital allocation priorities: capital expenditures, strategic acquisitions, dividend payments and reduction of debt. The gearing level declined to 3%. Long term, we are aiming to keep our gearing ratio below 30%.
Let me finish with the outlook of 2017. We have seen the oil price recently reaching the USD 60 per barrel mark for the first time in more than 2 years. However, for the full year 2017, we maintain our forecast of roughly USD 52 per barrel on average.
Based on the market developments and our own operational performance in the first 9 months of this year, we increased our production guidance for 2017 to above 330,000 barrels per day. We expect Libyan production also to be above 20,000 barrels per day for the entire year.
As I mentioned already, 2017 CapEx is expected to come in at around EUR 1.7 billion. Exploration and appraisal expenditures are now projected to come in below EUR 300 million in 2017 due to fewer activities in Romania and Norway. Despite the refinery turnaround in the second quarter, our capacity utilization is expected to be above 90% for the full year.
Now for the full year 2017, our cost reduction program of more than EUR 250 million is very well on track.
With that, thank you very much for your attention. Now I'm happy to take your questions.
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Florian Greger, [4]
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Yes, thank you, Reinhard. I would now like to open the call for questions. (Operator Instructions)
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Questions and Answers
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Florian Greger, [1]
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The first question comes from Hamish Clegg, Bank of America Merrill Lynch.
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Hamish William George Clegg, BofA Merrill Lynch, Research Division - Director and Senior Analyst [2]
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Just quickly, first, on CapEx. You've guided us to EUR 1.7 billion for the full year number. You're mark to market 9 months EUR 1.1 billion, which implies quite a large step-up in the fourth quarter especially when you've done around EUR 400 million for the remaining 3 -- on a quarterly basis. Is -- are you telling us that your CapEx is going to be EUR 600 million? And could you outline which projects or why it's going to be that much higher in the fourth quarter according to your guidance? Sticking with CapEx, my second question just is the proportion of your CapEx going on your Upstream. You've guided us towards 75%. Are you still happy with that? And year-to-date looks like you've achieved a find and development cost per barrel of $9. Is this something that we can see going forwards? And then just finally, just sort of housekeeping. You've included the Pearl number in your clean adjusted number. I wondered why you did that given it's not likely to be a recurring item at all.
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [3]
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Okay. Hamish, thanks for your 1, 2, 3 questions, coming to the CapEx. Indeed, we are guiding for close to EUR 600 million CapEx in quarter 4, as the math clearly gives it. That comes from increased activities in Romania, in Norway, but also in Austria. We do have our exploration and near-field drilling activities in place. We have ramped that up with several more rigs that we are planning to drill on. So this is the reason, and we are quite confident that we are having this level than in Q4. There is also in Downstream a retail refurbishment that we are adding in our program, and this adds also up to the expected EUR 600 million. So your question on Pearl, why we included that in our clean. This is not because it's a recurring effect, but it's an operative effect. This has very much to do with the operative investments that we have done in the previous years in our activities in the Kurdish region of Iraq. And therefore, as this has been also booked negatively in the clean operating result, the respective dividend that we are taking from there is classified as a dividend and therefore is also justified in this context. And then your question was about the general lifting cost respectively with production and development cost of below $9, whether we are confident to keep that. I think we are in a situation where we are very confident that this is a stable situation and that we can even improve on that level given the expectation that also our Russian projects will close and have a positive impact on that as well.
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Florian Greger, [4]
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The next question comes from the Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale Cross Asset Research - Equity Analyst [5]
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So 2 questions. First one on the gas and power division, please. So you've been -- you said that you benefited from the increasing clean spark spread at Samsun and Brazi power plants. I wanted to know if the current increase in the natural gas price that we are having in Europe is negatively impacting your spark spreads and that would negatively impact the operating results from those power plants for the quarters to come particularly Q4 and Q1. So that's on the gas and power division. I have another question on the Upstream division, still on the natural gas. So the natural gas price is going up in Europe. Do you think that your realized natural gas price will reflect this increase? So I am asking because in Q4 '16, your realized natural gas price did not reflect the increase in the spot natural gas price in Europe probably because of increasing consumption from household in Romania. So I just wanted to know if you will still be penalized by this, this year or not.
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [6]
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Yes, thank you, Mehdi for your questions. To your first question on gas and power and the development of spark spreads. In general, the spark spreads are developing very positively specifically in our Romanian market environment. This is also something which we do not see that there is a negative impact from rising gas prices specifically as there is an increased power demand. And we are currently seeing also from the seasonality that we would not expect Q4 or Q1 to be expected -- affected negatively. But of course, these are also quite short-lived cycles, so we have to monitor how the developments are there. But currently, we feel that there is strong performance coming from that. Regarding Upstream natural gas prices, we are seeing that the realized gas prices are developing more or less in line with that, however, always at a lower rate. So we are not expecting that the full increment of a positive development of the natural gas prices also will affect our realized gas prices because there are some effects, as you have mentioned, specifically also in the Romanian environment where we have some different development. But in general, we feel that we also can participate from that positive development.
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Florian Greger, [7]
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The next question comes from Josh Stone, Barclays.
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Joshua Eliot Dweck Stone, Barclays PLC, Research Division - Analyst [8]
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I've got a question on the Yuzhno deal set to close end of the year. You guided towards around EUR 200 million of dividends from the trade of profits. And I wonder, with the latest increase in prices, whether or not that number could be a little bit higher. And then from a modeling standpoint, is it fair to assume the same level of earnings as dividends from that -- from the Yuzhno trader?
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [9]
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Yes, thank you. In general, we stay with the guidance that we have given on Yuzhno Russkoye. We don't see that there is speculation reasonably done that there will be major deviations from that neither to the up nor to the downside. And I think for the modeling, you can, as you assumed, take this into account as a dividend.
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Florian Greger, [10]
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Okay. Thanks, Josh. Next question comes from Michael Alsford, Citi.
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Michael J Alsford, Citigroup Inc, Research Division - Director [11]
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I just have a question on Romania and the current tax proposals there. So based on the current proposals, could you perhaps give some color as to the potential impact to your onshore operations in Romania? And then also, how do you see the impact to offshore potential gas developments that you have clearly domino given the proposals that are outstanding today?
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [12]
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Yes, thanks, Michael, for this question. I think we have to differentiate there between onshore and offshore. The progress that we are seeing in onshore is clearly slower and will come to an end, clearly, later than the offshore as we see it from today. Therefore, I will not comment on the onshore side because this is something where we are still at a preliminary stage in our negotiations and do not have all the proposals on the table in that. On the offshore side, progress has been made. I think it is important that with the offshore tax environment, also the foundation for a potential FID on our Neptun project is being lead, this is very important that we find conditions which are acceptable there and this is in the final stages. Romania has come up with a proposal there, which is currently in the parliament, and we'll see how that will be finalized. So whether this still is finalized this year or beginning next year, we are not entirely sure. So we are seeing that there is a positive topics.
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Florian Greger, [13]
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The next question comes from Henri Patricot, UBS.
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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [14]
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A couple of questions for me. The first one on the asset swap with Gazprom. We've seen some reports potentially lower MET for projects in Russia, such as the Achimov field eventually. I was wondering if that could delay the (inaudible) because obviously that would make that field more valuable, so maybe you need to offer a larger stake in your assets in Norway or some sort of cash payment to Gazprom from the swap. And then secondly on Nord Stream 2. It seems like there's bit of a higher risk of this project not going forward given the changes in Germany and EU regulations. So I was wondering what would be the impact on your gas business if the project doesn't go ahead and what would happen to the financing you have provided to the project at this point and that you should provide over the next few months.
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [15]
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Okay. To the asset swap, we are progressing there alongside the agreements that we have. So we are in a very good partnership there, and we do not see that there is reason to change any of the ideas -- any of the agreements that we had so far. This is the basis for how we are going forward, and this is how we expect this deal also to be signed and then closed by the end of 2018. In Nord Stream 2, you mentioned that there would be more concerns about that. Honestly, we wouldn't directly see it like that. We feel that from a legal side with the clarifications that have been put on the table by the Secretary of State, we feel that OMV's position rather is confirmed and strengthened. Of course, many topics still to be discussed in that area, but we are very much committed to this project. We are confident that this will go ahead. And if your question is whether the situation where Nord Stream 2 is inhibited or anything like that would have a negative impact, we are not thinking really of that scenario because we think it's an extremely important project for Europe's energy supply. But as you see that our engagement there is a purely financial engagement. We feel that there is strategic benefit from that, but that is not something that would threaten our profitability in any way. But as I said, we are fully committed to this project because it has a high benefit not only to Europe, but also to the OMV ability to supply more gas and a stable gas supply to our customers.
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Florian Greger, [16]
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Next question comes from Giacomo Romeo, Macquarie.
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Giacomo Romeo, Macquarie Research - Analyst [17]
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I think I have a couple of more maintenance-related questions. First one is, is if you can provide an update on your tax rate guidance for the full year given that you had a very low tax rate this quarter and whether your previous indication still stand. The second is on CapEx. You lowered your CapEx guidance again for 2017, and I was wondering how you're thinking in terms of 2018 and what sort of figure you -- this can move to.
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [18]
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Okay. Regarding the tax rate guidance, I have mentioned that the comparably low clean tax rate of 19% that we showed for Q3 has some specific reasons, which are not entirely in our business, but specifically also have to do with the amount that we have received the dividend from the Pearl environment which comes already as a net effect to us. Of course, that has a positive impact on that ratio. However, year-to-date, we are at around 24% clean tax rate, and we are expecting, as always, anticipated around 25% for the full year and that has not changed in the context of Q3. Regarding CapEx 2017, yes, this is -- as I have explained, the guidance that we have given, that has no impact that we are expecting anything less in 2018. So we stick with the expectation that we are around the EUR 2 billion, and this is something which has not changed and is also not adversely affected. As I said, there are even some spillover effects that we are expecting from 2017. So I think this is, for modeling purposes, a good figure.
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Florian Greger, [19]
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Next question comes from Marc Kofler, Jefferies.
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Marc B. Kofler, Jefferies LLC, Research Division - Equity Analyst [20]
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Just a couple left, please. Can you talk about how you expect the group gearing level to move from what is a very low level at present, not so much Q4, but then I guess into 2018 as well, please? And then I just wanted to ask a question in the Upstream. Given oil price is back in the $60 and everyone's feeling a bit more comfortable in oil markets in general, how does that impact your view on your assets in New Zealand? And can you just remind me there, how you feel about them in terms of are they core, noncore going forward?
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [21]
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Yes, thank you very much. Regarding the gearing ratio, yes, we have reached a very impressively low standard on gearing at the moment. However, our long-term gearing guidance that we give is still in the range of some 30%. Of course, it has to do also with the ambitions that we have in terms of developing OMV further and are also applying growth opportunities in our portfolio. So in total, we think that having taken the chance of very good cash flows and more or less filling a little bit our war chest for the times to come is a very positive development for OMV. But we do not see this kind of gearing rate as we have today as sustainable rather than the value that we have given as guidance. Regarding New Zealand, New Zealand is a very good contributor of cash to our business. It may be distant to our headquarters, but still we are very knowledgeable and very much engaged in this country. I have a very good team there. Whether that's core or noncore is maybe not the question for the moment. Rather, it is the situation that we have a good run there. It's a fantastic team. We are providing good results, and therefore they have our full support.
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Florian Greger, [22]
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The next question is from Matt Lofting, JPMorgan.
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Matthew Peter Charles Lofting, JP Morgan Chase & Co, Research Division - VP [23]
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Just one, please, on capital allocation and if you could talk about how you see the order of priorities from here especially given the [DGID] balance sheet starting point that you referred to. And I guess in some ways sort of taking 1 or 2 of the previous questions and putting it together in terms of if you could just talk a bit more holistically around how you see the preliminary framework around 2017 cash return given the strength of year-to-date cash generation and then balancing that against where you see the ambitions of the management team around both inorganic and organics or CapEx requirements on a 2018-plus view.
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [24]
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Okay. Thank you. Well, the priorities regarding capital allocation are as I've mentioned it in my summary for quarter 3. So first priority, of course, is the CapEx to support our project. The second is strategic acquisitions. The third is dividend payment, and the fourth is that we will also strengthen the balance sheet. As we have already a very strong balance sheet, of course, you can see it exactly in that order. And well, more generally, I think, of course, there are ambitions of OMV to grow the company, to take opportunity if there are positive possibilities in the market. But our ambition always is towards value. We are not lured into any topics where there is still some doubtfulness about that. We also do not tend to be overoptimistic regarding the market environment. So we'll look at everything very carefully, but we will also not hesitate if there are opportunities that make a perfect fit and an opportunity for value increase for the company. You were asking about 2017 cash return to shareholders. The shareholder -- the dividend policy, of course, and the dividend itself will be determined after the full year 2017. So I will not preempt anything like there. But I would like to still reflect our dividend policy that we have newly engaged on in 2017, which says based on the dividend that we have paid for 2016 of EUR 1.20, we are anticipate and progressively growing dividend according to what we see in our cash flow and profitability development in the company.
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Florian Greger, [25]
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Next question is from Tristan de Jerphanion, Kepler Cheuvreux.
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Tristan de Jerphanion, Kepler Cheuvreux, Research Division - Oil and Gas Equity Analyst [26]
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Two, if I may. The first one is on Downstream Gas. It's my understanding that Q3 benefited from a one-off receipt from some instruments regarding the temporary shutdown of Petrobrazi power plant last year. So first small question, do you think we could see more of that in the coming quarters? Or was that just a one-off? And second, you had quite a lot of one-offs in the last quarters, both positive and negative. Is it possible that you could give us a hard normative guidance for 2018 and beyond excluding, of course, potential one-offs? And the second question, you confirmed that Yuzhno Russkoye is expected to close by year-end. And if I'm not mistaken, the transaction will be retroactively effective as of January 1 of this year. Is this still the case? And if yes, could you please highlight how this will be reported in Q4 '17 in terms of the 100,000 barrels per day net to OMV reproduction and earnings both at equity accounted and consolidated levels?
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [27]
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Yes. Regarding the Downstream Gas, yes, there was a EUR 17 million onetime effect from an insurance payment on the Brazi gas power plant. We had reported about the difficulties that we had with our transformers there and that the gas power plant was not working. That is an insurance case, and that has now been mainly settled. We are not expecting many -- more topics to come from that. So we see that in this dimension clearly as a one-off in Q3. Regarding the Yuzhno Russkoye situation and the retroactive effect, of course, this is reflected in the transaction value as such. So with that being then the closing -- in the closing value, all these kind of effects will be compensated. But the reflection of the volumes to be booked here, this is -- as of the point of closing, we will report these kind of volumes in there, and the level of roughly 100,000 barrels is the right one. This has also been confirmed by (inaudible).
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Tristan de Jerphanion, Kepler Cheuvreux, Research Division - Oil and Gas Equity Analyst [28]
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Just coming back on Downstream Gas. If you have a recurring guidance for earnings on a non-one-off basis?
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [29]
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We do not guide 2018 right now. This will be done after our full year and also some more details coming in the course of our Capital Markets Day that we have been proposing for March.
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Florian Greger, [30]
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Next question is from Oleg Galbur, Raiffeisen CENTROBANK.
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Oleg Galbur, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [31]
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I have a follow-up question on your income tax. I understand the impact of a barrel payment and the high Downstream earnings on your third quarter tax. But now with the Libya having stronger impact on the Upstream earnings, could you please explain us how are the Libyan-related taxes and royalties impacting your operating result and your income tax?
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Reinhard Florey, OMV Aktiengesellschaft - CFO and Member of Executive Board [32]
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In Libya, we are having a profit-sharing agreement, and this is a very special topic. And this means that we are receiving, according to this contract, volumes that we can also then market and ship. Of course, for the purposes of accounting and the purposes of showing, we are grossing that up with the tax rate, which means, in principle, that we are paying tax in barrels. But of course, this is not comparable, so therefore we are applying a comparable tax rate. The tax rate in Libya is 65%, and therefore the barrels are accordingly being grossed up. This is the normal way that you can then also compare it and also have a sustainable modeling of that with this respective tax rate, and this is also how we record that and how we do that in our earning.
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Florian Greger, [33]
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Okay. Ladies and gentlemen, before I conclude today's call, I would like to remind you of our Capital Markets Day which will take place in London on March 13, 2018. Thank you for joining us today. And should you have any further questions, please contact the Investor Relations team, and we will be happy to help you. Goodbye, and have a nice day.
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