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OMV Aktiengesellschaft (OTCPK:OMVJF) Q1 2020 Earnings Conference Call April 29, 2020 5:30 AM ET

Company Participants

Florian Greger – Head-Investor Relations

Rainer Seele – Chairman and Chief Executive Officer

Reinhard Florey – Chief Financial Officer

Conference Call Participants

Mehdi Ennebati – Bank of America Merrill Lynch

Michael Alsford – Citi

Jason Gammel – Jefferies

Michele Della Vigna – Goldman Sachs

Henri Patricot – UBS

Josh Stone – Barclays

Thomas Adolff – Credit Suisse

Alwyn Thomas – Exane BNP Paribas

Matt Lofting – JPMorgan

Peter Low – Redburn

Sasikanth Chilukuru – Morgan Stanley

Bertrand Hodée – Kepler Cheuvreux

Operator

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 of 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. The presentation does not contain any recommendations or invitation to buy or sell securities in OMV.

I would now like to hand over the conference to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.

Florian Greger

Yes, thank you. Good morning, ladies and gentlemen. Welcome to OMV’s Earnings Call for the First Quarter 2020.

With me on the call are Rainer Seele, OMV’s Chairman and CEO; Reinhard Florey, our CFO. As always, Rainer Seele will walk you through the highlights of the quarter and will discuss OMV’s financial performance. Following his presentation, the two gentlemen are available to answer your questions.

And with that, I’ll hand it over to Rainer.

Rainer Seele

Yes. Thank you, Florian and very good morning, ladies and gentlemen and thank you for joining us today. Looking into the first quarter of 2020, it was influenced by two significant effects: a shock in oil supply and the global COVID-19 pandemic. While the Upstream business was substantially hit by the collapse of oil prices, the Downstream business benefited in the first quarter from lower feedstock cost and showed a strong performance.

The negative impact from COVID-19 on demand was in the first quarter still rather limited, as most measures of European countries such as lockdowns were only effective as of mid-March. Thanks to our integrated portfolio, we were able to achieve a quite resilient result in an extremely challenging market environment.

Cushioned by a strong start into the year, the Brent oil price still averaged $50 per barrel in the first quarter of 2020, a decline of 21% versus both Q1 and Q4 of last year. However, the average price masks one of the most volatile quarters in history. The simultaneous shocks to supply and demand, driven by the failure of OPEC+ to agree on production cuts and the coronavirus pandemic, caused a dramatic collapse of oil prices during the quarter. Brent fell from around $70 per barrel in early January to the mid-20s by the end of March.

European gas prices further declined in the first quarter, with CEGH spot prices 18% lower quarter-on-quarter and 45% below the previous year’s level. A warm winter, full storages at the beginning of the season, increased supply due to the ramp-up of LNG capacities as well as decreased demand, resulting from the pandemic – all these factors contributed to deterioration of gas prices.

The refining indicator margin averaged $4.9 per barrel, which is 22% higher than the prior-year quarter and on a comparable level as the fourth quarter 2019. Driven by the collapsing oil price, the margin increased from $2.7 per barrel on average in December to over $6 per barrel in March. While light fuel oil and diesel cracks improved, jet cracks fell to unprecedented low levels because of a sharp decline in air traffic.

The ethylene and propylene margin rose slightly year-on-year and was 26% higher quarter-on-quarter. The increase was driven by substantially lower naphtha prices and robust demand, especially in packaging and healthcare. Benzene margins increased significantly year-on-year, while butadiene slightly decreased.

The integrated nature of our business once again proved successful. In an extremely challenging quarter, we achieved a clean CCS operating result of €699 million, a decline of only 8% versus the prior-year quarter. The substantially lower Upstream result, impacted by a materially weaker market environment and higher exploration expenses, was to a great extent compensated by very strong Downstream performance.

Cash flow from operating activities, excluding net working capital effects, amounted to €838 million, a decrease of 30% compared to the first quarter 2019, primarily due to significantly lower prices.

In Upstream, our production was flat year-on-year while the cost decreased slightly to $6.4 per barrel. In Downstream, our European refineries ran at a very high rate of 94%, and this despite the significant decline in demand in the second half of March.

In the first quarter of 2020, we made significant progress in the execution of our 2025 strategy. On March 12, we signed an agreement to increase our shareholding in Borealis to 75%. We are aware that the transaction comes at a complex point in time – as we are experiencing the biggest oil market crisis in at least 40 years and the dramatic negative impact of the coronavirus pandemic on global demand. However, we are firmly convinced that Borealis is a fantastic fit for OMV. Borealis not only enables us to participate in the growing petrochemicals market, but also improves our natural hedge against commodity cycles.

Let’s now cover more details concerning our financial performance in the first quarter of 2020. Our clean CCS Operating Result decreased by 8% versus the prior-year quarter. In Upstream, earnings were 65% lower year-on-year, significantly impacted by weaker oil and gas prices. Downstream earnings were up 34% compared with the prior-year quarter, benefiting from healthy refining and petrochemical margins, as well as positive contributions from sale of CO2 certificates and middle distillate hedges.

The Consolidation line was positively impacted by the reversal of inter-segmental profit elimination recorded in the fourth quarter of 2019. Moreover, the weaker oil price environment resulted in lower inter-company profit eliminations in the first quarter of this year. The clean tax rate amounted to 33% and thus remained at a similar level as the previous year’s quarter. Clean CCS net income attributable to stockholders decreased by 9% to €316 million. Clean CCS earnings per share came in at $0.97.

Let me continue with the performance of our two business segments. Compared to the first quarter of 2019, the Upstream clean operating result decreased by $256 million to €137 million, mainly due to weaker prices. Market effects had a negative impact of €235 million, a reflection of substantially lower oil and gas prices.

OMV’s realized oil price decreased by 22%, in line with Brent. While the CEGH gas price dropped by 45%, the OMV realized gas price declined by only 19%. This is explained by OMV’s international portfolio: Only approximately 40% of our gas sales are linked to European hub prices. The market prices in other countries, such as Romania, New Zealand, or Malaysia recorded a lower decline than European prices.

At 472,000 barrels per day, production was basically flat compared with the first quarter of last year. Lower production in Libya, where the fields have been shut in since the end of January, and small declines in Russia and Romania were compensated by the production ramp-up in Malaysia. With 25,000 barrels per day on average in Malaysia, we were able to triple production in just one year since we formed the partnership with Sapura.

Our total sales volumes rose by 19,000 barrels per day, attributable to higher gas sales in Malaysia and one additional oil lifting in Norway. As in the first quarter of 2019, there were no oil liftings in Libya. The positive impact of higher sales was more than offset by increased exploration expenses, due to write-offs of wells in Austria, New Zealand and Malaysia.

Depreciation declined by €38 million compared to the first quarter of 2019 mainly due to reserves revisions in New Zealand and the reclassification of the Maari field as asset held for sale.

In Downstream, the clean CCS operating result rose by 34% to €501 million due to higher contributions from our petrochemicals, retail, and gas businesses. A one-off effect from the sale of CO2 certificates and margin hedges supported the result in the first quarter.

A higher refining indicator margin and slightly higher petrochemical margins led to positive market effects of €36 million. In addition, we recorded a positive impact from unwinding a portion of our middle distillates hedges, which is not reflected in the indicator margin.

Total refined product sales went down by 4% as a result of the substantial decline in demand in retail and partially, in commercial experienced in the second half of March due to travel restrictions. Despite lower volumes, retail improved its performance significantly year-on-year, on the back of increasing fuel margins. The commercial business increased also year-on-year due to higher margins and showed a better performance than the strong first quarter of last year, when OMV benefited from local supply shortages.

The petrochemicals result rose by 32% to €93 million, supported by healthy volumes and lower feedstock costs, the contribution from Borealis decreased by €18 million to €54 million, mainly attributable to a lower result from Borouge, due to weak market conditions in Asia. The demand for polyolefins in Europe was still healthy during the first quarter, with increases in sectors like health, personal care, and packaging. Sales in automotive declined at the end of the quarter. A stronger fertilizer business due to lower gas prices and higher volumes offered some support to Borealis’ result.

The clean CCS contribution of ADNOC Refining and Trading amounted to minus €7 million. The result was negatively impacted by the weak market environment in Asia and the extensive turnaround of the Ruwais refinery from beginning of February until mid-April. The rFCC plant has been restarted successfully and is currently running stable.

The contribution from the gas business grew by 18% to €92 million, mainly due to a better storage business, where we recorded the unwinding of summer/winter spread hedges. The gas sales volumes increased significantly to 48 terawatt-hours driven by sales in Romania, the Netherlands and Belgium.

Turning to cash flow, our operating cash flow, excluding net working capital effects, declined to €838 million. This includes dividends from Borealis of €108 million and €34 million in dividends from ADNOC Refining. Following a significant decrease in inventory valuation due to the drop in oil and gas prices, we recorded positive net working capital effects in the amount of €283 million. In the prior-year quarter, net working capital effects led to an outflow of €330 million. As a result, cash flow from operating activities increased by 29% to €1.1 billion. Organic cash outflow from investing activities amounted to €527 million. The organic free cash flow before dividends increased by 42% to €594 million, primarily as a result of the positive net working capital effects.

The cash outflow for inorganic investments was €114 million. OMV’s balance sheet remained very healthy and showed strong liquidity with a cash position of €2.8 billion at the end of the first quarter. Net debt excluding leases decreased to €3.2 billion. Consequently, our gearing ratio excluding leases declined to 19%.In April, we issued three tranches of senior bonds totaling €1.75 billion.

A four-year note of €0.5 billion with a coupon rate of 1.5%, an eight-year note in the same amount with a coupon rate of 2%, and a 12-year note with a coupon rate of 2.375%. The proceeds from the issue of the notes will be used in particular to finance the acquisition of an additional 39% stake in Borealis. Our divestment program is well underway. We are in exclusive negotiations with Verbund, the largest power company in Austria, for our 51% share in Gas Connect Austria. We have already opened the data room and the due diligence process is in progress. For the second ongoing divestment project, the retail network in Germany, we have received great interest. Around 20 companies indicated that they would like to acquire the network.

Last but not least, we expect to close the sale of the Maari field in New Zealand by mid of this year. Let me conclude with an update of the outlook for the full year 2020. I probably do not need to point out that it is extremely difficult to provide you with a reasonable outlook in this challenging, unprecedented, volatile environment. We are not only confronted with the biggest oil crisis in decades, but also with the COVID-19 pandemic, which heavily affects demand. What will happen in the remainder of this year largely depends on when the different countries will end the lockdown, on whether there will be a second wave of the coronavirus pandemic and when and how fast we will see a recovery of the global economy.

Based on the developments we have seen so far, we assume an average Brent price of $40 per barrel and an average realized gas price of around €10 per megawatt hour for the full year 2020. We now anticipate the refining indicator margin to be around $4 per barrel. However, we expect additional positive contributions from the middle distillate hedges over the coming quarters.

Petrochem margins have recovered from the low levels of the fourth quarter of 2019. We now estimate the margins to be at the prior year level on average in 2020. On the operational level, in Upstream, we expect average production to be between 440,000 and 470,000 barrels per day in 2020, depending on the security situation in Libya and potential imposed production cuts by governments.

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In Downstream, we have seen a significant decline in demand in April. The sharpest drop was in jet fuel, where volumes plummeted by 90%. Gasoline demand decreased by 50% while diesel consumption was down 20% to 30%, supported by heavy traffic. Petrochemicals demand is still healthy, driven by packaging, healthcare, and cleaning products. This is partially offset by weaker demand from the automotive and construction sectors.

Some refiners have already been forced to shut down, especially those that do not benefit from integration into petrochemicals or do not have the necessary flexibility. Following the collapse of jet demand, we were able to crack jet into monomers, so our refinery utilization declined to a lesser degree. We are currently running our European refineries at a utilization rate of around 80% and we expect a similar level for the full year. The scheduled maintenance works at the Schwechat and Petrobrazi refineries will be postponed to June and the third quarter.

Retail and commercial margins are predicted to be at the prior year level. The clean tax rate for the year 2020 is estimated to be in the low-30% range. Given the extremely challenging market environment, we will not reach our 2020 ambition of a clean CCS Operating Result of €4 billion, envisaged at the Capital Markets Day in March 2020 – 2018, sorry.

Ladies and gentlemen, in the first quarter, we have only seen the first, still rather limited impact of the current crisis. We assume an extremely challenging market environment for the second quarter and most likely also for the third quarter with very low and volatile commodity prices and weak demand.

We have therefore decided to take further action to safeguard the financial stability of our company. In addition to the substantial measures announced end of March, we will cut costs by another €200 million. This means CapEx for the full year 2020 will be reduced to below €1.8 billion, a cut of more than 25% compared with the originally planned €2.4 billion. Exploration and appraisal expenditures will be reduced to around €250 million. Before we come to your questions, I would like to inform you that we will postpone our Capital Markets Day to the first half of next year.

Thank you for your attention. And now, Reinhard and I are more than happy to take your questions.

Question-and-Answer Session

A – Florian Greger

Thank you, Rainer. Let’s now come to your question, I’d ask you to limit your questions to only two at a time, so that we can take as many questions as possible. You can of course, always re-queue for a follow-up question. The first question is from Mehdi Ennebati, Bank of America Merrill Lynch.

Mehdi Ennebati

Hi, good morning everybody and thanks for the presentation. So two questions. First one regarding integrated petchem profit, which has been pretty strong this quarter. So given that net price is significantly down quarter-on-quarter, would you expect the integrated petchem profit to keep increasing in the coming quarters or at least in the second quarter? Or do you expect that lower demand and lower margin on some key products such as ethylene [indiscernible] are getting any potential increase in the current quarter.

And another question regarding the realized gas prices. So you said that Romania, Malaysia and New Zealand declined less than in Europe. What about the coming quarters? Do you expect those countries, natural gas realized prices in those countries to decrease significantly, due to some time lag impact that can pull all other demand or anything else? Or do you expect them to remain regiment compared to the European prices? Thank you.

Rainer Seele

Mehdi, your first question on the integrated petchem. My view on petchem for the second quarter, I’m expecting what I do see right now in the market is that petchem margins stay healthy in the second quarter. Yes, so the first quarter, you can see in April are encouraging us to enjoy our business. This – the petchem business right now is benefiting from the high calls, volume calls from packaging. This will continue into the second quarter. And as the corona crisis is asking for more hygiene standards, especially the polypropylene, the propylene will benefit from that because the mask which are produced are based on our polypropylene.

So looking to the second quarter, I would say petchem looks good in the second quarter. Third quarter, I do hope that petchem in Europe will then benefit from the automotive and construction industry coming back, that’s a topic of volumes. So I see a healthy demand for ethylene and propylene in the two quarters to come. On the other side – on the other hand, as you know, it’s one side of the metal – both sides on the metal, we have to look at on the supply side, we see that we have roughly 25% of the capacities shut down in petrochemicals. The steam crackers especially, which are backed by colleagues from the automotive industry are shut down right now.

We see that especially the reducing utilization in the refineries is with using the propane – propylene supply into the market because the FCC plan is now running with high propylene volumes. So all in all, I have to say healthy demand I see with C2 and C3 supply is reduced. That’s my more or less a healthy outlook for petrochemicals for Q2 and also a little bit less in Q3. The realized gas prices from the other countries, some of them are fixed prices, Mehdi, but the gas price in New Zealand for example is index to the methanol price partially, so it’s falling different price curve than the hop prices.

So what I’m saying is, yes, the realized gas price in the second quarter, we might see a less impact what’s going on here in European pricing, but the second quarter, my outlook for the gas price is lower than the gas price we have seen in the first quarter. So you – I wouldn’t call €11 per megawatt hour in the summer quarter, at least not. But if you look into gas trading business in the second quarter, we also will benefit from the summer, winter spread in storages.

Mehdi Ennebati

All right. Thank you very much.

Florian Greger

We now come to Michael Alsford, Citi.

Michael Alsford

Good morning. Thanks for taking my questions. I’ve got a couple, please. Appreciate, it’s a very volatile environment, but could you perhaps give some guidance on why you see cash neutrality in 2020 post dividends in terms of oil price? I think for my calculations, it looks like it’s below $40, but I would like to get maybe some confirmation from that. And then secondly, a further reduction in CapEx announced today, I was just wondering whether you could perhaps give a bit more color as to where that reduction is coming from and how that might impact the production outlook in the upstream business into 2021? Thank you.

Reinhard Florey

Michael, this is Reinhard. Just to give you an idea about cash neutrality after dividend. I think this is in these days really in an integrated business, a difficult number to provide. Therefore, we have abstained from giving this number, because if you take just the like for like with the number that we have given in 2018 in our strategy of $25, that of course was still at a time when we had a little bit more of an oil exposure. And on the other hand, of course also healthy assumptions when it comes to gas prices, when it comes to downstream margins and all that. As we have to live more or less as Rainer also indicated in his outlook on site level to see how the impact of less demand, it would not be very wise to give you advice here.

All I can say is, you can see that we still have very strong levels regarding our resilience on the free cash flow breakeven also from the first quarter, where you can see that we came out with a very healthy free cash flow and very – that is also the case if you discount the effect of networking capital, because the networking capital effect is a real cash effect, of course, but on the other hand, if you estimate prices at the year end or in average to go up again, you will lose some of these evidence again or this benefit again, if not, if you think that this would come out with lower prices, then you would stay more or less at where you were by the end of the quarter. Therefore, there is very high volatility in this number. So therefore, I don’t think it’s the right measurement to do that as an outlook for the year right now.

Rainer Seele

Michael, I’d take your second questions. Well, the reduction CapEx, what’s really behind it is a big share of the CapEx reduction is in our retail business. We have had plans to buy, to build some retail stations in Bulgaria for example, and we’re not building that stations, that’s it. So the current business is not impacted, especially as you can see that the consumption is not on a 100% plus level, this will not impact our downstream business. The same story with upstream CapEx reduction, it’s in all regions where we are going to reduce maybe also in Romania.

My production guidance is 440,000 to 470,000 barrels per day, yes, there is no real major impact from these CapEx reduction in my forecast. The range of the 30,000 barrels per day is just depending on Libya, whether or not this is coming back and potential impact from OPEC quarters, which will be implemented in some regions where we are operating. So no impact from the CapEx reduction on our production forecast.

Michael Alsford

Okay. Thank you very much.

Florian Greger

The next question is from Jason Gammel, Jefferies. Please go ahead, Jason.

Jason Gammel

Thank you very much. First question for you is, perhaps you can give a little more detail on the financial instruments that were used for the middle distillate margins that had a very healthy contribution to the results in the quarter, and then perhaps also how long those extend out? And then my second question is related to refined product demand in your retail markets. Can you talk about the level of year-over-year declines that you see in there? And it’s probably way too early, but the trajectory of how the demand can potentially come back?

Reinhard Florey

Jason regarding the financial instruments on the middle distillates. To be honest, these are hedges that we have very much on the product level. The hedges are being executed in a way that we try to optimize the marketing environment that we envisage. Therefore, in the effects that you have seen, we have positive effects for just working with these hedges that have an effect actually in all quarters of this year. So there is an effect that even if some have been sold, some have been new bolt, we have a relatively equal effect of those in a positive way to be expected also for the upcoming quarters. So that’s stabilizes our results to a certain degree. And of course, it’s not all products, as you say, it’s middle distillates mainly, but it stabilized part of our result very nicely over the next quarters. also from the downstream business.

Rainer Seele

Jason, the retail volumes, I have four product groups the jet down by 95%, gasoline down by 60%, diesel down by 30%, heating oil up 5%. This was – these were the numbers a week ago, since there was a reopening, especially here in Austria, I will give you the actual numbers. Jet minus 95%, gasoline minus 40%, diesel minus 20%, heating oil, well the season is not there anymore.

Jason Gammel

Thanks. If I could just have one follow-up on the middle distillate hedges, I think it’s fairly clear, but just to make sure there is no financial instruments related to crude oil in those address.

Reinhard Florey

No, absolutely not.

Jason Gammel

Okay. Thank you. Thank you very clear.

Florian Greger

We now come to Michele Della Vigna, Goldman Sachs.

Michele Della Vigna

Thank you very much for your time and congratulations on a very strong set of results in a difficult quarter. I have two questions, if I may. First of all referring to the monetization of some of your CO2 credit. Really to understand, perhaps you could quantify that impact and go through some of the thinking behind the decision there? And how much you still retain of credit after that?

And then secondly, going back to operating working capital, I was wondering as demand drops in the second quarter, whether there was the risk that you would see a material increase in the amount of inventories at your refineries, as you wait effectively for the market to restart in the third and fourth quarter? Thank you

Reinhard Florey

Michele, let me take the first question on the monetization of CO2 certificate. First of all, this impact came in, in Q1, there is not much more impact from that to be expected in the quarters to come. We are not specifically quantifying, but I can give you assurance that in the mid double-digit effect that we directly took million effect that we have in Q1 from this. Your question was, do we have to buy certificates? I can assure you that is be it in the Western part or be it in the Eastern part, at the moment for this year, no requirement for us to buy CO2 certificates. And therefore, we will handle that more according to the market development that we see on CO2 prices.

Rainer Seele

Michele, on inventories. Well, first of all, I think we will see another buildup of inventories, especially now in the second quarter. We still have some capacities available as we speak about diesel. The main topic I would like to raise here is the specifications you need to have with the different products. That’s why we have highest storage capacities for diesel because the quality stays for longer.

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We have only limited jet capacities, but we have changed the process structure in our refineries so that we are just now nearly fully cracking into monomers and a little bit of diesel. Gasoline was and is still a problem. But if you remember, Michele, what I have said about the diesel, the gasoline – diesel consumption, gasoline is coming back and next week on May 4, there is another lifting of the restrictions here in Austria. And then I hope that people have enough from staying in their flat and that they are going to drive as much as possible. That’s the best storage I can get.

Michele Della Vigna

Thank you very much.

Florian Greger

We now come to Henri Patricot, UBS.

Henri Patricot

Hello, everyone. Thank you for the update. I had a couple of questions on Downstream as well and just pulling up on your comments too. The first one, I wanted to get a sense of what the bottleneck is for your refining utilization, the guidance of around 80% for the year. It’s only like – just not, it’s more down to gathering demand rather than jet, which you’ve managed to reduce very substantially. So you have the delta here what base does gasoline demand comes back over the rest of the year? And secondly, on ADNOC refining, I was wondering if you can give us some guidance around growth utilization for the year for ADNOC and also any impact on the CapEx program, I would ask given the more challenging environment. Thank you.

Rainer Seele

Henri, pleasure to take your questions. What is the bottleneck with 80%? Absolutely, it’s jet. Especially when we talk about our refinery Germany, there is nearly no diesel and gasoline, I can talk about. So, it’s jet and we are running now, we are running now at the Burghausen refinery, our petchem units on 100% utilization. Okay, it’s – I never say 100%, it’s 99%. Yes. So this is fully used and that’s really setting the limits and the bottleneck over there. So, it’s definitely jet.

If we look into the refinery in Austria and it’s also the case partially to a less extent in Romania, there is – the main problem there is jet and gasoline. Gasoline is the real issue. Diesel, I have a bit brighter outlook because heavy traffic would come back, especially when the border lines are going to be opened. Then diesel demand would come back earlier.

So, in ADNOC refining, okay, there was an impact by turnaround and a decline in demand in April. The utilization rate of ADNOC was around 60%. We see a ramp up in the next two months. The second half of the year, we estimate that the refined – that utilization rates will be higher. Why is it so, and I think that’s a success, Henri.

You might remember what I always have said last year and I’m like [indiscernible] was always. We have problems with the FCC, problems with the FCC, technical problems and so on and so on. Now I’m really more optimistic that we could use the maintenance shutdown to bring back reliably the FCC plant. And it’s also important for us because the propylene from there we also need. CapEx guidance, I really feel sorry that ADNOC is giving us some limitations to give you an answer.

Henri Patricot

Okay, understood. Thank you.

Florian Greger

The next question is from Josh Stone, Barclays.

Josh Stone

Hi, good morning. Two questions, please. Firstly, looking at the Downstream result, the contribution from Petrom looks particularly strong in the quarter as long as you talk about maybe the main drivers there and how much of that you think is repeatable. And then second, I noticed the Rhine river has been getting a few more headlines about potential your dryness or drying up. And I wonder this – if you’re seeing any early signs of any boost to the commercial business from that or if that’s something you’re looking at. Thank you.

Reinhard Florey

Josh, regarding the Petrom downstream results. Yes, you’re right. They have been strong. And in the Downstream side, there have been contributions from all three areas there. So from the gas business, from the Downstream refining business as well also from the power plant that we had there. We’re actually seeing that specifically also the demand in energy in Romania is still on a high level and we are seeing that some outages from other facilities have benefited the gas fire power plant that we are seeing here. So, in that result – in that respect, we are actually seeing that there is a potential that the Downstream result in Petrom are on a continuously high level.

Rainer Seele

Josh, I like every sign of hope also the Rhine river, but I’m afraid I’m not a member of your club. What I need is that the Germans are lifting the restrictions and the Germans are going to start driving more their car, this is more helpful because if we getting less supply via the Rhine river, it wouldn’t – it could be easily compensated that one of the guys running the other refinery exceeding this utilization rate. And then the effect is minor. That’s my view on it.

The Rhine river will have a positive impact if we really will see a stronger demand in the market. If there is less imports coming off from the North and the South, it easily can be compensated by a higher run rate of the refineries in the region.

Josh Stone

Yes, that makes sense. Thank you, Rainer. Thank you, Reinhard.

Florian Greger

Next is Thomas Adolff, Credit Suisse.

Thomas Adolff

Good morning. Two questions for me please. Firstly just on production, I understand the Libya part, so going from 500 to 470, I understand direction you might be lower because of the OPEC+ cuts. But it’s quite a big cut from the 470 to 440 potentially. And UAE contributed 22 kboed in the first quarter. And otherwise you produce a lot of gas in Malaysia, so perhaps you can talk about your barrel case of 440 and where these cuts are coming from please.

And then secondly, going back to ADNOC, you received a dividend of €34 million. And I wonder whether you can comment on the €34 million is it a semiannual or is it quarterly dividend on last year’s earnings presumably or what’s a dividend policy? Why does €34 million? Thank you.

Rainer Seele

All right, Thomas. Thanks for your question. Working on the 440 of course, you’re right, Libya is as good for 35,000 barrels per day. That’s what we have could use to the average and what was in our plan for 2020. Then we will see further production cuts more or less in all the regions. One is in the UAE, yes. And UAE made I think an announcement that this will be a low double-digit percentage. Then we will see a reduced reduction also in Malaysia, because one of our projects – because we have pipeline restrictions will not come on stream on time. We have a reduction of our gas production in New Zealand because our main customer has had to reduce his utilization of his chemical plant.

And we have of course in Romania, and natural decline, which is coming into, because we have also cut the CapEx spending in Romania. You might remember, Thomas, I also said, if we’re going to reduce the CapEx, the response in Romania is a little bit quicker. And therefore the decline also gave a range in Romania between 3% and 5%. We expecting that we also will see cuts coming – upcoming in Norway.

Now I’m talking about the lower, the bottom line, the 440. Yes, we are expecting it could be. This is a little bit the kind of words I have to use but I’m saying so. So this is more or less the scenario. We have only maintenance reduction from our production in Russia. So there is no production cut for gas. We are talking about mainly oil. Yes, it’s an impact. We will see a lower buildup of gas production in Tunisia. So, I can tell you in all the regions a good story. And if you sum it up, you will get to the 440 and the bottom line scenario.

Reinhard Florey

Thomas, the question regarding the €34 million, the €34 million we received here are also partly an adjustment or call it compensation, however you want. It’s still in context with our purchase price that we paid for the participation in last year. So very honestly, I’m broader conservative on the prospect of dividends from ADNOC refining for this year, given that the situation that they had a large turnaround skill throughout the full quarter one that there will be topics ramping up that in the Asian markets still some difficult market conditions.

I’m not worried about long-term dividend prospects. I think this is a fantastic asset. This is very much geared towards markets that may be even the first ones to open up again in greater dimension. But however, for 2020, they’re rather conservative.

Thomas Adolff

So, it is €34 million, just to confirm is a compensation for having had bigger issues on the FCC, which was essentially meant to restart I think in February of last year.

Reinhard Florey

That’s not exactly what I said. I said it’s in context with our purchase price. The conditions about that of course have been confidential, but now there is more or less everything settled.

Thomas Adolff

Okay. Thank you.

Florian Greger

We now come to Alwyn Thomas, Exane BNP Paribas.

Alwyn Thomas

Hi, good morning. If I could just circle back to the Borealis acquisition, I think – since you announced the acquisition, I think company investors have become a little bit more comfortable with the strategic fit, obviously with your existing business. But I think one of the – some of the key questions I’ve had particularly in the last month or so, have been around the company’s relationship with Mubadala and Abu Dhabi. And I just wanted to ask you directly yes, how did you ensure, you’ve paid a value for it and kept the transaction at arms length and just how you manage that, that’s whole complex governance relationship with Mubadala. And I guess secondly, just to follow up, the impact of COVID-19 on downstream in general and particularly, in Europe. I just wanted to get your thoughts on how you see what the potential structural impact could be to downstream in Europe, some of the nuances there, and how you prepare the business for that? Thank you.

Reinhard Florey

Okay. Alwyn, regarding the Borealis acquisition, as you can imagine that a related party transaction and Mubadala as a shareholder in OMV is clearly classified as a related party has been under total scrutiny from a governance perspective. And you can be sure that with fairness opinions with very strong valuation cases that we did with sensitivities up and down, we are absolutely certain that per price that we are paying is a fair one, don’t forget that we have announced that there will be some 700 million of synergies within the next five years that will come to the benefit in 75% in our case, because this of course, will be a very good opportunity to get much more efficient and much more tighter integration to the benefit of the business and that of course, it goes very much to the benefit of the shareholder.

So therefore, from a formal side absolutely, you can be ensured that things have been probed also of course, from the supervisory board. If it comes to the prospect to say how much this business will develop now in the near future? I can tell you it’s an extremely stable, extremely cash generative business. However, it also has growth opportunities in markets that really have a prospect to be another good – a leg for them to enter markets like U.S. as well as Southeast Asia. And the transaction in U.S., where they acquired another 25% of the based our Baystar facility has just been concluded. And I think this is another great success that will safeguard the rich cash generation for the future of this company.

Rainer Seele

Alwyn, just one or two comments and forward some top what Reinhard has said. What is the value of Borealis? We see that especially, in times of this COVID-19 crisis; a flexibility, I have explained to you in our refineries with a high utilization rate, and now I’m talking about the integrated value. We couldn’t run that without Borealis. Borealis is our captive market behind our refinery even times, where we can’t find a buyer project. Borealis is a company, which has a much, much broader product spectrum than other competitors, who are, I’d say two, vast majority depending on the automotive industry. looking into Borealis performance as we talk about their business and how other companies are impacted by COVID-19. I can see a real robustness. We are not talking about like my VTL network with volumes going down or going down overnight by 50% to 80%.

So, what we are gaining at the flexibility is relatively stable captive market, especially with Borealis. I think that that Borealis has to speak about the business plan also given the framework for the next years to come. I see Borealis with their business, especially as they are standing on two lakhs in Europe and in the middle East Asia. I think that there is a stability is really coming with that.

So, I see that value, which is an integration. and I think given the current business environment, Borealis is performing on an oppressive level compared also to their competitors and we are benefiting for a very reliable captive market, impact COVID structural in Europe downstream, that’s a difficult question. That’s why I’ve asked Reinhard that to start first answering a question that I have a bit more time to think about it.

I hope you will get now a better answer with a bit more substance. What I see in Europe is consumption is coming back only slowly and this is this is customers’ behavior. This is what the people – the ordinary people on the street has changed. There is so much fear to be infected that people, need to have a convincing story that they are not afraid about a virus infection.

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So, my picture sort of tells me, while Europe will come back the day we do have a vaccination. Then we are back to normal. Then, I think we are back also really spending our holidays in one of these beautiful beaches somewhere. So, what I’m saying is, I think COVID-19 has a huge impact on the aviation industry. Air traffic needs a little bit of an eternity to come back to the level we have seen in 2019.

When I say eternity, it’s not lasting forever. Yes. But I think we are talking about nearly two, three years. That’s my view. What is changing is, I think people especially, in the first weeks, will avoid public transportation, and I hope they take their car and not the bicycle. Yes. So, individual transportation, just it’s in the mindset of the people look at a priority. What else do I see? I think that people, and especially, the industry. Healthcare and packaging would benefit from COVID, healthcare in each sense. It doesn’t matter what we talked about, pharmaceuticals and so on. And I’m – I think that especially the new standards on hygiene in daily life yes, will determine the customers’ behaviour, when he’s going for shopping.

The third and last point I want to make is, especially, in a European refining. Low cost and flexibility will determine the success of the players in the industry. Maybe, some of the shutdowns are not coming back. That would be good for the market, because we have seen since decades and over supply and refining in Europe. But I’m afraid that low cost and flexibility will be even more important than refining business in Europe.

Alwyn Thomas

Okay. Thanks for the detailed answer.

Florian Greger

We now move on to Peter Low, Redburn. Peter, are you still there? We can’t hear you at least. Okay. We go to the next question, Matt Lofting at JPMorgan.

Matt Lofting

Good morning, gents. Thanks for taking the questions. Two, if I could please. First just on the cash cycle and gearing, given this with the near-term outlook dynamics and uncertainty that you’ve talked about, can you give us a sense of where your hard ceiling is on leverage, inclusive for post absorbing the Borealis transaction and depending on disposal execution, what determines how long you’re comfortable carrying gearing above the target threshold?

And then secondly, I wanted to have another go at the CapEx to production relationship and how you see that. I mean, I understand the point you’ve made around this with a limited impact on this year’s production range from the lower CapEx, but given OMV’s exposure to higher decline CE basis, et cetera, was the anticipated implication of lower spend today for future volumes into 2021 and 2022. Thanks.

Rainer Seele

Matt, thanks for the question. I think the question about leverage is one that we cannot see only in the context of 2020. You have seen that we have given you at the moment, when we announced this transaction and also, the way how we are going to finance it. A guidance that we want to achieve by the end of 2021, again, a return to our target levels regarding our gearing. Now, to be very frank with you in the times of COVID-19 with demands being low, this will be a challenge; however, we are, of course, not giving up on that target, because it shows clearly that we are giving us this kind of 12 months to 24 months to return to normal levels of financial strength, for which OMV, I think has quite a good reputation.

Now, this means that in 2020, of course, we’ll see higher gearing. And this is also very natural, but therefore it was very important to us to show you also today how strong we are in the gearing starting from Q1. Because I think the very good cash flow and the very good profitability from Q1 showed that we are able to manage this kind of financial stability exactly in anticipation of the execution of this great and very beneficial transaction. And this will happen this year and therefore, we’ll see some elevated gearing level this year and we’ll try to return to normal then by the end of next year.

Reinhard Florey

Matt? I’m going to tell you what was my thinking when you raised the question. I thought I wish my board colleague; Hans Pleininger will would be here, because he can give you really a solid answer to your question. So, very honestly speaking, I don’t have the numbers, yes. he might have it. And I only give you a little bit of a qualitative answer on your question. First, if I see the CapEx cut, also running into 2021, I think the most sensitive region is Romania and we might see there is stronger decline coming up. What I have discussed with Hans so far is that I tested him do, are we coming back to the 500,000 barrels, which is the first number we have always proudly mentioned when we talked to you in 2021. yes, but it depends really on the environment. Are we going to see them further production cuts or what is the OPEC quote?

So, there’s – so there are so many ifs, but reading between your lines, I think this is not my, my major concern when I’m thinking about what is the next journey OMV is sailing. It’s more the question, what is the mid and long-term impact on OMV’s production level? And then we are not talking about mainly, the cuts we have taken this year. Then we are talking about whether or not we would acquire the two big projects into our portfolio, which means are we going to acquire Achimov 4/5 and do we have them the financial muscles to go for that?

Secondly, are we going to take then FID for Neptun? Yes. So, these are the two projects determining whether or not we will have really a visible, impressive ramp-up of our production in upstream. So, in a nutshell, I would ask you Matt to ask the question again, in our next call when Hans is present. I hope he was saved, not so much different what I have mentioned today.

Matt Lofting

Very good. Thanks for the comments and we’ll remember to ask Han next time. Appreciate it.

Florian Greger

Good. we give it another try with Peter. Peter, can you hear us?

Peter Low

Hi, can you hear me okay?

Rainer Seele

Yes. We can hear you very clearly.

Peter Low

Okay. So sorry about before. Just hopefully, a couple of quick follow-ups. The first visit from refinery utilization, given you’re guiding to 80% for the full year and that the 1Q average was 94%. Does that mean you’re saying that you’re going to be lowering utilization below the current 80% level in the coming weeks in order to achieve that kind of year average? And then the second was on the giving and sorry if I missed this, but – can you provide a reason as to why you changed the disclosure to be a preleased measure that you’re now looking at rather than kind of the post-lease metric. Thank you.

Reinhard Florey

Peter, 100 points. You catch me? Yes. You make good math today. I agree with you, because we have said it’s more than 80%. You’re right. Given the fact, there is – it is a conservative number given the uncertainty with our outlook, especially, with the demand, we have been more on the cautious site. You’re absolutely right and my answer is yes, it’s more than 80%.

Rainer Seele

Peter, your question regarding gearing and why excluding leasing. first of all, I think there are some reasons just for the comparability and the visibility regarding the history also. We have given always gearing targets for OMV, pre-IFRS 16. Now, the IFRS 16 is clearly the majority part of the leasing, because that it has made the big change. So, after the new IFRS regulation, we cannot even differentiate anymore between finance lease and operating lease. But the real increase that came on our balance sheet was clearly with the operative lease on the balance sheet as well. So, we have kept also this differentiation to say this is what is pre-leased; this is what is including leases. So, we are fully transparent on that.

So, we are not hiding anything from you, but while there is also a clear – from financial theory, a clear reason for doing this. If you take the nature of leases, this means that you are much more flexible in keeping the debt or leaving the debt, because they are linked to specific assets that you also might be able to dispose of. You do not have this kind of long-term bindings in the contract that you would have, for instance, with a bond. If you issue a senior bond, then you keep it until the runtime is there and maturity is rich.

in leasing contract, the standard forces you to attribute to your accounting, the probable lifetime of that, but that does not meet the contractual. So therefore, you are in a different way and therefore, we think that you are much more flexible on that, that you could easily more easily shed that. And therefore, we are seeing that the long-term debt to long-term hearing is more of a relevance for us on this.

Peter Low

Thank you. That’s very clever.

Florian Greger

Okay. now, we come to Sasikanth Chilukuru from Morgan Stanley.

Sasikanth Chilukuru

Hi, everyone. Thanks for taking my questions. I had two please. I was just wondering if you could comment on the dividend, the one that’s been announced for 2019 and to be paid in 2020. I was just wanting to give this any risk without being announced ahead of the AGM in September. And the second question I had on the disposals when do we expect, or when do you expect to have a definitive agreement on the two divestments that you have outlaid, is it more a first half event or it’s a second half event? thanks.

Rainer Seele

Sasi, on the dividends, I think we have been very clear on commitment to our dividend policy. Our dividend policy is very clear that we intend to raise our dividends year-after-year or keep it at least at the level of the previous year, and this is what is our intention, and for the moment there is also no deviating attitude for us regarding a proposal to the even postponed AGM in autumn.

Reinhard Florey

Sasi, on the two disposals. I was thinking, both disposals, I think we will have an agreement until year-end for the transportation business, maybe earlier, because we’re already in exclusive negotiations, then for the reaching network in Germany.

Sasikanth Chilukuru

Thank you.

Rainer Seele

Now, next question is from Bertrand Hodée at Kepler Cheuvreux.

Bertrand Hodée

Yes. And we went through I think…

Florian Greger

Can you speak up a little bit, Bertrand? We can’t hear you.

Bertrand Hodée

Yes. Is it better now? Is it better?

Rainer Seele

A little better? Yes.

Bertrand Hodée

Okay. So, two questions if I may, I understand that for 2020, you’re referring to give a number or an outlook for the organic cash neutrality point, but can you share with us, where do you see OMV in 2021 in terms of organic cash utility point or – and any, I would say other sorts around this projected organic cash utility point whether it is capEx number, whether these include Borealis being fully consolidated or not, so – but just wanted you to have your view on where do you see when we – in 2021, when all of those dusts will have settled. And then my second question, European natural gas is quite early to release. Can you have a view on 2021 for natural gas in Europe?

Rainer Seele

Well, to be honest, I’d take the question on natural gas. Well, to be honest, it depends on the winter. very, very much, it will depend on the winter. It will depend on whether or not Asia is coming back with higher consumption and less cargos will move into European gas market. From my point of view, the gas prices in 2021, I really should not tell you now an honest answer, I really don’t care. I’m busy to think about 2020 and it already creates me a headache to think about the gas price in 2020. So, the 2021, I do hope that we will see a recovery, then we will see higher prices. and especially, if St. Peter is sending us a blizzard – ice blizzard for three, four months, then it will be much, much higher.

Reinhard Florey

Okay. Bertrand on your first question, just to give you a little bit of a flavor here. Why I was a little bit evasive in my answer on Michael’s question in the beginning of the call is the high volatility that you have here. Just to give you a number in comparison, if you take quarter one, how a free cash flow breakeven oil price would have been minus $30. There, you can see this doesn’t make sense in this volatile times as we are seeing very different impacts from dividends coming in from the different impact between downstream and upstream, and the balance in there. So, please give us the chance to discuss as you also proposed more post-Borealis situation. And there, I can assure you that our target is clearly, with the full consolidation of Borealis and with the ability to come to a situation of normal comparable market environment again, whether this is in 2021 or in 2022 that we even beat our cash flow breakeven of 25 that we have given in 2018.

Bertrand Hodée

Thank you.

Florian Greger

Good. With this, we end the today’s conference call. I would like to thank you for joining us and your interest in OMV. Should you have further questions, please contact the Investor Relations team, we will be happy to help you. goodbye and have a great day.