Welcome to the OMV Group's Conference Call. You should have received a presentation by email. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio webcast is available on OMV's website. At this time, I would like to refer you to the disclaimer, which includes our position on forward looking statements.
These forward looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward looking statements. OMV disclaims any obligation and does not intend to update these forward looking statements to reflect actual results, revised assumptions and expectations and future developments and events. 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 Graeger, Head of Investor Relations. Please go ahead, Mr. Graeger.
Yes. Thank you. Good morning, ladies and gentlemen. Welcome to OMV's earnings call for the Q1 2020. With me on the call are Rainer Seele, OMV's Chairman and CEO and 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 2 gentlemen are available to answer your questions. And with that, I'll hand it over to Rainer.
Yes. Thank you, Florian, and a very good morning, ladies and gentlemen, and thank you for joining us today. Looking into the Q1 of 2020, it was influenced by 2 significant effects, the shock and oil supply and the global COVID-nineteen pandemic. While the upstream business was substantially hit by the collapse of oil prices, the downstream business benefited in the Q1 from lower feedstock cost and showed a strong performance. The negative impact from COVID-nineteen on demand was in the Q1 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. Passioned by a strong start into the year, the Brent oil price still averaged $50 per barrel in the Q1 of 2020, a decline of 21% versus both Q1 and Q4 of last year. However, the average price mask, one of the most volatile quarters in history. The simultaneous shocks to supply and demand driven by the failure of OPEC plus to agree on production cuts and the coronavirus pandemic caused a dramatic collapse of oil prices during the quarter. Rent 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 Q1 with 6 spot prices 18% lower quarter on quarter and 45% below the previous year's level. The warm winter for storages at the beginning of the season increased supply due to the ramp up of LNG capacities as well as a 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 Q4 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 €699,000,000 a decline of only 8% versus the prior year quarter. The substantially lower upstream result impacted by a materially weaker market environment and high 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 €838,000,000 which is a decrease of 30% compared to the Q1 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 run at a very high rate of 94% and this despite the significant decline in demand in the second half of March.
In the Q1 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.
The purchase price of $4,680,000,000 is to be paid in 2 equal tranches now, The first at closing, which is expected by the end of this year and the second no later than the end of 2021. Based on the new shareholding, OMV is entitled to 75% of the dividends distributed after 2019. Let's now cover more details concerning our financial performance in the Q1 of 2020. Our Clean CCS operating results decreased by 8% versus the prior year quarter and Upstream earnings were 65% lower year on year, significantly impacted by weak oil and gas prices. Downstream earnings were up 30 4% compared with the prior year quarter benefiting from healthy refining and petrochemicals margins as well as positive contributions from sale of CO2 certificates and middle distillate hatches.
The consolidation line was positively impacted by the reversal of intersegmental profit elimination recorded in the Q4 of 2019. Moreover, the weaker oil price environment resulted in lower intercompany profit eliminations in the Q1 of this year. The clean tax rate amounted to 33% and thus remained at a similar level as the previous year quarter. Clean CCS net income attributable to stockholders decreased by 9% to EUR 316,000,000 Clean CCS earnings per share came in at 0 point 97 dollars Let me continue with the performance of our 2 business segments. Compared to the Q1 of 2019, the Upstream Clean operating result decreased by €256,000,000 to €137,000,000 mainly due to weaker prices.
Market effects had a negative impact of €235,000,000 a reflection of substantially lower oil and gas prices. OMV's realized oil price decreased by 22% in line with Brent. While the SEK 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 and Malaysia recorded a lower decline than European prices. The 470 2,000 barrels per day production was basically flat compared with the Q1 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 1 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 Q1 of 2019, there was 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 €38,000,000 compared to the Q1 of 2019, mainly due to reserves revisions in New Zealand and the reclassification of the Murray field as asset held for sale. In downstream, the claims CCS operating result rose by 34% to €501,000,000 due to higher contributions from our petrochemicals, retail and gas businesses. The one off effect from the sale of CO2 certificates and margin hatches supported the results in the Q1.
The higher refining indicator margin and slightly higher petro impact from unwinding a portion of our middle distillate hatches, 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 experience 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. Commercial business increased also year on year due to higher margins and showed a better performance than the strong Q1 of last year when OMV benefited from local supply shortages. At a chemical's results rose by 32% to €93,000,000 supported by healthy volumes and lower feedstock costs.
Contribution from Borealis decreased by €18,000,000 to €54,000,000 mainly attributable to a lower result from Barouche due to weak market conditions in Asia. The demand for polyolefins in Europe was still healthy during the Q1 with increased which increases in sectors like health, personal care and packaging. Sales and automotive declined at the end of the quarter. The 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 €7,000,000 The result was negatively impacted by the weak market environment in Asia and the extensive turnaround of the Ruhweis refinery from beginning of February until mid April.
The FCC plant has been restarted successfully and is currently running stable. Contribution from the gas business grew by 18% to €92,000,000 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 €838,000,000 This includes dividends from Borealis of €108,000,000 €34,000,000 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 €283,000,000 In the prior year quarter, net working capital effects led to an outflow of €330,000,000 As a result, cash flow from operating activities increased by 29% to €1,100,000,000 Organic cash flow from investing activities amounted to €527,000,000 The organic free cash flow before dividends increased by 42 percent to €594,000,000 primarily as a result of the positive net working capital effects. The cash outflow for inorganic investments was €114,000,000 ONV's balance sheet remained very healthy and showed strong liquidity with a cash position of €2,800,000,000 at the end of the Q1. Net debt, excluding leases, decreased to €3,200,000,000 Consequently, our gearing ratio excluding leases declined to 19%. In April, we issued 3 tranches of senior bonds totaling €175,000,000 a 4 year note of €500,000,000 with a coupon rate of 1.5 percent an 8 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
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 Gasconnec Austria. We have already opened the data room and the due diligence process is in progress. For the 2nd 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 Marifield in New Zealand by mid of this year.
Let me now 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-nineteen 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 a 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 oil 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. ADKAM margins have recovered from the low levels of the Q4 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, 470,000 barrels per day in 2020, depending on the security situation in Libya and potential imposed production cuts by governments.
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. Hydrochemical demand is still healthy, driven by packaging, health care and cleaning products. This is partially offset by weaker demand from the automotive and construction sector.
Some refiners have already been forced to shut down, especially those that do not benefit from integration into petrochemicals 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 work at the Schwechat and Petrobras refineries will be postponed to June Q3. Retail and commercial margins are predicted to be at the prior year level.
The claim 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 clean CCS operating result of €4,000,000,000 envisaged at the Capital Markets Day in March 2020 2018, sorry. Ladies and gentlemen, in the Q1, we have only seen the first still rather limited impact of the current crisis. We assume an extremely challenging market environment for the Q2 and most likely also for the Q3 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 €200,000,000 This means CapEx for the full year 2020 will be reduced to below €1,800,000,000 a cut of more than 25% compared with the originally planned €2,400,000,000 Exploration and appraisal expenditures will be reduced to around €250,000,000 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.
Yes. Thank you, Rainer. Let's now come to your question. I'd ask you to limit your questions to only 2 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 Anabati, Bank of America Merrill Lynch.
Hi. Good morning, everybody, and thanks for the presentation. So two questions. First one regarding the integrated petchem profit, which has been pretty strong this quarter. So given that net price is significantly down quarter on quarter, who do you expect the integrated petchem profit to keep increasing in the coming quarter or at least in the second quarter?
Or do you expect that lower demand and lower margins on some key products such as PCLAN, for example, are capping any potential increase in the coming quarters now? 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 that you have gas realized prices in those countries to decrease significantly due to some time lag impact, for example, or lower demand or emitting gas?
Or do you expect them to remain resilient compared to the European prices? Thank you.
Mehdi, your first question on the integrated padcam. My view on padcam for the second quarter, I'm expecting and what I do see right now in the market is that petchem margins stay healthy in the second quarter. So the first quotes you can see in The petchem business right now is benefiting from the high calls, volume calls from packaging. This will continue into the Q2. And as the corona crisis is asking for more hygiene standards, especially the polypropylene, So the propylene will benefit from that because the masks which are produced are based on our polypropylene.
So looking to the Q2, I would say Pat Cam looks good in the Q2. 3rd quarter, I do hope that Pet Chem 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 petrochemical coats, the steam crackers, especially which are backed by calls from the automotive industry are shut down right now. We see that especially the reducing the utilization in the refineries is reducing the propylene supply into the market because the FCC plant is not running with high propylene volumes. So all in all, I have to say healthy demand, I see with the C2 and C3, supply is reduced. That's my more or less 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, Mili, but the gas price in New Zealand, for example, is indexed to the methanol price partially.
So it's following a different price curve than the hub 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 Q2, my outlook for the gas price is lower than the gas price we have seen in the Q1. So you I wouldn't call an €11 per megawatt hour in a summer quarter, at least not. But if you look into gas trading business, in the Q2, we also will benefit from the summer winter spread in storages.
All right. Thank you very much.
We now come to Michael Alsford, Citi.
Good morning. Thanks for taking my questions. I've got a couple, please. I appreciate it's a very volatile environment, but could you perhaps give some guidance on where you see cash neutrality in 2020 post dividends in terms of oil price? I think from my calculations, it looks like it's below $40 but I like maybe some confirmation from that.
And then just 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.
Michael, this is Rainer. Just to give you an idea about cash neutrality after dividends. 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 Q1, where you can see that we came out with a very healthy free cash flow and 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 this 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 these numbers. So therefore, I don't think it's the right measurement to do that as an outlook for the year right now.
Michael, I 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 are 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 mainly 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 quotas, which will be implemented in some regions where we are operating. So no impact from the CapEx reduction on our production forecast.
Okay. Thank you very much.
The next question is from Jason Gammel, Jefferies. Please go ahead, Jason.
Thank you very much. First question for you is, perhaps can you 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've seen there?
And it's probably way too early, but the trajectory of how that demand potentially come
back?
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 market 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 bought, we have relatively equal effect of those in a positive way to be expected also for the coming quarters. So that 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.
Jason, the retail volumes, I have 4 product groups. The jet down by 95%, gasoline down by 60%, diesel down by 30%, heating oil up by 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 percent gasoline, minus 40% diesel, minus 20%.
Heating oil while the season is not there anymore.
Thanks for that. 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 hedges.
No, absolutely not.
Okay. Thank you. Thank you very clear.
We now come to Michele Della Vigna, Goldman Sachs.
Thank you very much for your time and congratulations on a very strong set of results in a difficult quarter. I had two questions, if I may. First of all, referring to the monetization of some of your CO2 credits, I wanted to understand if 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 Q2, 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 3rd Q4? Thank you.
Michele, let me take the first question on the monetization of CO2 certificates. First of all, this impact came in Q1. There is not much more impact from that to be expected in the quarter to come. We are not specifically quantifying, but I can give you assurance that in the mid double digit effect that we double digit million effect that we have in Q1 from this. Your question was, do we have to buy certificates?
I can assure you there is beat in the western part or a beat 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.
Miguel, on inventories. Well, first of all, I think we will see another buildup of inventories, especially now in the Q2. We still have some capacities available as we speak about diesel. The main topic I would like to raise here is the specification you need to have with the different products. That's why we have highest storage capacities for diesel because the quality stays for longer.
We have only limited jet capacities, but we have changed the process structure in our refineries so that we are jets now nearly fully cracking into monomers and a little bit of diesel. Gasoline was and is still a problem. But if you remember, Mikaela, what I have said about the diesel and 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 flats and that they are going to drive as much as possible.
That's the best storage I can get.
Thank you very much.
We now come to Henri Patricot, UBS.
So everyone, thank you for the update. I've got a couple of questions on downstream as well and just following up on your comments. 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 sounded like just now that it's more done to gasoline demand rather than jet, which you've managed to reduce very substantially. So if the delta here, what pace does gas demand comes back over the rest of the year?
And secondly, on unmet refining, I was wondering if you can give us some guidance around both utilization for the year for ADNOC and also any impact on the CapEx program over there given the more challenging environment? Thank you.
Henri, pleasure to take your questions. What is the bottleneck for the 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 jabs and we are running now at the Bokhousen refinery, our petchem units on 100% utilization.
Yes, okay, I'd 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 chat. If we look into the refinery in Austria and it's also the case partially in 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 will come back, especially when the borderlines are going to be opened. Then diesel demand will come back earlier. So on ADNOC Refining, RK, 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 2 months For the second half of the year, we estimate that the refined that the utilization rate 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 a Papa guy already. It 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.
Okay. That's it. Thank you.
The next question is from Josh Stone, Barclays.
Hi, good morning, Jonathan. I've got 2 questions, please. Firstly, looking at the downstream result, the contribution from Petrom looks particularly strong in the quarter. I was wondering if you could 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 dryness or drying up. And I wonder 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.
Josh, regarding the Petron 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 are 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 fired 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 results in Petrom are on a continuously high level.
Josh, I like every sign of hope also with the Rhine River, but I'm afraid I'm not 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're getting less supply by the Rhine River, it wouldn't it could be easily compensated that one of the guys running the other refinery are increasing its 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.
Yes, makes sense. Thank you, Ronald. Thank you, Ronald.
Next is Thomas Adolff, Credit Suisse.
Good morning. Two questions for me, please. Firstly, just on production. I understand the Libya part, so going from $500,000,000 to $470,000,000 I understand directionally why it might be lower because of the OpEx plus cuts. But it's quite a big cut from the 4.70 to 4.40 potentially.
And UAE contributed 22 kilobytes D in the Q1 and otherwise you produce a lot of gas in Malaysia. So perhaps you can talk about your bear case of 440 and where these cuts are coming from, please? And then secondly, going back to ADNOC, you received a dividend of €34,000,000 And I wondered whether you can comment on the €34,000,000 Is it a semiannual, quarterly dividend on last year's earnings presumably? Or what's the dividend policy? Why this $34,000,000 Thank you.
All right, Thomas. Thanks for your question. Well, working on the 440,000,000 of course, you're right. Libya is good for 35,000 barrels per day. That's what we have produced in 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 reduced reduction also in Malaysia. We will 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, a natural decline, which is coming and 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, I also gave a range in Romania between 3% 5%. We're expecting that we also will see cuts coming up coming in Norway. Now I'm talking about the lower, the bottom line, the 440,000,000,000, yes. We are expecting it could be. This is a little bit the kind of words I have to use when I'm saying 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, is 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 4.40 in the bottom line
scenario. Thomas, a question regarding the €34,000,000 The 34,000,000 we received here are also partly an adjustment or call it compensation or however you want, still in context with our purchase price that we paid for the participation in last year. So very honestly, I'm rather conservative on the prospect of dividends from ADNOCO Refining for this year, given that the situation that they had a large turnaround still throughout the full quarter one, that there will be topics ramping up that there is 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 a very much geared towards markets that maybe even the first ones to open up again in greater dimension. But however, for 2020, I'm there rather conservative.
So this €34,000,000 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?
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.
Okay. Thank you.
We now come to Alwyn Thomas, Exane BNP Paribas.
Hi, good morning. If I could just circle back to the Borealis acquisition. I think since you announced the acquisition, I think, generally 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, how did you ensure you paid value for it and kept the transaction at arm's length?
And just how you manage that sort of complex governance relationship with Mubadala? And I guess secondly, just a follow-up. The impact of COVID-nineteen 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.
Regarding the Borealis acquisition, as you can imagine that related party transaction OMV is clearly classified as a related party, has been under total scrutiny of former 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 the price that we are paying is a fair one. Don't forget that we have announced that there will be some €700,000,000 of synergies within the next 5 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 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 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 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.
Alvin, just wanted to comment and thoughts on top what Einhardt has said. What is the value of Borealis? We see that especially in times of this COVID-nineteen crisis. The flexibility I have explained to you in our refineries with the high utilization rate and now I'm talking about the integrated value. We couldn't run that without Berriales.
Borealis is our captive market behind our refinery even times when we can't find a buyer for jet. Borealis is a company which has a much, much broader product spectrum than other competitors who are, let's say, to a 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-nineteen, I can see a real robustness. We are not talking about like my retail network with volumes going down overnight by 50% to 80%. So what we are gaining is the flexibility, a relatively stable captive market, especially with Borealis.
I think that Borealis as we speak about their business plan also given the framework for the next years to come. I see Borealis with their business, especially as they are standing on 2 legs in Europe and in the Middle East, Asia. I think that there is a stability really coming with that. So I see that value, which is in integration. And I think given the current business environment, Borealis is performing on an impressive 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 have asked Reinhard 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 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.
So my picture tells me, well, 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-nineteen 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, but I think we are talking about nearly 2, 3 years. That's my view. What is changing is, I think people, especially in the 1st weeks, will avoid public transportation. And I hope they take their car and not their bicycle, Yes. So individual transportation just it's in the mindset of the people will get a priority.
What else do I see? I think that people and especially the industry, healthcare and packaging will benefit from COVID. Health care in each sense, doesn't matter whether we talk about pharmaceuticals and so on. And I think that especially the new standards on hygiene in daily life, yes, will determine the customer's behavior when he's going for shopping. The 3rd and last point I want to make is especially in 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 an oversupply in refining in Europe. But I'm afraid that low cost and flexibility will be even more important in refining business in Europe.
Okay. Thanks for the detailed answers.
We now move on to Peter Low, Redburn. Peter, are you still there? We can't hear you at least. Okay. Then we go to the next question, Matt Lofting, JPMorgan.
Good morning, James. Thanks for taking the questions. 2 if I could please. 1st just on the cash cycle and gearing given the sort of the near term outlook dynamics and uncertainty absorbing the Borealis transaction? And depending on, 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 the sort of limited impact on this year's production range from the lower CapEx. But given OMV's exposure to higher decline, sea basins, etcetera, what's the anticipated implication of lower spend today for future volumes into 2021 2022? Thanks.
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 are we 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-nineteen 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 will 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.
Matt,
I'm going to tell you what was my thinking when you raised the question. I thought I wish my board colleague Hans Pleinier will be here because he can give you really a solid answer in your question. So very honestly speaking, I don't have the numbers. 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 births, 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?
So there are so many ifs. But reading between your lines, I think this is not 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 2 big projects into our portfolio, which means are we going to acquire Akimov IV or V?
And do we have then the financial muscles to go for that? Secondly, are we going to take then FID for Neptune? So these are the 2 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 a question again in our next call when Hans is present. I hope he will say not so much different what I have mentioned today.
Very good. For the comments and we'll remember to ask Hans next time. Appreciate it.
Good. We give it another try with Peter. Peter, can you hear us?
Hi. Can you hear me?
Okay. Yes. Now we can hear you very clearly.
Okay. Sorry about before. Just hopefully a couple of quick follow ups. The first was just on the 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 gearing and sorry if I missed this, but can you provide a reason as to why you changed the disclosure to be a pre lease measure, that you're now looking at rather than kind of the post lease metric? Thank you.
Peter, 100 points. You catch me, yes. You made 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 side.
You're absolutely right. And my answer is yes, it's more than 80%.
Peter, on 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 a gearing target for OMV pre IFRS 16. Now the IFRS 16 is clearly the majority part of the leasing because that 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 the pre lease, this is what is including leases. So we are fully transparent on that. So we are not hiding anything from you. But why 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 off. You do not have these 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 run time is there and maturity is reached. In leasing contract, the standard forces you to attribute to your accounting the probable lifetime of that, but that does not mean the contractual. So therefore you are in a different way and therefore we think that you are much more flexible on that and that you could easily more easily shed that.
And therefore, we are seeing that the long term debt, the long term gearing is more of a relevance for us on this.
Thank you. Thanks, Matt. Okay.
Now we come to Sasikanchilukuru from Morgan Stanley.
Hi, everyone. Thanks for taking my questions. I had 2, please. I was just wondering if you could comment on the dividend, the one that's been announced for 2019 and be paid in 2020. I was just wondering if there's any risk to that 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 2 divestments that you have outlined? Is it more a first half event or it's a second half event? Thanks.
Sassy, 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's also no deviating attitude for us regarding a proposal to the even postponed AGM in autumn.
Daseke, on the 2 disposals, I was thinking, both disposals, I think we will have an agreement until year end. For the transportation for the transportation business maybe earlier because we are already in exclusive negotiations than for the region network in Germany.
Thank you. Now next question is from Bertrand Hodee at Kepler Cheuvreux.
Yes, everyone. So thank you for
Can you speak up a little bit Bertrand? We can't hear
you. Is it better now? Is it better?
A little better, yes.
Okay. So two questions, if I may. I understand that for 2020, you refrain 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 maturity points or and any, I would say, other thoughts around this projected organic capital expenditure point, whether it is CapEx number, whether this includes Boralis, Boralis being fully consolidated or not. So I just wanted to have your view on where do you see OMV in 2021 when all those dust will have settled.
And then my second question,
U. K. Natural gas is quite heavy, to say the least, right now. Do you have a view on 2021 for natural gas in Europe?
Well, to be honest, I take the question on natural gas. Well, to be honest, it depends
on the
winter. Very much it will depends on the winter. It will depend on whether or not Asia is coming back with higher consumption and less cargoes will move into European gas market. From my point of view, the gas prices in 2021, I really shall I tell you 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 in a blizzard, an ice blizzard for 3, 4 months, then it will be much, much higher.
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 at 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 1, our free cash flow breakeven oil price would have been minus $30 You can see this doesn't make sense 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 a 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.
Fair enough. Thank you.
Good. With this, we end 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.