Welcome to the OMV Group's conference call. If you would like to ask a question after the presentation, you may register your request by pressing the star one button on your telephone at any time during the actual presentation or during the question and answer session itself. You should have received a presentation by email. However, if you do not have a copy of the presentation, the slides and 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. 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. Greger. Thank you.
Thank you, Maddy. Good morning, ladies and gentlemen, welcome to OMV's earnings call for the second quarter of 2017. With me on the call are Rainer Seele, OMV CEO, Reinhard Florey, our CFO, and Manfred Leitner, the board member responsible for the Downstream segment. Johann Pleininger and the executive board responsible for Upstream is on a business trip and therefore cannot join our call today. Rainer will walk you through the highlights of the quarter and discuss OMV's financial performance. Afterwards, the three 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 midterm strategy.
The new date will also enable us to put our strategy into context with our full year 2017 figures. 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 first quarter, 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 production in the fourth quarter last year, oil prices have increased in second quarter 2017 compared with the very weak environment in the second quarter of last year. The oil price was up 9% to $50 per barrel. The oil price has weakened compared to the first quarter 2017 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 38% higher than the previous year's quarter due to the planned turnarounds and unplanned outages. Butadiene margins decreased from the peak levels seen in March, April, remain on a very good level. 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 2017, we achieved a Clean CCS Operating Result of EUR 1.5 billion. To put this into perspective, the six-month result is almost at the level of the entire year 2016. Both segments contributed to the strong performance. Upstream showed a sharp increase of EUR 673 million. Downstream improved by EUR 221 million compared to the first half of 2016. The organic free cash flow of EUR 930 million more than doubled compared to the first half of 2016. Proceeds from divestments contributed EUR 1.7 billion, with EUR 2.6 billion of free cash flow before dividend payment in the first half of 2017. OMV demonstrated a good resilience in a low oil price environment.
Let me now come to the key highlights. In Q2 2017, 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. 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 EUR 80 million in Q2, downstream again generated strong earnings and cash flows. Over the last month, we also made further progress in reshaping our portfolio. On May 25th, OMV signed a memorandum of understanding with the Abu Dhabi National Oil Company. The agreement outlines the cooperation in a number of areas, including the evaluation of opportunities in refining and petchem projects.
On June 13th, we closed the sale of our Turkish subsidiary, OMV Petrol Ofisi, to Vitol, marking another important milestone in the execution of our corporate strategy. On August 2nd, we divested our 50% stake in the Ashtart offshore oil field in Tunisia. OMV's average net production from Ashtart was 3,000 barrels per day in 2016. We also continued 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 EUR 250 million in 2017 compared to 2015. Now let's turn to our financial performance indicators in Q2 '17. We were able to double our Clean CCS operating results to EUR 662 million compared to the previous year quarter.
Compared with the high Q1 '17 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 EUR 282 million compared to the prior year's quarter. The clean tax rate amounted to 35%, significantly above the second quarter of last year, due to a bigger share of revenues from high-tax countries in upstream. Clean CCS earnings per share increased to EUR 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 of FX effects. In Q2 '17, we recorded net special items in the amount of EUR 1.3 billion, thereof EUR 1.2 billion related to the OMV Petrol Ofisi divestment. This stems from the negative development of the Turkish lira against the EUR since the acquisition of OMV Petrol Ofisi in 2010.
OMV's group reported operating results came in at a minus EUR 694 million. The group tax rate amounted to minus 23% in Q2 '17. Net income attributable to stockholders was minus EUR 1 billion, and earnings per share were minus EUR 3.15. Let me now come to the performance of our two business segments. In upstream, the clean operating results substantially increased from EUR 3 million to EUR 259 million. This was driven by higher realized oil and gas prices, as well as favorable FX effect, contributing to a total of EUR 109 million. The OMV realized oil price rose by 19%, while Brent increased by 9%. We recorded a hedging gain of EUR 17 million, EUR 34 million higher than in Q2 '16 when we recorded a loss. We also saw an improvement in our operations of EUR 104 million compared to the previous year's quarter.
Hydrocarbon production went up by 22,000 barrels per day, reaching a new quarterly record of 339,000 barrels 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 Gullfaks field. Higher sales volumes contributed EUR 91 million to the Q2 operating result. Strict cost management led to an improvement of EUR 28 million. With the upward revision of reserves in Q4 '16, depreciation decreased by EUR 43 million. The downstream business continues to be a key contributor to group earnings and cash flow. The Clean CCS operating results of downstream improved from EUR 363 million to EUR 411 million, driven by better results in downstream oil. The Clean CCS operating results of downstream oil increased by almost EUR 100 million to EUR 382 million. This was mainly attributable to significantly higher refining and petchem margins.
OMV's indicator refining margin rose from 4.7 to $6 per barrel in the second quarter 2017. Ethylene and propylene margins improved by 38%. Butadiene margins were very strong, substantially above the prior year's quarter. In second quarter 2017, we successfully completed the turnaround of our fuel and petchem units at the Schwechat Refinery. The negative impact on earnings was more than EUR 80 million. 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 EUR 50 million. The contribution from Borealis declined by EUR 18 million to EUR 94 million related to the negative inventory effects. In addition, depreciation was lower due to the reclassification of OMV Petrol Ofisi to asset held for sale.
In downstream gas, the Clean CCS Operating Result declined from EUR 74 million to EUR 29 million. The previous year's quarter included one-off and valuation effects of EUR 41 million. The good performance in our business segments in the second quarter of 2017 is accompanied by a continued strict cost discipline. In upstream, production costs decreased from $10.7 in second quarter of last year to $8.7 per barrel. Despite maintenance activities, we were able to keep production costs at a similar low level as in first quarter 2017. We reduced our 2017 CapEx guidance by another EUR 100 million to EUR 1.8 billion. We expect investments in Romania to be lower than initially planned. In the first half of 2017, capital expenditures amounted to roughly EUR 700 million. Around 60% of the investments were in upstream, primarily in Romania and Norway.
In downstream, the major spending was related to the turnaround activities at the Schwechat Refinery. Exploration and appraisal expenditures are expected to come in at EUR 300 million 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 EUR 250 million is very well on track. Let me now come to cash flow. In the first half of 2017, cash flow from operating activities increased by 19% to EUR 1.9 billion. This was supported by OMV's strong operational performance, higher prices, as well as increased dividends distributed by Borealis. This means, ladies and gentlemen, that our operating cash flow generated in the first six 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 (U.K.) Upstream and OMV Petrol Ofisi amounting to roughly EUR 1.7 billion. 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 EUR 200 million. Free cash flow after dividends rose substantially to EUR 2.1 billion compared to EUR 27 million in the same period of last year. This marks a record high free cash flow after dividends for OMV in a mid-50 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 EUR 3 billion at the end of 2016 to EUR 0.9 billion by mid-year 2017.
OMV's balance sheet is very healthy, reflecting a strong liquidity. Cash and cash equivalents increased by EUR 2.1 billion to EUR 4.2 billion compared with the end of 2016. We have EUR 3.5 billion 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 2017 outlook as follows. For the second half year in 2017, OMV expects the average Brent oil price at a similar level compared to the first half year, which was $52 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 2017, and thus on a similar level as in the first six 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 2017, we now project the full-year refining margins to be higher than in 2016. 2017 CapEx is expected to come in at EUR 1.8 billion, EUR 100 million lower than previously assumed. Moreover, we updated our group sensitivities with respect to Brent price and EUR-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 two key major upstream projects, Yuzhno Russkoye and Achimov 4, 5. The acquisition of a 24.99% 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 4, 5 assets with Gazprom are developing as we speak. We are progressing on the details on the swap agreement, which we plan to discuss with the Norwegian Ministry of Petroleum and Energy in autumn. We thus estimate to finalize the negotiations with Gazprom in the fourth quarter 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 are always welcome to rejoin the queue for a follow-up question. The first question comes from Mehdi Ennassiri, Societe Generale. Please go ahead, Mehdi.
Hi. Good morning, all, and thanks for taking my question. I will ask a question on Russia. Rainer, you say that the sanctions will have no impact on Yuzhno Russkoye and Achimov 4, 5 projects. I just wanted to know if you were expecting to export some natural gas from Achimov 4, 5 to Europe via Nord Stream 2. I am asking the question because Achimov 4, 5 should have been started roughly at the same time than Nord Stream 2. Another very quick question on Russia. You intend to lend roughly EUR 285 million 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?
Just maybe an additional question on your CapEx guidance of EUR 1.8 billion for the full year 2017, whereas you have only spent EUR 700 million in H1. 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, Mehdi. You haven't changed. You count one for three. I think I try to answer your question as short as possible. Well, as we speak about Achimov 4, 5, we are negotiating the terms with Gazprom right now, but we are targeting an agreement with Gazprom, what we do have in place also for Yuzhno Russkoye. Which means that our activity in Russia is going to end up in a wellhead business. We are selling the gas at the wellhead to Gazprom, and the gas will move into their big pot. 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.
We don't have any marketing risk or logistic risk coming with our activities Neither in Yuzhno Russkoye nor in Achimov 4-5. 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. 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 EUR 1.8 billion , you're absolutely right. We haven't spent so much in the first half year, we have to improve our activities. 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.
We expect that the CapEx spending second half will be higher than the first half year. You are right that there's a reduction of some project activities. I have mentioned in my speech that in Romania, some projects were postponed or will not be realized. There's a major impact of the delay in Nawara and 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 Nawara project, and that's the reason why a shift from Tunisian CapEx from 2017 into 2018 happened.
All right. Thanks very much.
You're welcome. The next question comes from Henri 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 it's an increase of the production in higher tax countries. When I look at your production disclosure, the production has gone up in Libya, but actually down in Norway quarter-on-quarter. The oil price was also down quarter-on-quarter. I was wondering if there was anything else, anything special that would explain the higher tax rate in the second quarter. What's the guidance for the rest of the year, assuming the oil price stays pretty close to where it is at the moment? Thank you.
Thanks for your question, Henri. This is Rainer Seele 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 effects. The fact that we had 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 reason that, first of all, in Austria, we had less result due to the turnover in Schwechat from our downstream activities. Secondly, that we had higher volumes both in Libya and in Norway, where we have high tax rates. This, of course, has an effect. 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. We also had two small extraordinary effects that I'll just give you some information on. One is indeed on Norway, where we have taken some accrual on the tax side for a discussion that we are currently having on intercompany charges. This is in the amount of some EUR 15 million. We also had a reduction of a tax receivable in Tunisia that is in the local currency of dinar. This dinar has depreciated quite significantly, this also had an effect of some EUR 15 million. Those are two effects that you cannot expect to be continued in the quarter three or quarter four this year.
Okay. Thank you. Tax rate going on something about closer to 30%, perhaps?
Yes. I think this 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. The question's on the upstream and I guess the volume expectations into 2018. Clearly upgrading guidance in 2017 on the back of Libya production. 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, the building blocks to sort of get us towards a 2018 number. I appreciate Russia obviously is a big part, 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, on our next call in autumn, he might give you a more specified and detailed answer on that. What I can tell you is that in 2018, as we are expecting the closing of our transaction with Uniper, 100,000 barrels per day come on top of our production. This is a trend from 330,000 to 430,000 barrels per day. This is the best estimate I can give you today. The 430,000 barrels per day are expecting that we have a 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 is an upside potential because right now we are producing around more 24,000 to 25,000 barrels per day. Let's see how much of shutdowns we have to put into our calculation. To make a long story short, next year OMV, the production level will be something around 430,000 barrels per day.
Thank you. There's no real change to the view on decline rates within the base business-
Yeah
still as previously. Okay. Thank you.
Yeah. Absolutely. A small decline in Romania, which we have discussed already, nothing changed there.
Okay. Thank you.
Yep.
Good. Thanks, Michael. The next question comes from Joshua Stone, Barclays.
Hi, good afternoon. Thanks for the presentation. I want to ask on costs. You talk about the EUR 250 million improvements in OpEx. Perhaps can you say how much, give us an idea of 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 EUR 250 million in savings potential in comparison to a 2015 cost base. This is going on very well. Measures are kicking in, are implemented on all areas. In that respect, we think that the impact will be there. Regarding 2018, look, there's not a single year where we are not caring for our cost and where we are not trying to improve our efficiencies. Of course, this will also, on the absolute figure, depend very much on the change in our portfolio as you might see. 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.
Oh, hi there. 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 or 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 were hoping to make around sort of the big strategic moves the company that you've been making? 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. I was just wondering if you could give an update on that, please.
Particularly the parameters that you would judge any incremental downstream new FIDs or project expansion.
Well, thanks, Marc. I try to make it short because what you are asking is the main topic we will have in March next year, when we have our strategy day with you together. I will go more a bit in detail. Taking your questions, I would say the vast majority of the strategy I have agreed and worked out with my board colleagues two years ago is more or less done. All what is remaining is the two projects in Russia, and all the other projects we have mentioned are more or less realized. Only Yuzhno Russkoye and the asset swap is the remaining part of our strategy. 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.
You are absolutely right that this will be also on the focus of how do we balance the company as we do see, especially in these two years with a difficult oil price environment, that we are benefiting from the integrated structure. It will be a downstream storyline. In between, we will work a little bit, to come up with more details on downstream. Manfred is totally silent. He's not ready to give you anything. 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.
Yeah, I just wanted to remind you, if you want to ask a question, please press the star 1 button on your telephone. The next question comes from Matthew Lofting, J.P. Morgan. Please go ahead, Matt.
Yeah, thanks all. As much as Manfred's been silent, I wanted to ask a question on the downstream, if I could. I mean, Rainer, you referenced the strength of refining and petchems 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 EUR 800 million downstream oil EBIT came from petchems, given that you're sort of guiding petchems margins lower in the outlook for the second half? Thanks.
Thanks for the question. What we know already is now July and the third week in 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 market, but not only, you look on the global demand for fuel, there is an increase. This is the background for us to believe that we will most probably have lower margins in the second half of the year. At the end, we will come out more or less at, I give you an indication of $5 per barrel of the refining margin for 2017. 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, 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 smoothen, and they will flatten out. At the same time, what I am currently seeing is we will not be very far away from the average in the first 6 months over the year. 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.
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 result in the second quarter has been impacted by two things. One is that we had the extended turnaround in the Schwechat refinery, as you know. Most of the EUR 80 million-EUR 85 million impact has been as well coming in the petrochemical part because this was the main focus of the turnaround. The second one is a little bit less contribution by Borealis. That is 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.
The other reason in Borealis is that there is a certain operational problem with a unit in Abu Dhabi refinery. The propylene coming from that unit as a 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 result 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. Maddie, are there any other questions? Or if someone has an additional question, you can obviously re-queue.
We have no further questions in the queue at the moment.
Okay. 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.
Bye-bye.
Thank you.
Thank you. That concludes today's teleconference call. A replay of the call will be available for one week. The number is printed on the teleconference invitation. Alternatively, please contact OMV's investor relations department directly to obtain the replay numbers. Thank you.