Q2 2018 OMV AG Earnings Call
Aug 02, 2018 AM UTC
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OMV.VA - OMV AG
Q2 2018 OMV AG Earnings Call
Aug 02, 2018 / NTS GMT
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Corporate Participants
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* Florian Greger
OMV Aktiengesellschaft - VP & Head of IR
* Johann Pleininger
OMV Aktiengesellschaft - Deputy Chairman of the Executive Board
* Manfred Leitner
OMV Aktiengesellschaft - Member of Executive Board
* Rainer Seele
OMV Aktiengesellschaft - Chairman of Executive Board & CEO
* Reinhard Florey
OMV Aktiengesellschaft - CFO & Member of Executive Board
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Conference Call Participants
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* Bertrand Hodee
Kepler Cheuvreux, Research Division - Head of Oil and Gas Sector Research
* Christopher Kuplent
BofA Merrill Lynch, Research Division - Head of European Energy Equity Research
* Henri Jerome Dieudonne Marie Patricot
UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst
* Jason Gammel
Jefferies LLC, Research Division - Equity Analyst
* Joshua Eliot Dweck Stone
Barclays Bank PLC, Research Division - 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
* Robert John Pulleyn
Morgan Stanley, Research Division - Analyst
* Thomas Yoichi Adolff
Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director
* Yuriy Kukhtanych
Deutsche Bank AG, Research Division - Research Associate
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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 e-mail. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. 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 beliefs, 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, OMV Aktiengesellschaft - VP & Head of IR [2]
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Thank you, Andrea. Good morning, ladies and gentlemen, and welcome to OMV's earnings call for the second quarter of 2018.
With me on the call are Rainer Seele, OMV's Chairman and CEO; Reinhard Florey, our CFO; and Hans Pleininger, our Deputy CFO and the board responsible for Upstream; and Manfred Leitner, the board member for Downstream.
Rainer Selee will walk you through the highlights of the quarter and will discuss OMV's financial performance. Following his presentation, all 4 board members are available to answer your questions.
And with this, I will hand it over to Rainer.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [3]
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Good morning, ladies and gentlemen, a warm welcome to our press conference, and thank you for joining us.
In the second quarter, we made significant progress in the implementation of our strategy by achieving important milestones. We generated, once again, a strong cash flow. And our second quarter operating result increased versus last year, reflecting our portfolio changes and the more favorable oil and gas prices.
Before coming to our business development, let me briefly review the external environment. In the second quarter of 2018, the Brent oil price rose for a short time to almost $80 per barrel, the first time since November 2014 and averaged $74 per barrel. This was 50% higher than the average during the same period in 2017. The oil price strengthened due to the continued strong compliance with OPEC production cuts as well as ongoing supply disruptions in Venezuela and the U.S. decision to reinstate sanctions on Iran.
European gas prices averaged around EUR 21 per megawatt hour, 26% above the same period last year. This increase was driven by the need to replenish storage levels following exceptional cold weather in February and March of this year.
In addition, gas prices were supported by high Asian LNG price levels as well as a cross-commodity strength from oil, coal and carbon prices. The OMV indicator refining margin was down 13% compared to the second quarter of last year, reflecting the strong upwards momentum of crude prices. Margins for NAFTA and middle distillates increased, driven by strong global demand, partly offsetting weaker margins for gasoline and fuel oil. Net margins for both ethylene and propylene decreased versus the previous year's quarter, mainly driven by higher feedstock cost, following the crude oil price rally. Butadiene margins were below the exceptional high level of the previous year's quarter but increased significantly compared to the first quarter of 2018.
So let me now briefly point out the highlights of the second quarter of 2018.
Our clean CCS operating result reached EUR 726 million, up 10% versus the same period a year ago. The result was negatively impacted by the Petrobrazi refinery turnaround to amount -- in the amount of EUR 35 million and not yet realized intersegmental profit of approximately EUR 60 million in connection with the turnaround, hedging effects of minus EUR 124 million and currency headwinds of around EUR 50 million.
OMV's hydrocarbon production rose by 8 1 to 419,000 barrels per day compared to the last year's quarter due to the addition of Yuzhno Russkoye to our portfolio. Compared to the first quarter of this year, our production slightly declined mainly due to the seasonal demand in Russia and pipeline repairs in New Zealand.
We successfully completed the planned full site turnaround at the Petrobrazi refinery without any significant incidents or LTIs. Investments in the modernization of the refinery over recent years now enable us to perform turnarounds going forward only every 4 years instead of every 2 years previously. The next Petrobrazi turnaround is planned for 2022.
After the payment of a record dividend, organic free cash flow after dividends came in at EUR 88 million in the second quarter. In the first half of 2018, OMV generated an organic free cash flow after dividends of EUR 733 million, illustrating OMV's strong cash generating capabilities. While we will continue to focus on costs, compared to the same quarter last year, we managed to decrease our production cost from $8.7 to $7.6 per barrel as a result of higher production, coupled with the successful implementation of our cost reduction program. In the first -- in the last months, we made significant progress towards our strategic goals.
In April, we closed the acquisition of the offshore concession agreement in Abu Dhabi. In May, we signed the agreement to divest our Turkish power plant, which marks the final step in our strategic target to reduce the exposure of the non-integrated power business. In June, we closed the divestment of our Upstream business in Pakistan and we signed an agreement with Gazprom for the extension of natural gas supplies to Austria until 2040. In July, we signed an agreement to divest our stakes in the Polarled gas pipeline at the Nyhamna gas processing plant in the North Sea. This gas infrastructure is not strategic for OMV and its divestment will have no impact on OMV's production. The transaction is expected to be completed in fourth quarter 2018 and is subject to relevant approvals. I will continue with August, September and October in our next analyst call, of course, so I have to stop here.
Let's now turn to our financial performance in the second quarter of 2018. The clean CCS operating result increased by EUR 64 million to EUR 726 million compared to the second quarter of last year. Upstream recorded a significant increase of EUR 189 million, supported by our portfolio changes and the more favorable oil price environment and partially offset by a weaker euro-dollar exchange rate.
Downstream earnings declined by EUR 72 million due to the lower refining and petchem margins, as well as the missing contribution from OMV Petrol Ofisi, which was divested in June 2017.
In autumn of 2017, given that oil prices increased above our budgeted oil price and above market expectations for 2018, we decided to secure a certain level of cash flows and hedged below 50% of our oil production for the first half of 2018. The aim was to support the company's financial resilience by establishing a downside protection against lower prices and, thus, ensure cash flows for our growth strategy. However, crude price rallied to unexpected high levels, and we could not capture the entire upside of the price increase.
Our 2018 oil hedging activity is weighted towards the first half of the year. In the second half of 2018, our hedging position will be substantially lower. We have hedged only half of the volumes compared to the first half of the year and at higher prices. For 2019, we do not have any oil hedges in place.
Clean CCS net income attributable to stockholders slightly decreased to EUR 272 million, due to a substantially higher tax rate. The clean tax rate amounted to 49%, 14 percentage points higher than in the second quarter of 2017. This was mainly driven by an increased contribution from the higher taxed upstream countries and a higher oil price environment and a lower contribution from Downstream oil. In addition, the high tax rate reflects the negative hedging effects. For the full year 2018, based on our oil price assumption of $70 per barrel, we expect the clean tax rate to be in the mid-30s. Clean CCS earnings per share were at EUR 0.83 in second quarter 2018.
Let me now come to the performance of our 2 business segments. Upstream experienced a strong quarter driven by the higher sales volumes in Russia and higher crude prices. The Upstream clean operating results substantially increased from EUR 259 million to EUR 457 million. Market effects had a positive impact of EUR 77 million compared to the second quarter last year. OMV's realized oil price rose by 32%, while the realized gas price decreased by 16%. European and Russian gas prices increased compared to the same quarter last year, but the inclusion of Yuzhno Russkoye in our portfolio led to a decrease in our average realized gas price, due to the lower price level in Russia compared to the European market. Russian gas volumes amounted to 40% of our gas production in the second quarter of 2018.
In second quarter in '18, we recorded a hedging loss of EUR 124 million compared to a gain of EUR 17 million in the second quarter of 2017. In addition, the higher realized oil prices were partly offset by a weaker U.S. dollar.
Compared to the same quarter last year, we improved our operations, resulting in an increased earnings contribution of EUR 105 million. Hydrocarbon production went up by 81, reaching 419,000 barrels per day. Yuzhno Russkoye contributed 98,000 barrels per day, slightly lower than in the first quarter due to the seasonal gas demand.
Production in Romania and New Zealand declined, the latter due to the pipeline damage at the Pohokura offshore field. The pipeline was brought back in service, and production restarted already in July.
Hydrocarbon sales volumes developed in line with the increased production and amounted to 35.7 million barrels, an increase of 25% compared to the second quarter of 2017.
Production costs were further reduced to $7.6 per barrel, down 13% versus the prior year's quarter. Depreciation decreased and had a positive impact of EUR 16 million compared to second quarter '17, mainly reflecting positive reserve revisions in Norway and Romania, partly offset by higher depreciation in Russia.
In Downstream, the clean CCS operating results decreased by EUR 72 million to EUR 338 million as compared to second quarter '17, mainly driven by Downstream Oil. The clean CCS operating result of Downstream Oil declined by EUR 64 million to EUR 318 million, stemming from a weaker market environment and the missing earnings contribution from OMV Petrol Ofisi of EUR 44 million.
OMV's indicator refining margin decreased by 13% from $6 to $5.2 per barrel. The refinery utilization rate was at 77%, similar to the previous year's quarter. The low utilization reflects the planned 6-week turnaround of the Petrobrazi refinery and small-scale scheduled maintenance activities at the Burghausen refinery.
Excluding OMV Petrol Ofisi, total refined product sales were at the same level as in Q2 '17. The slight increase in retail sales volumes was offset by lower commercial volumes. On the back of higher feedstock costs, margins in both businesses decreased.
The earnings from our petchem business increased by EUR 4 million to EUR 55 million, despite lower ethylene, propylene and butadiene net margins. Last year's second quarter result was negatively impacted by the turnaround at the Schwechat refinery. The contribution from Borealis to the clean CCS operating result grew by EUR 12 million to EUR 106 million, supported by an income from a license agreement and healthy integrated polyolefin margins. The fertilizer market environment remains challenging.
In Downstream Gas, clean CCS operating result decreased by EUR 9 million to EUR 20 million. Natural gas volumes declined by 5% primarily due to lower volumes in Romania and Turkey, partially offset by higher sales in Germany. The contribution by -- from Gas Connect Austria declined by EUR 6 million.
So let's continue with cash flow. In the first half of 2018, the cash flow from operating activities amounted to EUR 2.3 billion, an increase of EUR 395 million compared to the first half of last year.
This increase was driven by OMV's operational performance, a favorable market environment and portfolio changes. Cash flow was also supported by positive net working capital effects due to lower receivables and an increase in supply liabilities.
As a result of portfolio changes, we recorded, in the first half of 2018, a cash flow of EUR 166 million, thereof EUR 146 million from the divestment of the Upstream business in Pakistan.
Cash flow for investing activities excluding acquisition showed an outflow of EUR 1 billion in the first half of '18. This includes payments to the Nord Stream 2 pipeline project of EUR 141 million of which EUR 60 million were paid in the second quarter.
We also paid dividends of EUR 693 million, thereof EUR 490 million annual dividends to OMV shareholders and EUR 45 million to hybrid holders. As a result, in the first 6 months, we reached a positive organic free cash flow after dividends of EUR 733 million.
Cash outflow for acquisitions amounted to EUR 1.3 billion, reflecting mainly the payment of the transaction in Abu Dhabi. As a consequence, our free cash flow after dividends in the first half of 2018 was minus EUR 541 million. As presented to the Capital Markets Day in March, we aim to have a yearly positive free cash flow after dividends.
OMV's balance sheet remained very healthy and showed strong liquidity. Net debt increased by EUR 0.5 billion to EUR 2.8 billion, primarily due to the acquisition of the 20% stake in the 2 offshore fields in Abu Dhabi. We further improved our financial -- our financing structure by redeeming the EUR 750 million hybrid bond with a coupon rate of 6.75%, which was issued in 2011. In June, we issued a new hybrid bond of EUR 500 million, with a much lower coupon rate of 2.875%. According to IFRS, the proceeds of the hybrid bond are fully treated as equity. On June 30, 2018, the gearing ratio stood at 20%, well below our long-term target of equal to or below 30%.
Let me conclude with the outlook for 2018.
Throughout the first half of this year, we saw the oil price stabilizing at a level of around $70 per barrel. Based on this, we have decided to update the oil price forecast for the full year 2018 to $70 per barrel. We now anticipate average European gas price -- spot prices for 2018 to be higher than in 2017. We reconfirm our average yearly production of more than 420,000 barrels per day. Production from Russia is planned to contribute around 100,000 barrels per day. Production in Libya is forecasted to be at a similar level to that of 2017, which was roughly 25,000 barrels per day.
Production in third quarter 2018 is expected to be lower than in the second quarter '18, due to the planned annual maintenance in Russia, maintenance work in Norway and the divestment of the Upstream business in Pakistan, which produced approximately 7,000 barrels per day in the second quarter of 2018. But to be honest, I don't see a real big impact on our profit development.
Production in fourth quarter 2018 is expected to be strong, slightly higher than in the first quarter. This will be driven by higher volumes in Russia due to the seasonal gas demand, the expected production startup of Aasta Hansteen in Norway and the 2 fields in Abu Dhabi.
The announced acquisition in New Zealand provides additional upside. Average production of the acquired assets in New Zealand is estimated to be around 30,000 barrels per day. Closing is expected in the fourth quarter of this year.
In Downstream Oil, in the second half of the year, we expect the refinery utilization to increase significantly from 77% in the second quarter to above 90%. Furthermore, we expect a positive impact in our results following the realization of the intersegmental profit eliminated in the second quarter due to the Petrobrazi turnaround. We expect refining margins to be lower than in 2017 and petchem margins at the similar level to those in 2017.
In Downstream Gas, yearly sales volumes are projected to be higher than in 2017 and natural gas sales margins are forecasted to be at the similar level to last year.
As I mentioned earlier, our hedging volumes in the second half of the year will be significantly lower than in the first half and at higher prices. 2018 organic CapEx is expected to come in at around EUR 1.9 billion.
Thank you for your attention. We are now more than happy to take your questions.
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Questions and Answers
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [1]
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Okay, let's now come to your questions. (Operator Instructions) First question comes from Mehdi Ennebati, Societe Generale.
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Mehdi Ennebati, Societe Generale Cross Asset Research - Equity Analyst [2]
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First question about the hedging. So you say that the hedging impact will be much lower in second half than in the first half. Can you please be more precise by telling us or by providing us the price you hedged in the second half? So I am asking that question because everybody underestimated negative impact from hedging in the second quarter. And there will remain some fear about the hedging for the second half despite the information that you provided us, unless you give us the price you hedged in the second half of the year. Second question, regarding the New Zealand production, so you said that the pipeline restarted in July. Can you please provide us the production result in New Zealand in July? And can you also tell us if you are currently producing in New Zealand at, let's say, the result pre pipeline issue meaning roughly 18, 19 kboe?
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [3]
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Okay, Mehdi. Thanks for your question for hedging. I know this is an important topic today. Rainer has given you some very important messages already in his speech. The first one is that there will be, from the oil hedges, a significantly lower volume. He talked about that there will be only half of the volume in there and also at higher prices. We will, of course, also from some tactical reasons not be able to give you exactly hedging levels because that is something that is embedded in our total risk strategy which we are, of course, looking into. We have given you, I think, a very good guidance in the sense that there will be a significant lower impact from that. However, what I personally cannot forecast is where the oil prices will move to. And we have seen the impact because there has been an extremely high increase and also not anticipated in that volume. But what is important is that, for 2019, we do not have any hedges in place, and for the second half, we are seeing that there will be significant lower impact from that. There is one second aspect that I would like to give you as well. That is the impact on tax because you have also seen that we have a tax rate which is significantly higher in Q2, and part of that has been also due to the hedging simply because there have been effects from that from country-by-country effect as well as from the specific effect of higher oil prices as such.
So if you want to have an indication there, the impacts from the hedging on the tax rate has been around 7.5% from the hedging. And the other effect on the tax rate have come, of course, also from the effects in Petrom with lower general result throughout the turnaround that we have there and some of the smaller effects. And we should also not forget that there has been an effect from FX also on the tax side. But answering your question about hedging, this is also an aspect that you should not forget that also tax rate will improve when we have significant lower tax effects there -- hedging effects there.
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Johann Pleininger, OMV Aktiengesellschaft - Deputy Chairman of the Executive Board [4]
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Mehdi, I will take your question regarding pipeline Pohokura in New Zealand, so we had the effect of around 5,000 to 6,000 boe less production in the last weeks, so the pipeline is now restored and is in operation again. So we are ramping up the production right now. And just year-to-date, we saw a production slightly above 17,000 boe per day, so that's the production volume what we have in our plans. So 17 -- slightly above 17,000 is what you can expect until the end of the year. From a current basis, so if we close the deal that we'll be assuming before year-end in Q4, then you will see an upside of another 30,000, 31,000 boe per day in addition to the 17,000.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [5]
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The next question is from Jason Gammel, Jefferies.
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Jason Gammel, Jefferies LLC, Research Division - Equity Analyst [6]
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I just wanted to come back to hedging but approaching more from a strategic standpoint. You did mention that you put the hedges in place for 2 reasons is that the price had went above your budget level and also to lock in some cash flow, which is quite understandable given that new -- you have the outflow for the Abu Dhabi acquisition. So my question really is, on a move forward basis, how strategically will you approach hedging just given that your free cash flows are strong, the balance sheet's in good shape. Would you still look to lock in prices when you hopefully have gotten above a level you felt was sustainable? Or do you think that the financial condition of the company is now strong enough that you might avoid the hedging markets? And I'll leave it at that.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [7]
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I think, Jason, the trend is crystal clear. We have burnt our fingers a little bit in the second quarter, and we are not of that kind that we would like to have our fingers burnt. So we are going to reduce heavily in the third and fourth quarter. And I said to you that there are no hedges in place. I fully agree with you that the situation within OMV has changed as we speak about the strong balance sheet and the cash position and the cash flow so that I don't exclude any kind of hedging activities. But as I remember, the discussions in our board meeting, the probability, I would say, is not very high, okay. And as we speak about hedging, the last guidance for Mehdi. Well, Mehdi has now looked through the math. In the second quarter, we have said we have hedged below 50% of the oil volumes. Than I have said it's only half in third and fourth quarter in the second half of the year. So what I can say is it's less than 25% in the second half of this year. This is just pure math, yes. And the level is above the price level we have seen as a hedging effect in the second quarter. But the number, I think, Reinhard doesn't want to release.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [8]
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Next question is from Josh Stone, Barclays.
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Joshua Eliot Dweck Stone, Barclays Bank PLC, Research Division - Analyst [9]
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Yes, I've got 2 questions please. Firstly on Borealis. Very strong earnings results in the quarter, outperforming the indicator margins. You mentioned a license agreement income. Could you just say a bit more detail around that, is that an ongoing income we should expect? Are there any more potential license agreements in Borealis in the pipeline that could help earnings? And then secondly, on the Upstream, if you could provide a likely exit production for this year assuming Abu Dhabi and New Zealand close before the end of the year?
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Manfred Leitner, OMV Aktiengesellschaft - Member of Executive Board [10]
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Hi, Josh, this is Manfred. On Borealis, this was a onetime license income that have been accounted for in June in respect to a project that is currently going on in the States. It's -- our share in that is EUR 12 million and is not a repeatable income, it's a onetime off.
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Johann Pleininger, OMV Aktiengesellschaft - Deputy Chairman of the Executive Board [11]
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Second question you asked, a very challenging one. What is the exit rate at the end of the year? So if we assume that we close the deal in New Zealand, as I mentioned, so we would see around 30,000 boe in addition to the current production.
For UAE, for our assets which we acquired, SARB and Umm Lulu, we do expect to start the ramp-up phase in Q4. So we expect an exit rate of around plus/minus 10,000 boe per day. Aasta Hansteen will bring onstream beginning of Q4. We'll ramp up the production to the plateau production already at the end of the year, which is around 18,000. So if you add all these to the current production, what we see is 420,000, that's what we said, plus 30,000 from New Zealand, plus 18,000 -- 17,000, 18,000 from Nawara -- from Aasta Hansteen, and another 10,000 from SARB and Umm Lulu, then you can do the math by yourselves. And then you will see what will be the exit rate what we are expecting end of the year.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [12]
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Next is from only Henri Patricot, UBS.
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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [13]
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Two questions for me. The first one is on your -- following up on production and on Libya and Yemen. So Libya, what -- do you see that the risk is more to the upside or to the downside in your figure given the recent developments around security and your outlook for the rest of year? And secondly, I saw that there was some return of some production in Yemen in the quarter. Should we expect to see some ramp-up over there? And then secondly, just on the asset swap with Gazprom, if you have any update on the timing and the progress there?
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Johann Pleininger, OMV Aktiengesellschaft - Deputy Chairman of the Executive Board [14]
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Okay. Henri, I take the first 2 questions regarding Libya and Yemen. So Libya the current situation is the potential in Libya is 30,000 boe per day. We're producing right now to Sirte of NC186. This is part of the Sharara fields. We are producing right now OMV share 25,000 boe per day. This we are also estimating as an average production until end of the year.
The total potential in Libya right now is at around 30,000. So if everything is going well, then we could achieve 30,000. But as I said, our assumption is 25,000, which is in the same range as we have been producing last year. Yemen, we've ramped up the production. You saw the effect already in Q2, a rather small one. The current production is at around 5,000 boe per day. That's what we are assuming that we will keep until end of the year if nothing is changing materially in Yemen. So 5,000 in Yemen until end of the year from now on, and 25,000 in Libya from now on until the end of the year.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [15]
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Henri, to my biggest regret, I cannot give you so much information about progressing asset swap for a very good reason. We have a new situation in Norway when the energy minister raised some concern which we have to understand better, and I think we need to have a dialogue between the 3 parties involved. And the problem is not the energy minister, the problem is that our partners from Gazprom were very busy with the football championship in their country. And now they are on holiday season, and they are not available, yes. That's why I think we will make some progress starting in September, sitting together, having discussion, and then Henri, I will give you a better picture on our last conference call when we talk about the third quarter. But I will repeat myself, both parties are committed to the transaction on the same level we have seen a year or 2 years ago.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [16]
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Next is Thomas Adolff, Crédit Suisse.
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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [17]
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Two questions for me as well, please. One on the tax rate and another one just on downstream inorganic spend. Just on the tax rate, to clarify your comments made for the full year, you said mid-30s, which clearly incorporates the high level in 2Q. And you said earlier on that 7.5 percentage points was linked to the hedges you had in place. So you would've been otherwise in the low 40s. So if you say mid-30s for the full year, that kind of implies low 30s maybe in the second half of the year. So I wanted to understand why it's much lower than it is in 2Q adjusted for the hedges?
Second question, just on Downstream inorganic spend if you don't mind refreshing my memory, kind of new to the story again. I believe in the past you did say that you're interested in expanding your footprint in the UAE, maybe it's wise [3], whatever it is. So I wondered whether it's both for refining and petrochemical i.e. the integrated facility, and if so, how imminent this is.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [18]
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Tom, let me start with the tax. When I referred to the differences in tax rates you correctly cited to the hedging effect of that. But I also said that there has been the effect of the Petrom topics with the turnaround there that have been around 5%, and we had some FX effects, which I had also mentioned. The FX effect, just to give you an example, that the Tunisian Dinar depreciated a lot, which in total for the FX effect also had an effect of close to 3%. So there is a quite significant onetime effect in the tax rate that we are seeing in Q2 so that the reiteration of what we said that, for the full year, we are seeing the tax rate at the mid-30s can be fully confirmed in that respect. However, we also said we are conserving that in the context of our guided oil prices and gas prices. And of course, if you would have massive deviations there, then you would also see some effects there. This is something that we cannot predict at the moment more precisely than from the outlook that we are giving. But I think, in general, that should give you an idea how our portfolio, when it is balanced in a normal quarter between Upstream and Downstream and where you see then the full impact of the effects that we are, also in Romania, acting in a lower tax country, is then fully realized then that gives us the return to these lower tax rates.
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Manfred Leitner, OMV Aktiengesellschaft - Member of Executive Board [19]
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On the second question, inorganic CapEx in Downstream. In March, in the Capital Markets Day what we informed you was that we are earmarking EUR 5 billion but until 2025 for that purpose. And in the meantime, what we are doing is we're screening obviously the different options that are on the table. Is Abu Dhabi one of them? Yes, definitely yes. And the second question, whether it's refining and petrochemicals, I -- that would be a priority for us and in the directional of moving outside of Europe to transfer our know-how in operating project management and others in refining and petrochemical. So this would be the first priority to find refining and combined petrochemical options.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [20]
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Next is Rob Pulleyn, Morgan Stanley.
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Robert John Pulleyn, Morgan Stanley, Research Division - Analyst [21]
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Most of my questions, I think, have already been covered, so let's not rehash old ground. But I did have 2 left. The first one is, I caught a nuance around this 4Q production comment that it would be slightly better than 1Q despite the fact, of course, the Russian seasonality and Aasta Hansteen being on which you confirmed at the start of 4Q. Are there some offsetting declines elsewhere that we should be taking into account? And the second one, a little bit conceptual, obviously, you've mentioned the hybrid debt. Is that something you would consider doing more of going forward? Just for our understanding.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [22]
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Let me start with your second question on the hybrids. Please take into consideration that, in total, we even reduced our hybrid exposure on the financing side. We originally had EUR 2.25 billion in hybrids outstanding. We have repaid EUR 750 million, and we have replaced it by EUR 500 million. So we are now at a level of EUR 2 billion.
Now with that move, we have significantly reduced the interest burden from a level of 6.75 to a level of 2.875. This is the way that makes also hybrid more attractive area of financing for us. On the other hand, still if we are talking about senior bonds or even facilities in which we can breathe are still more favorable. So my expectation is that the ratio between the senior and the hybrid will not dramatically change, but both instruments are welcome by us as the opportunity of some flexibility is there also regarding the tenure. And it is also good to see that the acceptance also taking into account our upgraded credit rating when Moody's put us back on A level, on the A- stable outlook level again, contributed to a very high demand for these kinds of instruments in the market.
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Johann Pleininger, OMV Aktiengesellschaft - Deputy Chairman of the Executive Board [23]
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Again, regarding the question regarding production in Q4, as outlined before the exit rate. And the exit rate, once you add to this current production of 420,000, there's 30,000 from New Zealand; Abu Dhabi, 10,000; and Aasta Hansteen, 18,000. We would land between 470,000 and 480,000. And some of those projects, we don't know right now whether we ramp up the production beginning of Q4. So then you would see the full impact for the full quarter. Also in New Zealand, we don't know right now when we will have the closing of the deal. If the closing is already beginning of Q4, then you will see the 30,000 for the entire quarter. If the closing is just mid of September, then you will see minor effects on Q4. So it's very difficult for us to give you now a really firm number for Q4. That's why I referred before to rather the exit rates than to an average production in Q4. What we have to consider as well is that we will see some decline in core countries like in Austria and in Romania. In Romania, mainly because there, the big discovery some 8 years ago is now starting to decline. So you will see a decline of 4%, 5% in Romania from year-to-year and around also 4%, 5% in Austria. So but we can tell you a little bit more, I would say, end of Q3 of when will be the project or the closing in New Zealand will be and whether the ramp-up in Abu Dhabi and Aasta Hansteen is as predicted right now.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [24]
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Next is Yuriy Kukhtanych, Deutsche Bank.
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Yuriy Kukhtanych, Deutsche Bank AG, Research Division - Research Associate [25]
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2 questions from me, please. First, very short on working capital move, which was somewhat counterintuitive given the rising oil price environment. I presume that most of the reversal in receivables can be explained by the gas payments from the first quarter, but the question here is, whether you used any securitization at all. So that would be my first question. But generally, how we should think actually about the working capital going forward? And the second question is on upstream in Romania. There was a news early in July that Romanian government decided to increase taxation for Black Sea gas production, and I can recall there was a joint statement by OMV petroleum, LUKOIL and Exxon Mobil that this will impact very negatively development of the industry in the country. So if you could just elaborate a little bit what this actually means, this negative development, how it will impact your plans to approve FID for Domino this year, and how we should think about it going forward. And generally, if you could shed some light why the Romanian government has been so hostile towards the investors in upstream.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [26]
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Yuriy, let me take the question on net working capital. Your assumption is perfectly right, the clear majority is coming from the gas payments from first quarter, respectively, from payment, with payment terms that are, therefore, not accounted directly as income already. So these effects are the majority of that. Your second question was about whether OMV uses securitization or any instruments like that. Yes, of course, we also do that. This is something that we are doing that has, in generally, an effect that, over the year, we can balance net working capital effects. In second quarter, there has been slight positive effects from that as well. But clearly, the main part was from the gas payments here. We should also see that in the context of hedging, you all know, hedging contracts are concluded the end of the quarter, which means that this is not counted in that sense in second quarter, but in third quarter when it comes to the conclusion of these contracts. So this is the net working capital situation. We have a clear seasonality in net working capital in every single year, and this is very much to the gas cycle that we have with strong gas input in our storages in the second half of the year and then output in the cold parts of the year.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [27]
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Well, Yuriy, what I have discussed with Petrom is that they are still committed to take an FID in second half of this year. Was the recent developments in Romania helpful to go for such an FID? Not at all. I agree what you have said. This was not the right framework we needed to see. That's the reason why I think Petrom is now ready to further intensify the discussion with the Romanian government to find and agree on a framework which is sufficient to go for positive FID. It's my understanding that both parties really wanted to go for the FID. I never heard that the Romanian government would like to diminish the attractiveness of their country for investors, to make a clear statement. But on the other hand, what we need is stable framework with reliable and acceptable terms, as we speak about taxes and royalties and as we speak about the freedom to market the gas in Europe. We do have an interest that we are supplying as much as possible of the gas to the Romanian countries because it's understandable that, from a trade balance point of view, Romania doesn't want to import gas when they have so much excess gas in production. This is accepted. But when we have supplied all customers in Romania, we need to have the freedom to sell the gas abroad. This is a must. What I have learned is that now there will be another round to discuss the offshore lower. Let's wait for better terms. The terms right now, which I have seen in the last weeks, were not sufficient, but we are cooperating to find the right framework acceptable for both parties, for the government as well as for investors to go for a positive ID. The project is important for the country of Romania as well as for the investors.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [28]
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Next is Matt Lofting, JPMorgan.
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Matthew Peter Charles Lofting, JP Morgan Chase & Co, Research Division - VP [29]
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Two things, if I could, I mean firstly, just coming back to oil hedging, probably following on from Jason's question earlier. I'd like to just better understand philosophically the underlying policy if possible. Is it pure risk management or were you looking to take in more risk [of all] based view on price versus the internal budget levels that you've been running? And with that in mind, what should we expect on hedging from OMV on a medium-term basis? Are there, for example, any triggers that would lead you to think about hedging 2019 volumes between now and year-end? And then second, Downstream outlook for the second half of the year, refining and petchems. Is there any scheduled maintenance embedded in the view for the rest of the year? And if you could also touch on how you, today, are seeing demand trends evolve in the context of increased product prices.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [30]
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About hedging strategy, I think, very straightforward in what we have in mind there. It is a means for risk management in order to protect the cash flows necessary for our growth strategy. Now if we put ourselves back some half year, 3 quarters ago, we have still seen quite low levels of oil price in the market, with even lower expectations to come. That has been, sort of, the trigger, and of course, not for the first time, to take in a certain volume into hedges to make sure that if there would be a rather steep decline, that none of our efforts that we have in mind to capture good opportunities in the market to grow would be endangered. So this is a clear protection topic, this has nothing to do with budgets, this has nothing to do with speculation, this is more of a secure policy protecting the strategy that we have post related forward. That of course has flexibility and the flexibility is given by the circumstances in the market. If you have higher prices with higher turnovers, with higher cash flows running in, you have much less of a need to go into a sizable hedging, whereas I have to emphasize, we would never hedge more than 50% in this, so we would never expose ourselves to real high risk in that. But we have clearly given you also the implications that will even out that. And for the longer run, there's nothing where we are taking a big bet on anything for 2019. So this is how we do that from a strategic, as you call it, philosophical point of view.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [31]
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Matt, only 1 sentence and I repeat what I have said to Jason, our appetite for oil hedges is extremely low.
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Matthew Peter Charles Lofting, JP Morgan Chase & Co, Research Division - VP [32]
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Clear, and the Downstream question?
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [33]
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On the downstream question, for the second half, there is no major turnaround playing in any of our refineries anymore. So you will see a [indiscernible] we'll have a very high utilization in the second half. And on the product demand, that's a bit more -- that's a bit trickier. But the first half of the year has been building up demand in our market in each of those. And so I would even be inclined to say that the $70 oil price is potentially limiting the demand growth, but it is not going to be demand destructive.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [34]
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Now we move to Chris Kuplent, Bank of America Merrill Lynch.
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Christopher Kuplent, BofA Merrill Lynch, Research Division - Head of European Energy Equity Research [35]
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2 questions for me still remaining. Firstly, you reiterated once again that you expect the full year position to be positive? Just wondered whether you can remind us that that is after M&A spend and I'm guessing also after working capital. Or if I'm wrong, please could specify what kind of free cash flow definition you're using? And the second question on Achimov again and your asset swap. Now if we take it that the deal will be closed before year-end, what kind of implications does that have on cash payments because, as I can recall, the deal was effective 2017. So would you expect there to be a cash payment in I suppose Gazprom's direction if the deal indeed closes before year end?
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [36]
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This was a very intelligent question. You try to extract a bit more for Achimov. But let me start with the free cash flow positive after dividends, it's also after M&A, yes. So the clear guidance is that we would like to finance the M&A transaction, the dividend and the investments and after that we would like to have positive free cash flow after dividends. The Achimov cash payment, well, you are talking about a cash payment, yes. The structure of the transaction, and I repeat myself, what I said 3 years ago, there is no cash involved. There's no cash involved as we speak about the transaction, as we speak about the adjustments. So we have agreed on the economic terms that a share of 24.99% in Achimov is equivalent to the shares we have published for OMV Norge. So this is more or less the economic structure, and there's, of course, retroactively compensation for investments done in Achimov and the cash flow of OMV Norge which have an effect. From our point of view, today's point of view, given the fact that we have a little bit of a delay because of the concern raised by the Norwegian energy minister. In our plans, we don't think that in 2017, our cash position in what sense however is being impacted by the transaction -- in 2018 sorry, in 2018, yes.
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Christopher Kuplent, BofA Merrill Lynch, Research Division - Head of European Energy Equity Research [37]
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Okay, understood.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of Executive Board & CEO [38]
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So we'd be running into the numbers at earliest next year.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [39]
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Next is Mehdi again.
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Mehdi Ennebati, Societe Generale Cross Asset Research - Equity Analyst [40]
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Just 2 follow-up questions. And just maybe a precision high number regarding the hedging. I also did the math, that's why you know my question was only about the oil price hedging. Two questions, please. The first one regarding Samsun power plant, so can you please tell us if the contribution on a yearly-to-yearly level is positive or negative because this is just from (inaudible). I am asking the question because for example this quarter you do at roughly EUR 20 million again in power debit whereas here the Gas Connect Austria contribution was EUR 20 million. So just would like to understand what could be the impact or what will be the impact from the Samsun power generation cell at your (inaudible)? Another question regarding the CapEx, so you keep your EUR 1.9 billion CapEx guidance unchanged for this year. You've spent roughly EUR 800 million, EUR 850 million in H1? So in terms of cash flow payment, should we expect roughly EUR 300 million CapEx acceleration of CapEx growth in second half of the year just this first half?
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Manfred Leitner, OMV Aktiengesellschaft - Member of Executive Board [41]
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Let me take Samsun. The years in Turkey due to the impact of the authorities are very, very different. But what I can tell you is that, this year there is not a significant operating resite impact by Samsun so you will not see a significant reduction once we have sold the plant. On Downstream gas, what did you want to go behind the 29 or the 20? So that we have only a 20 -- operating -- EUR 20 million operating resite in the second quarter. And if you then more or less take out the Samsun power plant, this will not have a real impact on the 20 for instance, would not have. The only impact is that we are currently not having any depreciation because as you know, the plant is accounted for as asset for sale and so this is producing to a certain extent a resite but since we have impaired the plant already twice in the past as well, that one is minor.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [42]
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There is of course a difference between the accounting CapEx and the cash flow CapEx. And you were asking what is the impact on the cash flow, and we will certainly see that parts of the CapEx that is accounted in 2018 will be payable only in 2019. This only will be a minor part, this is what I can say. But for the explanation of what is different between half 1 and half 2, you have to take into account that there are additional investments that we have for our acquisition in Abu Dhabi, which of course have not been there in first half but will be there in second half. So therefore, the estimate of the 1.9 is very possible.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [43]
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Next is Michael Alsford, Citi.
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Michael J Alsford, Citigroup Inc, Research Division - Director [44]
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Firstly, just wanted to touch on the E&P bridge that you kind of started with in the beginning of the call. It clearly shows you're getting pretty close to your 500,000 barrels per day target for 2020. I guess, one of the other little building blocks within that is Nawara in Tunisia, and I just wondered if you could just update us on that project and just remind us of the contribution to OMV that that should deliver. And then just secondly, on Nord Stream 2, clearly your commitment was, if I remember right, around EUR 950 million to that project. I was under the impression that maybe some of that would have been financed through debt, but I think that clearly is now off the table with recent sanctions. But I'm also -- I've heard that the potential route is a little bit longer and could cost a little bit more money. So just could you maybe update us as to exactly what I guess we should expect as sort of the cash out for that project from an OMV perspective.
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Johann Pleininger, OMV Aktiengesellschaft - Deputy Chairman of the Executive Board [45]
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Mike, I would take the first question regarding Nawara. So Nawara is on schedule as we have announced in the last quarterly meeting. So we said, 2019 -- Q2 2019, Nawara will come onstream. This is still what we are planning, and what we're predicting right now. Nawara will -- we expect around 10,000 boe per day additional production starting in Q2 2019.
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Manfred Leitner, OMV Aktiengesellschaft - Member of Executive Board [46]
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On Nord Stream 2, project finance is not off the table because the discussions with the credit agencies are currently running. We will see how successful it will be though, maybe it's less than we have planned. But I think the finance is actually secured and on top of that, the EUR 9.5 billion, we do have reason to believe that we are comfortable within that project limit that we have given in the past as well. And the EUR 9.5 million is the 100% figure, of course.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [47]
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We have 2 more questions. Next is Thomas Adolff, again, Crédit Suisse.
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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [48]
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2 more for me as well. Just kind of wanted to better understand what you've done with the refinery maintenance cycle moving from 2 years to 4 years. I mean what exactly happened there? And why didn't you do it in the first place? And then secondly, just on your petrochemical guidance you've provided. I'm more interested ex Borealis. What sort of feedstock flexibility do you have in your system? Or do you have some LPG flexibility and if so how much? I'm just trying to better understand the profitability and the impact it might have on this oil price.
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Manfred Leitner, OMV Aktiengesellschaft - Member of Executive Board [49]
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On the refinery turnaround frequency. Obviously, you cannot do that in 1 step only, but what we have been doing during the last couple of years is to replace more or less those units in that equipment that would, obviously, being already -- be in a pretty old shape or technically not at the later stage. And this turnaround was not the final step to come to a situation where we believe it is actually reliable to say that we can go from 2 to 4 years. So what are you doing there? What we have replaced is a lot in the fluid catalytic cracking unit, for instance, we have replaced materials in other parts, you have to replace all the piping and all that kind of things in order to can -- that you can run without any problems for a period of 4 years. And the second one, this LPG flexibility, I would differentiate between OMV here and Borealis because Borealis is having such an LPG flexibility to a certain extent for their crackers. In northwest Europe, OMV is not using LPG as a feedstock while what we are doing is we are using NAFTA and gas oil in our furnaces.
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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [50]
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Okay, you're not looking to do something similar to what Repsol has done in the past whereby with some investments you increase the flexibility -- feedstock flexibility to the tune of, kind of, 30% mix sales? No?
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Manfred Leitner, OMV Aktiengesellschaft - Member of Executive Board [51]
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Now we are not investing into that and one of the main reasons is that we are selling a lot -- that we have already in the past gone for optimization of the whole feedstock and product equation, if you want. So LPG is something which we are not really -- we are producing to a certain extent, of course, LPG, but this is going automatically into the cracker. We do not go for an increase by third party purchase for LPG because this would have an impact on our value chain which will actually not pay off.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [52]
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Okay, now we come to the final question Bertrand Hodee, Kepler Cheuvreux.
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Bertrand Hodee, Kepler Cheuvreux, Research Division - Head of Oil and Gas Sector Research [53]
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Just a housekeeping one. On your OpEx in Upstream, they're down 13% year-on-year from EUR 8.7 million to EUR 7.6 million, benefiting, I guess, from a big part from the inclusion of Yuzhno Russkoye. Can you disclose whether your OpEx were down excluding the impact of Yuzhno Russkoye?
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Johann Pleininger, OMV Aktiengesellschaft - Deputy Chairman of the Executive Board [54]
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No, we are not disclosing OpEx reduction on project level on (inaudible). And this would be the case if we would give you this information that we were not doing. We are giving the average production cost which would go down from EUR 8.8 million to EUR 7.6 million. What I can say is the major effect is coming from Yuzhno Russkoye.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [55]
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Good. With this, we're at the end of our conference call. Thank you all for joining. If 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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Operator [56]
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That concludes today's teleconference call. A replay of the call will be available for 1 week. The number is printed on the teleconference invitation, or alternately, please contact OMV's Investor Relations department directly to obtain the replay numbers. You may now replace your handsets.
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