Welcome to the OMV Group's Conference Call. You should have received a presentation by e mail. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio web cast 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.
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I would now like to hand over the conference to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Florian.
Thank you, Molly. Good afternoon, ladies and gentlemen, and welcome to our conference call on the just announced transaction that OMV and Sampura Energy will enter into a strategic partnership. With me on the call is Rainer Seele, RMB's Chairman and CEO. He will give you more details about the transaction and then we'll be happy to answer your questions. And with this, I'll hand it over to Rainer.
Yes. Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on such short notice. I'm delighted to announce that OMV signed the agreement to acquire 50% share in Sapura Upstream, a major independent Malaysian oil and gas company. We will be partner with a highly esteemed local company Sapura Energy, who will continue to own a 50% stake in Sapura Upstream.
The purchase price for our 50% stake amounts to $540,000,000 We also agreed to contingent payments of up to $85,000,000 The majority of these contingent payments are conditional upon taking the final FID on a certain commercial volumes from the license in Mexico. The new company Sapura Upstream has a total debt position of $350,000,000 That is for 100%, not for the OMV share. The transaction will be effective as of January 1, 2019. Closing is envisaged in Q1 next year and is subject to relevant approvals. OMV intends to fully consolidate Sapura Upstream in its financial statements.
Sapura Upstream will add attractive reserves to our portfolio. The total cumulative production is estimated at around 260,000,000 barrels, mostly gas. With this transaction, OMV is establishing Australasia as a new core region. The oil and gas demand in this region is expected to increase significantly in the long term. OMV will get access to growing markets and rising LNG demand in Asia Pacific.
Let me now briefly give you an overview of Sapura Upstream. The company has been the exploration production business segment of Sapura Energy, an integrated oil and gas service group based in Malaysia. OMV is thus partnering with a local operator, which is an advantage for business development. Sapura Upstream has production and development assets located in shallow waters offshore Malaysia. Patronas, Malaysia's fully integrated oil and gas multinational is a joint venture partner in all domestic assets of Sapura upstream.
The company currently produces approximately 10,000 barrels per day, mostly liquids. The 5 producing oil fields have been in operation since the early 2000s and are located close to the Peninsula Malaysia. Gas production started in 2018 and is located in the Sarawak fields. The company has several attractive gas development and exploration assets offshore and onshore Malaysia. The highest upside is coming from the gas development projects in the Sarawak Basin, SK408 and SK 310.
Moreover, the transaction will add to our portfolio exploration licenses in the Gulf of Mexico and Australia, once the recent farm in agreements have been closed. This can potentially bring additional growth in the long term, which is not reflected in our current view. This transaction is a further step in the execution of our strategy. We are focusing on producing fields and advanced development projects, which are close to production start up. We target assets with near term cash contribution and low CapEx requirements.
Sapura Upstream's production portfolio increases in the near term, driven by the gas developments in SK408 and SK 310. SK408 is a production sharing contract with Sapura Upstream is the operator with a 40% stake and its partners are Petronas and Shell, each owning a 30% stake. This project will be developed in 2 phases. Phase 1 of the project comprises of the fields Bangkok, Bakonk, Larac and Gorek. The FID for this phase will be taken in the first half of twenty eighteen.
The development will consist of unmet wellhead platforms on each of the fields tied back to a nearby facility. First gas from Phase 1 is anticipated to come on stream in 2020. Phase 2 includes the Yirom field, the largest discovery within this block. Phase 2 is expected to start production in 2023 and will boost production to 60,000 birds per day. About 90% will be gas.
OMV's financially solid position and strong skills in operating shallow water projects will support bringing these developments on stream. The majority of the gas production is transported to the Bintulu LNG Complex, the 3rd largest in the world. This LNG complex is maturity owned and operated by patrenas. The LNG is exported to neighboring growing Asia markets. Asia is the highest priced global gas region due to strong demand and typically oil index long term contracts.
The oil produced in Malaysia has crude qualities similar to tapis and it is typically sold at a premium compared to the brand price. There is already existing infrastructure near to our fields and only small additional investments are needed to tie in the new developments. Thus, the total gross capital expenditure commitments required in the 1st 5 years amount to €500,000,000 This represents the total 100% interest. Ladies and gentlemen, this acquisition is a great strategic fit for OMV. The transaction will provide OMV's access to growing Asian markets.
Gas and LNG demand in Asia Pacific is anticipated to grow substantially by 50% until 2,030. OMV takes the opportunity to capitalize on the growing market and on the increasing supply gap in LNG. We will be part of the Asia Pacific market, which the long lasting backbone for LNG trading and demand. This acquisition supports our target of a reserve replacement ratio above 100%. Sapura Upstream brings a total cumulative production of approximately 260,000,000 barrels, mostly gas.
We see potential upside to this figure from the exploration portfolio on the long term. The transaction will be timely cash flow accretive. In 2020, we expect the transaction to be already free cash flow positive. As production volumes ramp up, production costs for these assets will be in line with our target. As Asia Pacific is an attractive growing market, Sapura Upstream will represent OMV's platform for further regional growth.
Thank you, ladies and gentlemen. And now I'm more than happy to take your questions.
Okay. The first question comes from Mehdi Ennebati, Societe Generale.
Hi, good afternoon all. Thanks for the presentation. So two questions. First, regarding the price, let's say, the pricing, the EV of the transaction. Do you agree that if we consider that you take you pay $540,000,000 to get the 50% stake plus, let's say, you take half of the debt, meaning $175,000,000 plus the potential $85,000,000 payment, we are talking about an EV of $800,000,000 which is in line with what was let's say announced by Sapura Energy a few months ago.
Second question regarding the pricing of the natural gas. So you produce the natural gas. You sell it to the LNG complex facility, which makes it LNG. I wanted to know if regarding the pricing of that of the natural gas that you sell, you have a kind of correlation to the LNG price, which might go up in the following years? Thank you.
Okay. Mehdi, the purchase price is $540,000,000 for the 50% stake, correct. There is an additional purchase price a conditional payment in case we see an increase of the value. The enterprise value is 1.25 $1,000,000,000 plus $350,000,000 of debt. The $350,000,000 is nothing else than an intercompany loan from Sapura Energy to Sapura Upstream.
What we are doing is OMV is going to manage the refinancing of the USD 315,000,000 which is the 100% number. Whether this is going to be most probably an intercompany loan, therefore, as we are going to fully consolidate Sapura Upstream, it has no impact on our cash flow, no visible impact on our debt and on our gearing. Your second question, the LNG pricing is the pricing of the production at the Bintulu plant and we do have a pricing reflecting the market prices in Asia.
I mean, when you say reflecting the prices in Asia, the LNG prices in Asia, you mean?
Yes, absolutely. Yes, yes. It's LNG, Mehdi, of course.
Okay. Thank you very much.
Okay. Next question is from Jason Gammel, Jefferies.
Thanks very much and congratulations on completing the transaction, gentlemen. First question for me, SK-four zero eight Phase 2, can you talk about whether Phase 2 has actually reached FID? And if not, what steps are necessary to bring it to that point? Second question for me, will there be any OMV employees actually seconded into the Sapura organization or will the management of that organization simply continue as it has been?
All right. I will start with your second question, Jason. As we want to fully consolidate the company, we have to demonstrate that all the conditions to fully consolidate are also met, which means that we of course will second our management into the company. But honestly speaking, I'm very much impressed about the scientific skills the company has. They have really extremely good experts, especially when you look into the track record of their exploration activities.
I think it was 9 out of 11 wells they successfully drilled and that was the reason why we do have that prime assets in the Sarawak region. So yes, we will second our people. We also will take some people maybe from Sapura Upstream into OMV Group, so that we have an exchange of expertise. It's very important for us that OMV also takes care about the financial situation in the company, explaining you why OMV we have no FID so far for Phase 2. The production start up will be in 2023.
So we have no public timing for FID.
Okay, very clear. Again, congratulations.
Thank you, Jason.
Thanks, Jason. The next question comes from Giacomo Romeo, Macquarie.
Good afternoon. Thanks for taking my question. I believe Sapura earlier today discussed that the this entity will have will exclusively operate in the Asian region. Can you please talk a little bit about this sort of this exclusivity agreement and how future interest in assets from OMV will have to go through this entity? And what are the details behind this exclusivity?
Well, we do have Giacomo, we do have a joint understanding that the Asian region and now we are speaking about the upstream activities of OMV, we will use the expertise of Sapura Upstream and especially also that we are using and let me call it an Asian joint venture with an Asian brand to expand into the region. This is one of the major advantages I do see in the strategic cooperation. We are a newcomer in the Asia market as an upstreamer. Sapura is well connected and especially they do have a very strong relationship with Petronas. They know the basins and that's the reason why we will use more and more their expertise also to extend the activities in the Asian market.
But now Giacomo, we are really talking about future activities, which are not top ranked on my agenda. The top ranked topic on my agenda is just spend money and develop these nice assets that we can get more cash flow, because we are now committing that we will be cash flow positive already in 2020. It will be an investment case in 2019 and we will have nice cash in our files already when we talk about 2020. So I'm not really focusing with the first priority on an extension of the cooperation in the Asia market. I'm really focusing now that we are going to manage the company to the better that we are going to deliver more cash.
Okay. Next on the list is Josh Zohn, Barclays.
Hi, good afternoon. I've got three questions, please. Firstly, could you say or comment what the gas production you expect from Phase 1 of SK408 at peak? And secondly, on the CapEx, you talked about €500,000,000 per year or over the 5 years. Is it fair to assume €100,000,000 a year?
Or is it more front end loaded than that? And then lastly, in the press release, there is some mention of synergies. I was hoping maybe you could just elaborate on where you see those synergies? Thank you.
All right. Josh, I do regret that I can't give you the production numbers for Phase 1. All I can say is in your calculation go for a gradual ramp up over the next years and we are peaking in 2023 with the 60, so 6 times higher. When we are talking about the CapEx profile, if you remember what I have said, first of all, the €500,000,000 is 100% figure. So my share is €250,000,000 just to be quite clear.
And if you look into the CapEx profile, I only can say, well, there is no linear 1 100 every year, but that's not the case for any development project I have seen so far to be honest. And if you remember what I have said in the beginning, we will be cash flow positive in 2020 and not in 2019. Maybe I have a little bit of a bigger cake to swallow in 2019. And what was the
Yes, very clear. The last one is just on the synergies, a quote from the Sapura Energy, talking about synergies.
I think as I said, Sapura impressed me a lot as an operator in the region when we discuss the exploration success. What we can now freshly inhale into the company is our well track record in developing assets. So I think the next phases is, if you would like to increase the productions from a level of 10,000 to 60,000 barrels per day, it will be a proper, a very proper project management in executing the necessary investments into the gas fields. I think that's one of the expertise we will bring in it and the synergies is we will manage cash flow better. If you look what we have done the last 2 or 3 years, impressively good cash flow management and that's I think something we will bring into the company.
Can you put a tag on that? I would say, I can't give you a number, but it gives me the comfort that the commitment we are going to take today that we develop the production to a level of 60,000 barrels per day comes in with a higher probability.
Great. Thank you.
Yes. Thank you, Josh. We come now to Matt Lofting, JPMorgan.
Hi. Thanks for taking the questions. 2, please, if I could. I mean, first is coming back to CapEx. Can you just elaborate on how much of the $500,000,000 relates to the SK408 asset?
Is there any allowance for Mexico within that balance? And then just to be clear, post the deal, can Sapura now finance its share of the spend? Or is there any agreement for OMV to carry any of their share? And then second on exploration, I think you flagged towards the end of your comments, right, and sort of upside to the 260,000,000 barrels, what are the key asset steps, timings around the program to realize any of the upside? Thanks.
Well, Matt, I can't give you a figure for SK408, but I can see that the majority of the CapEx we spend is for SK408, yeah. And especially the production jump we are going to see is coming for SK408, so that it's the main assets we have to spend the investment money. 2nd is, there is no carry for their share, Sapura Energy share in any agreement we have so far. They have to finance their share. We have to finance our share and especially the transaction they have now with OMV, I think it's a fresh backwind for them that they can better organize also the financing of the mother company.
The up side, the key assets, the upside I was talking about was is mainly the upside in Mexico. But if you look into the exploration asset in Mexico, if we really would like to pay for it and that's the contingent payment I have mentioned with up to $5,000,000 We have to be convinced that there is a commercial discovery coming with Mexico. If there is no commercial discovery, my upside will be diminished substantially and my payment will be diminished substantially. So then we might end up with something in between the €540,000,000 and the €625,000,000
Great. Clear. Congrats on the deal. Thanks.
We now come to Henri Patricot, UBS.
Yes, everyone. Thank you for the update on the transaction. A couple of questions. The first one is following up on the potential upside and looking at the oil assets, which it seems like they're relatively mature assets given the kind of production targets you mentioned. Is there any possibility for you to increase the recovery rate or just too close to the end life?
And on this point, how should we think about some of the abandonment cost for this asset? Any risk around that? Thank you.
Henri, to be honest, I will not focus on oil there. The story and the perspective of this transaction is gas. We will turn the company, which is now a little bit of an oily company into a more or less purely gas company. We will not waste our time focusing on any oil assets in their portfolio in Malaysia, because it doesn't make sense. The potential I get from this tiny nitty gritty oil production is so low that I will focus myself with our enhanced oil recovery projects to other fields in our portfolio where it really makes more sense to demonstrate a real impact on our numbers.
The question of abandonment cost is not a topic on our table because we are talking about really very young assets. We are just investing into the production, into the fields, so that I will not lose any time discussing too much abandonment liabilities or abandonment costs waiting us. It is a very fresh young company with very, very fresh asset base.
Okay. Thank you.
Thanks, Ori. Next question is from Yuri Kukhtanych, Deutsche Bank.
Yes. Thank you very much. Two questions from my side, please. The first one, I understand that production targets are based on both commercial and contingent or technical reserves. And then just question is, how well apprised are these technical reserves?
How many wells were drilled? And what understanding do you have about these areas that we'll be producing for the Phase 2 production targets? And if you could just talk a little bit more about available infrastructure and perhaps how many wells will you need to drill in the next 2, 3 years? And the second question, very simple, looking at your financial targets for 2020, would you need to do more deals in upstream to reach these targets? Thank you.
Well, I will start with your second questions. I don't need any deal, neither Sapura nor any additional deal to meet my 2020 targets, because the 2020 target I will meet in a few weeks from now at the end of this year. We have already mentioned that the 500,000 barrels per day production, which we have targeted for 2020 will be met will be in reach at the end of this year is the exit production rate. So this all we are discussing right now, Jody is already working on the second target of 600,000 barrels per day, which is scheduled to be met in 2025. If we continue to be so busy and if we are successful with ACHIM-four-five next year, then the 600,000 barrels per day target maybe also be met in very much earlier like we have shown it and demonstrated this with the 2020 target.
As we speak about the development concept in the region, I really would like to ask you to have some patience. When we have closed the transaction and when Hans is back from Kuala Lumpur, I will listen more carefully to him. He and his team has spent weeks in data rooms and they have checked the development concepts. They have discussed it in more details with the experts in KL. So we don't want to release any details on the development concept so far, also given that we don't have taken FID so far.
So when we have done FID, we might come back on your question and give you a little bit more insight. All I can say is that we are convinced that we have a high quality asset base and that we have a very professional development concept because we are now ready to commit to a certain production contribution in 2023. And if my team around Hans is not convinced, we wouldn't do that.
Understood. Thank you very much, Rainer.
We now come to Chris Kuplent, Bank of America Merrill Lynch.
Yes, thanks. I've got three questions. Firstly, just coming back on SK408, the 260,000,000 barrels of oil equivalent of cumulative production you quote, Can you put that into context? Because on your plateau rate, that doesn't give you a very long reserve life. So perhaps you can explain to us how long that plateau you expect to last and how decline rates will look like in the late 2020s?
So that's question number 1. Question number 2, can you put OpEx per BOE? OMV has been very vocal about reducing its group OpEx per BOE upstream into context with what you see SK408 comparing against? And then 3rd question, a bit more generic. We're all aware that Sapura was trying initially to perhaps IPO these assets.
How have you found if you can give us a little bit of context on how have you found the bidding environment in general as you were looking to expand in a new region for yourself? How many regions did you look at And what in the end made your choice? Thank you.
All right. Chris, first of all, I can't give you any additional information on SK 408 as we speak about the plateau. I again have to repeat myself. The day we are going to have FID after that and we are going to give you more detailed information on SK408, because we really have to prepare the setup and I don't I want to avoid to be in any conflict with any information I release today when we are going to have FID because it's a substantial investment project. So I really would like to ask you about your understanding.
It's not that I don't want to answer your question in detail. It's because we have not taken FIT so far.
Okay. Understood. But does that mean the 260 is a very early estimate? It could yet go up?
Yes, of course. Of course, the reserve numbers are going to change, yes, because the reserve number each value are drilling Chris, the reserve number is being adjusted, But our evaluation is based on the 260. The OpEx per barrel, the production, we are estimating to get mid long term from Malaysia will perfectly fit into our strategic target that we are below $8 per barrel. Well, we have right now in OpEx per barrel, which is around $7 per barrel, what I can tell you is that this number will not go up in the mid long term because of Malaysia.
Got it. Thank you.
The third question about the bidding environment. Well, let me start first what we did here in house over several months. We started something around February this year and we have screened more than 1500 assets in the Asia market. We have screened more than 100 companies and we ended up with Sapura. One of the reasons we have chosen Sapura was, first of all, it's a very young asset base with a positive growth perspective in the company.
The second, we have realized that Sapura is a partner who fits into the business culture of OMV. We know Sapura as a partner in our exploration assets in New Zealand and we got to know them in that partnership and that's the reason why Sapura is not a newcomer or a new partner in this respect. It is a company we do know since quite a while and where we realized that Sapura was initially planning to go for an IPO and then we were sitting together and we were discussing whether or not a partnership could be a better solution for Sapura as well as for OMV. The third point is that this is a company which we think has not only a good quality asset base, they are also interlinked into the region and especially the good relationship with Petronas is a value we have seen when we have chosen Sapura.
Okay. Thank you, Rene.
Thanks, Chris. We now come to Thomas Pletze, AssetBank.
Yes. Thank you very much. I just got two questions. First of all, is the market of the natural gas you will produce, is there any risk with the relationship to Petronas and their LNG? I think you just partially answered to this question, but do you have any long term agreement on this?
And my second question would be about the management of this company. Do I understand correctly that you will delegate the CFO to the joint venture? Thank you.
Well, Tamas, first of all, I think there is no risk in relation ship with PetroMas as we speak about the marketing of LNG. If you look into the numbers of the utilization rate of the LNG Bintulu facility, you will find out that they urgently need gas from the region. Each single molecule you have with the daylight, they will with a big appetite knock on your door to get that molecule. So it's a win win combination as we speak about Pachana's working together with Sapura and as the partners in all the fields, yeah, and all the assets in Malaysia they are operating, they both have an interest that the production will be monetized. So there is a long term agreement and the long term cooperation of course in place, but given the fact that there is a win win situation in the utilization rate of the LNG liquefaction plant, I think it tells you that the contractual framework is one thing, but that the commercial understanding of this cooperation is convincing us.
The second is, we are going to I haven't mentioned that this is a CFO, yes. We have not finally agreed on the different positions. But Tamas, as I said that we would like to have the biggest impact in the financing and the financial situation of the company, I have some lovely eyes for it.
We now come to Bertrand Hordet, Kepler Cheuvreux.
Hello. So two So two questions, if I may. So I understand, Reina, that you don't want to split the EUR260,000,000 BOE between Phase 1, Phase 2. But can you give us at least the split between producing assets and development assets out of the EUR260,000,000? So clearly, just to get it straightforward, what is the reserve associated with the current producing assets?
And the second question is around your transfer gas price.
Could you repeat the first question? We didn't get it.
Yes. So the first question is out of the 260,000,000 BOE of reserve you estimate over the life of the field. Can you split it between the current producing assets, which are currently producing 10,000 BOE per day and the development asset, which is mainly the SKA-four zero eight? That was the first question. And then the second question is around coming back on the first question that was asked by Mehdi before.
On your transfer gas price agreement on the Bintulu plant, can you give us a clue of what kind of discount should we think compared to LNG landed price?
Bertrand, the second question is a question I wish I couldn't hear. So I cannot make any comments on prices and on discounts and so on. So no, all I can I can't give you any clue about the transfer gas price? None of our competitors by the way is doing. As we speak about the 260,000,000 BOE of reserves, I was thinking how I can be of help.
When we talk about the producing assets right now with the 10,000 barrels per day, it's a fraction, it's a fraction of the 260,000,000 BOE reserves. So the vast, vast, vast, vast, vast majority of the 260,000,000 is the reserve base for the investments we are doing to boost the production to the level of 60,000 barrels per day.
We now come to Oleg Galbouwer, Raiffeisen.
Yes. Good afternoon and thank you for taking my questions. I have 2. The first one, could you talk a little bit about the taxes? What kind of taxes will the JV pay on the current and future production?
Is it royalty type of taxes or is it based on production sharing agreement? And secondly, maybe it's too early, but still in New Zealand, just trying to understand the future potential of synergies you might enjoy there provided that you discover oil and gas there. Are those exploration assets that you acquired now closely located to existing assets? Any potential for significant or for some synergies? Thank you.
Okay.
Let me start with the first question on the taxes. Well, it is of course a production sharing agreement we have in place. And the government take, I don't give you the specific tax number for our assets, but the government take in Malaysia is something between 60% 80%. Your second question, Alek, on synergies, honestly speaking, there are no synergies in New Zealand. The shares of Sapura in our assets is in assets operated by OMV already.
We are acquiring these assets, the majority from Shell. So I wouldn't claim any synergies as I speak about the assets in New Zealand. We do see some synergies in Australia because the blocks Sepura has acquired is adjacent to the existing 2 blocks of OMV in Australia. And these two blocks, we have had 2 discoveries, but we had no commercial discovery because of the size of the reserve base. And given the fact that there are some adjacent blocks coming with Sapura, we might come up to a critical reserve base that in a development project would be possible.
So there is a synergy potential I can see, but whether or not it really would kick in, it's really pretty early to give you a real firm answer on that. Very clear. Thank you. Okay.
That brings us to the end of our call. Thanks for your questions and for joining us on such short notice. If you have any further questions, please contact any member of the IR team and we are happy to help. Wishing you a good weekend and a nice afternoon. Bye.