Welcome to the HomeV 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 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 OMB. 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. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV.
I would now like to hand the conference over to Mr. Florian Krieger, Head of Investor Relations. Please go ahead, Mr. Krieger.
Thank you, Andrea. Good morning, ladies and gentlemen, and welcome to OMV's earnings call for the Q2 of 2018. With me on the call are Rainer Seeler, OMV's Chairman and CEO Reinhard Flori, our CFO Hans Bleininger, our Deputy COO and in the Board responsible for Upstream and Manfred Leitner, the Board Member for Downstream. Bijner Siede will walk you through the highlights of the quarter and will discuss OMV's financial performance. Following his presentation, all 4 board members are available to answer your questions.
And with this, I will hand it over to Rainer. Good morning, ladies and gentlemen. A warm welcome to our press conference and thank you for joining us.
In the Q2, we made significant progress in the implementation of our strategy by achieving important milestones. We generated once again a strong cash flow and our 2nd quarter operating result increased versus last year, reflecting our portfolio changes and the more favorable oil and gas prices. Before coming to our business development, let me briefly review the external environment. In the Q2 of 2018, the Brent oil price rose for a short time to almost $80 per barrel, the first time since November 2014 and averaged $74 per barrel. This was 50% higher than the average during the same period in 2017.
The oil price strengthened due to the continued strong compliance with OPEC production cuts as well as on going supply disruptions in Venezuela and the US decision to reinstate sanctions on Iran. European gas prices averaged around €21 per megawatt hour, 26% above the same period last year. This increase was driven by the need to replenish storage levels following exceptional cold weather in February, March of this year. In addition, gas prices were supported by high Asian LNG price levels as well as across commodity strength from oil, coal and carbon prices. The OMV indicator refining margin was down 13% compared to the Q2 of last year, reflecting the strong upwards momentum of crude prices.
Margins for naphtha and middle distillates Net margins for both ethylene and propylene decreased versus the previous year's quarter, mainly driven by higher feedstock costs following the crude oil price rally. Butadiene margins were below the exceptional high level of the previous year's quarter, but increased significantly compared to the Q1 of 2018. So let me now briefly Q2 of 2018. Our clean CCS operating results reached EUR 726,000,000 up 10% versus the same period a year ago. The result was negatively impacted by the Petrobras refinery turnaround to amount in the amount of €35,000,000 and not yet realized intersegmental profit of approximately €60,000,000 in connection with the turnaround, hedging effects of minus €124,000,000 and currency headwinds of around €50,000,000 OMV's hydrocarbon production rose by 81,000 to 419,000 birds per day compared to the last year's quarter due to the addition of Yuzhno Russkoye to our portfolio.
Compared to the Q1 of this year, our production slightly declined mainly due to the seasonal demand in Russia and pipeline repairs in New Zealand. We successfully completed the planned full site turnaround at the Petrobras refinery without any significant incidents or LTIs, investments in the modernization of the refinery over recent years now enable us to perform turnarounds going forward only every 4 years instead of every 2 years previously. The next Petrobras turnaround is planned for 2022. After the payment of a record dividend, organic free cash flow after dividends came in at EUR88 1,000,000 in the second quarter. In the first half of twenty eighteen, OMV generated an organic free cash flow after dividends of EUR733,000,000 illustrating OMV's strong cash generating capabilities.
While we will continue to focus on costs compared to the same quarter last year, we managed to decrease our production costs from $8,700,000 to $7,600,000 per barrel as a result of a higher production coupled with the successful implementation of our cost reduction program. In the last months, we made significant progress towards our strategic goals. In April, we closed the acquisition of the offshore concession agreement in Abu Dhabi. In May, we signed the agreement to divest our Turkish power plant, which marks the final step in our strategic targets to reduce the exposure of the non integrated power business. In June, we closed the divestment of our Upstream business in Pakistan and we signed an agreement with Gazprom for the extension of natural gas supplies to Austria until 2,040.
In July, we signed an agreement to divest our stakes in the polar led gas pipeline at the Njeramna gas processing plant in the North Sea. This gas infrastructure is not strategic for OMV and its divestment will have no impact on OMV's production. The transaction is expected to be completed in Q4 2018 and is subject to relevant approvals. I will continue with August, September October in our next analyst call, of course. So I have to stop here.
Let's now turn to our financial performance in the Q2 of 2018. The clean CCS operating result increased by €64,000,000 to €726,000,000 compared to the Q2 of last year. Upstream recorded a significant increase of €189,000,000 supported by our portfolio changes in a more favorable oil price environment and partially offset by a weaker euro dollar exchange rate. Downstream earnings declined by EUR72,000,000 due to lower refining and padchem margins as well as the missing contribution from OMV Patralofisi, which was divested in June 2017. In autumn of 2017, given that oil prices increased above our budgeted oil price and above market expectations for 2018, we decided to secure a certain level of cash flows and hedged below 50% of our oil production for the first half of twenty eighteen.
The aim was to support the company's financial resilience by establishing a downside protection against lower prices and thus ensure cash flows for our growth strategy. However, crude price rallied to unexpected high levels and we could not capture the entire upside of the price increase. Our 2018 oil hedging activity is weighted towards the first half of the year. And the second half of twenty eighteen, our hedging position will be substantially lower. We have hedged only half of the volumes compared to the first half of the year and at higher prices.
For 2019, we do not have any oil hedges in place. Clean CCS net income attributable to stock holders slightly decreased to €272,000,000 due to a substantially higher tax rate. The clean tax rate amounted to 49%, 14 percentage points higher than in the Q2 of 2017. This was mainly driven by an increased contribution from the higher taxed upstream countries in a higher oil price environment and a lower contribution from downstream oil. In addition, the high tax rate reflects the negative hedging effects.
For the full year 2018, based on our oil price assumption of $70 per barrel, we expect the clean tax rate to be in the mid-30s. Clean CCS earnings per share were at €0.83 in Q2 2018.
Let me now come
to the performance of our 2 business segments. Upstream experienced a strong quarter driven by higher sales volumes in Russia and higher crude prices. The Upstream Clean operating results substantially increased from EUR259,000,000 to EUR457,000,000 Market effects had a positive impact of €77,000,000 compared to the Q2 last year. OMV's realized oil price rose by 32%, while the realized gas price decreased by 16%. European and Russian gas prices increased compared to the same quarter last year, but the inclusion of usual Ruskoy in our portfolio led to a decrease in our average realized gas price due to the lower price level in Russia compared to the European market.
Russian gas volumes amounted to 40% of our gas production in the Q2 of 2018. In Q2 'eighteen, we recorded a hedging loss of EUR124 1,000,000 compared to a gain of EUR17,000,000 in the Q2 of 2017. In addition, the higher realized oil prices were partly offset by weaker US dollar. Compared to the same quarter last year, we improved our operations, resulting in an increased earnings contribution of EUR 105,000,000 Hydrocarbon production went up by 81,000, reaching 419,000 barrels per day. Yuzhno Russ Koye contributed 98,000 barrels per day, slightly lower than in the Q1 due to the seasonal gas demand.
Production in Romania and New Zealand declined, the latter due to the pipeline damage at the Purokura Offshore Field. The pipeline was brought back in service and production restarted already in July. Hydrocarbon Seals volumes developed in line with the increased production and amounted to 35,700,000 barrels, an increase of 25% compared to the Q2 of 2017. Production costs were further reduced to $7.6 per barrel, down 13% versus the prior year's quarter. Depreciation decreased and had a positive impact of EUR 16,000,000 compared to Q2 2017, mainly reflecting positive reserve provisions in Norway and Romania, partly offset by higher depreciation in Russia.
In Downstream, the Clean CCS operating results decreased by EUR 72,000,000 to EUR338,000,000 as million to EUR318 1,000,000 €64,000,000 to €318,000,000 stemming from a weaker market environment and the missing earnings contribution from OMV Petalofisi of €44,000,000 OMV's indicator refining margin decreased by 13% from $6 to $5.2 per barrel. The refining utilization rate was at 77%, similar to the previous year's quarter. The low utilization reflects the planned 6 week turnaround of the refinery and small scale scheduled maintenance activities at the Bokhousen refinery. Excluding OMV Petrol Ofisi, total refined product sales were at the same level as in Q2 2017. The slight increase in retail sales volumes was offset by lower commercial volumes.
On the back of higher feedstock costs, margins in both businesses decreased. The earnings from our PET Chem business increased by €4,000,000 to €55,000,000 despite lower ethylene, propylene and butadiene net margins. Last year's Q2 result was negatively impacted by the turnaround at the Schwechat refinery. The contribution from Borealis to the clean CCS operating result grew by EUR 12 €1,000,000 to €106,000,000 supported by an income from a license agreement and healthy integrated polyolefin margins. The fertilizer market environment remained challenging.
In downstream gas, Clean CCS operating results decreased by €9,000,000 to €20,000,000 Natural gas volumes declined by 5%, primarily due to lower volumes in Romania and Turkey, partially offset by higher sales in Germany. The contribution from GasKonext Austria declined by €6,000,000 So let's continue with cash flow. In the first half of twenty eighteen, the cash flow from operating activities amounted to EUR2.3 billion, an increase of EUR395 million compared to the first half of last year. This increase was driven by OMV's operational performance, a favorable market environment and portfolio changes. Cash flow was also supported by positive net working capital effects due to lower receivables and an increase in supply liabilities.
As a result of portfolio changes, we recorded in the first half of twenty eighteen a cash flow of EUR166,000,000 thereof EUR140,000,000 from the divestment of the upstream business in Pakistan. Cash flow for investing activities excluding acquisition showed an outflow of EUR1 1,000,000,000 in the first half of 'eighteen. This includes payments to the Nord Stream 2 pipeline project of EUR141 1,000,000 of which EUR60 1,000,000 were paid in the Q2. We also paid dividends of €693,000,000 there are EUR490 1,000,000 annual dividends to OMV shareholders and EUR45 1,000,000 to hybrid holders. As a result, in the 1st 6 months, we reached a positive organic free cash flow after dividends of EUR733 1,000,000 Cash outflow for acquisitions amounted to EUR 1,300,000,000 reflecting mainly the payment of the transaction in Abu Dhabi.
As a consequence, our free cash flow after dividends in the first half of twenty eighteen was minus EUR 541,000,000 As presented to the Capital Markets Day in March, we aim to have a yearly positive free cash flow after dividends. OMV's balance sheet remained very healthy and showed strong liquidity. Net debt increased by €500,000,000 to €2,800,000,000 primarily due to the acquisition of the 20% stake in the 2 offshore fields in Abu Dhabi. We further improved our financing structure by redeeming the EUR750 1,000,000 hydrate bond with a coupon rate of 6.7% which was issued in 2011. In June, we issued a new hydrobond of EUR 500,000,000 with a much lower coupon rate of 2.875%.
According to IFRS, the proceeds of the Hydrobond are fully treated as equity. On June 30, 2018, the gearing ratio stood at 20%, well below our long term target of equal to or below 30%. Let me conclude with the outlook for 2018. Throughout the first half of this year, we saw the oil price stabilizing at a level of around $70 per barrel. Based on this, we have decided to update the oil price forecast for the full year 2018 to $70 per barrel.
We now anticipate average European gas spot prices for 2018 to be higher than in 2017. We reconfirm our average yearly production of more than 420,000 barrels per day. Production from Russia is planned to contribute around 100,000 barrels per day. Production in Libya is forecasted to be at the similar level to that of 2017, which was roughly 25,000 barrels per day. Production in Q3 2018 is expected to be lower than in the Q2 'eighteen due to the planned annual maintenance in Russia, maintenance work in Norway and the divestment of the upstream business in Pakistan, which produced approximately 7,000 barrels per day in the Q2 of 2018.
But to be honest, I don't see a real big impact on our profit development. Production in Q4 2018 is expected to be strong, slightly higher than in the Q1. This will be driven by higher volumes in Russia due to the seasonal gas demand, the expected production start up of Aasta Hansteen in Norway and the 2 fields in Abu Dhabi. The announced acquisition in New Zealand provides additional upside. Average production of the acquired assets in New Zealand is estimated to be around 30,000 barrels per day.
Closing is expected in the Q4 of this year. In Downstream Oil, in the second half of the year, we expect the refinery utilization to increase significantly from 77% in the second quarter to above 90%. Furthermore, we expect a positive impact in our results following the realization of segmental profit eliminated in the Q2 due to the Petrobras turnaround. We expect refining margins to be lower than in 2017 and pad can margins at the similar level to those in 2017. In downstream gas, yearly sales volumes are projected to be higher than in 2017 and natural gas sales margins are forecasted to be at the similar level to last year.
As I mentioned earlier, our hedging volumes in the second half of the year will be significantly lower than in the first half and at higher prices. 2018 organic CapEx is expected to come in at around €1,900,000,000 Thank you for your attention. We are now more than happy to take your questions.
Okay. Let's now come to your questions. As always, I'd ask you to limit your questions to only 2 at a time, so that we can take as many questions as possible. Of course, you can always rejoin the queue for a follow-up question. The first question comes from Mehdi Ennebati, Societe Generale.
Please go ahead, Mehdi.
Hi, good morning and thanks for taking my questions. First question about the hedging. So you say that the hedging impact will be much lower in second half than in the first half. Can you please be more precise by telling us or by providing us the price you hedged in the second half? So I am asking that question because everybody underestimated a negative impact from hedging in the second quarter.
And there will remain some fears about the hedging for the second half despite the information that you provided us unless you give us the price you hedged in the second half of the year? Second question regarding the new Zealand production. So you said that the pipeline we started in July. Can you please provide us the production level in New Zealand in July? And can you also tell us if you are currently producing in New Zealand at, let's say, the level pre pipeline issue, meaning roughly 18, 19 ks BUILD?
Thank you.
Okay, Missi. Thanks for your question for hedging. I know this is an important topic today. Rainer has given you some very important messages already in his speech. The first one is that there will be from the oil hedges a significantly lower volume.
He talked about that there will be only half of the volume in there and also at higher prices. We will of course also from some tactical reasons not be able to give you exactly hedging levels because that is something that is embedded in our total risk strategy, which we are of course looking into. We have given you, I think, a very good guidance in the sense that there will be a significant lower impact from that. However, what I personally cannot forecast is where the oil prices will move to. And we have seen the impact because there has been an extremely high increase and also not anticipated in that volume.
But what is important is that for 2019, we do not have any hedges in place and for the second half, we are seeing that there will be significant lower impact from that. There is one second aspect that I would like to give you as well. That is the impact on tax, because you have also seen that we have a tax rate, which is significantly higher in Q2 and part of that has been also due to the hedging, simply because there have been effects from that, from country by country effects as well as from the specific effect of higher oil prices as such. So if you want to have an indication there, the impacts from the hedging on the tax rate has been around 7.5% from the hedging. And the other effects on the tax rate have come of course also from the effects in Petrom with lower general results throughout the turnaround that we have there and some of the smaller effects.
And we should also not forget that there has been an effect from FX also on the tax side. But answering your question about hedging, this is also an aspect that you should not forget that also tax rate will improve when we have lower tax effects there hedging effects there.
Thank you. Nicky, I will take your question regarding pipeline of Bokura in New Zealand. So we had an effect of around 5000, 6000 BOE less production in the last weeks. So the pipeline is now restored and is in operation again. So we are ramping up the production right now.
And just yesterday, we saw a production slightly above 17,000 BOE per day. So that's the production volume what we had in our plants. So 17, slightly above 17,000, that's what you can expect until the end the year. From our current assets, so if we close the deal, that we will be assuming before year end in Q4, then you will see an upside of another 30,000, 31,000 BOE per day in addition to the 17,000.
Perfect. Thank you very much.
Thank you, Mehdi. The next question is from Jason Gammel, Jefferies. Please go ahead, Jason.
Thank you very much, gentlemen. I just wanted to come back to hedging, but approach it more from a strategic standpoint. You did mention that you put the hedges in place for two reasons that the price had went above your budget level and also to lock in some cash flow, which is quite understandable given that you had the outflow for the Abu Dhabi acquisition. So my question really is on a move forward basis, how strategically will you approach hedging just given that your free cash flow is so strong, the balance sheet is in good shape? Would you still look to lock in prices when you felt they had gotten above a level you felt was sustainable?
Or do you think that the financial condition of the company is now strong enough that you might avoid the hedging markets? And I'll leave it at that.
I think, Jason, the trend is crystal clear. We have burned our fingers a little bit in the second quarter and we are not of that kind that we would like to have our fingers burned. So we are going to reduce heavily in the 3rd Q4 and I said to you that there are no hatches in place. I fully agree with you that the situation within OMV has changed as we speak about the strong balance sheet and the cash position and the cash flow, so that I don't exclude any kind of hedging activities. But as I remember the discussions in our board meeting, the probability I would say is not very high, okay?
And then as we speak about hedging the last guidance for Mehdi. Well Mehdi, now let's look to the math. In the Q2, we have said we have hedged below 50% of the oil volumes. Then I have said, it's only half in 3rd and fourth quarter in the second half of the year. So what I can say is, it's less than 25% in the second half of this year.
This is just pure math. Yeah. And the level is above the price level we have seen as a hedging effect in
Okay. Thanks, Jason. Next question is from Josh Stone, Barclays.
Hi, good morning. I've got two questions, please. Firstly, on Borealis, very strong earnings results in the quarter, outperforming the indicator margins. You mentioned a license agreement income. Can you just say a bit more details around that?
Is that an ongoing income we should expect? Are there any more potential license agreements in Borealis in the pipeline that could help earnings? And then secondly, on the upstream, if you could provide a likely exit to production for this year, assuming Abu Dhabi and New Zealand closed before the end of the year? Thank you.
Hi, Josh. This is Manfred on Borealis. This was a one time license income that had been accounted for in June in respect to a project that is currently going on in the States. It's our share in that is a 12,000,000 euros and it's not a repeatable income, it's a one time off.
2nd question, you asked a very challenging one, what is the exit rate at the end of the year? So if we assume that we close the deal in New Zealand, as I mentioned before, so we would see around 30,000 BOE in addition to the current production. For UAE, for our assets, which we acquired, SARB and Lulu, we do expect to start the ramp up base in Q4. So we expect an exit rate of around plusminus10,000 BOE per day. Asda Hansen will bring on stream beginning of Q4, we will ramp up the production to the plateau production already at the end of the year, which is around 18,000.
So if you add all this to the current production, what we see is 420,000,000, that's what we said, plus 30,000 from New Zealand, plus 18,000, 17,000, 18,000 from Navara up from Astra Hansen and another 10,000 from SARB and Umlulu, then you can do the math by yourself and then you will see what will be the exit rate we are expecting end of the year.
Great. That's very clear. Thank you.
Thanks, Josh. Next is from Henri Patricot, UBS.
Yes, everyone. Thank you for the presentation. Two questions for me. The first one is on your following up on production and on Libya and Yemen. So Libya, do you see that the risk more to the upside or to the downside in your figure given the recent developments around security and your outlook for the rest of the year?
And secondly, I saw that there was some return of some production in the EMEA in the quarter. Should we expect to see some ramp up over there? And then secondly, just on the asset swap with Gazprom, if you have any update on the timing and the progress there? Thank you.
Okay. Wery, I'll take the first two questions regarding Libya and Yemen. Libya, the current situation is the potential in Libya is 30,000 BOE per day. We are producing right now due to the shut in of NC-one hundred and eighty six. This is part of the Sharara field we are producing right now when we share 25,000 POE per day.
That's what we are also estimating at an average production until end of the year. The total potential in Libya right now is at around 30,000. So if everything is going well, then we could achieve 30,000. But as I said, our assumption is 25,000, which is in the same range as we have been producing last year. Yemen, we ramped up the production.
You saw the effect already in Q2, a rather small one. The current production is at around 5,000 TE per day. That's what we are assuming that we will keep until end of the year if nothing is changing materially in Yemen. So 5,000 in Yemen until end of the year from now on and 25,000 in Lubea from now on also until the
end of the year. Henri, to my biggest regret, I cannot give you so much information about progressing asset swap for very good reason. We have a new situation in Norway when the Energy Minister raised some concern, which we have to understand better and I think we need to have a try a dialogue between the 3 parties involved. And the problem is not the Energy Minister, the problem is that our partners from Gazprom were very busy with the football championship in their country and now they are in holiday season and they are not available. That's why I think we will make some progress starting in September, sitting together, having discussion and then Henri, I will give you a better picture on our last conference call when we talk about the Q3.
But I will repeat myself, both parties are committed to the transaction on the same level we have seen a year or 2 years ago.
Understood. Thank you.
Next is Thomas Adolff, Credit Suisse.
Two questions for me as well, please. 1 on the tax rate and another one just on downstream inorganic spend. Just on the tax rate to clarify your comments made for the full year, you said mid-30s, which clearly incorporates the high level in 2Q. And you said earlier on that 7.5 percentage points was linked to the hedges you had in place. So it would have been otherwise in the low 40s.
So if you say mid-30s for the full year, that kind of implies low-30s maybe in the second half of the year. So I wanted to understand why it's much lower than it is in 2Q adjusted hedges? 2nd question just on downstream inorganic spend, if you don't mind refreshing my memory, kind of new to the story again. I believe in the past, you did say that you are interested in expanding your footprint in the UAE, maybe it's wise 3 or whatever it is. So I wondered whether it's both for refining and petrochemical, I.
E, the integrated facility. And if so, how imminent this is? Thank you.
Thomas, let me start with the tax. When I referred to the differences in tax rates, you correctly cited to the hedging effect that I brought, but I also said that there has been the effect of the Petrom topics with the turnaround there that have been around 5% and we had some FX effects, which I had also mentioned. Some FX effects, just to give you an example that the Tunisian Dina depreciated a lot, which in total for the FX effect also had an effect of close to 3%. So there is a significant one time effect in the tax rate that we are seeing in Q2. So that the reiteration of what we said that for the full year, we are seeing the tax rate at the mid-30s can be fully confirmed in that respect.
However, we also said we are confirming that in the context of our guided oil prices and gas prices. And of course, if you would have massive deviations there, then you would also see some effects there. This is something that we cannot predict at the moment more precisely than from the outlook that we are giving. But I think in general, that should give you an idea how our portfolio when it is balanced in a normal quarter between upstream and downstream and where you see then the full impact of the effects that we are also in Romania acting in a lower tax country is then fully realized and that gives us the return to these lower tax rates.
On the second question, inorganic CapEx in downstream, in March, in the Capital Markets Day, what we informed you was that we are earmarking €5,000,000,000 but until 2025 for that purpose. And in the meantime, what we are doing is we're screening obviously the different options that are on the table. Is Abu Dhabi one of them? Yes, definitely, yes. And the second question, whether it's refining and petrochemicals, there would be a priority for us and this is the rationale of moving outside of Europe to transfer our know how in operating project management and others in refining and petrochemical.
So this would be the first priority to find refining and combined petrochemical options.
Next
is Rob Pulleyn, Morgan Stanley. Please go ahead.
Hi. Thank you, gentlemen. Most of my questions I think have already been covered. So let's not rehash old ground. But I did have 2 left.
The first one is, I caught a nuance around this 4Q production comment that it would be slightly better than 1Q despite the fact, of course, the Russian seasonality and Astellanston Bean on, which you confirmed at the start of 4Q. Are there some offsetting declines elsewhere that we should be taking into account? And the second one, a little bit conceptual. Obviously, you've mentioned the hybrid debt. Is that something you would consider doing more of going forward, just for our understanding?
Thank you.
Let me start with your second question on the hybrid. Please take into consideration that in total, we even reduced our hybrid exposure on the financing side. We originally had €2,250,000,000 in hybrids outstanding. We have repaid €750,000,000 and we have replaced it by SEK 500,000,000. So we are now at the level of SEK 2,000,000,000.
Now with that move, we have significantly reduced the interest burden from a level of 6.75 to a level of 2.875. This is the way that makes also hybrid more attractive area of financing for us. On the other hand, still if we are talking about senior bonds or even the facilities in which we can breathe are still more favorable. So my expectation is that the ratio between the senior and the hybrid will not dramatically change, but both instruments are welcomed by us as the opportunity of some flexibility is there also regarding the tenure. And it is also good to see that the acceptance also taking into account our upgraded credit where Moody's put us back on A level on A minus stable outlook level again contributed to a very high demand
for these kinds of instruments in the market.
Again, regarding your question regarding production in Q4, as I outlined before, the exit rate. And the exit rate, once you add to this current production of 420,000,000, there's 30,000 from New Zealand, Abu Dhabi 10 and Assa Hans in 2018, we will land between 470,000,480. In some of those projects, we don't know right now whether we ramp up the production beginning of Q4, so then you would see the full impact for the full quarter. Also in New Zealand, we don't know right now when we will have the closing of the deal. If the closing is already beginning of Q4, then you will see the 30,000 for the entire quarter.
If the closing is just mid of December, then you will see a minor effect on Q4. So it's very difficult for us to give you now a really firm number for Q4. That's why I referred before to rather the exit rate than to an average production in Q4. What we have to consider as well is that we will see some decline in our core countries like in Austria and in Romania. In Romania mainly because Sotea, the big discovery some 8 years ago, is now starting to decline.
So you will see a decline of 4% or 5% in Romania from year to year and around also 4% or 5% in Austria. So but we can tell you a little bit more, I would say, end of Q3, when will be the project or the closing in New Zealand will be and whether the ramp up in Abu Dhabi and Aasta Hansteen is as predicted right now.
Thank you very much for the color on both subjects.
Okay. Thanks, Rob. Next is Yuriy Kukhtanych, Deutsche Bank.
Yes. Good morning, gentlemen. Two questions from me, please. First, very short on working capital move, which was somewhat counterintuitive given the rising oil price environment. I presume that most of the reversal in receivables can be explained by the gas payments from the Q1.
But the question here is whether you used any securitization at all. So that would be my first question. And generally, how we should think actually about the working capital going forward? And the second question is on upstream in Romania. There was a news earlier in July that Romanian government decided to increase taxation for Black Sea gas production.
And I can recall that there was a joint statement by OMV Petrone, LUKOIL and ExxonMobil that this will impact very negatively development of the industry in the country. So if you could just elaborate a little bit what this actually means, this negative development, how it will impact your plans to approve FID for Domino this year and how we should think about it going forward? And generally, if you could shed some light why the Romanian government has been so hostile towards the investors in upstream? Thank you.
Okay. Juri, let me take the question on net working capital. Your assumption is perfectly right. The clear majority is coming from the gas payments from Q1 respectively from payments with payments terms that are therefore not accounted directly as income already. So these effects are the majority of that.
Your second question was about whether OMB uses securitization or any instruments like that. Yes, of course, we also do that. This is something that we are doing that has in generally an effect that over the year, we can balance networking capital effects. In Q2. There has been slight positive effect from that as well.
But clearly, the main part was from the gas payments here. We should also see that in the context of hedging, you all know hedging contracts are concluded at the end of the quarter, which means that this is not counted in that sense in Q2, but in Q3 when it comes to the conclusion of these contracts. So this is a networking capital situation. We have a clear seasonality in networking capital in every single year and this is very much to the gas cycle that we have with strong gas input in our storages in the second half of the year and then output in the cold parts of the year?
Well, Yuri,
what I have discussed with Petrom is that they are still committed to take an FID in second half of this year. Was the recent development in Romania helpful to go for such an FID? Not at all. I agree what you have said. This was not the right framework we need to see.
That's the reason why I think Petrom is now ready to further intensify the discussion with the Romanian government to find and agree on a framework which is sufficient to go for a positive FID. It's my understanding that both parties really want to go for an FID. I never heard that the Romanian government would like to diminish the attractiveness of their country for investors to make a clear statement. But on the other hand, what we need is a stable framework with reliable and acceptable terms as we speak about taxes and royalties and as we speak about the understandable that from a trade balance point of view, Romania doesn't want to import gas when they have so much excess gas in production. This is accepted, but when we have supplied all customers in Romania, we need to have the freedom to sell the gas abroad.
This is a must. What I have learned is that now there will be another round to discuss the offshore law. Let's wait for better terms. The terms right now, which I have seen in the last weeks were not sufficient, but we are cooperating to find the right framework acceptable for both parties for the government as well as for investors to go for a positive ID. The project is important for the country of Romania as well as for the investors.
Great. Thank you very much, Rainer.
Next is Matt Lofting, JPMorgan.
Yes. Thanks for taking the questions. Good morning, all. Two things, if I could. I mean, firstly, just coming back to oil hedging, probably following on from Jason's question earlier.
I mean, I'd like to just better understand philosophically the underlying policy, if possible. Is it pure risk management? Or were you looking to take a more risk award based view on price versus the internal budget levels that you've been running? And with that in mind, what should we expect on hedging from IMV on a medium term basis? Are there, for example, any triggers that would lead you to sort of think about hedging 2019 volumes between now year end?
And then 2nd, downstream outlook for the second half of the year, refining and pet chems, is there any scheduled maintenance embedded in the view for the rest of the year? And if you could also touch on how you're to date seeing demand trends evolve in the context of increased product prices? Thanks.
About hedging strategy, I think very straightforward in what we have in mind there. It is a means for risk management in order to protect the cash flows necessary for our growth strategy. Now, if we put ourselves back some half year, three quarters ago, we have still seen quite low levels of oil price in the market with even lower expectations to come. That has been sort of the trigger and of course not for the first time to take in a certain volume into hedges to make sure that if there would be a rather steep decline that none of our efforts that we have in mind to capture good opportunities in the market to grow would be endangered. So this is a clear protection topic.
This has nothing to do with budgets. This has nothing to do with speculation. This is more of a secure policy protecting the strategy that we have postulated forward. That of course has flexibility and the flexibility is given by the circumstances in the market. If you have higher prices with higher turnovers, with higher cash flows running in, you have much less of a need to go into sizable hedging, whereas I have to emphasize, we would never hedge more than 50% in this.
So we would never expose ourselves to real high risk in that. But we have clearly given you also the implications that will even half that and for the longer run, there is nothing where we are taking a big bet on anything for 2019. So this is how we do that from a strategic, as you call it, philosophical point of view.
Matt, only one sentence and I repeat what I have said to Jason. Our appetite for oil hatches is extremely low.
Clear, thanks. And the downstream question?
On the downstream question, for the second half, there is no major turnaround planned in any of our refineries anymore. So you will see a very thing runs as planned, we'll have a very high utilization in the second half. And on the product demand, that's a bit more that's a bit trickier, but the first half of the year has been building up demand in our markets in each of those. And so, I would even be inclined to say that the $70 oil price is potentially limiting the demand growth, but it is not going to be demand destructive.
Okay. Thanks all.
Thanks, Matt. Now we move to Chris Kuplent, Bank of America Merrill Lynch.
Yes. Good morning all. Two questions for me still remaining. Firstly, you reiterated once again that you expect the full year free cash flow position to be positive. Just wondered whether you can remind us that, that is after M and A spend and I'm guessing also after working capital.
Or if I'm wrong, please could you specify what kind of free cash flow definition you're using? And the second question on Achimov again and your asset swap. Now if we take it that the deal will be closed before year end, what kind of implications does that have on cash payments? Because as I can recall, the deal was effective 2017. So would you expect there to be a cash payment in, I suppose, Gazprom's direction if the deal indeed closes before year end?
Thank you.
Well, Chris, this was a very intelligent question. We tried to extract a bit more for Achimov. But let me start the free cash flow positive after dividends, it's also after M and A. So the clear guidance is that we would like to finance the M and A transaction, the dividend and the investments and after that, we would like to have a positive free cash flow after dividends. The Achimov cash payment, well, you are talking about a cash payment, There is no cash involved as we speak about the transaction, as we speak about the adjustments.
So we have agreed on the economic terms that a share of 24.99 percent in Achimov is equivalent to the shares we have published for OMV Norge. So this is more or less the economic structure and there is of course retroactively compensation for investments done in Achimov and the cash flow of OMV Norge, this which have an effect. From our point of view, today's point of view, given the fact that we have a little bit of a delay because of the concern raised by the Norwegian Energy Minister, in our plans, we don't think that in 2017, our cash position in what sense so ever is being impacted by the transaction. In 2018, sorry, 2018, yes.
Okay, understood.
So it would be running into the numbers at earliest next year.
Right. Thank you.
Thanks, Chris. Next is Mehdi again.
Hi. Thanks for just 2 follow-up questions. And just maybe a precision, Rainer, regarding the hedging. I also did the math that was that's why my question was only about the oil price hedging. Two questions please.
The first one regarding Samsung Power Plant. So can you please tell us if the contribution on the yearly level is positive or negative at the EBIT level? This is just for model purpose. I am asking the question because for example this quarter you were at roughly €20,000,000 in Gas and Power EBIT whereas the Gas Connect Austria contribution was €20,000,000 So just would like to understand what could be the impact or what will be the impact from the Samsung power generation cell at your EBIT level. Another question regarding the CapEx.
So you keep your 1.9 €1,000,000,000 CapEx guidance and shank for this year. You've spent roughly €800,000,000, €850,000,000 in H1. So in terms of cash flow payment, should we expect roughly €300,000,000 CapEx acceleration or CapEx growth in second half of the year versus first half? Thank you.
Let me take Samsung. The years in Turkey due to the impact of the authorities are very, very different. But what I can tell you is that this year, there is not a significant operating result impact by Samsung. So you will not see a significant reduction once we have sold the plant. On downstream gas, what did you want to go behind the 29 and 20, so that we have only a 20 operating €20,000,000 operating result in the second quarter.
And if you then more or less take out the Samsung power plant, this will not have a real impact on the 2020, for instance, would not have. The only impact is that we are currently not having any depreciation because as you know, the plant is accounted for as asset for sale. And so this is producing to a certain extent the result, but since we have impaired the plant already twice in the past as well that one is minor. Thank
you. Maybe to your question of CapEx, there is of course a difference between the accounting CapEx and the cash flow CapEx. And you were asking what is the impact on the cash flow and we will certainly see that parts of the CapEx that is accounted in 2018 will be payable only in 2019. This only will be a minor part, this is what I can say. But for the explanation of what is different between half 1 and half 2, you have to take into account that there are additional investments that we have for our acquisition in Abu Dhabi, which of course have not been there in first half, but will be there in second half.
So therefore, the estimate of the 1.9 is very plausible.
Next is Michael Alsford, Citi. Please, Michael.
Hello. I must have been snoozing when I pressed my button for questions. So thanks for taking my two questions. Firstly, just wanted to touch on the E and P bridge that you kindly started with at the beginning of the call. Clearly, it shows you're getting pretty close to your 500,000 barrels per day target for 2020.
I guess one of the other little building blocks within that is Nuwara in Tunisia. And I just wondered if you could just update us on that project and just remind us of the contribution net to OMV that should deliver. And then just secondly on Nord Stream 2. Clearly, your commitment was, if I remember rightly, around €9 50,000,000 to that project. I was under the impression that maybe some of that would have been financed through debt, but I think that clearly is now off the table with the recent sanctions.
But I'm also of the I've heard that the potential route is a little bit longer and could cost a little bit more money. So just could you maybe update us as to exactly what, I guess, we should expect as to the cash out for that project from an OMV perspective? Thank you.
Hey, Mike. I would take the first question regarding Navara. So Navara is at or on schedule as we have announced in the last quarterly meeting. So we said 2019, Q2 2019 Navara will come on stream. This is still what we are planning and we are predicting right now.
Navara will we expect around 10,000 BOEs per day additional production starting in Q2 twenty
19. On Nord Stream 2, project finance is not off the table because the discussions with the credit agencies are currently running. We will see how successful it will be though. Maybe it's less than we have planned, but I think the finance is actually secured and on top of that, the SEK 9,500,000,000, we do have reason to believe that we are comfortably within that project limit that we have given in the past as well. And the 9.5% is 100% figure of course.
Okay, thanks.
There are 2 more questions. Next is Thomas Adolff again, Credit Suisse.
Sorry guys, 2 more for me as well. Just kind of wanted to better understand what you've done with the refinery maintenance cycle moving from 2 years to 4 years. I mean, what of Or do you have some OPG flexibility? And if so, how much? I'm just trying to better understand oil price.
Thank you.
On the refinery turnaround frequency, obviously, you cannot do that in one step only, but what we have been doing during the last couple of years is to replace more or less those units and that equipment that would obviously been already in a pretty old shape or technically not at the later stage. And this turnaround was now the final step to come to a situation where we believe it is actually reliable to say that we can go from 2 to 4 years. So, what are you doing there? What we have replaced is a lot in the fluid catalytic cracking unit, for instance, we have replaced materials. In other parts, you have to replace all the piping and all that kind of things in order to that you can run without any problems for a period of 4 years.
And the second one, this LPG flexibility, I would differentiate between OMV here and Borealis because Borealis is having such an LPG flexibility to a certain extent for their crackers. In Northwest Europe, OMV is not using LPG or as a feedstock. What we are doing is we are using naphtha and gasoil in our furnaces.
Okay. You're not looking to do something similar to what Repsol has done in the past, whereby with some investments, you increase the flexibility, feedstock flexibility to the tune of kind of 30% mix size,
no? No, we are not investing into that. And one of the main reasons is that we are selling a lot that we have already in the past gone for optimization of the whole feedstock and product equation if you want. So LPG is something which we are not really we are producing to a certain extent of course LPG, but this is going automatically into the cracker. We do not go for an increase by 3rd party purchases from for LPG because this would have an impact on our value chain, which would actually not pay
off. Okay. Thank you.
Okay. Now we come to the final question, Bertrand O'Dea, Kepler Cheuvreux. Please go ahead, Bertrand.
Yes. Thank you for taking my question. Just housekeeping one. On your OpEx in Upstream, they're down 13% year on year from 8.7% to 7.6%, percent benefiting I guess from a big part from the inclusion of Husqvist Koy. Can you disclose whether your OpEx were down excluding the impact of Husqvist?
No. We are not disclosing OpEx reduction on a project level or on a single country level, yes. And this would be the case if we would give you this information. That's what we're not doing. We are giving the average production costs, which we go down from 8.8 to 7.6.
What I can say is the major effect is coming from usual risk.
Okay. Thank you.
Good. With this, we are at the end of our conference call. Thank you all for joining. If you have any further questions, please contact the Investor Relations team and we will be happy to help you. Goodbye and have a nice day.
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