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 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 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 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 Ms. Magdalena Moll. Please go ahead, Ms. Moll.
Thank you very much, Andrea. Good morning, ladies and gentlemen, and welcome to OMV's conference call. As you have seen over the weekend, there was a lot of action at OMV. On Friday evening, we signed the divestment of OMV Petrol Ofisi, and on Sunday evening, we signed the acquisition of a 24.99% share in the Yuzhno-Russkoye gas field, one of the largest fields in Russia. With this, OMV shows the ability to deliver on its communicated strategy of value-added growth. With me on the call today to explain both of the transactions are Rainer Seele, our chairman of the executive board and chief executive officer, Johann Pleininger, executive board member upstream, and Manfred Leitner, executive board member downstream. Now I would like to hand the presentation over to Rainer.
Good morning, ladies and gentlemen, welcome to today's conference call, and thank you for joining us. As Maggie said, over the last days, we have successfully delivered on our strategy by completing two major transactions. On March 3rd, we have signed the divestment of OMV Petrol Ofisi, and yesterday, we have successfully signed the acquisition of a 24.99% share in the Yuzhno-Russkoye natural gas field. First, let me hand over to Manfred Leitner for the OMV Petrol Ofisi divestment. Manfred.
Thank you, Rainer. Welcome to today's conference call as well from my side. On Friday, we have signed the sale of OMV Petrol Ofisi to Vitol Group. The overall value of the transaction amounts to EUR 1.368 billion, thereof EUR 81 million relates to net cash proceeds from a prior carve-out of OMV Turkish gas entity. The transaction is subject to conditions, including the relevant regulatory approvals and is anticipated to close in Q3 2017 at the latest. The original plan of integrating Petrol Ofisi into the value chain of OMV Group could not be realized. Therefore, the decision to sell the company was the right and necessary step in the course of implementing our corporate strategy. In light of the challenging environment, we are pleased that we successfully concluded the negotiations. Based on the purchase price, OMV will record a further impairment of EUR 186 million in its Q4 2016 financial accounts.
This booking is in addition to the impairment of EUR 184 million recorded as of December 31st, 2016, when OMV reclassified OMV Petrol Ofisi as asset held for sale. Upon closing of the transaction, a negative foreign exchange rate effect of approximately EUR 1.1 billion has to be recorded in OMV Group net income. This stems from the negative development of the Turkish lira against the euro since the acquisition of OMV Petrol Ofisi in 2010. This has no impact on OMV Group equity since corresponding foreign exchange translation effects were directly charged to group equity in prior periods. On the next slide, you can see the impact of OMV Petrol Ofisi sale on downstream. In a nutshell, the sale of OMV Petrol Ofisi results in both improved efficiencies and financials of our downstream operations.
Obviously, total refined product sales volumes and the number of filling stations will strongly decline following the divestment. However, the downstream oil operations will not be significantly impacted, and in some cases, we will see even a positive effect. For example, on the basis of 2016 numbers, the average throughput per filling station increases to 3.6 million liters per station, excluding OMV Petrol Ofisi. This is obviously due to a lower than average throughput per station in Turkey. Looking at the financials, there will be an approximately EUR 100 million negative impact in Clean CCS EBIT following the divestment. However, OMV Petrol Ofisi only had a minor impact on the operating cash flow as well as on the free cash flow of the downstream oil division. Operating cash flow and free cash flow, excluding OMV Petrol Ofisi, only show a decline of 7% and 3% respectively.
Bottom line, the Clean CCS return on the net assets even increases by two percentage points. I would like to hand over now back to Rainer for the presentation of our second transaction.
Thank you, Manfred. Ladies and gentlemen, I am now very much delighted to announce that OMV signed an agreement to acquire a 24.99% share in the Yuzhno-Russkoye natural gas field in Western Siberia from Uniper. It was a late-night transaction. Although it was very close to midnight, we took the chance to have some champagne. I will be very fluent afterwards to answer your questions. The purchase price amounts to $1.85 billion U.S. plus cash on the balance sheet as of December 31, 2016. It includes $36 million U.S., corresponding to part of 2017 transportation costs, which have been paid in advance by the seller. The transaction will be retroactively effective as of January 1, 2017. Closing is envisaged until year-end 2017.
The implementation of the transaction is subject to further conditions, including co-shareholder consent, as well as merger control and foreign investment control clearance in Russia. The project gives OMV access to a world-class, fully developed and producing natural gas field with a secondary horizon up for a development decision by the end of 2017. Yuzhno-Russkoye's remaining recoverable reserves, net to OMV, are around 580 million barrels of oil equivalent. The gas from the field is the key resource for the Nord Stream pipeline, which supplies Germany directly with gas from Russia. The operator and owner of the production license is the Russian company, Severneftegazprom, SNGP. The license was awarded to SNGP in 1993. Gazprom will continue to hold a 50% stake in SNGP, while Wintershall and OMV each own approximately 25%. OMV will be entitled to 24.99% of the economic interest of the Yuzhno-Russkoye field.
With this transaction, ladies and gentlemen, we build a new core area, Russia, in our upstream portfolio with production of 100,000 barrels per day. This is fully compliant with the execution of our strategy to expand the integrated cooperation with Gazprom. Now my colleague, Johann, will give you more insight into the Yuzhno-Russkoye field and the financials.
Thank you, Rainer. Welcome from my side as well. Let me provide you with more insight to the Yuzhno-Russkoye field. The Yuzhno-Russkoye field is located in Russia's autonomous region of Yamal-Nenets, in Western Siberia, 200 kilometers east of the Ust-Balyk field. The Yuzhno-Russkoye field was discovered in 1969 and extends over approximately 1,100 square kilometers. The license for the field was awarded in 1993 and is valid until the end of 2043. The gas produced is transported to the central processing facilities in the field. From there, shipped 120 kilometers to the tie-in point of Gazprom's transportation network. After going through various compressor stations, the gas is fed into the Nord Stream pipeline. The total distance from the fields to the landing point in Germany is close to 4,000 kilometers. Production started at Yuzhno-Russkoye in October 2007.
In 2009, Yuzhno-Russkoye reached plateau production of 25 billion cubic meters per year, which corresponds to 400,000 barrels of oil equivalent per day. Currently, more than 140 wells are producing. The production profile shows that the Yuzhno-Russkoye project brings net production of 100,000 barrels of oil equivalent per day to OMV right after closing. The field will add approximately 580 million barrels of oil equivalent of remaining recoverable reserves going forward. Yuzhno-Russkoye will deliver 100% reserve replacement rate for around five years based on OMV's production volumes from 2016. OMV's share of CapEx is expected to amount to approximately $20 million per year until license expiry. Therefore, only very small investments are needed to realize the production profile. Our participation in Yuzhno-Russkoye does not change OMV's CapEx guidance. Let me explain you to the subsurface of Yuzhno-Russkoye. The field consists of four layers.
The first layer is the Turonian reservoir, which lies at 700 meters depth. Production tests from first wells are ongoing at the Turonian reservoir, and the final investment decision for the development of this layer is planned to be taken in Q4 2017. The second layer is the Cenomanian at a depth of 850 meters. This is the layer where the current production comes from. There are two more layers at a depth of 1,200 meters and 2,800 meters respectively, which are not yet developed. Looking at the combined production profile of both our participations in Yuzhno-Russkoye and Achimov 4 and 5, one sees steady production growth. To date, Yuzhno-Russkoye is already producing at plateau. Production will begin to decline at Yuzhno-Russkoye in the early 2020s, Achimov 4 and 5 will begin.
This ensures a stable and increasing production flow for OMV for a long period of time, reaching around 150,000 barrels of oil equivalent per day in 2025. Yuzhno-Russkoye production, resulting in an immediate and stable cash flow, will be used to fund the capital needs of Achimov 4 and 5, which will start producing in 2019. This means that with the acquisition of Yuzhno-Russkoye, we are creating a self-funding OMV Russia business. Following this transaction, Russia becomes one of our core regions in our upstream portfolio. Both projects provide OMV with a sustainable Russia upstream portfolio, boosting OMV's reserve space by more than one billion barrels of oil equivalent. Let me now turn to the organizational structure and the financial impact on OMV. The gas produced is sold by the operator, Severneftegazprom, pro rata to the three joint venture partners.
OMV's 24.99% share in Severneftegazprom's production will be sold by the trader at a cost-plus-margin price. The trader will subsequently sell the gas to Gazprom under a take-or-pay agreement. The volumes will be 50% sold domestically at Russian domestic price net back, and 50% at German import price net back. The trader's result will be fully consolidated into OMV's figures in Clean CCS EBIT and net income. In addition, OMV will consolidate 24.99% of Severneftegazprom's net profit in income from equity accounted investments. The traders in Severneftegazprom's net profits in each financial year will be distributed as dividends. OMV will receive its share of dividends for the result of the financial year 2017, starting in 2018. Let me hand back to Rainer for the strategic rationale of this transaction.
Thank you, Hans. Ladies and gentlemen, let me now summarize the strategic rationale. By acquiring this stake, OMV will provide this stake with the opportunity to increase its current production by approximately 100,000 barrels per day. This means that after closing, OMV will be producing more than 400,000 barrels per day. Costs in Russia along the entire upstream value chain from finding to development and production costs are among the lowest in the world. Therefore, production in Russia will improve OMV's cost position. Unit production costs in Yuzhno-Russkoye are expected to be below EUR 2 per barrel on average for the contracted period. This translates into average production costs in our upstream portfolio of below EUR 10 per barrel after closing. This was the target I have announced to you, which we have reached now as OMV as a cost target.
Yuzhno-Russkoye will generate attractive cash flows without requiring significant investments. It is expected to generate dividends of approximately EUR 200 million per year midterm. CapEx needs are projected to amount to only $20 million per year until license expires. Just put the number in the context of our budget, which is EUR 2 billion, and this is 1% of our budget, what I am talking about, so less than the figures I normally discuss with you. The transaction gives OMV the ability to replenish its reserves. With remaining recoverable reserves of around 580 million barrels, Yuzhno-Russkoye becomes a major source of reserve replenishment in OMV's portfolio. Thus, the Yuzhno-Russkoye volumes will enable OMV to reach its strategic target of 100% reserve replenishment rate for a period of around five years based on our production in 2016.
OMV has, of course, a long and successful cooperation with Gazprom for almost half a century. Gazprom is a key gas player for Europe and will remain in this position for decades. OMV will continue to identify and jointly develop further projects and opportunities with Gazprom. Thank you, ladies and gentlemen. Now we are more than happy to take your questions.
Ladies and gentlemen, I would now like to open the call for questions and ask you to please limit your questions to only one at a time, so that we can take as many questions as possible. Of course, we would like to invite you to rejoin the queue for any follow-up questions you may have. Now we have already a list of questions, and we start with our dear colleague, Mehdi Ennebati from Société Générale.
Hi. Good morning all, and thanks for taking my questions. Two very small questions. Not one, but two very small. First one, you provided EUR 200 million cash dividend from the Yuzhno-Russkoye project from midterm. What does midterm mean? What gas price do you use to get this EUR 200 million dividend? Second question, now you've resolved your production decline issue with Achimov 4/5 and Yuzhno acquisitions. Should we consider that even post 2018, your CapEx will remain at EUR 2 billion? Thanks.
Welcome, Mehdi. I'm more than happy to answer your questions very short. Midterm means three to five years. The gas price we are using, we keep as a secret, but I will give you some guidance that you will look into the forward prices. The production decline past 2018, we are still committed to the EUR 2 billion CapEx guidance we have given to you. There is no further need to increase our CapEx forecast. As I have said, Yuzhno-Russkoye has no real impact on our CapEx numbers.
Post 2018-
Wait a minute.
Your CapEx will remain at EUR 2 billion?
Correct.
Thank you.
Good. Next question comes from Michael Alford, Citigroup. Please limit it to one question because we have so many, otherwise the other colleagues don't have a chance to ask. Okay, Michael?
Thanks, Maggie. I'll honor your request. One question from me. Can you just confirm what the cash in will be from the Petrol Ofisi deal in third quarter? There's lots of moving parts. I just wanted to know what you'll receive in terms of incremental cash, versus the headline price that you've announced today. Thank you.
The cash coming to the OMV Group will be, as indicated already, EUR 1.368 less EUR 81. The EUR 81 refers to a sales price that will be transferred from OMV Gas & Power to buy out the gas entities from the Petrol Ofisi holdings. The difference will be the cash in into the Group with EUR 1.287.
Okay, thank you.
Welcome.
The next one comes from Thomas Adolff, Credit Suisse.
Good morning. Thanks for taking my question. Rainer, I think in Russia they drink vodka, not champagne. I do look forward to, given the importance of Russia now to OMV, I look forward to the field trip that you plan on organizing. The question I had was just overall on the portfolio. I think in the past you've said each of the key hubs that you plan on building needs to be at least 50 KBD in size and self-sufficient. Obviously Russia will represent triple the minimum by 2025. I guess my question is, by 2025, as you see the business today and whatever potential acquisition you're planning for the near term, where do you see production evolve by 2025? Also, how do you define concentration risk if there's a definition for that? How do you think about oil versus gas split by 2025?
Thank you.
Thomas, I have to make a first statement on this nice liquids. I started to drink champagne with Uniper because it's a German company, but I will continue with vodka with Gazprom when we will close our asset deal.
Certainly.
Let's talk about 2025. Hans has given you a little bit of an idea where we are going to be in 2025. He was talking about a 450,000 barrels per day company. Do we sit back and do nothing until 2025? I don't think so. We will prepare the company for value-added growth. Right now, we do see projects in our pipeline, which will bring us to 450,000 barrels per day. It's a little bit depending on how much North Africa will kick into our numbers. We have now changed our position in Libya. As you may remember with the last transaction when we have acquired the shares from Occidental. We have now the potential to build a 50,000 barrels per day production in Libya, which is bringing Libya as a core by itself.
As we speak about our production volumes from Russia right now, if you take the increase from 320 to 420, we are talking about one fourth of our production, which is associated with Russia. That's more or less a pretty good size in our portfolio. If there are other opportunities, let's wait and see how we will outbalance our portfolio. We might grow then also in other regions, but as an orientation, one fourth to one third is more or less the production volume we do have in our mid to long-term plans right now. The split oil and gas will be now in favor of gas, slightly 60% is now gas.
We don't make it a secret that we do like gas because the long-term outlook for gas looks a bit more positive than for oil. We're talking about the global growth in gas, whereas we are talking long-term, global decline of oil demand. That's why we have a clear strategy that we would like to go for gas.
Perfect. Thank you very much.
The next question comes from Marc Kofler from Jefferies.
Hi there. Morning, everyone. Thanks for taking my question. I guess this one's a little bit similar to the previous question. Rainer, a lot's changed in the company since you became CEO in a relatively short period of time. Given, or rather assuming successful completion of this transaction, is it fair to say that all the sort of big strategic cards which you planned on playing when you first joined the company will have been played? Thank you.
Well, Marc, we have done a lot to restructure our portfolio. Absolutely. I fully agree. If you look back within one year, we are talking at least about three big mega deals we have closed with our transaction. Is there more to come? Well, first of all, we have to finalize our swap transaction, which makes us really busy, which is also a EUR 1 billion transaction. We are working hard also to find a solution to participate in the Nord Stream 2 pipeline project. Then give me some time to think about a new surprise for you.
Great. Thanks very much.
The next question comes from Hazem Rasheed from Morgan Stanley. Good morning, Hazem.
Thank you. Good morning, and thank you for the presentation. Actually, most of my sort of questions have already been answered actually, the one question I have is just on the dividend impact, and you talk about it sort of obviously coming in from 2018. You've given a medium-term guidance. Is there any sense you can give us in terms of what that could be sort of nearer term? Is there anything around 2018 that we should think about that it could be quite a bit lower? Actually with 2018, are you likely to get sort of two dividend payments in one? I just wanted to get clarification on that because the transaction is dated as of 1st of January 2017, so just in terms of understanding the phasing of the cash flow. Thanks.
Thank you, Hazem, that you did not repeat what you always say, that our dividend yield is so low. I know that, and I'm always thinking about it. I have taken your point, and that's the reason why Reinhard in our last conference call said that we are working on a progressive dividend. Yeah. I don't have to explain to you what progressive means. First of all, what we can say is our cash flow in 2017 is not hugely negatively impacted by the two transactions. Yeah. What we have said, we have closed our deal in January with Siccar Point. The first quarter 2017 will have an impact from cash in from this transaction. As we speak about 2017, and if I remember the face of Reinhard, he still has a smile when we talk about cash flow. 2017 looks good.
2018 and the dividend, we have to wait how we are going to close 2017, of course. I know that you don't like this answer, that's the only one I can give to you.
Sure. Sorry. I apologize I wasn't clear. I actually was referring to the dividend from the acquisition that you've made today. Rather than the OMV dividend, sorry, I didn't make that clear.
Oh, okay.
Given that you will receive dividends from this entity from 2018 onwards, I just wanted to understand whether the cash flow from that will sort of come in at the start of 2018, or you'll get sort of two dividend payments effectively in 2018, which is your 2017 dividend and 2018.
No. We only get one dividend, continuously you should calculate with the EUR 200 million year by year by year. That's the dividend inflow.
Good. Okay. Very clear. Thank you.
2018, we get the dividend from 2017.
From 2017.
2017, yeah.
So on.
So on. Thanks.
In 2017, there will be a dividend paid, of course, from Yuzhno-Russkoye into the pocket of Uniper for the FY 2016. Therefore, the production, yeah, the net dividend from the production 2017, we will get in 2018 from January 1st, 2017 onward.
Very clear. Thank you.
Yeah. Super. Next question comes from Hamish Clegg from Bank of America. Hello, Hamish.
Good morning, everybody. Thanks very much. Hamish Clegg from Bank of America. My question is just on if you could confirm exactly the EV paid for the Russkoye assets. Given that in the announcement you talked about the $1.85 billion plus cash on the balance sheet. If you could confirm that, along with how you reconcile that EUR 200 million dividend you talk about with what Uniper said this morning on their call of EUR 175 million of EBITDA.
Well, first of all, the $1.85 billion we paid is more or less, as we have explained, the purchase price. You have to deduct the transportation cost, so you come to the $1.814 billion, which is the real purchase price, deducting the transportation cost.
Cash
The net cash position is $60 million, this is left pocket, right pocket.
Yeah.
We do have $60 million in the company, we will pay them the $60 million. You are netting it, yeah? It has no real impact at all. We will net it. As we speak about the acquisition price, well, we have asked Lambert Energy to have a look into that. Lambert Energy has made a calculation, as a consulting company, that we paid something between three and three and a half dollars per barrel on 2P reserves. Which is more or less the average acquisition price, which has been paid also with transactions you have seen in the Russian market the last two, three years ago.
On a flowing barrel per basis, we have the $18 per barrel, which is one of the lowest acquisition prices I have seen now on my slide from Lambert Energy, if you compare with the last transactions we have seen in the Russian market. We are not calculating on EBITDA, on any statement of Uniper. What we can say is we have looked into our numbers, we are going to tell you that the $200 million are the one you should use as a dividend payment to calculate our deal.
Excellent. Well, thanks very much, and congrats again on the deal.
I would like to add something because Rainer mentioned the purchase price is based on what he said, for example, Lambert Energy based on 2P reserves. What you should know is that on the one hand, we have contracted volumes and around two-thirds because the Cenomanian layer is fully developed already. You can consider two-thirds of the reserves as proven reserves, and one-third will be booked over time as proven reserves as well. It's a little bit better than 2P reserves, what you should have in mind.
Well, actually, sorry to kind of follow up on that, because I think that's very interesting because the number you talk about in terms of the 580 million barrels, is that a reserve number or 1P reserve number? Just because I noticed it was different or a bit lower than what Wood Mackenzie forecast, which is closer to 750 million barrels of 2P.
Where we are deriving from is we have, in contract terms, we have guaranteed 610 bcm. We have been producing already until end of 2016, 215 bcm. What's left is around 400 bcm. One-fourth, 25% is for us. These are 100 bcm. This is calculated on boe basis to 580 million boe. That's what we have contracted. As I said, because the Cenomanian layer, which is the producing layer right now, is fully developed, you can consider this at least as two-thirds as P50 reserves. Why I can't give you a key information on it, because the Russian system, they don't have the P50 and the P90 reserves as we do. They have different categories of reserves, yeah?
Oh, yeah.
That's why we can't 100% translate it into P50 and P90. That's why I said the proxy is two-thirds P90 and one-third P50 reserves.
Got it. Thank you so much.
Super. The next question comes from Matthew Lofting from JP Morgan.
Thanks all morning. Rainer, could you just talk about how you're thinking about sort of the risk management on country-specific capital exposures and what the right levels for OMV are going forward? Russia's obviously now becoming a core hub for the company going forward with this deal, following on from the Achimov asset swap. I'm just wondering whether you're now getting towards the limit of the capital exposure that you're comfortable putting into Russia, or whether we should expect you to continue to look to sort of further build out the position, alongside screening opportunities in Iran and U.A.E. that you've talked about previously. Thanks.
All right, Matt. Thanks for the question. The reason why I'm so happy that we have closed both deals during the weekend is it tells you the changes in our risk portfolio. What we have done over the weekend is we have substituted our risk position in Turkey with a new position in Russia. From our judgment point of view, the risk we are associating with Russia is lower than the risk we do see right now in Turkey. Yeah? If you read the press, how the political relationship between Europe and Turkey is developing, I see it contrary to the first dynamic I do see in the political European arena, that they are restarting the dialogue with Russia. All the risk we are talking about Russia is the political remaining risk as the conflict all around the Ukraine.
Let's wait and see how this is going to develop. The risks within the country, I know that field since 10 years. I was with Wintershall 20 years in Russia. We have been always paid. We have had always a fair system, and we have had lots of success in Russia. As a country by itself, given the framework they offer us, it's very reliable. The geological risk, if I listen what Hans has said, forget about it. We are talking about a cash cow we have now acquired, and therefore we have no real big CapEx commitment towards Russia. If the moment we are going to close the deal with Gazprom on Achimov, we will have committed EUR 900 million of CapEx for the development of Achimov 4 and 5. This is over a period of 5 to 7 years.
If we take into account that we have EUR 2 billion as a budget for each year, we are not talking about the substantial investment we are dedicating in our portfolio towards Russia. What we are going to do is, we will now close our deal with Gazprom, then we will wait and see whether or not new opportunities arriving and knocking at the door. We are very much driven by costs. What is the value if I operate in a country where I have extremely low political risk, but I have production cost of EUR 80 per barrel? Therefore, we have to take both into account, especially that we are driving our portfolio towards low-cost production. In a short version, we have not reached our limit in our portfolio.
Good. That was the short version.
Great. Thanks, Rainer. Appreciate it.
Here we move on to Henri Patricot from UBS.
Yes, everyone. Just one question left for me. On the CapEx profile, I'm trying to reconcile what Uniper was saying about additional CapEx requirement for production in the midterm, with what you've been saying about the EUR 20 million. Should we assume that it is very much front-end loaded as you develop the Turonian layer, and falls down even much lower to EUR 20 million later on? Thank you.
Thanks, Henri. For the lifetime, as we said, until expiry of the licenses, it will be less than EUR 20 billion per year. In the midterm, meaning the next three to five years, we will decide at the end of this year, we will make the final investment decision for the development of the Turonian. The Turonian should go on stream with the first economic production in 2021. Until then, we will spend some money for drilling, but it will not be more than EUR 40 million-EUR 50 million per year in this midterm phase.
Thank you.
Later on, it will go down substantially so that we arrive at below EUR 20 million per year average until expiry of licenses.
Thank you very much. We come on to Lydia Rainforth from Barclays.
Thanks, and good morning. Just one question, if I could. In terms of coming back to the purchase price paid, how are you looking at it in terms of the investment? Should I be thinking about this being 11% dividend yield, and that's the sort of criteria that you were thinking in terms of price? Is there actually a higher sort of IRR NPV number that we should be thinking about from a wider reserves and strategic side? Just in terms of the criteria you used when looking at the valuation. Thanks.
Lydia, I'm not quite sure what your question is about. Are you asking me what is the IRR we might-
Yes
see with the project Yuzhno-Russkoye or?
Yeah. Essentially. From OMV's perspective, you're getting what is an 11% yield. I'm just wondering if that was high enough for you or if there is actually a higher IRR we should be thinking of on the project side.
Well, Lydia, we don't exclude our IRRs country by country, as you may know. We only give you one indication, which says that OMV, as a group, is targeting a double-digit rate of return overall.
Okay. Understood. Thank you.
Good. Thank you.
Of course, every project has to meet our criteria. All I can say is it's a double-digit percentage, I don't tell you the number. I can't tell you, I'm sorry. I can't tell you the number.
Yeah, basically, you know this, Lydia, it's our policy-
Yeah
On individual projects. We cannot give you IRRs or NPV. Hope you understand. I think what we have tried to do is to give you a lot of information concerning or regarding this transaction so that you can make a good and a reasonable assumption.
Thank you. I understand, but I have to try. Thank you.
Now we come back to Mehdi with his follow-up question.
Yeah. Thank you very much. Just one question. Trying to compare the two recent projects you are involved in. In your view, which one proposes the highest rate of return?
You're comparing now Petrol Ofisi with Yuzhno-Russkoye?
No, I think Achimov.
Achimov and Russkoye.
Yeah.
Mehdi, both are excellent. I like both equally. You can't compare it because the nature of the two projects are totally different, Mehdi. When we talk about the Yuzhno-Russkoye field we acquired, you will get immediate cash, which I like. Early cash flow makes me happy, you know that. The second project, we will use the cash we generate from Yuzhno-Russkoye to be invested for future production from Achimov. Both in combination do make sense. As we speak about Achimov, we are not talking about a dry gas field like Yuzhno-Russkoye. One third of the production is, of course, condensate, which is a high-value product, so we do have a split. What I say, I'm falling in love with both projects, and don't call me that I have to stay only with one and decide for one. That's not fair.
Does it mean that Achimov 4/5 return is higher than the acquisition you've just realized today, however, it's not free cash flow positive from the first year. Should I understand it like this?
No, Mehdi, both returns are excellent. I repeat myself. You don't get anything more than this.
Good. Mehdi, we move on. The next question comes from Thomas Adolff from Credit Suisse.
Hi. Thanks for taking my follow-up question. Just going back to the question I asked at the start around concentration risk or asset risk exposure. Ultimately, managing relationship is driven by performance as an operator, and the relationship, good or bad, will be determined by that. It's also the stability of the fiscal regime. The performance you can manage, it's up to you. The latter, you can't, and it's a function of external factors, which can change the fiscal regime, either because you didn't do a good job as an operator or because the country needs money.
Sure.
My question, I guess, specific to OMV is, in the eyes of Gazprom or in the eyes of any NOC that you're considering partnering with or deepening your relationship with, can you just remind me what OMV brings to the partnership other than money?
Well, I think that what makes us special, Thomas, is that we do build an integrated partnership with Gazprom. We are creating a partnership where, on the one hand side, we will be invited to work with Gazprom in their country, in Russia, and if you look how many companies are invited to be a partner of Gazprom, we are talking only about a handful. Yeah. OMV is one of them. On the other hand, we are inviting Gazprom to partner with OMV in Europe. In between, we are partnering in all the different elements of the value chain, from upstream towards midstream with the Nord Stream 2 pipeline, until we reach our customers in the market.
Therefore, I think we should not pick only one project to discuss what kind of value OMV is bringing into the partnership or Gazprom is bringing into our partnership when we talk about the North Sea, for example. What we can say is both parties do like to intensify their cooperation. As we speak about Yuzhno-Russkoye, of course, OMV will benefit for being part in an operating company in Siberia, where we can expand our technological footprint towards drilling wells in the permafrost regions. Yeah. We will benefit from that. Don't underestimate what a reliable partner from Europe means for Gazprom. I'm not talking about how much money I put on the table, whether or not I'm going to pay my bill at the right time. I'm talking about a partner who is also a good partner in difficult times.
We are not facing the easiest times, as we speak about the relationship towards Russia. Especially that relationship we do have as OMV towards our partner, Gazprom, is highly valued by them.
Okay. Just to clarify, in essence, technology or asset swap opportunities, Gazprom can pick many companies, to be honest with you.
Sure.
I guess your expertise might be in more mature place. Basically, what you're saying is, for Gazprom, export of gas is key and the European market is key. Because you're a fairly big European company that does a lot of gas, and therefore you're a reliable partner, that's the most important part for this partnership. Is that a fair summary of how I should think about the relationship?
I agree with you partly. As we speak about the technological competence of OMV, I think you see our company not in the right picture. Johann will give you more insight.
I would like to give you some examples where our technical capability compared with other companies, where we are, and I think we are world-class operator in offshore oil and gas fields, as you said. Regarding development of new layers, like the Turonian, what's key is our drilling capability. Just giving you some examples of our capability, we still hold the world record in onshore shallowest drilling horizontal well in Suplacu de Barcau. We just established a world record from a floating drilling rig in the North Sea, horizontal drilling. We are holding several world records and European records in casing while drilling. This is a competence which we have developed in our core areas and which we will bring to the table with the cooperation with Gazprom. I think that we are participating as a partner there is also very valuable for Gazprom, not only for us.
Perfect. This is great. Thank you very much.
Ladies and gentlemen, I would like to invite you to bring forward any last interesting questions or information needs you may have. Here I go along with the currently last question from Bertrand Hodée from Kepler Cheuvreux. Bertrand?
Yes. Hello. Thank you for taking my question. One clarification, if I may, on page nine to understand the structure of the deal. If I understand well, the production will be equity accounted, and then the flows of income, in fact, will come from two different sources. You penciled around EUR 200 million of dividends mid-terms. The purpose of my question is to understand where is the value in this deal. Is it on the trading side or is it on the production side? Can you try to split us this EUR 200 million, I would say, dividend between the two streams as Severneftegazprom or the trader?
Well, first of all, as we speak about the deal, when we talk about the value, first of all, there is a high value for us that we could acquire cheap reserves with cheap production costs. It's part of our replacement strategy. If you look back, Bertrand, what we have spent in exploration over the last years, we are talking about EUR 600 million-EUR 700 million, which we could reduce to half, which is around EUR 300 million. That's more or less the value that we could acquire the barrels in the range of $3-$3.5 per boe. Secondly, it will bring down our cost basis.
Thirdly, as we speak about the structure of Yuzhno-Russkoye production, we of course are more than happy that 50% of the gas we are selling is indexed to the European gas prices, and that we are not heavily depending on one market, especially the Russian gas price. Thirdly, as we speak about the structure from Yuzhno-Russkoye, most of the dollar income is from the trader who sells the production. The trader is fully consolidated and is really running the numbers.
Okay. If I understand well, the main inflows in terms of dividends will come from the trader?
That's right.
Coming back to your production cost, I totally agree that these are very low production costs, this field. As it is equity accounted, we won't see that in terms of production cost because it is equity accounted, no?
Yeah, that's correct. If you really would like to have the real picture of OMV, you should take it into account.
This I agree. Thank you.
Thanks, Bertrand.
There are no further questions at the moment. Is there anything else still open, then please press the button. No. Okay. Ladies and gentlemen, with that, we are at the end of our conference call. I would like to thank you for joining us this morning. Should you have any other questions, then please contact the investor relations team and we will be happy to help you. We all wish you a very nice day and hope to talk to you soon. Bye-bye.
Bye.
Bye-bye.
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