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Thank you, Molly. Good afternoon, ladies and gentlemen, and welcome to our conference call on the just announced transaction that OMV and Sapura Energy will enter into a strategic partnership. With me on the call is Rainer Seele, OMV's Chairman and CEO. He will give you more details about the transaction, and then we will be happy to answer your questions. With this, I will hand it over to Rainer.
Yeah. Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us on such short notice. I am delighted to announce that OMV signed the agreement to acquire a 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 million. We also agreed to contingent payments of up to $85 million. The majority of these contingent payments are conditional upon taking the final FID on certain commercial volumes from the license in Mexico. The new company, Sapura Upstream, has a total debt position of $350 million. That is for 100%, not for the OMV share. The transaction will be effective as of January 1, 2019.
Closing is envisaged in first quarter 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 million bbl, 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. PETRONAS, 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 bbl per day, mostly liquids. The five producing oil fields have been in operation since the early 2000s and are located close to Peninsular 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 SK310. 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 startup. 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 SK310. 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 two phases. Phase one of the project comprises of the fields Bangkok, Bakong, Larak and Gorek. The FID for this phase will be taken in the first half of 2018.
The development will consist of unmanned wellhead platforms on each of the fields, tied back to a nearby facility. First gas from phase I is anticipated to come on stream in 2020. Phase II includes the Jerum field, the largest discovery within this block. Phase II is expected to start production in 2023 and will boost production to 60,000 bbl 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 PETRONAS Bintulu LNG Complex, the third largest in the world. This LNG complex is majority owned and operated by PETRONAS. The LNG is exported to neighboring growing Asian markets. Asia is the highest priced global gas region due to strong demand and typically oil indexed long-term contracts.
The oil produced in Malaysia has crude quality similar to Tapis, and it is typically sold at a premium compared to the Brent 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 first five years amount to EUR 500 million. 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 2030. 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 is the long lasting backbone for LNG trading and demand.
This acquisition supports our target of a reserve replacement ratio above 100%. Sapura Upstream brings the total cumulative production of approximately 260 million bbl, 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. Now I'm more than happy to take your questions.
Okay. The first question comes from Mehdi Ennebati, Société Générale.
Hi. Good afternoon, all. Thanks for the presentation. 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 pay $540 million to get the 50% stake, plus, let's say you take half of the debt, meaning $175 million, plus the potential $85 million payment. We are talking about an EV of $800 million, 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. 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 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 million 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 billion plus $350 million of debt. The $350 million 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 $350 million, 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.
When you say reflecting the prices in Asia, the LNG prices in Asia, you mean?
Yes, absolutely. Yeah. 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 from me, SK408 Phase II. Can you talk about whether Phase II has actually reached FID? If not, what steps are necessary to bring it to that point? Second question from me, will there be any OMV employees actually seconded into the Sapura organization? 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. 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 nine out of 11 wells they successfully drilled, and that was the reason why we do have that prime assets in the Sarawak region. 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 is now managing the intercompany loan. As we speak about Sarawak SK408, we have no FID so far for phase two. The production start-up will be in 2023. 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 this entity will exclusively operate in the Asian region. Can you please talk a little bit about 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?
Giacomo, we do have a joint understanding that the Asian region. Now we are speaking about the upstream activities of OMV. We will use the expertise of Sapura Upstream, especially also that we are using, 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 this strategic cooperation. We are newcomer in the Asian market as an upstreamer. Sapura is well-connected, especially they do have a very strong relationship with PETRONAS. They know the basins, that's the reason why we will use more and more their expertise also to extend the activities in the Asian market. 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. We are now committing that we will be cash flow positive already in 2020. It will be an investment case in 2019, we will have nice cash in our files already when we talk about 2020. I'm not really focusing with the first priority on an extension of the cooperation in the Asian 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.
Very clear. Thank you.
Okay. Next on the list is Josh Stone, Barclays.
Hi, good afternoon. I've got three questions, please. Firstly, can you say or comment what the gas production you expect from phase one of SK408 at peak? Secondly, on the CapEx, you talk about EUR 500 million per year or over the five years. Is it fair to assume EUR 100 million a year, or is it more front-end loaded than that? 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 one. All I can say is in your calculation, go for a gradual ramp up over the next years, we are peaking in 2023 with the 60. 6x higher. When we are talking about the CapEx profile, if you remember what I have said. First of all, the EUR 500 million is 100% figure. My share is EUR 250. Just to be quite clear. If you look into the CapEx profile, I only can say, well, there is no linear EUR 100 every year, but that's not the case for any development project I have seen so far, to be honest. 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. What was the third-
Yeah, very clear. The last one, 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 discussed their exploration success. What we can now freshly inhale into the company is our well track record in developing assets. I think the next phases is if you would like to increase the production from a level 10- 60,000 bbl per day, it will be 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 two, three years, impressively good cash flow management, and that's, I think, something we will bring into the company. Can you put a tack 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 bbl per day comes in with a higher probability.
Great. Thank you.
Yes. Thank you, Josh. We come now to Matt Lofting, JP Morgan.
Hi. Thanks for taking the questions. Two, please, if I could. First, coming back to CapEx, can you elaborate on how much of the EUR 500 million relates to the SK408 asset? Is there any allowance for Mexico within that balance? 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? Second, on exploration, I think you flagged towards the end of your comments around a sort of upside to the 260 million bbl. 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. Especially the production jump we are going to see is coming for SK408, so that it's the main asset we have to spend the investment money. Second is, there is no carry for their Sapura Energy share in any agreement we have so far. They have to finance their share. We have to finance our share. Especially the transaction they have now with OMV, I think it's a fresh tailwind for them that they can better organize also the financing of the mother company. The key assets. The upside I was talking about is mainly the upside in Mexico.
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 $85 million, 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. We might end up with something in between the $540 and the $625.
Great. Clear. Congrats on the deal.
Thanks. We now come to Henri Patricot, UBS.
Yes, I have one. Thank you for the update on the transaction. A couple of questions. The first one is following up on the potential upside, looking at the oil assets, which it seems like they're relatively mature assets given the construction targets you mentioned. Is there any possibility for you to increase the recovery rate or just too close to the end life? 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 oil 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 fresh asset base.
Okay. Thank you.
Thanks, Henri. Next question is from Yuriy Kukhtanych , Deutsche Bank.
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. Just the question is, how well apprised are these technical reserves? How many wells were drilled, and what understanding do you have about these areas that will be producing for the phase II production targets? 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 two, three years? 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 question. 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 bbl per day production, which we have targeted for 2020, will be in reach at the end of this year as the exit production rate. All we are discussing right now, Yuriy, is already working on the second target of 600,000 bbl per day, which is scheduled to be met in 2025. If we continue to be so busy and if we are successful with Achimov four, five next year, the 600,000 bbl per day target may also be met 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. 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. 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. If my team around Hans is not convinced, we wouldn't do that.
Understood. Thank you very much, Rainer.
We now come to Christopher Kuplent, Bank of America Merrill Lynch.
Thanks. I have three questions. First, coming back on SK408, the 260 million bbl of oil equivalent of cumulative production you quote. Can you put that into context? On your plateau rate, that does not give you a very long reserve life. 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. That is question number one. Question number two, 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? Third question, a bit more generic. We are all aware that Sapura was trying initially to perhaps IPO these assets.
If you can give us a little bit of context, Rainer, 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 cannot give you any additional information on SK408 as we speak about the plateau. I again have to repeat myself. The day we are going to have FID, after that, we are going to give you more detailed information on SK408, because we really have to prepare the setup, and I want to avoid being in any conflict with any information I release today when we are going to have FID. It is a substantial investment project. I really would like to ask you about your understanding. It is not that I do not want to answer your question in detail. It is just because we have not taken FID so far.
Okay. Understood. Rainer, does that mean the 260 is a very early estimate? It could yet go up.
Of course. Of course, the reserve numbers are going to change.
Yeah.
The reserve number, each well you are drilling, Chris, the reserve number is being adjusted. Our evaluation is based on the 260.
Okay.
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 EUR 8 per barrel. We have right now an OPEX per barrel, which is around EUR 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. Let me start first what we did here in-house, over several months. We started something around February this year. We have screened more than 1,500 assets in the Asian market. We have screened more than 100 companies. We ended up with Sapura. One of the reason 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. We got to know them in that partnership. 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. We realized that Sapura was initially planning to go for an IPO. We were sitting together. 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. Especially the good relationship with PETRONAS is a value we have seen when we have chosen Sapura.
Okay. Thank you, Rainer.
Thanks, Chris. We now come to Tamas Pletser, Erste Bank.
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. Do you have any long-term agreement on this? 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.
Tamas, first of all, I think there is no risk in relationship with PETRONAS 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 a daylight, they will, with a big appetite, knock on your door to get that molecule. Yeah? It's a win-win combination as we speak about PETRONAS working together with Sapura, and as they are partners in all the fields. Yeah? In all the assets in Malaysia they are operating, they both have an interest that the production will be monetized. There is a long-term agreement and a long-term cooperation, of course, in place.
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, I haven't mentioned that this is a CFO. Yeah? We have not finally agreed on the different positions. 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.
Okay. That's pretty clear. Thank you very much.
We now come to Bertrand Hodee, Kepler Cheuvreux.
Hello. Two questions, if I may. I understand, Rainer, that you don't want to split the 260 million BOE between phase I, phase II. Can you give us at least the split between producing asset and development asset out of the 260? Clearly just to get it straightforward, what is the reserve associated with the current producing assets? The second question is around your transfer gas price.
Bertrand?
Yeah.
Could you repeat the first question? We didn't get it.
Yeah.
Thank you.
The first question is out of the 260 million 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 SK408? That was the first question. 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. I cannot make any comments on prices and on discounts and so on. No. 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 million 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 bbl per day, it's a fraction of the 260 million BOE reserves. The vast majority of the 260 is the reserve base for the investments we are doing to boost the production to the level of 60,000 bbl per day.
Okay. Thank you.
We now come to Oleg Galbur, Raiffeisen.
Yes. Good afternoon, and thank you for taking my questions. I have two. 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? 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. 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, Oleg, 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. I wouldn't claim any synergies as to speak about the assets in New Zealand. We do see some synergies in Australia because the blocks Sapura has acquired is adjacent to the existing two blocks of OMV in Australia.
These two blocks we have had two discoveries, but we had no commercial discovery because of the size of the reserve base. Given the fact that there are some adjacent blocks coming with Sapura, we might come up to a critical reserve base that a development project would be possible. There is a synergy potential I can see. 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.