Q4 2019 OMV AG Earnings Call
Feb 06, 2020 AM UTC
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OMV.VA - OMV AG
Q4 2019 OMV AG Earnings Call
Feb 06, 2020 / 10:30AM GMT
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Corporate Participants
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* Florian Greger
OMV Aktiengesellschaft - VP & Head of IR
* Rainer Seele
OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO
* Reinhard Florey
OMV Aktiengesellschaft - CFO & Member of Executive Board
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Conference Call Participants
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* Henri Jerome Dieudonne Marie Patricot
UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst
* Joshua Eliot Dweck Stone
Barclays Bank PLC, Research Division - Analyst
* Michael J Alsford
Citigroup Inc, Research Division - Director
* Oleg Galbur
Raiffeisen CENTROBANK AG, Research Division - Financial Analyst
* Raphaël DuBois
Societe Generale Cross Asset Research - Equity Analyst
* Sasikanth Chilukuru
Morgan Stanley, 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 the 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 any 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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Yes. Thank you. Good morning, ladies and gentlemen. Welcome to OMV's Earnings Call for the Fourth Quarter 2019.
With me on the call are Rainer Seele OMV's Chairman and CEO; Reinhard Florey, our CFO; Hans Pleininger, Deputy CEO and in the Board responsible for Upstream; and Thomas Gangl, the Board member for Refining and Petrochemical Operations. As always, Rainer Seele will walk you through the highlights of the quarter and will discuss OMV's financial performance. Following his presentation, the 4 Board members are available to answer your questions.
And with that, I'll hand it over to Rainer.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [3]
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Yes. Thanks, Florian. Good morning, ladies and gentlemen, and thank you for joining us today.
The fourth quarter of 2019 was characterized by significant volatility. Low gas prices and weaker petchem margins offset OMV's substantial increase in production to above the 500,000 barrels per day mark and the outstanding refinery utilization.
Let me start by briefly reviewing the economic environment. In the fourth quarter of '19, the Brent oil price averaged $63 per barrel, slightly up quarter-on-quarter but 8% down year-on-year. Prices showed an upwards trend throughout the fourth quarter, moving from just under $60 per barrel in October to a 7-month high at the end of 2019 of around $68 per barrel. The main drivers were the emerging optimism over a possible trade deal between the U.S. and China as well as the OPEC+ decision to further cut production.
European gas prices saw a slight increase compared with the third quarter, but they were almost 50% lower than the fourth quarter of 2018. Global LNG overcapacities continued to push surplus volumes into Europe. Prices were shortly supported by colder weather in November. However, they started to decrease by mid-December as a gas transit agreement between Russia and the Ukraine became more and more likely.
The refining margins averaged $5 per barrel, 8% lower quarter-on-quarter and 4% lower year-on-year. The decrease, however, masks a very volatile quarter. October saw a strong jump in the margins to $7.5 per barrel while, in December, the refining margin fell to an average $2.7 per barrel driven by weak middle distillates and a rising oil price.
The ethylene and propylene margin declined by 18% versus the third quarter and by 28% versus the fourth quarter of 2018. For both products, the market became long, aggravated by year-end destocking activities. Butadiene margins were substantially below the previous year's level, and benzene margins decreased as well.
Although we had a better operational performance, the clean CCS operating results declined by 26% to EUR 781 million. This was due to the weaker market environment, in particular, in gas and petrochemicals as well as higher depreciation. Despite the market headwinds, our quarterly cash flow from the operating activities, excluding net working capital effects, remained robust at EUR 963 million.
We continue to show a strong operational performance. In Upstream, we increased our production to more than 500,000 barrels per day for the first time in the quarter while our costs remained below $7 per barrel. In Downstream, our refineries ran at an exceptional rate of 98%.
In the fourth quarter, we continued with our active portfolio management. In November, we agreed to divest the 69% interest in the Maari field in New Zealand. This is a mature field with an average production in 2018 of around 5,000 barrels per day net to OMV. The divestment further optimizes our portfolio and will change OMV New Zealand to a gas-only producer. It is yet another step in our strategy to shift our Upstream production towards gas in order to reduce the carbon intensity of our portfolio.
Last, but not least, we deliver on our progressive dividend policy and then, once again, increased our dividend. We will propose to the Annual General Meeting a dividend per share of EUR 2, up 14% versus the previous year.
Let's now turn to more details of our financial performance in the fourth quarter of 2019. Our clean CCS operating result decreased by 26% versus the strong prior year quarter. In Upstream, earnings were 21% lower year-on-year, significantly impacted by weaker gas prices and higher depreciation. Downstream earnings were down 13% versus the prior year quarter, which had benefited from strong petrochemical margins and a favorable regional supply situation. The clean tax rate amounted to 43%, 7 percentage points above the previous year's quarter, following a higher contribution from high tax rate fiscal regimes in Upstream, especially Libya. Clean CCS net income attributable to stockholders decreased by 37% to EUR 310 million. Clean CCS earnings per share came in at EUR 0.95.
Let me now come to the performance of our 2 business segments. Compared to the fourth quarter of 2018, the Upstream clean operating result decreased by EUR 119 million to EUR 459 million mainly due to weaker prices, lower oil sales in Norway and higher depreciation.
Market effects had a negative impact of EUR 91 million, a reflection of lower realized oil and gas prices partially compensated by a stronger U.S. dollar. OMV's realized oil price decreased by 2%. While the CEGH gas price in Austria dropped sharply by 48%, the OMV realized gas price decreased only by 18%. This is explained by the international portfolio of OMV. Only 40% of our gas sales are linked to the European hub prices. The market prices in other countries recorded a lower decline while the realized gas price in Romania slightly increased.
Production went up by 58,000 to 505,000 barrels per day driven by the acquisitions in New Zealand and Malaysia as well as the production ramp-up of Aasta Hansteen in Norway and our fields in Abu Dhabi. In Libya, we were able to produce 35,000 barrels per day, higher than the same period last year. Production in Romania decreased due to natural decline and the divestment of marginal fields partly compensated by the start-up of new wells. At the end of December, SapuraOMV started production at the Larak gas fields which is part of SK408.
Our total sales volumes increased by 50,000 barrels per day, mainly coming from gas in Malaysia and New Zealand. Oil sales were only marginally higher and -- as we recorded one less oil lifting in Norway than in the fourth quarter of 2018 due to the lifting schedule. Our production cost was basically flat at $6.4 per barrel. Depreciation increased by EUR 75 million due to the acquisition and higher production in Norway and Libya.
In Downstream, the clean CCS operating results decreased by 13% to EUR 385 million. In Downstream Oil, result was EUR 303 million, 20% below the prior year quarter primarily due to materially weaker petrochemical margins. The refining margin declined slightly as a result of weaker middle distillate cracks, which were partly offset by higher gasoline and naphtha cracks.
Our operational performance was once again strong, reflected in the outstanding refining utilization rate of 98%, well above the European average around 80%. The supply shortages in the fourth quarter of 2018, driven by a refinery outage in Southern Germany and the low Rhine water levels, normalized in the fourth quarter of 2019. As a result, retail margins and commercial volumes decreased.
The petchem result declined sharply by 56% to EUR 35 million due to the substantially lower margins, which could only be partially offset by lower feedstock costs. The contribution from Borealis decreased by 25% to EUR 50 million. The main drivers were a lower Borouge result impacted by the weak Asian markets and softer integrated polyolefin margins.
The ADNOC refining and Trading business contributed EUR 18 million in the fourth quarter of 2019. We still had some operational challenges as the FCC was not running stable throughout the quarter. The result was positively impacted by a onetime effect. The Trading joint venture is expected to start in the third quarter of this year.
The clean operating result in Downstream gas grew significantly to EUR 82 million mainly due to the storage business, where we recorded the unwinding of summer/winter spread hedges. The gas sales volumes increased by 37% year-on-year driven by sales in Romania and Germany, where we managed to increase our market share to 5% at the end of the year.
Turning to cash flow. The fourth quarter was again strong with an operating cash flow, excluding net working capital effects, of EUR 963 million. This includes a dividend from Borealis of EUR 153 million. Looking at a full year picture, the operating cash flow, excluding net working capital effects, slightly increased to EUR 4.3 billion. We delivered EUR 2.1 billion in organic free cash flow in 2019, 15% lower versus the year before due to the negative net working capital effects. The cash flow from inorganic investments came in at EUR 2.7 billion primarily reflecting the payment for the 15% shareholding in ADNOC Refining and Trading as well as the 50% share in SapuraOMV.
Putting our last year's performance into perspective, despite a weaker macro environment, we managed to achieve a clean CCS operating result of EUR 3.5 billion in 2019, almost at the record level of the year before. Both business segments delivered a strong result. Our cash delivery continued to be strong. We are clearly on a structurally new level of cash generation. In the last 3 years, we delivered an operating cash flow, excluding net working capital effects, of some EUR 4 billion. The natural hedge provided by our integrated and balanced Upstream and Downstream segments is key for our ability to generate strong and sustainable cash flows despite market volatility.
Despite major acquisitions, OMV's balance sheet remained very healthy and showed strong liquidity with a cash position of EUR 2.9 billion at the end of the fourth quarter. Following the payment of the 15% share in ADNOC Refining and Trading in July 2019, the net debt increased materially in the third quarter of 2019. However, we were already able to decrease it to EUR 4.7 billion in the fourth quarter. Consequently, our gearing ratio declined to 28%. This includes the impact of IFRS 16 of around 5 percentage points versus 2018.
Ladies and gentlemen, as I already mentioned, we will again deliver on our progressive dividend policy. We will propose to the Annual General Meeting a dividend of EUR 2 per share for 2019. This is an increase of 14% compared to the previous year and marks another record in OMV's history. Since 2015, we have increased our dividends at average rate of 19% per year. We herewith reconfirm our progressive dividend policy.
Let's now come to the outlook of this year. For 2020, we assume an average Brent price of $60 per barrel and expect the average realized gas price to be below the level of 2019. The refining indicator margin is projected to be above $5 per barrel. We have hedged around 60% of our total middle distillates volume at the high crack level we have seen in October last year. Petrochemical margins have recovered from the low levels we have seen in the fourth quarter of 2019. For the full year 2020, we estimate these margins to average slightly below EUR 400 per ton.
On the operational level, as demonstrated in the fourth quarter of 2019, we have the capacity to produce more than 500,000 barrels a day. However, as the production in Libya is currently shut in, we expect an average production of around 500,000 barrels per day in 2020. This depends, of course, on the security situation in Libya. We expect increased production in Malaysia and Tunisia while we assume a decline in Romania, Russia and New Zealand. Exploration and appraisal expenditures are expected to be around EUR 350 million.
The utilization rate of the European refineries is expected to be around 95% in 2020. There are no major turnarounds planned in Europe this year. However, we will have scheduled maintenance work at our refineries in Austria and Romania mainly in the second quarter. In Abu Dhabi, there is also planned maintenance shutdown in the first half of this year.
Total product sales will be on a similar level compared to 2019. Retail and commercial margins are predicted to be slightly lower than those in 2019 as regional supply shortages normalized at the end of 2019. Natural gas sales volumes in 2020 are projected to be above those in 2019. Organic CapEx is projected to come in at around EUR 2.4 billion, thereof EUR 1.6 billion in Upstream. We expect the clean tax rate for the year 2020 to be in the high 30s.
Before we come to your questions, I would like to address an important topic that has shaped the public discussion and which is of particular importance for the future of our industry: how to tackle the climate change. We take this topic very seriously. Our strategy is based on 3 pillars: more gas, less oil; more valuable products, burn less; and develop innovative technologies.
And we have already made progress. We have increased our gas share to around 60%. We are active in e-mobility solutions. We work on processing biofuels, and we are at the forefront for research in chemical recycling of plastics. We have further advanced with our ReOil process and now -- and are now focusing on the scale up, first, to a demonstration plant with a capacity of up to 20,000 tons per year, then to an industrial-scale plant of 200,000 tons per year. The latter expected by 2025.
But ladies and gentlemen, the world is transitioning fast. We will intensify our efforts to position ourselves successfully in a lower-carbon world. This means we have to continue to actively shape our portfolio. And this includes not only divestments, but again, also acquisitions. Both need to fit into the 3 areas I mentioned before and have to be financially attractive.
Let me conclude my remarks with announcing that we will hold a Capital Markets Day mid of this year. We plan to give you an update on our strategy and present how we want to position ourselves in a fundamentally changing environment.
Thank you for your attention. Now my colleagues and I are more than happy to take your questions.
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Questions and Answers
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Operator [1]
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The first question comes from the line of Michael Alsford. Apologies, may I transfer?
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [2]
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Yes. Thank you. As you have said already, the first question comes from Michael Alsford, Citi.
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Michael J Alsford, Citigroup Inc, Research Division - Director [3]
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I've got a couple if I could, please. I was just wondering if you could maybe elaborate a little bit more on how you see your progression towards your medium-term targets. Clearly, cash flow generation in the year was actually pretty good despite what was obviously a challenging 4Q environment. But you've talked about getting to over EUR 5 billion of cash generation over the medium term. So given the macro outlook, which has clearly changed a lot, could you maybe give some confidence as to delivering that sort of target over the midterm?
And similarly on production, you've talked about 600,000 barrel per day target. I'm just wondering whether you can talk about, given the portfolio changes, that is still a target that you feel you can meet with the current portfolio. That was my first sort of question.
And then just secondly, just specifically on ADNOC Refining. You made a small contribution in the quarter. You mentioned a onetime effect. I was just wondering if you could perhaps talk a bit about what you think the contribution can be from that business in 2020. You mentioned the FCC issues, but just wondering what you think that, that could deliver this year.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [4]
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Michael, this is Reinhard speaking. Regarding your question about our propositions and targets on the mid or long term. On the cash flow side, the target of EUR 5 billion seems to be, with further execution of our strategy, a value that is in reach. Of course, we are very much aware about volatilities in the commodity markets these days. However, of course, also, our strategy will adapt to those situations and the target to increase the level, which started at a level of EUR 3 billion for a couple of years. Now I think the third year in a row, we delivered about EUR 4 billion. And now the next logical step until 2025 midterm is EUR 5 billion, and we would confirm that.
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Unidentified Company Representative, [5]
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For the second question about ADNOC Refining, so we expect that the operational performance will improve, and we expect that to receive a dividend for the financial year 2020. We are, at the moment, supporting with our experts on-site, also to improve the stability of the RFCC cracker. As Reinhard mentioned, there is a turnaround this year in the first half and there are activities to improve that. And midterm, we anticipate a dividend yield of above 10%, as mentioned earlier. So everything in line with previous statements.
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Michael J Alsford, Citigroup Inc, Research Division - Director [6]
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And just to follow up on the production long-term guidance.
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Unidentified Company Representative, [7]
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Yes. Mike, regarding your question regarding long-term production, long term until 2025. How do we achieve the 600,000 barrels, which we have been promised in March 2018 London? What you have seen in Q4 is that we have the capacity to go slightly above the 500,000 already right now. As Rainer mentioned, it depends very much also on the security situation in Libya. So that's why we forecast for this year, the 500,000, around 500,000 barrels in average for the entire year.
If we start from there, where we have been started already, it's also in portfolio optimization. So we'll sell 5,000 barrels roughly in Maari in New Zealand from our well production. Kazakhstan, we started already the process. What we have been producing in the last 2 years was between 7,000 and 8,000 barrels per day. Additional production will come from Neptun until end of 2024 around 70,000 boe; from Achimov, 4,000 or 5,000 until 2025; also 70,000, 80,000 barrels per day from our Russian assets. Sapura, we have been starting last year with around 12,000, 13,000 boe per day. With the startup of the Larak field, we have been doubling the production since January this year, and we'll double the production -- or more than double the production from where we are right now. So we go beyond 50,000. So if you add this up, 70,000 Neptun; 70,000, 80,000 Achimov; 25,000 Sapura; and Nawara in Tunisia, we will bring onstream also this year around 10,000, then you will end up with 180,000 barrels plus. And then you need to deduct the decline and some portfolio optimization, as I mentioned before, and then you will see that we are clearly above 600,000 barrels per day.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [8]
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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 [9]
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Two questions for me. One, the first one, financial around the dividend and if you can provide just a bit more detail around your thinking going forward, pulling this, again, sizable increase for the 2019 dividend. So should we expect to see similar increases in the future as long as you keep the debt levels below your target range? Any indications around that would be helpful.
And then secondly, I'd like to ask around the petrochemical business, which was pretty much weak in the fourth quarter. And you mentioned number of products that earned very weak margins. It seems like things have improved a little bit in the first quarter. So you'd -- I'd expect a bit of a rebound in terms of EBIT contribution from both your own operations and [price] in 2020 compared to the level of the fourth quarter.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [10]
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Henri, regarding your question on dividend, as you have heard the proposal of the management of OMV is to increase the dividend payment per share to EUR 2. This is a clear increase from EUR 1.75 by almost 15%. This is very much in line also with the increase of the profit per share that we have in comparison to 2018. So this is -- if you take EPS comparison, this is very much in line and is also, of course, in line with the dividend policy that we have given. We think that this is very much adequate also to a situation where we were able to keep a gearing at 28%, very much in the line with our target ranges that we have for the midterm. And we have enough firepower on the stability of our balance sheet in order also to do the transition that Rainer has talked about.
So we stick with the dividend policy also for the coming years, to say that there will be a progressive increase targeted of the dividend year after year. And this is what you have seen now in the fifth consecutive year, if you go to the past. So I think we have demonstrated that it's not only words, it is exactly what we deliver.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [11]
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Henri, Reinhard hasn't changed. He explains a lot, but he is not releasing any numbers as we speak about future dividends. It's all the same, okay? So we went well. All right. But you should try further, yes. Maybe you catch a special moment with him.
Let's talk about petchem because petchem is very important in these days. If you recall that we have seen a EUR 363 per ton in the fourth quarter we are talking about -- mainly about ethylene and propylene, about the performance of our petchem business. The other products I have mentioned are smaller products like butadiene and benzene.
Our assumption for 2020 is a different level, margin level like we have seen in the fourth quarter. We have guided you that this is something around EUR 400 per ton. And we don't see that already in the market. I think in the fourth quarter, we have seen the bottom line in C2, C3 margins, and we have seen a recovery of the margin end of January. We are now on a more healthy level. It was helpful that we have seen in Europe also some maintenance shutdowns of some crackers. And especially, you have to see that there was an incident in Tarragona in Spain. It was in the ethylene value chain. You might look into that because this had an impact into the market. So as we speak about the petchem business, I think, over here in Europe, we feel comfortable with our EUR 400 per ton right now.
The other products like benzene -- benzene is a roller coaster product. This is the price curve you see in the market, and you should be prepared for roller coaster also in 2020. But I repeat myself, the benzene business is really small compared to our ethylene, propylene business in petchem. Butadiene is lacking, of course, the low [coal] in the tire markets. Still, we have -- we do have a comfortable price level. Let's wait and see how the impacts of the coronavirus will be on the automotive industry. From my point of view, it's more important to look into ethylene and propylene and don't worry too much about the 2 other product groups when you evaluate OMV with the expected performance in 2020.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [12]
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Okay. The next question comes from Sasi Chilukuru, Morgan Stanley.
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Sasikanth Chilukuru, Morgan Stanley, Research Division - Research Associate [13]
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I had 3 questions, please. The first thing I just wanted comment on the Borealis dividend. Essentially, it has been stronger. But looking into the future, are you expecting any material reduction in the dividend that you're expecting from Borealis?
The second question, I just wanted to check on the strategy itself. Now that you've mentioned acquisitions are back on the table, mostly on the low carbon assets, I just wanted to understand how big this would be or any -- in terms of size and whether the dividends and the distribution of dividends still -- a bit easier top priority of -- post-CapEx is your top priority for distributions.
And then the last one, I just wanted to understand your expectations of Romanian gas prices, what your expectations were in for 2020 and a little bit beyond.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [14]
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Sasi, quickly on the Borealis dividend. Borealis is extremely successful company in the market, of course, also undergoing the cycle. And we are seeing currently cycle in petrochemicals rather on the lower level than on the higher level. Nevertheless, this is a company that has also, in the past, given a very steady flow of dividends. We have seen some extra dividend in this year. We might not expect this special situation in the years to come. However, the overall performance seem to be very strong and very stable. So don't worry about the dividends in general.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [15]
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Well, Sasi, I will have the same story. You shouldn't worry too much about the dividends, yes? Whatever we say and we have guided, our dividend policy is written in stone, yes?
Although we see now the business environment changing and especially the transition our industry has to prepare, OMV will focus on the portfolio change, which is reflecting that we have to prepare the company for a low-carbon world. So when we're talking about these acquisitions, and I repeat myself, we are not talking only about acquisitions. Don't pick only one message. This was a combination. I have started with divestments and not with acquisitions, to be honest. And repeating what I have presented at speech, so it will be both when I talk about portfolio optimization.
It will be in the framework of the strategy the OMV Board has presented to the financial market. And if you remember, our strategy we have set and we have written a budget until 2025 for acquisitions. By the way, we have not budgeted the divestments, but I think we have to give you then later on some guidance where this will lead. But first of all, we have to say this will be just in the framework of our explained strategy, corporate strategy to the financial markets, which means also that the dividend policy, which was part of our strategy, is not impacted at all, yes. Also, Henri would like to know some numbers. I know I can't give you numbers, but the dividend policy stays as it is like we have explained to the market, although we have to go for a portfolio optimization.
The prices in Romania for gas prices. Well, I said this morning in an interview with CNBC, I really need to have an ice blizzard to talk about better gas prices. We have guided you that the gas prices will be slightly below the unsatisfactory price level we have seen last year, yes? So I'm not very, very optimistic on the gas prices. The impact on Romanian gas prices will be less than the impact on Western European gas prices. This is something I can tell you. The reason is, because of the coronavirus outbreak, we do see more LNG cargoes landing in Europe, impacting the hub prices, especially in Northwestern Europe. And that's the reason why I think we need to have a stronger demand to compensate or to absorb the additional volumes coming from China or we need to have a super medicine that the infection rate of the coronavirus goes down.
So these are the 2 topics I have to say in the context of the gas prices in Europe.
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Operator [16]
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(Operator Instructions)
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [17]
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So there are currently no further questions in the line. If you would like to ask one, you still have the opportunity to do this or a follow-up. If this is not the case, then -- okay. There's a follow-up question from Henri Patricot.
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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [18]
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Yes. I want to follow up on the topic of Romania. If you can give us an update on Neptun Deep. I mean you mentioned in an answer to a recent question 2024 startup, potentially. So I was wondering if you could give us an update on the latest around both the regulatory framework and whether you're more confident about that framework. And secondly, around the structure of the partnership to develop the field.
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Unidentified Company Representative, [19]
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Okay. Henri, I will take the question regarding Neptun. As you have maybe realized that there was -- there is no government anymore since yesterday. So our hope is that the offshore law will be approved by the government in these days, let's say, in Q1. Right now, we have to put a question mark on this topic because there is no government. So we cannot speculate when we will get this approval of the offshore law. But what we can say right now is that we keep the first guess, the startup of production end of 2024 because it's still feasible and realistic. But we would need and we would get or we would need to get government approval, I would say, as soon as possible.
From the deal structure here, the question is rather -- you need to ask ExxonMobil. ExxonMobil is in the driving seat. We have 50% share in Neptun. We will keep the 50% share. ExxonMobil, what we know, will test the market. What I can ensure you that we will not take over the 50% from ExxonMobil, but the rest is with ExxonMobil, how they are deciding how to test the market.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [20]
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So there are now a couple of more question. The next one is from Josh Stone, Barclays.
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Joshua Eliot Dweck Stone, Barclays Bank PLC, Research Division - Analyst [21]
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Sorry, I was late into the call so I don't know if my questions -- so hopefully, you won't have to repeat yourselves. But -- so I was hoping for an update on ADNOC Refining. I know there was the outage in the fourth quarter, whether that's been fixed now and what your expectations are kind of earnings run rate in 2020.
Secondly, on net debt. Have you got any -- what your sort of outlook here, what you're thinking about net debt and gearing in 2020, given the CapEx and macro outlook you've presented.
And then lastly, you do highlight some hedges in your presentation. Just wanted to see if you're able to disclose how long those hedges are locked in for.
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Unidentified Company Representative, [22]
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Josh, so about ADNOC Refining and the RFCC, so we had in the fourth quarter still issues with the performance of the RFCC. The unit was running, but not with the quality that we expect. So we have now the opportunity in the turnaround, which is in these weeks now, to fix some topics there, and we hopefully see the results and the improvement. So this is ongoing activity, but we see a good chance to fix most of that.
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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [23]
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Josh, regarding net debt, you have seen that we were able to reduce our net debt from quarter 3 to quarter 4 from EUR 4.9 billion to below EUR 4.7 billion. In principle, I have already indicated our midterm gearing expectation, that the gearing target of 30%, excluding our effects from the IFRS 16, would still be what we see on the midterm.
Of course, this company has theoretically a much higher capacity to take net debt. However, we follow, I would say, financial stability strategy on the midterm, which allows us to exactly execute on the strategy as we have done so far. So don't forget, we have come a very long way on our strategy already without overstretching the financial capacity of this company, and we will also continue and keep the situation on the midterm target as we have indicated.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [24]
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Josh, I am delighted to give you an answer on the hedges. It's covering the full year 2020. Downstream, yes. So it's a Downstream hedge on the margins, on the refining margins. So what we have safeguarded is roughly $1 per barrel in 2020 on our refining margin, and that's the reason why we are also saying it's about $5 per barrel. And we're expecting a high refining margin next year -- this year in 2020, yes.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [25]
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There's a follow-up question from Sasi, Morgan Stanley.
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Sasikanth Chilukuru, Morgan Stanley, Research Division - Research Associate [26]
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Just a quick follow-up on the production guidance. I was just wondering what you're putting in for Libya for 2020. I know it's kind of contingent on that. But I just was -- what is the number or how long do you think the shutdown will happen and in your guidance for 500,000 barrels a day?
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [27]
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For 2020, our guidance is 35,000 boe per day if Libya is onstream. So regarding when it will come onstream, we can't say anything right now.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [28]
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Then we have a follow-up from Michael Alsford, Citi.
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Michael J Alsford, Citigroup Inc, Research Division - Director [29]
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I'll take the opportunity for a follow-up as well. I just wanted you to maybe just elaborate more on Nord Stream 2. It gets a lot of headlines. I just wondered if you could maybe just confirm some of your financial exposure to the project. Yes, how you see that sort of being -- the return being to repay it over the medium term and then just sort of timing around the progress on the project. That would be helpful.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [30]
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All right. Okay. Michael, let me have a look into the crystal ball. Well, it's a little bit complicated to say anything about the timing. What I can say is that OMV more or less has financed the project. So we are not expecting high cash calls from Nord Stream 2 company in 2020. We have already financed something around EUR 700 million into the project.
The delay of the project, it doesn't matter which startup date we both are talking about, has no impact on the rate of return of our participation in the project, which means that the cash return is a bit later, but might come on a higher level. That's point number one when we talk about all the impact. We do have contractual agreements where I cannot go into detail because of confidentiality agreements, but we feel comfortable that the risk in the project is not that we are losing our money.
Timing. Well, first of all, let's wait and see what kind of fantasy in terms of sanctions is developing. Yes. I'm not joining the club of speculators, what kind of additional sanctions might come. I see that in the press. But at the end of the day, we have to deal with the situation as it is. There are no construction activities, pipe lay activities at the moment for Nord Stream 2 pipeline. The construction has stopped just after the sanctions. You could see it implemented exateral -- unilateral by the U.S. You could see that in the press. We don't see now short term that the company will continue the pipe laying activities. When it will be, honestly speaking, Michael, I haven't had -- I haven't received an invitation from Nord Stream 2 company that they would like to present a plan B to us. So that's the reason why I say -- why I tell you that the pipe lay activities will not restart shortly.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [31]
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We now come to Oleg Galbur, Raiffeisen CENTROBANK.
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Oleg Galbur, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [32]
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Yes. I have a short follow-up on the hedging policy for the Upstream segment, and I apologize if you have already answered this question. I had some technical issues. So my question is if you have, for 2020, any hedges in place and if you could provide more details on how much oil, how much gas has been hedged.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [33]
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The shortest answer, no hedges stream -- in Upstream, of course.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [34]
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And we now come to Raphael Dubois, Societe Generale.
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Raphaël DuBois, Societe Generale Cross Asset Research - Equity Analyst [35]
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I just have one question on petchem. Can you share with us if either at Borealis or at OMV, you're thinking about postponing any of the projects that are currently in the pipeline?
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [36]
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Raphael, can you specify a little bit which projects you have in mind? Because they're -- so that I don't run to...
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Raphaël DuBois, Societe Generale Cross Asset Research - Equity Analyst [37]
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Well, for Borealis, I'm thinking about Borouge 4, and also the potential new cracker in India, the one in Kazakhstan and you also have this MoU for something in Indonesia. So considering the change in environment, are those projects still on the table?
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Unidentified Company Representative, [38]
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So the project that you mentioned are -- most of them are more long term, addressing the growth in demand there in these regions. And so these projects are more MoU type of, except Borouge. Borouge, Borouge 4, the activities are ongoing, so the project is in development. So we think there is good progress on that one.
For the other one, let's see where we will then land. This is something where I do not expect that the actual development of margins is really the relevant one. We see for petchem prices always this cycle, and this is something where we are now not on the top, more on a lower level, but this will not influence the decisions for those projects.
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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [39]
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Well, Raphael, just one addition, yes, because you have mentioned Kazakhstan. I only make a personal statement that I'm not a real fan of this country.
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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [40]
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Good. So there are no further questions. So we are at the end of our conference call. I'd like to thank you for joining us. 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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Operator [41]
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That concludes today's teleconference call. A replay of the call will be available for one week. The number is printed on the teleconference invitation or, alternatively, please contact OMV's Investor Relations Department directly to obtain the replay numbers. Thank you.
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