Ladies and gentlemen, thank you for standing by. I'm Hayley, your Chorus Call operator. Welcome, and thank you for joining the BASF conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd like to ask a question, you may press star followed by one. When preparing to ask your question, please ensure that your phone is unmuted locally. If any participant has difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors.
They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in the Opportunities and Risk Reports of page 111 to 118 of the BASF Report 2017. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the signing of an agreement between BASF and LetterOne to merge their respective oil and gas businesses in a joint venture. Analysts and investors, as well as journalists, were invited to join this call. On this call with me today are Hans-Ulrich Engel, BASF's Chief Financial Officer and Deputy Chairman of the Board of Executive Directors, and Mario Mehren, Chief Executive Officer of Wintershall. Please be aware that we already posted the slides for this call, so a longer version, not the selected IR slides you saw last night on our website at basf.com/call_20180928, so today's date. Following the presentation, Hans and Mario will be happy to answer your questions. With this, I would like to hand things over to Hans.
Yeah. Thank you, Stephanie. Ladies and gentlemen, good morning also from my side. Thank you for joining us on such short notice. I'm delighted to tell you more about the agreement we signed late last night with LetterOne on the formation of Wintershall Dea. We will create significant value for both shareholders of the joint venture by forming the leading independent European exploration and production company, seizing additional growth opportunities, generating synergies of at least EUR 200 million per year, and last but not least, IPO Wintershall Dea. In the following, I will briefly highlight Wintershall Dea's main characteristics, the key elements of the transaction agreement, and the corporate governance structure of the company. Mario will later provide you with further details. Please go to slide three of the presentation we published this morning.
Yesterday night, BASF and LetterOne signed a definitive transaction agreement to merge their respective oil and gas businesses in a joint venture, which will operate under the name Wintershall Dea. This merger is an important value-creating step on BASF's strategic path. By combining these two German-based entities, we create the basis for further profitable growth. Wintershall Dea will become the leading independent European exploration and production company with strong international operations and significant scale. In 2017, the combined business had pro forma sales of EUR 4.7 billion. EBITDA reached EUR 2.8 billion, and net income amounted to EUR 740 million. We will strengthen the portfolio footprint of the combined business and realize synergies, thus creating significant additional value. Furthermore, BASF and LetterOne envisage to list Wintershall Dea through an initial public offering.
The merger will lead to a more balanced regional footprint with even stronger operating companies. In 2017, pro forma hydrocarbon production totaled 210 million barrels of oil equivalent. This equals a production of around 575,000 barrels of oil equivalent per day. Through leveraging strategic partnerships and sharing technological expertise, Wintershall Dea will enhance its access to growth opportunities. Wintershall Dea has a clear strategy for profitable growth based on a solid project pipeline. As a midsize E&P company, the joint venture will continue to focus its activities on core and development regions where Wintershall and DEA build up specific know-how. Exploration activities are near-field and greenfields and operated with a limited exploration risk profile. The company will further strengthen its world-class partnerships in key countries and leverage operational excellence and technological expertise.
Wintershall Dea will be one of the most cost-efficient operators with low reserve replacement costs and low production costs. The joint venture will also be a major operator in the non-cyclical European gas transportation business, which provides earning stability. Last but not least, Wintershall Dea has a superior growth portfolio across the whole E&P life cycle and generates strong free cash flows. To effect the merger, LetterOne will contribute all its shares in DEA Deutsche Erdöl AG into Wintershall Holding GmbH against the issuance of new shares of Wintershall to LetterOne. Wintershall will then be renamed to Wintershall Dea. BASF will initially hold 67% and LetterOne 33% of Wintershall Dea's ordinary shares, reflecting the value of the respective exploration and production businesses of Wintershall and DEA.
To reflect the value of Wintershall's gas transportation business, BASF will receive additional preference shares following the closing, resulting in total shareholding of BASF in Wintershall Dea of 72.7%. No later than 36 months after closing, but in all cases before an IPO, these preference shares will be converted into ordinary shares of Wintershall Dea. Initially, it was intended to reflect the value of the gas transportation business through a mandatory convertible bond. However, we now agree to replace the bond with preference shares, which offer higher degree of flexibility in terms of capital structuring as well as a straightforward tax treatment. Closing of the transaction is expected in the first half of 2019, subject to approvals of merger control and foreign investment authorities, as well as several mining authorities and the German Federal Network Agency.
In the medium term, BASF and LetterOne envisage to list Wintershall Dea through an IPO. BASF and LetterOne agrees on a corporate governance structure which leads to joint control and determines our reporting. Later on, I will explain the impact on BASF statement of income. BASF determined Mario Mehren as the Chief Executive Officer and the Chairman of the Management Board. LetterOne determined Maria Moraeus Hanssen as Deputy CEO and Chief Operating Officer of Wintershall Dea. In total, the management board will comprise five members with distinct responsibilities. Wintershall Dea will have a supervisory board with a co-determination level of 1/3. The supervisory board shall initially consist of four representatives of BASF, two representatives of LetterOne, and three employee representatives. In preparation of an IPO, the supervisory board shall later be composed of four representatives of BASF, two representatives of LetterOne, four employee representatives, and two independent members.
The shareholders, BASF and LetterOne, will coordinate their interest in a shareholders committee. Wintershall Dea will be headquartered in Kassel and Hamburg. With that, I will hand things over to Mario, who will tell you more about Wintershall Dea.
Thank you, Hans. Welcome also from my side. Let me highlight Wintershall Dea's strategy, its strengths and key capabilities, as well as the position of the company within the E&P industry. Wintershall Dea has a focused business model and is active in the exploration, development, and production of natural gas and crude oil. Going forward, our strategy is to further profitably grow our upstream activities. We secure our lasting success by broadening our technological expertise. Our focus is on increasing the yield from producing fields, as well as on operating as efficiently as possible. In addition to exploration and production, we are also running together with our partner, Gazprom, and other companies, a well-connected gas pipeline network in Europe, which contributes stable earnings. The following slide depicts the financial and operational performance of Wintershall Dea on a pro forma 2017 basis.
With sales of EUR 4.7 billion and an EBITDA of EUR 2.8 billion, the company will be the leading independent European E&P company. Total production amounted to 210 million BOE in 2017. The merger leads to combined proven reserves of 2.2 billion BOE and a healthy R/P ratio of 10 years on a pro forma basis at the end of 2017. This is in line with our target range. The 2P and 1P reserves stood at 3.9 billion BOE, which lead to an R/P ratio of 18 years. Of these reserves, 46% are already developed and will support production growth in the midterm. When you look at the map on slide nine, you see the production asset footprint of the combined business.
I would call it a perfect match with a strong presence in Western Europe, Russia, Latin America, and in North Africa. Our strategy to concentrate on core regions will remain in place, and we will further establish partnerships in each region or country and combine the regional expertise with our technological expertise to create value for our shareholders. Examples are Gazprom in Russia and Equinor in Norway. In addition to our existing core regions, that's where we are already producing, we have so-called development regions. In these regions, we are evaluating projects and are conducting, for example, exploration activities. To dive a little bit deeper, the following benchmark shows Wintershall Dea's leading positions in its core regions.
Based on the expected production volumes in 2018, the company will be the largest independent producer in Northwest Europe, the largest independent producer in Argentina, the largest international producer in Russia, and among the top five international producers in North Africa. Wintershall Dea has a solid project pipeline with access to high potential acreage. Along the whole E&P value chain from exploration, development, and production, the company has a balanced portfolio of producing assets and projects which will fuel future growth. Let me briefly mention some of the major projects. Together with our partners, we will develop the Turonian layers of the giant gas field Yuzhno-Russkoye, and thus prolong the plateau production for several years. Another example is the Nova oil discovery in Norway. Wintershall will develop this project as operator.
To secure a cost-efficient and environmentally friendly development, we will use a subsea tieback and the existing infrastructure in this area. As both companies did in the past, Wintershall Dea will continue to actively manage and upgrade its portfolio. The combination of the portfolios offers further possibilities to enhance the value of the assets. We will apply our technological expertise, further increase the share of own operated assets, and ultimately optimize the free cash flow. Based on the underlying E&P projects, I would like to give you an indication on the growth opportunities of Wintershall Dea within the next years. Through the merger, the company is on track to reach a production level of 750,000-800,000 BOE per day by 2021-2023, from currently 575,000 BOE per day.
This equals an annual production growth rate of 6%-7%. If you compare this to our peer group, you can see that we are well-positioned with respect to future growth. To deliver shareholder value, Wintershall Dea will set the focus on project execution and operational excellence. Cost efficiency is key for Wintershall. We strictly manage our costs, and we are one of the companies with the lowest production costs in the industry. We have several initiatives in place which target to further reduce our costs. This focus will also be kept in the merged entity. Both companies, Wintershall and DEA, continuously invested in the reserve replacement and also secured their leading positions with respect to reserve replacement. Strict cost management for investment projects and stringent selection criteria for new projects are also key to replace the reserves in a profitable manner.
By combining the German-based companies, Wintershall and DEA, we will be able to realize significant synergies. Through active portfolio management, we'll focus on the most profitable assets and the most promising discoveries. The cash flow and capital expenditures will be optimized. Synergies are also targeted to joint corporate functions, procurement, exploration, and R&D activities. Especially the portfolio overlap of the operating companies in Germany and Norway offers substantial cost synergy potential. We will form a joint headquarters with two locations. In total, we expect a synergy potential of at least EUR 200 million per year as of the third year following the closing of the transaction. In addition to our exploration and production activities, the natural gas transportation business of Wintershall is also part of the merger.
Wintershall Dea, with its partner, Gazprom, and other companies, will be active in the construction and operation of natural gas pipelines in Europe. Our pipeline network is well-connected to major European hubs, and the transit pipeline, Nord Stream 1, is contributing to supply security in Europe. We form a major part of the German gas distribution hub for Europe. As a major operator in the non-cyclical gas transportation business, Wintershall Dea will generate stable earnings and cash flows from its regulated and non-regulated pipelines. Let's now move on to the financing strategy of Wintershall Dea. First of all, Wintershall Dea will be committed to long-term profitable growth, which will be supported by appropriate financial resources. Following the closing, Wintershall Dea targets an investment-grade rating. To achieve that rating target, the capital structure will be set up accordingly.
The joint venture will be financed on a stand-alone basis through diversified debt financing instruments such as third-party loans and bonds. Shareholder loans will be repaid. As already mentioned, in the medium term, an IPO is envisaged by the shareholders, BASF and LetterOne. Going forward, Wintershall Dea strives to offer an attractive dividend to its shareholders. With that, back to Hans.
Thanks, Mario. Let's have a brief look at the expected timeline and next steps of the merger. As we have signed the business combination agreement, we are now entering the approval phase of the merger, which is expected to take at least six months. Approvals are required for merger control and foreign investment authorities, as well as several mining authorities and the German Federal Network Agency. We expect closing to take place in the first half of 2019. In parallel, we start with the detailed preparation of the integration phase. We expect that the integration will take roughly 12 months after closing. We will also work on preparing the IPO readiness. We expect that going public will not take place before the second half of 2020. The exact timing will obviously depend on market conditions.
Let me also explain the impact of the merger on BASF statement of income and how we will account for our share in Wintershall Dea in the future. The signing has immediate effect on the reporting of BASF Group. Sales and earnings of oil and gas are no longer included in BASF Group's reporting retroactively as of January 1st, 2018, and with the prior year figures restated. Until closing, which is expected in the first half of 2019, earnings will be presented in the income before minority interest of BASF Group as a separate item, and that separate item is called income from discontinued operations. From the transaction closing date, there's again a different type of accounting.
BASF will account for its share in the joint venture of Wintershall Dea using the equity method and include its share of Wintershall Dea's net income in EBIT before special items of the BASF Group. The gain from the transition from full consolidation to the equity method will be shown in income from discontinued operations as of the closing of the transaction. As a result of the changed reporting of Wintershall Group following the signing of the definitive transaction agreement, BASF Group's outlook for the full year 2018 is adjusted. We continue to expect a slight increase in sales compared to the adjusted 2017 figure. We now expect a slight decline in EBIT before special items compared to the adjusted 2017 figure, while EBIT is now expected to decline considerably.
Before taking the accounting effects of the transaction into consideration, a slight increase in sales and EBIT before special items and a slight decline in EBIT was expected. Now, Mario and I are glad to take your questions.
Ladies and gentlemen, I would now like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Please limit your questions to only two or three at a time so that everybody has a chance to ask his or her question. The first question is from Christian Faitz, Kepler Cheuvreux. Please go ahead.
Yes. Good morning, Stephanie. Good morning, gentlemen. Two questions, if I may. First of all, can you elucidate a bit the synergies of the EUR 200 million synergies you are aiming for in year three? Second question would be, obviously, I'm fully aware that the combined entity does not have any direct US exposure. So please excuse my limited legal knowledge, but does the US Department of Justice have any say in the approval of the transaction? Then I'm coming to our question two or three. As we have the benefit of having some management interaction so late in Q3, would you mind giving us some indication how demand trends in your chemical segments have developed in the quarter? Thanks a lot.
Yeah. Christian, good morning. I'll do questions two and three, and then Mario will cover your question on synergies. With respect to the approvals, we will have to go through merger control processes in the EU, in Mexico and in Argentina. We have foreign investment approvals to seek in Germany and in Russia. We have to go through the mining authorities in the countries that we are operating in, plus the Bundesnetzagentur. Since there aren't any assets in the US, we do not have to go through any type of approval process in the US On your Q3 question, as you rightfully mentioned, Q3 is not yet done. We will report on Q3 on October 26th.
What do we see at the current point in time? My suggestion would be that after this comment, we really concentrate on what we wanted to talk about here this morning, which is the merger of Wintershall and DEA. What do we see in Q3 so far? Demand I would describe as maybe a bit slower than what we had expected going into Q3. We also see certain effects of the continued low water levels on the River Rhine, which have, as you have read, in particular in August, but it also continues in September, as you could read, at least in the German newspapers, that have an impact on our operations in Ludwigshafen.
As I said, we will report on Q3 and then in the full detail that you are used to on October 26th. Then with that, I hand it over to Mario.
Yeah, Christian, on synergies, they will basically be fueled by synergies coming from production, higher combined production that we will have in certain fields. Of course, we will have synergies from procurement bundles, from joint exploration budgets and CapEx budgets. Last but not least, and maybe most importantly, of course, we have a certain overlap in Germany with the two headquarters and in Norway and Germany with the operations where we will eliminate duplications, and that will overall then lead to the EUR 200 million that we mentioned as a minimum figure for the year 2021 onwards.
Thank you very much.
The next question is from Andrew Stott, UBS. Please go ahead, Andrew.
Yeah, good morning, everyone. Thank you for the presentation this morning. Really just focus on the cash flow effect of the transactions for BASF Group, and then also for the new entity. The first question is, what does BASF look like in 2019 from a point of view of working capital ratio, ex oil and gas, and also from a point of view of the corporate tax rate? I get obviously CapEx is clear from your previous guidance, and also you'll just put the discontinued. Working cap and tax, please. The second question was around Wintershall Dea. What do you envisage to be the CapEx requirement of the company to get to those production targets of 2021-2023? Thank you.
Morning, Andrew. I'll take your tax question and also the CapEx question for the BASF Group, and Mario will briefly maybe cover the working capital question that you have. On the tax side, ex oil and gas, we would expect a tax rate in the mid 20%, maybe slightly lower than that. On CapEx, for the BASF Group, I think in the 2018-2022 CapEx plan, we have about EUR 1 billion per year CapEx allocated to our oil and gas operations, slightly less than that.
That would not be shown anymore from now on, neither for the discontinued business nor from the point in time on where we form the joint venture, and then show the at equity participation. With that, working capital. CapEx on the way to further growth, Andrew, for Wintershall. I mean, as you can imagine, it's very early days in the transactions. For Wintershall, we stick to the EUR 3.5 billion that were communicated by BASF earlier for the five year period. For the new entity, as soon as we have closing, we will come up with a CapEx guidance what is needed to achieve our goals and so on.
The next question is from Tony Jones, Redburn. Your questions, Tony. If we can't get him on the line, so the next one in the queue is Chetan Udeshi, JP Morgan. Chetan, please go ahead.
Hi, thanks. Maybe not a question on Q3, but just looking at, you know, your comment ex oil and gas for the full year guidance where you said, you know, slight decline. It's a pretty wide range, you know, 1%-10%. I mean, we've already had first half. You probably know most of the Q3. Can you give us more color on where should we think the outlook reflect in terms of whether the higher end or the lower end of the range as such? That would be useful.
Yeah. Chetan, thanks for your question. Let me maybe see. First of all, what we have here is we simply pulled out the oil and gas figures out of our guidance. This is at this point in time, there's nothing but a mathematical exercise that we've done. I think that is important to understand. Maybe the easiest way to look at this is when you go to our first half report, where on page 16, we're reporting the figures for the oil and gas segment. You go there from sales to EBIT before special items. All of these positions will simply come out of our P&L.
All that will be reported going forward is the net profit, and we show that in a separate line for a discontinued business. That's, I think, the easiest way to look at this. We've simply mathematically adjusted the guidance that we are giving now. Within the guidance, yes, we have the 1%-10%. Let me say at this point in time, we stay within what you describe as a rather broad range. I'd prefer to leave it there and not go any further. As I said already, we'll have our Q3 earnings coming out on October 26th, and we'll provide more information then.
Thank you.
The next question is from Andreas Heine, MainFirst.
Yes. Thank you very much for taking my question. The first is on the debt of the new organization of the new joint venture. Could you highlight a little bit what BASF have put into there? So you have this share in equity, 67, so 2/3 of BASF, 1/3 of DEA. Is that similar then also what each party puts in net debt, or is there a difference in what in total we can expect to be hived off when we see the discontinued line in the balance sheet? Sorry for asking again on the guidance. So you said it is mathematically calculated, so it is not that you put a high confidence behind it.
Because if I calculate it correctly, then in the first half, adjusted for oil and gas, you had a decline of 6%, and the second half shows MDI and TDI prices falling. You mentioned the Ludwigshafen side, and you have the consolidation of the Bayer business with, as for seasonal reasons, has a loss in the second half. Maybe you could give one more comment on how confident you are with this guidance. Thank you.
Yeah, Andreas, thanks for your questions. Your first question on the debt of the company. The expectation is that the shareholders will be in there with their respective equity, no question about that. The company for which we intend to have an investment-grade rating will be financed in the market. That will lead to us probably being able to reduce our overall debt position somewhere in the order of magnitude of, I would think, EUR 2.5 billion-EUR 3 billion. Always keeping in mind that there is also a position then via our preferred shares that reflect the gas transportation business. Much maybe for the financing of the company.
Your question with respect to the guidance. If I do the math, then I come to the conclusion that if I pull out oil and gas for the first half of the year, our EBIT before special items is down by slightly less than 5%. We do not yet have the full figures for Q3. Even though this is September 28th, it takes us a little bit of time to close our books after the end of the month. At that point in time, we'll have more clarity. Our target is clear to stay within the guidance that we gave.
Thank you.
Welcome.
Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone. At this time, we do not have any further persons in the queue, so we might wait for one more minute for you to decide. If there are no further questions at this time, then this brings us to the end of our conference call already. We will publish, as Hans said before, our quarterly statement and host our conference call on the third quarter on October 26th. Should you have any further questions at this time, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and goodbye for now.
Yep, thank you.
Thank you.
Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.