You should have received the 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, a live audio webcast is available on OMV's website. At this time, I would like to refer you to the disclaimer, which includes our position on forward looking statements. These forward looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV.
By their nature, forward looking statements are subject to risks and uncertainties that will or may occur in the future and are outside the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward looking statements. OMV disclaims any obligation and does not intend to update these forward looking statements to reflect actual results, revised assumptions and expectations and future developments and events. 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 Greger. Please go ahead, Mr. Kreger. Thank you.
Thank you, Mehdi. Good morning, ladies and gentlemen, and welcome Rainer Seeler, OMV's CEO Reinhard Florij, Rainer Sehle, OMV's CEO Reinhard Flori, our CFO and Manfred Leitner, the Board member responsible for the Downstream Rainer will walk Rainer will walk you through the highlights of the quarter and discuss OMV's financial performance. Afterwards, the 3 board members are available to answer your questions. Before we start the call, I would like to remind you that we decided to postpone our Capital Markets Day from September this year to March 13, 2018. We believe by then we will be able to provide you with more insights into our mid term strategy.
The new dates will also enable us to put our strategy into context with our full year 2017 figures. And now, I would like to hand it over to Rainer.
Good morning, ladies and gentlemen, and thank you for joining us. After a very good Q1, OMV was able to deliver again a strong operational performance. Let me start with a review of the economic environment. Following OPEC's decision to cap Q4 last year, oil prices have increased in Q2 'seventeen compared with a very weak environment in the Q2 of last year. The oil price was up 9% to $50 per barrel.
However, the oil price has weakened compared to the Q1 'seventeen under the pressure of slower than anticipated inventory declines. This was due to a higher than expected U. S. Oil production and increasing output from Libya and Nigeria, which are excluded from the OPEC agreement. Gas prices improved year over year due to a cold winter in Europe, rising coal prices and nuclear outages in France.
The decrease quarter on quarter is explained by the typical seasonal development. The OMV realized gas price did not decrease to the same extent as the Central European gas hub prices. This is due to the longer term locked gas agreements and pricing in countries, which are not linked to the Central European gas hub. The refining indicator margins has averaged $6 per barrel in the quarter, 29% higher than the previous year's quarter and 11% above the prior quarter. The margin improvement was fueled by unusually strong fuel oil cracks and better middle distillates.
Ethylene and propylene margins were 30% higher than the previous year's quarter due to the planned turnarounds and unplanned outages. Butadiene margins decreased from the peak level seen in March, April, but remained on a very good level. While Asian prices decreased, the European market continued to be tight due to the turnaround season. The transformation of OMV is paying off. We actively managed our portfolio, freed up capital for more profitable investments and improved our cost base.
The results can be seen in our key financials. In the first half of twenty seventeen, we achieved the 3 CCS operating result of €1,500,000,000 To put this into perspective, the 6 months result is almost at the level of the entire year 2016. Those segments contributed to the strong performance. Upstream showed a sharp increase of €673,000,000 while downstream improved by €221,000,000 compared to the first half of twenty sixteen. The organic free cash flow of €930,000,000 more than doubled compared to the first half of twenty sixteen.
In addition, proceeds from divestments contributed €1,700,000,000 with €2,600,000,000 of free cash flow before dividend payment in the first half of twenty seventeen, OMV demonstrated a good resilience in a low oil price environment. Let me now come to the key highlights. In Q2 of 'seventeen, OMV's hydrocarbon production remained strong, reaching a record high of 339,000 barrels per day. This was mainly the result of an increased production from Libya. Again, downstream proved to be a natural hedge for our business in times of low oil prices.
Despite the refinery turnaround, which had a negative impact of more than €80,000,000 in the 2nd quarter, down Stream again generated strong earnings and cash flows. Over the last month, we also made further progress in reshaping our portfolio. On May 25, OMV signed a memorandum of understanding with the Abu Dhabi National Oil Company. The agreement outlines the corporation in a number of areas, including the evaluation of opportunities in refining and pest camp projects. On June 13, we closed the sale of our Turkish subsidiary OMV Petroffizi to Vitol, marking another important milestone in the execution of our corporate strategy.
On August 2, we divested our 50% stake in the Ashtad Offshore Oilfield in Tunisia. OMV's average net production from Ashtad was 3,000 barrels per day in 2016. We also continue to work on our cost competitiveness. Despite the maintenance season, we managed to maintain our upstream production cost below $9 per barrel. Last but not least, we are well on track with our cost savings target of more than €250,000,000 in 2017 compared to 2015.
Now let's turn to our financial performance indicators in Q2 'seventeen. We were able to double our clean CCF operating results to €662,000,000 compared to the previous year quarter. Also compared with the high Q1 'seventeen results, the underlying operating performance was strong, considering the negative impact of the refinery turnaround. Clean CCS net income attributable to stockholders rose by 27% to €282,000,000 compared to the prior year's quarter. The claim tax rate amounted to 35%, significantly above the Q2 of last year due to a bigger share of revenues from high-tech countries and upstream.
Clean CCS earnings per share increased to $0.86 compared to the prior year's quarter. The picture looks different if we look at the reported operating results, which was negatively impacted by one off FX effects. In Q2 'seventeen, we recorded net special items in the amount of €1,300,000,000 thereof €1,200,000,000 related to the OMV Patralopisi divestment. This stems from the negative development of the Turkish lira against the euro since the acquisition of OMV Patralofisi in 20 10. Therefore, OMV's group reported operating results came in at a minus €694,000,000 The group tax rate amounted to minus 23% in Q2 2017.
Net income attributable to Let me now
come to the performance of our 2
Let me now come to the performance of our 2 business segments. In Upstream, the clean operating results substantially increased from €3,000,000 to €259,000,000 This was driven by higher realized oil and gas prices as well as favorable FX effect, contributing to a total of €109,000,000 The OMB realized oil price rose by 19%, while Brent increased by 9%. We recorded a hedging gain of €17,000,000 €34,000,000 higher than in Q2 'sixteen when we recorded a loss. We also saw an improvement in our operations of €104,000,000 compared to the previous year's quarter. Hydrocarbon production went up by 22,000 birds per day, reaching a new quarterly record of 339,000 birds per day.
This was primarily due to the production contribution from Libya of 24,000 barrels per day. Production in Norway also increased despite maintenance activities at the Gulf Fox field. Higher sales volumes contributed €91,000,000 to the 2nd quarter operating result. Strict cost management led to an improvement of 28 €1,000,000 with the upward revision of reserves in Q4 2016, depreciation decreased by €43,000,000 The Downstream business continues to be a key contributor to group earnings and cash flow. The Clean CCS operating results of Downstream improved from 3 €63,000,000 to €411,000,000 driven by better results in downstream oil.
The Clean CCS operating results of downstream oil increased by almost €100,000,000 to €382,000,000 This was mainly attributable to significantly higher refining and petchem margins. OMV's indicator refining margin rose from 4 point $7 to $6 per barrel in the Q2 'seventeen. Ethylene and propylene margins improved by 38%. Butadiene margins were very strong, substantially above the prior year's quarter. In Q2 'seventeen, we successfully completed the turnaround of our fuel and PATCAM units at the Schwechat refinery.
The negative impact on earnings was more than €80,000,000 This was higher than the impact of the turnarounds from last year due to a greater complexity and a more favorable margin environment. Therefore, the earnings of the petrochemical business decreased slightly to €50,000,000 The contribution from Borealis declined by €18,000,000 to €94,000,000 related to the negative inventory effects. In addition, depreciation was lower due to the reclassification of OMV pathophysi to asset held for sale. Downstream GAAP, the clean CCS operating results declined from €74,000,000 to €29,000,000 The previous year's quarter included one off and valuation effects of €41,000,000 The good performance in our business segments in the Q2 of 'seventeen is accompanied by continued strict cost discipline. In upstream production cost decreased from $10,700,000 in Q2 of last year to $8,700,000 per barrel.
Despite maintenance activities, we were able to keep production costs at a similar low level as in Q1 'seventeen. We reduced our 2017 CapEx guidance by another €100,000,000 to €1,800,000,000 We expect investments in Romania to be lower than initially planned. In the first half of twenty seventeen, capital expenditures amounted to roughly €700,000,000 Around 60% of the investments were in upstream, primarily in Romania and Norway. And downstream, the major spending was related to the turnaround activities at the Svejjad refinery. Exploration and appraisal expenditures are expected to come in at €300,000,000 in 2017 as we continue to focus on low cost regions and near field opportunities.
For the full year 2017, our cost reduction program of more than €250,000,000 is very well on track. Let me now come to cash flow. In the first half of twenty seventeen, cash flow from operating activities increased by 19% to €1,900,000,000 This was supported by OMV's strong operational performance, higher prices as well increased dividends distributed by Borealis. This means, ladies and gentlemen, that our operating cash flow generated in the 1st 6 months is fully covering our investments for the first half year as well as the increased annual dividend. In addition, OMV received the cash proceeds from the divestments of OMV UK Upstream and OMV Patroofisi amounting to roughly €1,700,000,000 The inflow from divestments was partly offset by the first drawdown under the financing agreements for the Nord Stream 2 pipeline project.
This resulted in a cash outflow of approximately €200,000,000 Free cash flow after dividends rose substantially to €2,100,000,000 compared to €27,000,000 in the same period of last year. This marks a record high free cash flow after dividends for OMV and a mid-fifty oil price environment. Our financial profile has transformed dramatically since 2015. Thanks to a strong free cash flow generation from operating activities and divestment proceeds, OMV has managed to further reduce its net debt from €3,000,000,000 at the end of 2016 to €900,000,000 by mid year 2017. OMV's balance sheet is very healthy, reflecting a strong liquidity.
Cash and cash equivalents increased by €2,100,000,000 to €4,200,000,000 compared with the end of 2016. Also, we have €3,500,000,000 in undrawn credit facility. The cash will be used according to our strategic capital allocation priorities, capital expenditures, strategic acquisitions, dividend payments and the reduction of debt. The gearing ratio declined to 7%. Long term, we are aiming to keep our gearing ratio below 30%.
Based on the market developments and our own operational performance in the first half year, we have updated our full year's 2017 outlook as follows. For the second half year in twenty 17, OMV expects the average Brent oil price at a similar level compared to the first half year, which was US52 dollars per barrel. We increased our production guidance for 2017 to 330,000 barrels per day. We expect the production from Libya to be about 20,000 barrels per day in the second half of twenty seventeen, and thus on a similar level as in the 1st 6 months of this year. Production in Tunisia, Norway and in the CE region is expected to be slightly lower compared to the strong first half year.
Following a strong performance in the first half of twenty seventeen, we now project the full year refining margins to be higher than in 2016. 2017 CapEx is expected to come in at €1,800,000,000 a €100,000,000 lower than previously assumed. Moreover, we updated our group sensitivities with respect to brand price and euro U. S. Dollar exchange rate, primarily to reflect increased production from Libya.
You can see the details in the backup of the presentation. Before we take your questions, let me comment on the current discussions around potential U. S. Sanctions against Russia. We do not expect any impact on our 2 key major upstream projects, Yuzhno Russkoye and Achimov 4.5.
The acquisition of a 24.99 percent interest in the Yuzhno Russkoye gas field is progressing as planned. We have already received approval from the relevant Russian regulatory bodies, closing is expected by the end of 2017 at the latest. The negotiations for the Achimov 45 assets with Gazprom are developing as we speak. We are progressing on the details on the swap agreement, which we plan to discuss within Deutsche Ministry of Energy in autumn. We thus estimate to finalize the negotiations with Gazprom in the Q4 of this year.
The big topic in the media with regards to the U. S. Sanctions against Russia is obviously Nord Stream 2. It is too early to draw any final conclusion. We are monitoring the situation very carefully and will make an assessment when all facts are on the table.
It is not clear when and in which form any decision is going to be made. In general, sanctions have not proven to be an instrument that achieves its given goal as we have seen in the last years. As mentioned by the EU President, Juncker, it is not reasonable that the U. S. Administration is working on unilateral sanctions for the first time.
It is in Europe's interest to guarantee its security of supply of natural gas independently. From a European standpoint, additional quantities of natural gas are necessary as European production is in a significant decline. This is what makes Nord Stream 2 a good project. It brings additional security of supply, while at the same time guaranteeing attractive conditions for European customers. Now we are happy to
take your questions.
Thank you, Rainer. I would like now open the call for questions and would ask you to limit your questions to only one at a time so that we can take as many questions as possible. Of course, you're always welcome to rejoin the queue for a follow-up question. The first question comes from Mehdi Ennebati, Societe Generale. Please go ahead, Mehdi.
Hi, good morning all and thanks for taking my question. I will ask a question on Russia. So, Heiner, you say that the sanctions will have no impact on Husqvarna and Akimov for 5 projects. I just wanted to know if you were expecting to export some natural gas from Achimov 45 to Europe via Nord Stream 2? I am asking the question because Achimov 45 should have been started roughly at the same time than Nord Stream 2.
Another very quick question on Russia. You intend to lend roughly €285,000,000 to Gazprom for the construction of Nord Stream 2. I wanted to know if the payment will be made before the end of the year or could it be postponed because of the U. S. Sanctions?
And just maybe an additional question on your CapEx guidance of €1,800,000,000 for the full year 2017, whereas you've only spent €700,000,000 in H1. So just wanted to know what is the reason of such a CapEx acceleration in H2 2017, especially given that the U. S. Dollar is weakening compared to H1? Thank you.
All right, Nicky. You haven't changed. You count 1 for 3. So I think I tried to answer your questions as short as possible. Well, as we speak about Achimov 45, we do have we are negotiating the terms with Gazprom right now.
But we are is going to end up in a wellhead business. So we are selling the gas at the wellhead to Gaz Prom and the gas will move into their big pot. And I don't care where they are selling the gas to Ukraine, to China or to Germany or wherever, it doesn't matter. They have to pay for the price on the take or pay terms at the wellhead. So we don't have any marketing risk or logistic risk coming with our activities neither in Yusho Ruzkoye nor in Achimov 45.
Well, yes, we have done the first tranche payment on Nord Stream 2. That's your second question. The next payment will depend on the progress of Nord Stream 2 company with the construction of the pipelines and they will have a call. But, Mehdi, to give you a guidance and idea, I wouldn't expect a cash call from Nord Stream 2 before end of the year. The CapEx guidance of €1,800,000 you're absolutely right.
We haven't spent so much in the first half year, so we have to improve our activities. But it's usual year by year that you will get your bill from your contractors, especially at the end of the year. Why it is so? There are many reasons for that. So we expect that the CapEx spending second half will be higher than the first half year.
But you are right that there will be that there is a reduction of some project activities. I have mentioned in my speech that in Romania, some projects were postponed or will not be realized, but there's a major impact of the delay in Navarre in Tunisia. We see some strikes in the neighborhood of our fields and the production areas. That's the reason why we are going to have a delay of the realization of Nabara project.
And that's
the reason why a shift from Tunisian CapEx from 2017 into 2018 happened.
All right. Thank you very much.
You're welcome.
The next question comes from Ori Patricot, UBS.
Yes. Hello, everyone. Thank you for the presentation. A question on your tax rate, which increased from 20% to 35% from Q1 to Q2. You said there's an increase of the production in higher tax countries.
When I look at your production disclosure, production has gone up in EBITDA, but they're actually down in Norway quarter on quarter and the oil price was also down quarter on quarter. So I was wondering if there was anything else, anything special that we've spent a higher tax rate in the second quarter? And what's the guidance for the rest of the year, assuming the oil price stays pretty close to what it is at the moment? Thank you.
Yes. Thanks for your question, Ovi. This is Guy Nath speaking. The tax rate in Q2 is actually triggered by a couple of facts. Some of them normal course of business, some of them also extraordinary effect.
The fact that we have a shift from our revenues and our operating result from countries where we are paying lower taxes or are tax shielded into countries where we have higher taxes have the reasons that first of all in Austria we had less results due to the turnover in Schwechat from our downstream activities. And secondly, that we have higher volumes both in Libya and in Norway where we have high tax rates. So this, of course, has an effect. And while we are confident that we'll keep up most of the volumes in Libya and in Norway, that effect, therefore, will stay. Of course, the effect from Austria will be reversed because we have been starting the operations full steam again.
But we also had 2 smaller extraordinary effects that I'll just give you some information on. 1 is indeed on Norway, where we have taken some accrual on the tax side for discussion that we are currently having on intercompany charges. And this is in the amount of some $15,000,000 And we also had a reduction of tax receivable in Tunisia that is in the local currency of dinar. And this dinar has depreciated quite significantly. And this also has an effect of some $15,000,000 So those are two effects that you cannot expect to be continued in the quarter 3 quarter 4 year.
Okay. Thank you. So backside going on something about closer to 30% perhaps?
Yes. I think this right conclusion is right. We will be at around 30% or slightly lower if we are looking for the full year.
Okay. Thank you.
The next question comes from Michael Alsford, Citi. Please go ahead, Michael.
Hello. Thanks for taking my question. So the question is on the up stream and I guess the volume expectations into 2018. Clearly upgrading guidance in 2017 on the back of Libya production. But I'm just wondering whether you can give some sense as to the building blocks into 2018 regarding perhaps the decline rates for the mature assets in Austria and Romania, but then the building blocks to sort of get us towards an 'eighteen number.
I appreciate Russia obviously is a big part, but if you can talk about the existing business that would be very helpful. Thank you.
Michael, I tried to give you an answer. Hans is not here. So on our next call in autumn, he might give you more specified and detailed answer on that. What I can tell you
is that in 2018, as we
are expecting the closing of 18, as we are expecting the closing of our transaction with Uniper, 100,000 barrels today come on top of our production. So this is a trend of from 3 30,000 to 430,000 barrels per day. This is the best estimate I can give you today. The 430,000 barrels per day expecting that we have production in Libya also of 20,000 barrels per day. Give us some time whether or not second half is really kicking in like the first half in Libya.
We are more and more convinced because the production is pretty stable and we might go up. There's an upside potential because right now we are producing around more 24,000 to 25,000 barrels per day. So let's see how much of shutdowns we have to put into our calculation. But to make a long story short, next year, OMV, the production level will be something around 430,000 barrels per day.
Thank you. And then there's no real change to the view on decline rates within the base business
still as
previously? Okay. Thank you.
Yes. Absolutely. The small decline in Romania, yeah, which we have discussed already. Nothing changed there.
Okay. Thank you.
Thanks, Michael. The next question comes from Josh Stone, Barclays.
Hi. Good afternoon. Thanks for the presentation. Okay. To ask on costs, you talked about the EUR 250,000,000 improvements in OpEx.
Perhaps can you say how much give us an idea how much you've already achieved? And then is there any potential to do more in 2018? Thank you.
Regarding our cost savings target, we are very confident that we'll reach and not only reach, but even surpass the $250,000,000 in savings potential in comparison to a 2015 cost base. So this is going on very well. Measures are kicking in, are implemented on all areas. So in that respect, we think that the impact will be there. Regarding 2018, look, there is not a single year where we are not caring for our costs and where we are not trying to improve our efficiencies.
But of course, this will also on the absolute figure depend very much on the change in our portfolio as you might see.
But on the
comparison basis that we have with 2015, of course, we are trying to continue this very successful journey.
Very good. Thanks.
Okay, good. The next question comes from Marc Kofler, Jefferies. Please go ahead, Marc.
Hi, there. Good morning, everyone, and thanks for taking my question. I wanted to ask Rainer about the overall strategy. And as we've seen in the financial reports over the last few quarters now, we're starting to see a material improvement in the underlying operations of the business. Since you took over and became CEO, how far would you now say that the company is in terms of the progress that you're hoping to make around sort of the big strategic moves to the company that you've been making?
And I suppose I'm really thinking about that in the context of the balance sheet. It strikes me that you still have lots more firepower if you were looking to sort of further change or further develop the strategy. So I was just wondering if you could give an update on that, please, and particularly the parameters that you would judge any incremental downstream new FIDs or project expansions?
Well, thanks, Mark. I tried to make it short because what you're asking is the main topic we will have in March next year when we have our strategy day with you together. So then I will go more a bit in detail. But taking your questions, I would say the vast majority of this strategy I have agreed and worked out with my colleagues 2 years ago is more or less done. All what is remaining is the 2 projects in Russia and all the other projects we have mentioned are more or less realized.
So only Yuzhno Russkoye and the asset swap is the remaining part of our strategy. And that's the reason why we have invited you for the Strategy Day next year because we will discuss with you what is the next story of OMV. And you're absolutely right that this will be also in the focus of how do we balance the company as we do see especially in these 2 years with a difficult oil price environment that we are benefiting from the integrated structure. So it will be a downstream storyline. In between, we will work a little bit to come up with more details on downstream, yes?
And Manfred is totally silent, yes? He is not
ready to give you anything. So
I feel sorry we have to pass Christmas and after Christmas we can talk about it.
Okay. I look forward to it.
Yes. You're most welcome. It's an interesting story.
The next question comes from Matt Lofting, JPMorgan. Please go ahead, Matt.
Yeah. Thanks, Al. As much as Manfred has been silent, I wanted to ask a question on the downstream, if I could. I mean, Randy, you referenced the strength of refining and petchem's margins through what's been a very good first half. Could you discuss your sort of views in terms of the repeatability of that strong first half divisional performance?
And specifically, within that, how much of the sort of circa $800,000,000 downstream oil EBIT came from petchem's given that you're sort of guiding petchem's margins lower in the outlook for the second half? Thanks.
Yes. Thanks for the question. What we know already is now July and to a certain extent August as well. So we are having a little bit of an advantage here. And that is the reason why I can tell you that before the background of increasing demand, especially in our markets, but not only you look on the global demand for fuel, there is an increase.
And this is the background for us to believe that we will most probably have lower margins in the second half of the year. But at the end, we will come out more or less, I give you an indication of $5 per barrel of the refining margin for 2017. So this would be close to 10% higher than last year. As far as the petrochemical margins are concerned, we have seen a very, very strong second quarter And this has been mainly supported by a lot of outages, a lot of turnarounds in crackers, especially in Europe here. This is over now.
So they will move and they will flatten out. But at the same time, what I'm currently seeing is we will not be very far away from the average in the 1st 6 months over the year. And if the oil price and this is always a topic where we have the integration discussion. If the oil price is not really shooting up, then I do not see a reason why demand would then go down next year. So I think this is something which is a very good basis for further significantly better refining margins than we have been accustomed to see in the last couple of years, I would say.
The petrochemical resides in the Q2 has been impacted by 2 things. One is that we had the extended turnaround in the Schweitzer refinery, as you know. And most of the €80,000,000 €85,000,000 impact has been as well coming in the petrochemical part because this was the main focus of the turnaround. And the second one is a little bit less contribution by Borealis. It's not significantly less, but it is a bit less and this is mainly coming from a very low fertilizer economic environment as well as a certain inventory effect, accumulation over a couple of months here due to declining prices.
And the other reason and poor reality is that there is just an operational problem with the unit in Abu Dhabi Refinery. So the propylene coming from that unit, the feedstock to Borealis is currently out. This is having a negative impact on the result as well. I mean, we are obviously contributing or affected with 36% in our operating results as well.
Thank you.
Thanks very much.
I don't see any other question in the queue. I just wanted to check with the operator. Mehdi, are there any other questions? Or if someone has you can obviously requeue.
We have no further questions in the queue at the moment.
Okay. So if that's the case, ladies and gentlemen, we are at the end of our conference call and would like to thank you for joining us today. Should you have any further questions, please contact the Investor Relations team and we will be happy to help you. Goodbye and have a good day.
Bye bye. Thank you.
Thank you. That concludes today's teleconference call. A replay of the call will be available for 1 week. The number is printed on the teleconference invitation or alternatively please contact OMV's Investor Relations department directly to obtain the replay numbers. Thank you.