Good afternoon, everyone, and thank you for joining us in the conference call for Statoil's 3Q results 2015. My name is Peter Hutton, head of research for investor relations, and I'm delighted to welcome Hans Jakob Hegge to lead the call, having taken over as CFO since the sixth of August.
Also participating on the call are Svein Skeie, head of performance management and risk, and Ørjan Kvelvane, head of accounting. We'll have a presentation from Hans Jakob Hegge for around 15 minutes, and then we'll open up for questions, and we expect to complete the call by around 1:30 P.M. U.K. time. With that, I'll ask Hans Jakob Hegge to start us off.
Thank you, Peter. Good afternoon, and welcome to everyone attending this conference call. May I start by saying that I look forward to presenting Statoil's results and taking questions, as this is the first opportunity to speak to you as CFO of Statoil. The focus remains the same as previous quarters. Safe and efficient operations, reducing costs, and positioning the company for the future.
Let me start with the three main messages today. First, we delivered strong performance in a challenging environment. Operations remain solid and reliable, generating strong cash flow and keeping our balance sheet robust. However, even though we have improved on our cost base in underlying currency, we have seen weaker results from international upstream, which I will address shortly.
Second, we continue to see cost improvements coming through and becoming more systematic, with adjusted OpEx and SG&A down 15% year-on-year when segments are weighted in underlying main currency. Showing not only in our bottom line, but also in our organization and culture. Third, we continue to make significant improvements in our capital expenditure, allowing us to reduce our guidance for CapEx in 2015 by $1 billion to around $16.5 billion.
We are bringing down the breakeven on several unsanctioned projects towards levels which look attractive even at current prices. As announced earlier today, two of our development projects, Aasta Hansteen and Mariner, have been delayed by one year. At the same time, we communicated the improvements on Johan Sverdrup. As a reminder, the dividend remains unchanged at $0.2201 per share.
The dividend will be stated in Norwegian kroner at the effective exchange rate closer to payment, as we announced last quarter. Moving on to strong production performance. Third quarter was another quarter of strong, safe, and reliable production. Our production efficiency was above 90% on NCS, with unplanned losses below 4%.
High regularity on our assets produces some of the most profitable incremental barrels. Overall, our equity production was up 4% year-on-year. That is 7% adjusted for divestment. Jack/St. Malo is now ramping up strongly from first production in December last year and is achieving good flow rates. We are seeing the benefit of projects which started earlier last year, such as Gudrun and Claude. In addition, we have Valemon, which started early this year and more fast-track projects.
We are also realizing value over volume from our gas machine, and this has contributed well as prices are higher than last year. Looking at Norway, the production was up 8% year-on-year. That is up 10% adjusted for divestment. This is despite the fact that underlying decline remains around 5%. More than half of the growth came from operational improvements and new fields.
The other half came from a successful decision to defer production in 2014, an example of value over volume as we realize higher prices. Equity volumes in the international segment were 1% lower overall, reflecting the Shah Deniz disposal. Moving to the next slide, adjusted earnings by segment. We have got quite a lot of information on this slide, but I'll take you through it.
Clearly, results in the third quarter reflect a Brent price which was down over 50% year-on-year and down nearly 20% on last quarter. Our job is to manage the controllable elements, and we continue to do so very actively. Upstream operations in Norway delivered adjusted earnings of NOK 15 and a half billion and NOK 5.1 billion after tax, down 33% and 22% respectively.
The adjusted earnings were supported by continuous strong operational performance, giving a 10% underlying production growth. The impact of lower crude prices was partially mitigated by lower costs and lower discounts to the Brent prices. However, we also saw higher European gas prices in Norwegian kroner. Adjusted OpEx and DD&A per barrel were down 10% compared to third quarter last year, reflecting increased cost efficiency in our operations.
DD&A costs per barrel increased 1%, reflecting higher depreciation as we ramp up production on new fields such as Gudrun and Valemon. Moving on to DPI, that was challenged by the tougher pricing environment in third quarter. Adjusted earnings moved from a small loss in the second quarter to -NOK 4.2 billion this quarter.
The negative results in US dollar is furthermore impacted by the US dollar NOK exchange rate development. We are not pleased with these results and are very focused in our actions to improve. To improve profitability, we have worked hard on reducing costs. Year-on-year, we see a 22% reduction in adjusted OpEx and DD&A per barrel in US dollars. These cost improvements are important contributions in a challenging oil price environment and shows that our efficiency efforts are paying off.
DD&A per barrel in US dollars has been reduced by 17%. Underlying production was up 4% as operating momentum is progressing in a very positive way as we continue to shift to more attractive areas. MMP has changed its name, but hasn't changed its ability to deliver strong earnings. Adjusted earnings were up 36% to 6 billion NOK. After tax, adjusted earnings increased by 83%.
The main driver for the strong results has been continuous high European refinery margins. High reliability at our refineries has put us in a position to take advantage of this high margin environment. Liquid trading have delivered strong results across the board and is benefiting from continued contango in the oil market. Downstream activity is normally in a lower tax environment compared to upstream. In this quarter, we see high after-tax contributions from this part of our business.
Moving to the next slide, financial results. As we have seen, these group figures include the benefit of strong operational performance and continued progress on costs. However, these were not sufficient to make up the reduction in prices year-on-year, with Brent prices down by more than 50%. At group level, our net operating income is NOK 7.3 billion, excluding adjustments of NOK 9.4 billion.
Let me take you through the adjustments. First, net impairment charges of NOK 4.8 billion, mainly related to exploration assets and unconventional assets onshore in the international segment. Second, provisions from disputes of NOK 3.3 billion and net other adjustments of NOK 1.3 billion. We reported adjusted earnings of NOK 16.7 billion. That was down 46% from third quarter last year, mainly reflecting the lower price environment.
Effective tax rate at around 78% was higher than last year due to the losses in the international upstream, which tends to have lower tax rates. Overall, we report adjusted earnings after tax of NOK 3.7 billion. We move to the slide on cash flow 2015. Despite the pressures from oil in the 50s, we are pleased that we remain close to neutral on free cash flow early year-to-date after dividends.
This includes proceeds from divestments of around NOK 27 billion. We are seeing resilience in our cash flows and the benefits of exercising flexibility in our capital spending. On top of this, we have strong underlying production efficiency and lower OpEx and DD&A per barrel in local currency. We will be updating the outlook in February next year. Our adjusted net debt to capital employed was 24% at the end of third quarter.
This is a small increase from second quarter due to currency impact and a small increase from impairment. What about the outlook for 2015? We move to the last slide in my presentation. We have positively revised all elements of guidance for 2015. First, capital spending is reduced by a further $1 billion to around $16.5 billion.
This is down 8% on the $18 billion guided in February at our Capital Markets Update, which was in itself a 10% reduction on previous plans for 2015. There are several drivers. We are making better progress on the improvement initiative. We are prioritizing the use of capital very strictly. We are starting to see some impact of cost deflation, and the weaker NOK also contributes as some of the NCS CapEx has NOK as underlying currency.
Second, we expect organic growth of over 3% in production this year. This is ahead of the 2% we said in 2015 and 2016. This is, as before, based on 2014. It is adjusted for divestment and reflects high production efficiency, lower impact on maintenance, and higher flexible gas volume. Third, the impact from maintenance is reduced to 40,000 barrels in the year and to 15 in the fourth quarter.
Last but not least, we expect exploration spend to total around $3 billion in the year, down from our guidance of $3.2 billion in February. We will drill a similar number of wells as expected, but with greater efficiency. To conclude my presentation, we see the imperative for continued improvement. We are taking action, and I look forward to providing a more detailed outlook at the Capital Markets Update February fourth next year. With that, I ask Peter to take us into the Q&A part of the call.
Thank you, Hans Jakob. With that, we'll open up for questions, and the operator will explain how to register. In the interest of time and fairness, I ask everyone to keep to one or absolute maximum of two questions. If there are any outstanding questions, there may be time to come back later in the call, or we can follow up directly in investor relations. With that, Operator, can you open up for questions and explain the process? Thank you.
Thank you. If you would like to ask a question at this time, please press star one on your telephone. That's star one on your telephone. We will pause for just a moment to allow everyone to signal. We will now take our first question from Michael Alsford from Citi. Please go ahead. Your line is open.
Thanks for taking my questions. I have two questions. Just firstly, on the priorities of the company, could you confirm, you know, in terms of priorities, whether you're willing to perhaps go above your gearing framework of 15%-30% in order to maintain the dividend policy of the company?
You know, where do you see perhaps the level of gearing that would perhaps mean that the dividend becomes more at risk if the macro remains weak? Then just secondly on the international E&P business, could you give some color as to what drove the further impairments since second quarter in the U.S. onshore, and what was the driver behind the reversal of the impairment on the offshore assets in the Gulf during the quarter? Thank you.
Thank you, Michael, for asking that question. First to the dividends. There's no change in policy, and we have strong commitment to our dividend policy. We see this as a confirmation to our financial discipline. We have guided on 15%-30% gearing, and we said that that's not a sacred band. If there are M&A opportunities coming up, we might look at that, but with a plan to be within the band.
The dividend policy remains firm. Impairment, looking at the impairment, we explained that we have a net of around $5 billion. The reason for the dividends, Ørjan Kvelvane could take us into. We do not comment on specific assets, but as I understand, this is the question around the Gulf of Mexico and the impairment figures.
Yes. You had a question on onshore, the driver for the impairment, and that is mainly market effects that, as you see, the forward prices of liquids are going down and that also impacts on the onshore. On the offshore, yes, there are negative market effects as well, but there are asset-specific improvements. As Hans Jakob Hegge commented upon, we are working hard on improvements, and at some point in time, we take some specific improvements into the models. This time that has a very positive effect, and that is the basis for that reversal.
Okay, thank you.
We will now take our next question from Haythem Rashed from Morgan Stanley. Please go ahead. Your line is open.
Thank you. Good afternoon, and thank you for the presentation. Two questions from my side. Firstly, on the international business, I wondered if you could just spend a little bit of time talking about how exactly, and what are the sort of things that are being done to turn around some of the weakness in the results here. Because as you highlight, costs are coming down already quite a lot. DD&A per barrel is also down. Is there a lot more on the cost side that you can do over and above that 22% that you think can help drive a better result there?
Secondly, my question sort of semi-related to this, given the tax impact of the loss in the U.S. over the quarter, is there anything you can say about Q4 and tax rate guidance over the next couple of quarters? Is there, should we expect the tax rate would remain quite high over the next couple of quarters if the international business continues to underperform? Thank you.
Thank you, Haytham, for asking that question. DPI or the international had a loss of NOK 4.2 billion in 3Q prior to tax. As you know, we are structurally more exposed to the oil price than DPN. We see significant improvement in the controllable elements, such as OpEx and SG&A that were down 22% year-on-year. The DD&A is higher in NOK, but down 17% year-on-year per barrel in US dollars. The production growth is 4% corrected for divestments. We also had some 3Q specific elements as part of the international results. Moving to the tax rate and four quarters, Svein, would you answer that question?
Yes, I can give some reflections around the tax rate for the international segment. As we have also explained earlier, is that it's the earnings composition in the different countries that will have an impact on the tax rate. Because we are in some countries, we have a positive contribution, and in others where there are less contribution, there are also often lower tax rates, and that will imply that the tax rates can vary a bit. So that you should also expect that could happen also going forward on the tax rate for the international segment.
Thank you. Hans Jakob, if I could just quickly just clarify the first part. Are you saying that if oil prices remain where they are now and oil and gas prices remain sort of at similar levels, that ultimately sort of the profitability in the international business is unlikely to improve dramatically from where we are at the moment? Or perhaps you could just sort of explain, is there sort of more that can be done on the cost side, even in this sort of oil price environment that would mean the sort of losses that were made in 3Q could be sort of reversed?
No. There were some specifics in the quarter, and as the improvement efforts move along, you could see a positive contributions from the internationals moving forward.
All right. Thank you.
We will now take our next question from Oswald Clint, Sanford C. Bernstein. Please go ahead. Your line is open.
Thank you. Yeah, can I ask a question on the U.S. onshore portfolio? I wonder if you could give us some more specifics in terms of kinda drilling cost reductions and the OpEx reduction in that side of the business, just so we can kinda compare it with some competitors. That would be useful. Thank you. Then maybe a question on that Aasta Hansteen and Mariner. I guess it is unusual to see projects going up in cost these days. Could you just explain a bit more thoroughly what exactly has happened there? Thank you.
First, on the U.S. onshore business, we are working hard on the improvement program, taking out synergies from reorganization. We also have some restructuring costs and layoffs, so we are working on improving the business, extracting the learning from the various assets. We compared to peers, we see very encouraging progress and results.,
Moving to Aasta Hansteen and Mariner, as we have announced, we have postponement of one year. One of the reasons for the project delays is engineering equipment packages and capacity and additional consequences. On Aasta, it is a 9% increase. The CapEx is up NOK 2.8 billion, and there's NOK 2.4 billion in currency. On Mariner, we announced a 10% CapEx increase.
This has negative impact on profitability in isolation, but we are working from a portfolio of more than 40 projects. Not to forget, we have had three discoveries this year adding volumes to Aasta and improving the economics.
Okay. Good. Thank you.
We will now take our next question from Jon Rigby, UBS. Please go ahead. Your line is open.
Yeah. Thank you. Two questions, please. The first, you referenced some number of issues of what was driving your lower CapEx figure. You had some significant success in driving down OpEx, which, if you listen to other companies, seems to be the more difficult thing rather than CapEx.
You referenced cost deflation, but you seem to say that there wasn't significant cost deflation in the adjusted figure. Perhaps could you sort of talk a little bit more about a snapshot of where you're seeing cost deflation right now and how it might affect your CapEx into 2016, where I assume that it will be more impactful, if you could do that, please.
The second, just going back to the tax issues and, particularly, I guess, the U.S., I sense that the tax paying position is quite important here, as I understand it, because you've obviously got tax loss carry-forwards as well.
So from an accounting perspective, what's the oil price you would estimate that you start becoming theoretically tax paying, although obviously sheltering it with the tax loss carry-forwards? Somehow sort of reverse the effect that we're seeing now, which is, you know, high accounting tax but low cash and turn it around the other way. Could you give us some more insight into that?
Well, thank you for asking those questions. First on the cost savings, I'm very pleased to see that OpEx and SG&A were 50% down year-on-year in underlying currency. Looking at EPM, the OpEx were down per barrel, driven by reduced activity level, lower use of external services and overtime. As you know, I used to be an operations guy, and on Snøhvit we took prioritization.
We reduced the personnel from the suppliers, utilizing our own staff, simplifying the work processes and very strict prioritization. We've gone through some substantial changes in that respect. Our efforts are also paying off in the international as we see lower O&M costs and SG&A savings.
Well, in addition to that, one third of the cost reduction in INB comes from lower royalties. I would also like to mention the softening of the supplier market as we have more than 500 initiatives to renegotiate and rebid. We see further benefiting from a softening market in the contracts awarded.
Maybe it's a bit technical, but we also done some changes to the way we split contracts and share risks that have been made. These are some examples of cost improvements. Early on, we had a very specific question related to the prices in the U.S.?
Yes. Yes.
As I understand it, you ask about how to kind of recognize the tax loss.
Yeah
That we see in the U.S. The accounting rules are pretty strict because you need to see that you have utilized the tax loss carry-forwards before you kind of start to recognize this in the tax asset again. If you cannot see that in the near term that you have utilized all the tax losses, then you're not allowed. I don't think I will be specific when we see or when we believe that will happen. We are not in a position where we have utilized that to defend having a tax asset in the balance sheet right now.
Okay. Hans, can I just come back to you on the cost question? Just would it be reasonable to conclude that you obviously have sort of greater velocity around OpEx than you do around CapEx. Would it be reasonable to conclude that 2016, 2017 will begin to see some of the flavor that is clearly evident in the OpEx trajectory in your CapEx trajectory? Will we see some of the clear benefits being driven through OpEx right now contributing to even further sort of optimization benefits in CapEx?
Well, what we guided on at the CMU is on CapEx side in 2017, 2018, you have $5 billion-$7 billion in flexibility. I think we demonstrated today and this year that we are using the flexibility and we'll come back on these issues at the CMU in February next year.
Sorry to pursue this point, but obviously the world is changing very rapidly. I was just trying to sort of get some color on sort of thinking between February of this year and now, given your experience with the success around the OpEx. Is this that a theme that we could expect to be expanded upon the CapEx outlook next time you revisit that?
Well, what we have estimated our outlook today and made some changes as announced, and we have given examples of that. Another example, maybe a last one in this round is also the staffing levels. We just did changes in the U.S. We used to be a 25,000-employee company. We are just about 22,000 at the moment, and we expect to be just below 21,000 in 2016. That's just another example of the dynamics.
Okay. All right. Thank you.
We will now take our next question from Teodor Nilsen from Swedbank. Please go ahead. Your line is open.
Good afternoon, and thanks for taking my question. I have two questions. First on Troll. The gas production at Troll has been very strong over the past few quarters, and I guess that does not represent a normalized production control. Could you please indicate what we should assume as a normalized production for Troll going forward?
Second question is on impairments. Over the past few quarters, you have booked pretty substantial impairments, in particular related to the North American business. Assuming that the forward curve increases by $10 per barrel, how much of the impairments would you be able to reverse?
Well, thank you, Teodor, for asking those questions. Troll is in my heart as I used to be the operations manager of Troll some years back. What I know from Troll and Oseberg is that it is our flex gas fields. I think we've made good decisions to defer production in 2014 to this year due to the stronger prices in the European gas market.
We've utilized that as a part of the volume over volume strategy. Moving forward, we do have this flexibility, but it's too early to say on the production of gas from Troll due to uncertainty about the market price. To your second question, impairments, North America going forward. This is quite dynamic. We have done impairments.
We do also reversals, and this is part of, to some extent, changes in the forward curve, but also the modeling around fair value or looking at a market which in some instances are there, in other instances we have little activity and a few reference points. These are dynamic considerations for triggering impairments and reversals.
Okay, thank you.
We will now take our next question from Rob West, Redburn. Please go ahead. Your line is open.
Hi there. Quick question from me is really on the international realizations. Just to get a sense of, was there any one-offy factor like a underlift coming into the realizations in your DPI segment this month? Or anything more persistent like challenging realizing full value for any particular volumes, any particular region that you think could last into future quarters?
Then secondly for me, you know, we've got the CapEx budget going down by $1 billion as announced this morning. Could you just say something around a potential fear maybe that some investors might have that, you know, maintenance is what's getting cut as part of that reduction? Anything you could say around that would be great, particularly if it's reassuring. Thanks.
The first question, thank you, Rob. The first question about one-offs in the international, there are some one-offs. One example is the restructuring costs in the U.S. On the CapEx, drivers for the reduced CapEx is, as you know, we moved from $18 billion, that was a cut from $20 billion last year. To $17 and a half billion last quarter, to $16 and a half billion this quarter. We are making better progress on the improvement initiatives. We are definitely doing strict capital prioritization.
Sorry, I'm not sure if my line is still open. I meant specifically on the realizations, so the revenue per barrel metric.
Svein, would you fill me in on that one?
I can fill in on that one. If you look at the realized prices then for the international segment, you see on the oil side that it has been down around $40 per barrel. We are then exposed to several markets for oil production, some with very light, including those things, getting a good benefit.
We're also then producing some fields with heavier quality which have a higher discount in the current environment. On top of that, we are also then having quite a bit of liquid production from the U.S., which is then exposed to a different market onshore than we have for the rest of it.
If you look then at the gas price, you could also look at that one. This quarter compared with the last quarter, in the international segment last year, we had Shah Deniz as a producing entity impacting the gas price. Now we have some gas production from Algeria. Rest of the gas production is coming from U.S. and is then much more exposed to the Henry Hub, which in this quarter, the Henry Hub price was in the two-ish.
Okay. Can we do the next question?
Our next question is from Anish Kapadia, TPH. Please go ahead. Your line is open.
Hi. Good afternoon. Yeah, a couple of questions, please. Just firstly on U.S. onshore, I was just wondering at current oil and gas prices, do you see the need to reduce activity further? Kind of on the flip side of things, what kind of oil price, what kind of gas price, do you need to start adding rigs back in the likes of the Bakken and the Eagle Ford?
Secondly, I just wanted to get somewhat of an update on your potential FIDs, the timing of these, if so they are indeed still planned. Just on, I suppose, some of the key projects, Johan Castberg, King Lear, Bressay and Tanzania LNG. If you can give some dates around those, if you're still planning to go ahead with them. Thank you.
Thank you, Anish. To the U.S. onshore oil and gas prices and the need for reduction in activity, we are working hard on improving the business. As I said, we've reorganized the business. Torgrim, the previous CFO has been quite actively reorganizing, doing some staff reductions, moving activity to Austin and trying to extract synergies from the various fields and a more standardized way of affecting the learning.
On Bakken, we have quite a high share over production, and we have taken down the rigs. We also look at utilizing the flexibility in the U.S. business in order to adjust to the current price environment while continue to improve our operations.
Looking at the potential FIDs and timing, we have quite a long list of projects. We try to improve on the projects. Johan Castberg is a project that I know quite substantially about from my previous role. It is very rewarding to see overall that in this bucket of portfolio we have been able to take down the break-even prices substantially.y
Johan Castberg in particular was around $80 break-even at a point. We've said that it's around $60, and we continue to improve it, and we won't sanction it until we've actually seen that we've taken all the benefits. We have some updated lists on those projects. Castberg in particular is estimated production start late 2022 as an example. I can't go into all the details because we have quite a long list.
Thank you. Just clarifying on the first question. At current oil and gas prices, given the improvements you've seen in cost and CapEx, you don't see the need to cut activity any further. Is that correct?
Well, we're taking it a little bit down while we're improving on it, but we have further flexibility. We also have the opportunity to scale up when prices are having a rebound.
Thank you.
We will now take our next question from John Olaisen from ABG. Please go ahead. Your line is open.
Good afternoon, gentlemen. Two questions for me, please. One, at the CapEx update in February this year, you said that you expect to have free cash flow that will cover the current dividend in 2016 with oil prices at $100.
Since then you have cut the CapEx and exploration for 2016, and operating costs as you highlighted for 2015. I just wonder if you could update us on that free cash flow to cover dividend at what oil price is at now for 2016, please.
Well, well, we've done an update on the outlook today, and we'll revert to this issue at the CMU next year.
Okay. My second question is on gas demand in Europe. One thing is your production irregularity, but I guess the main driver of your gas production and sale is demand from Europe. Sorry, in year-on-year gas production from you guys in Q3 was up roughly 20% compared to Q3 last year. I'm just wondering what is going on. Is it higher gas demand from Europe? Or is it lower supply from other suppliers of gas into Europe?
Well, we get quite a few questions on the European gas market, and we've seen good prices. We have produced flex gas, and it's a sign of our value over volume, as I said. We do see volatility in the European gas market moving forward, but we also see some reduced volume from European producers, UK and Groningen as an example.
There's nothing changed from the European gas demand? Is it improving or how about Russia? Just, if I may, just follow up, please.
Pretty stable.
Okay, thanks a lot.
We will now take our next question from Biraj Borkhataria from RBC. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. The first one was another tax question. On cash taxes, they were particularly low again this quarter, which is one of the reasons that helped your free cash flow generation. I was just wondering if you could remind us of the schedule of payments for each year in terms of how much cash tax is paid each quarter.
The second one on the midstream, you've guided well another strong result today, and your old guidance was NOK 3-4 billion per quarter. I was wondering if that is still relevant going forward and heading into 2016. Thanks.
Regarding the tax payments, as you saw in the quarter, not that high, compared with earlier one. As we also do, since we only have one installment in the third quarter in the taxes from Norway. We had a payment of an installment the first of October.
That's why we then included half of that one in our net debt ratio calculation. We paid one installment, first of October, and then we will pay the final installment for this year at the first of December. I also want to remind you that during the year, the first half of the year, we paid the taxes coming then from the results in 2014.
In the second half of the year, we are paying the taxes then coming from 2015, and we will pay the last half of those 2015 taxes in the first half of 2016. That's also why the taxes have come down compared with what we saw in the first half.
On the Midstream guidance?
The M&P business has traditionally been between $2 billion and $4 billion. It is strong refinery margins, high regularity, and we are not changing the guidance on the M&P.
Thanks very much.
We will now take our next question from Lydia Rainforth, Barclays. Please go ahead. Your line is open.
Thanks, and good afternoon, gentlemen. Two questions, if I could. The first one, just to pick up on something in answer to one of the earlier questions around the gearing levels and it not being a sacred band in the event of M&A activity. Can you talk through what the hurdle criteria would be for any M&A options that you would look at?
The reason I ask that is when I look at the impairments over the last 12-18 months, it does appear that the impairments that have been taken have been primarily in assets that have been acquired. I just want to make sure that whether you're looking at the M&A activity in comparison, being competitive with your own internal options. The second one was actually just more, Hans Jakob, for your reflections on what you found as CFO in the last sort of 2-3 months, and have there been any surprises within that you found since you started? Thank you.
Well, thank you, Lydia, for asking those questions. Tempting to go into detail on M&A, but I'm not going today. We haven't seen a very active market on the M&A, but we are definitely looking at it. If we are to close the deal, we will comment on the announcement. That's as far as I get on the M&A. When it comes to the impairment, it is certainly a dynamic issue.
The net impairment is of around NOK 5 billion, mainly exploration assets, this quarter. As the forward price is down 16% from Q1 and 20% from Q2. The prices, yeah, you always get the prices. The high level of engagement around the improvement activities is very rewarding to see throughout the organization. We see more and more examples coming up on improvements. That is, of course, good for a CFO to notice.
Thank you.
Could I just say that we've got around 10 minutes left. I'm not sure we're gonna be able to get through all of the questions. For those who are unable to take those questions, we'll certainly follow up after the call, and we'll take any questions directly through to Hans Jacob offline. Can we move to the next question, please?
Yes. We will now move to our next question. Please go ahead. Your line is open. Mehdi Ennebati, Société Générale.
Hi. Good afternoon, all. Thanks for taking my questions. Two questions, please. The first one on your production guidance for 2015. You say your 2015 equity production should increase above 3% year-on-year rebased, sorry, from divestment. To get this 3% or even 4% production growth, you have to post a very low production in Q4 compared to last year's.
Should we then consider a very low growth production in Q4 2015 maybe because of low natural gas prices? Or are you just overly cautious and we should expect your Q4 production at a kind of normal level, which would mean a year-on-year equity production growth of maybe 5-6%? The second question regarding your U.S. natural gas production.
Currently, Henry Hub is more or less $2 per MMBtu. You highlighted in the recent past that integration of your natural gas business, meaning in U.S., meaning upstream plus midstream, allows you to face a low Henry Hub price. I just wanted to know if at the current Henry Hub price of $2 per MMBtu, you are free cash flow positive regarding your U.S. natural gas integrated business. Thank you.
Well, thank you, Mehdi, for asking the questions. On the production guidance for this year, we said above 3%. It's of course dependent on the natural gas market and the attractiveness of using more flex gas. To the U.S. natural gas, as I said, we are adjusting the activity a bit, and we do have flexibility moving forward, and we are of course following the prices very closely.
The issue of adjusting flexibility in U.S. nat gas, let's say, it probably means that you are net free cash flow positive at $2 per MMBtu?
If I may add a bit there as well because we have the income in the G&P, the US results in itself. As you might have also seen from our MD&A, if you look at the disclosure in the back there, the natural gas had then also a positive result of approximately NOK 0.4 billion. On top of that, we also get some income from the gathering system coming into it.
What you also typically see in the US is that there is more seasonality there. We are taking benefits then from sending the gas up to Toronto as one example, and also into Manhattan. Manhattan typically has then a higher margin in the fourth and the first quarter. You also need to take that into consideration and not only the Henry Hub in itself.
All right. Thank you very much.
We will now take our next question from Torbjørn Kjus, DNB Markets. Please go ahead. Your line is open.
Yes. Good afternoon. Thanks for taking my question. I was wondering if you could comment a bit on the other post under Adjusted Earnings, NOK 700 million. A little bit on what's behind that post, and also how should we think about that going forward? Thank you.
Ørjan, comment on that?
Yes. NOK 700 million is consisting of the New Energy Solutions segment and also the technology and project department and other corporate staff. The main part of the NOK 700 million is from the New Energy Solutions and TPD segment. It's around the trend that you have seen, that is the normal level for that area.
Okay. Secondly, if I may, on the CapEx, you mentioned a couple of factors there, affecting the lower CapEx. Could you give some color on how much of the lower guidance is related to the foreign exchange, and how much is related to the lower activity and efficiency improvements?
Yes. There is a limited currency impact from 2Q. We are definitely starting to see some impact of cost deflation. As I said, we have strict prioritization, and are making very good progress on the improvement initiative, so limited currency impact from 2Q.
Okay, thank you.
Can I just intervene before we go to the next question? We've still got a few callers left who have a question. In the interest of time, so we get through to everybody, can I ask people to keep that just to one question each for the remaining questions, and then we will follow up with anything else after the call. With that, can we move to the next caller? Thank you, Idal.
Our next question is from Marc Kofler from Jefferies. Please go ahead. Your line is open.
Afternoon, everyone. Thanks for the presentation. I just had a quick question, again, coming back to the production guidance. I noticed that you haven't changed the 2% target from 2014 to 2016, despite the increase on the 2015 guidance. I was just wondering, if that 2% now in light of what we've seen year-to-date, is that conservative? You know, how much credibility should we be assigning to that 2%, based on the volumes year-to-date? Thanks.
Thank you, Marc. Hopefully we'll meet at the Capital Markets Update in February, and we'll revert to that.
Great. Just following on, can I ask, you know, just as a guide from here, perhaps for next year, you know, for the total group, could you say if, you know, production might be flat, up or down perhaps?
Depends on price development. They're flex scale.
Okay. Thank you.
We will now take our next question from Ilkin Karimli , Credit Suisse. Please go ahead. Your line is open.
Good afternoon. A quick one from me. Can you just remind us what kind of gas prices, your operating cash flow guidance, for 2017-2018 is based on, both in Europe and the U.S., please? Thank you.
What we said at the Capital Markets Day in February, and we gave the guidance on the $60-$80 and $100 on the oil price. We did not have a specific disclosure on the gas price for Europe and US.
Okay, thank you.
We will now take our next question from Nitin Sharma, J.P. Morgan. Please go ahead. Your line is open.
Thanks, gentlemen. Coming back to that question on dividend. You reiterated strong commitment to dividend policy. Now, that policy promises growth in cash dividend in line with long-term earnings. If we then factor in the lower oil price environment, it obviously means underlying earnings outlook has come down.
Given this background, could you maybe clarify, is there a commitment to a DPS number? Or no matter what the oil price is, you are promising to maintain the DPS, or will it likely change as the environment is changing? Thank you.
Well, thank you, Nitin, for repeating our dividend policy. We are talking about long-term trends, and we are sticking to the policy.
Thanks.
We will now take our next question from Brendan Warn, BMO Capital Markets. Please go ahead. Your line is open.
Yeah, thank you. It's Brendan Warn from BMO Capital Markets. Just one question, considering the timing. Just in terms of Aasta Hansteen and Mariner, just can you tell us your confidence level that, and can just step through what have you done to fully contain the schedule and budget creep, or are we expecting further delay? Just in terms of the 40 projects, what's the risk then to other major projects, such as Johan Sverdrup?
Well, thank you for asking that question, Brendan. Aasta Hansteen is two of more than 40 projects, but important to us. Aasta, we'll have a start of second half 2018. We have with Mariner a start of on the second half of 2018. We have several measures to make those projects robust, but I won't go into detail on those. Besides that, we work hard on the revised schedules and the improvement measures. We stick to our plans, revised plans for second half 2018 for both of the projects.
Considering you haven't reiterated the CAGR production growth 16-18, do I assume that's at risk because of this delay?
We're not commenting on that. The production guidance for the future is a CMU theme next year.
Yeah. Thank you.
No change today.
We will now take our last question from Hamish Clegg, Bank of America. Please go ahead. Your line is open.
Thanks very much, guys. Best to last, I guess. I've got a very simple question for you. What is the break-even gas price in the U.S. for your Marcellus business?
Svein, would you finish?
I can finish. I will not go into exact numbers on it, but because it's also dependent quite a bit, which kind of acreage you are in. You have some acreage that are extremely competitive at very low prices and then there are other areas that needs somewhat higher price.
You need also to take into consideration the midstream and the gathering system that is extremely important and can create significant value. Because as we look at the position that we have there, and we see it as a value chain project, and then linking both of them together, and then taking benefit from the market, both in, as we have done, this quarter in Toronto, and also the Manhattan pipeline that we're having.
Do you know what gas price you break even at?
We will not. We are not prepared to disclose that one.
Okay. Thanks.
Okay. Well, with that's the end of the questions. Thank you very much. We have to close the call after an hour. Thank you, everyone, for participating. Please feel free to follow up with IR for any questions that you may have. I look forward to seeing many of you in the near future and definitely again, I hope in the fourth of February at our Capital Markets Day next year. Thanks again, everybody. Thank you.