Welcome to the HomeV Group's Conference Call for the Q1 2016 Results. There will be a presentation of the results followed by a question and answer session. And answer atwww.omb.com. In addition, simultaneous to this conference call, a live audio webcast is available on OMV's website. I would now like to hand the conference call over to Mr.
David Davies. Please go ahead, Mr. Davies.
Thank you, and good morning, ladies and gentlemen. Thank you for dialing into this conference call. May I start with 2 announcements? Unfortunately, Mr. Staela, who was scheduled to actually introduce this meeting, has had to attend an unexpected and urgent meeting in relation to the development of 1 of our strategic business projects.
So I'm sure you'll forgive him for having to step out, unfortunately. He's asked me, obviously, to take over his part of the presentation, which, of course, I will do. And the second thing is equally as significant. This is the 57th and final presentation you will hear from me. The next time we do a quarterly presentation, my successor, Mr.
Flade, will lead the presentation. And similarly, Mr. Felix Rusch, who's coordinated these meetings for quite some time. This is also his last meeting, and Mrs. Moll, who joins us shortly, will be the new voice of Investor Relations in the future.
That said, let me start with the presentation. Clearly, as ever in the industry and for O and V, health and safety remains our top priority. And our record, as you can see from the graph, is commendable in terms of the improvements that we've made. But of course, one can never relax. And unfortunately, although not reflected on this chart, an incident that we've had in April will cause a deterioration of this otherwise very favorable trend and is further evidence of how one needs to continue to stay very focused on ensuring your operations are safe.
Our strategy in a nutshell on the next slide, clearly, and this is not unique to OMV in this current very low commodity price environment, focusing on cash and costs is absolutely critical. Similarly, through the portfolio realignment in our Upstream business, Achieving a sustainable position in a low price environment is clearly a major point of focus. Our Downstream Gas business, given the very challenging environment in the European market and restructuring that business, is clearly an area to continue to focus upon. And of course, the Downstream Oil business, which both last year and also into this year has helped compensate for the very low oil and gas price, is something clearly where the strengthening of its competitive position needs continuing focus. We have a leading position here in a very cost competitive market.
And of course, the announcement recently of the intention to sell our investment in Petro Mafisi in Turkey is further evidence of how we are focusing and refining the business in downstream oil. On the next slide, some recent highlights. Recently, Gazprom and OMV signed documents to develop the strategic operation. A further term sheet was signed regarding the non publicized asset swap, which we are proposing. We also signed a further cooperation agreement in terms of oil supply, technology swapping and indeed in terms of cross cultural support.
In United Arab Emirates, we've signed with Admark a technical evaluation agreement. Here, we have several fields in the northwest offshore of the country, including gas out and hail areas and what we've agreed is a 4 year work program for seismic drilling and initial engineering studies. In Iran, recently, we signed a memorandum of understanding regarding future projects. And in terms of downstream portfolio optimization, we have a number of projects which have been completed or are strongly underway. In the Austrian market, we purchased a number of unmanned filling stations during the year, which strengthens our market position and secures the supply for our refinery.
We also received merger control clearance for the sale of a number of relatively low margin check filling stations, which, of course, helps improve the average profitability of the overall estate. In terms of gas sales, we received merger control for the full takeover of Econ Gas. And clearly, once that is completed, that will give us the opportunity to continue to integrate and restructure that business more directly. In terms of the disposal, we have announced of a 49% stake in the Gas Connect Austria business. We have received indicative bids and they confirm, as we expected, a strong market interest in this asset.
So that process will continue in the remainder of the year. We've announced the Petro Lafisie divestment. We've appointed investment banks and mandated them to actually assist us with the program. And we're now preparing to approach potential buyers and a number of them having already expressed interest in looking at the asset. The next slide just outlines the asset swap and the status between Gazprom and OMV.
What we've indicated recently is that the asset that we're looking at swapping is a share in an O and D North Sea subsidiary. This is under negotiation for the consideration for the 24.98% stake in Achimov 4 and 5. We expect to sign the contract for the asset swap in the second half of this year and to close the transaction during 20 17. And you can see on the graphic, although there's no scale against it, particularly attractive is a very long term stabilized production, which will occur for many years in this asset and be helpful in achieving a stable reserve replacement rate also for the group. Let me turn now to the part of the presentation concerning the financials.
Slide number 7, the highlights for the Q1 this year. €333,000,000 last year, down by 50% to €167,000,000 This year, you can see clearly the decline is predominantly in the Upstream, dollars 130,000,000 37% drop in the average Brent price to $34 per barrel has clearly been the primary driver of this. Production was actually slightly higher, 312,000 barrels a day, up by 3%, predominantly due to increased production in Norway, somewhat offset by lower production in Romania and Austria. Higher sales volumes also occurred mainly in Norway. In the Downstream business, the decline of $35,000,000 is essentially due to a weaker gas market environment, particularly compared to the Q1 last year, which was also helped by 1 or 2 one offs, which didn't occur this year.
We must also report that the refining margins, although still attractive, have weakened compared to where we were a year ago, although this was largely compensated by a stronger petrochemicals business. The gearing ratio at the end of the Q1 improved versus last year to 29%, and this is clearly a consequence of the hybrid bond of €1,500,000,000 that we issued in quarter 4. Then on the next slide, we talk about the economic environment. The left hand chart is rather self explanatory. Clearly, we've seen successive quarters since Q2 last year of the oil price declining, and an average for the Q1 of this year was, as I said, dollars 34 What's been a relatively recent currency, see in the middle has been the strong decline recently in the Central European Gas Hub.
Natural gas price was an index for the natural gas price across the whole of the European market. You can see where we are now at about €14 per megawatt hour compares only 2 quarters ago to something in excess of €20,000,000 And this clearly has also been quite detrimental to us, although not as detrimental as for others who are sort of wholly exposed to the European market because, of course, we have a large number of our gas assets where the price is either regulated or fixed contractually. You can see, in fact, that our realized gas price with the orange line is, in fact, slightly above the Central European Gas Hub price, which is the first time that I'm certainly being aware been aware that, that's actually happened. On the right hand side, the indicator refining margin, as you can see, the very high levels that we experienced for the 1st 3 quarters of last year. We already saw a decline in quarter 4 and that has unfortunately continued.
We are 32% down at $5.10 per barrel compared to the same quarter last year and 14% down compared to quarter 4. So that is the environment that we've had and what results did that produce. You see on the next slide that our clean CCS net income attributable to stockholders is down by 27% from $2.37 to $1.74 On the right hand side, you can see the constituent parts of that. Our EBIT at the top, clearly, this isn't clean or CCS, was down by 79%. Our clean CCS EBIT was down by 50% from $333,000,000 to $167,000,000 Clearly, the negative CCS effect given the lower oil price has been eliminated in that number.
And our Clean CCS net income attributable to stockholders is only down by 27%. So it's got progressively better in this case, in particular, due to the lower deduction for minorities. Financial result was also a major swing compared to last year, €41,000,000,000 contribution versus minus €23,000,000 last year. And this is in large part due to a much stronger performance from Borealis, which posted a contribution of €92,000,000 for the quarter this year versus €50,000,000 last year. 1 or 2 other things have also contributed to the turnaround, but that's been the biggest part.
Of interest also is what's happening on the tax line. Clearly, we are trading at a loss in quarter 1 in the E and P business. So we're generating losses in a business where the very high tax rates in the Upstream business will give you a high value in terms of the tax relief on those losses. And where we're making profits is in the Downstream business, which is markets such as Romania with a 16% tax rate and Austria with a 25% tax rate. So we're making profits in low tax areas and losses in high tax areas, and that produces the other curious results that our effective tax rate for the quarter was minus 54%.
So we actually had a profit, as it were, from tax of $47,000,000 for the quarter. Minority is at $41,000,000 compared to $58,000,000 last year. Minorities and hybrid capital owners are here. Clearly, the hybrid capital owner stake has increased now that we've doubled, in fact, the size of the hybrids that we had. We had 750 dollars last year, and we issued a further $1,500,000,000 this year.
So the total hybrid owner's share has actually increased, as one would expect. But the lower level of profit in Petron has also had an impact here. So the share of that profit that goes to the minority shareholders is also as a consequence lower. And that feeds right down through the income statement to a position where, as I said earlier on, clean CCS income net income attributable to stockholders at $1.74 is a decline of 27% versus last year. Going to the special items and particularly the CCS effect.
You can see here CCS losses of €104,000,000 as a consequence of the collapsing oil price in quarter 1. It's the biggest reconciling item between the Clean CCS EBIT and the reported EBIT. In terms of special items, the only thing that matter of what we want to report is a further increase in the provision against our Gate LNG obligation and the associated transportation commitments, which arose for the very simple reason that the change in the interest policy at the European Central Bank led to the long term interest rate declining. And clearly, that's a constituent part of our calculation of the weighted average cost of capital. And accounting rules are quite strict.
If you actually see a reduction in your weighted average cost of capital, that clearly has an impact on your valuation and that has required us to book a further net provision on that line. Now coming to cash flow. On the next chart, you can see that our free cash flow after dividends at $145,000,000 is a significant improvement versus the negative cash flow of $517,000,000 last year. Why is that? Our profit of $136,000,000 is clearly not as high.
Our depreciation is rather similar, dollars 538,000,000 against 526 $1,000,000 the year before. And this, in fact, would have been higher, of course, had we not had the write offs during last year, which, of course, lowers the depreciation burden going forward. And that's probably had an impact of about €50,000,000 in the Q1 compared to the same quarter last year. Of course, the reason it's slightly higher as a consequence despite that €50,000,000 benefit is, of course, that we now have Edvard Grieg fully producing, whereas in quarter 1 last year, it was not yet on stream. The other position eliminates those items in profit which are not cash effective.
Usually, what we have in here is the share of our profit from Borealis because it doesn't pay a dividend every quarter, clearly. We book our share of the profit, but it's not cash affected. This quarter, in fact, it's the opposite. They paid a dividend of €100 and 53,000,000 during quarter 1, whereas the contribution of profit was only €92,000,000 So that actually went the other way, as it were in Bonnoyales. The cash contribution was greater than the profit contribution in quarter 1.
That will clearly not be the case for the rest of the year. And what you've actually seen leading to this negative position is really simply the valuation of a number of foreign exchange positions and derivatives, which were in the profit. Change in net working capital at minus €73,000,000 dollars compares to minus $274,000,000 last year. So that is clearly an improvement. It was not as negative as it was a year earlier.
And what you see here in particular is that the biggest reason for the increase, and clearly there's always a lot of pluses and minuses in it, but the single biggest effect is
the fact that we had a
lifting in Norway very close to the end of the quarter, which, of course, went into receivables at the end of the quarter rather than into cash, and that's probably more than half of the $73,000,000 change. What also is an improvement on last year and clearly has helped to improve the cash flow is the much lower level of investments. Cash flow using investments, dollars 745,000,000 is 20 percent down on the same position last year. You will see in a moment, however, that the cash invested is not the same as the amount of CapEx that we actually capitalized and booked. What you see here is that we're a couple of 100,000,000 actually higher than what we booked in quarter 1, which relates really to, in large part, a number of contract renewals in Petro Lafici, which were completed in quarter 4 last year and capitalized as a consequence, but where payments were only made in the Q1 this year.
And that, of course, means that the cash flow CapEx is higher than the accounting CapEx, as it were. That then produces the free cash flow of $145,000,000 which, as you can see, compares to over $500,000,000 negative a year earlier. Coming now to CapEx. And as I mentioned, as we saw on the previous slide, the cash flow CapEx was minus $724,000,000 but here, the accounting booked CapEx is $467,000,000 So quite a significant difference. The majority of which, as I said, is due to contract renewals and Petrorefici rights at the end of the year.
The 467,000,000 where we've been spending money, we're almost a quarter of it went in field workovers, drilling and field redevelopments in Romania, clearly continuing to invest in Norway, and Aasta Hansteen. So those developments continue to be rolled out. Exploration and trade activities were $79,000,000 during the quarter, and further contract renewals in Petro Laferriacy were $45,000,000 That's clearly in the Downstream part. So that's the lion's share of where we've been spending our CapEx. Coming now to the divisions and the profits that we generated.
If you look at the Upstream Clean EBIT, on the left hand side, you see the bridge between the Q1 last year and the Q1 this year. On the right, on the other hand, you see the reconciliation sorry, on the left, you see the reconciliation between the Q4 last year and the Q1 this year. On the right hand side, you see the reconciliation between the Q1 this year and the Q1 last year. So looking on the left, clearly, the biggest reason for the change in profit was lower realizations. Clearly, lower oil price, lower natural gas price contributed in total minus 100 and €55,000,000 Volumes were also slightly lower versus Q4 in this first quarter.
Exploration expenses, on the other hand, were better by €93,000,000 and depreciation was also better, of which some $33,000,000 of the $47,000,000 again is due to the write downs that we took in quarter 4 last year, which, of course, you don't appreciate going forward because you've written the value of the asset down. That brings us then to the minus 97 that we actually showed in the quarter. This is the same period last year when we actually made a small profit of €33,000,000 in the Upstream. Realization of the impact here was clearly even more dramatic €184,000,000 Volumes on the other hand versus the same quarter last year were actually higher by €10,000,000 in terms of EBIT contribution, the largest part of which is the production in Edvard Grieg, although also in Guggenheim and Guggenheim production was also slightly higher. Exploration expenses, again, more favorable.
And DD and A depreciation here, actually higher than the same quarter last year. And what you have here is that although you have a $48,000,000 improvement due to the asset write down, you clearly have the depreciation of the Norwegian assets, which are now fully producing. That was only partly the case in the reconciliation between Q1 this year and Q4 last year. But compared to the same quarter last year, Q1, Q1 as it were, clearly, you've got a full quarter's depreciation, whereas last year, you didn't have it, particularly for the Edvard Grieg asset. Other items, there's a variation of things there, foreign exchange, hedging, changes the residual hedging gains from the hedges that we closed last year, produces a €97,000,000 loss in total for this quarter.
Key performance indicators in the Upstream. Clearly, production overall has improved somewhat, 312 against 303, clearly helped here from the contribution of Edvard Grieg, which started in November 2015 and for the Q1 this year was fully on stream. This was unfortunately somewhat compensated by lower gas volumes from Romania and from Austria, which to some degree is due to the level of natural decline, of course, which we are experiencing in both of these markets. You see on the bottom left, OpEx in U. S.
Dollars per barrel clearly continues to decline, which is very encouraging. We are certainly seeing the benefit of lower levels of service activity clearly as we cut back, but also external service costs, clearly also cheaper than they were a year ago, and that's all starting to contribute favorably to the overall profit. If you turn to the next page, the position on costs in Petron is not dissimilar, although we actually saw a slight increase Q1 on Q4. And of course, this is really a reflection, as you look above, to what's been happening with production, which is now 175,000 BOE per day compared to 184,000. And clearly, the level of natural decline is contributing to this.
So if you have a lower level of production, clearly, you have to run even more quickly to keep your unit costs in line. And clearly, we weren't quite able to do that in this quarter compared to Q4. But of course, we are still substantially lower than where we were a year ago. In Petrom, the clean EBIT was a loss of $16,000,000 which is an improvement on the loss we had last year, which is clearly helpful. The one that explains that in particular was the lower exploration expenses and depreciation, partly due to the write offs that we booked last year as regards to the depreciation.
But the oil price and sales volumes clearly more than compensated that. Production decreased by 1% in total, and the OpEx position, I've already talked about. Turning now to the Downstream. The decline in profit Q1 this year versus Q1 last year is almost essentially in the Downstream Gas business. The gas business in terms of the lower commodity prices is more of a challenge in the Upstream.
Clearly, what you see here is the margin side of the business as it serves our end customers, which clearly also is under considerable pressure in the European market. It should be said, however, that the same quarter last year did include 1 or 2 one offs, for example, payments from Gazprom because they weren't delivering full volumes. The fact that we had reached a solution in terms of some of our power customers, which produced a one off gain last year, the non occurrence of that this year was also a big contributor to this relative decline in the downstream gas profitability. Downstream oil, as I mentioned already, the indicated refining margin was in fact down, and that's had our bulk refining business somewhat, but the petrochemicals business and improved performance in petrofeci has helped claw that back so that the Downstream Oil business is more or less flat on where it was a year earlier. So KPIs for the Downstream business.
Our level of utilization remains quite high at 90%, although West, you see it actually declined by from 94% to 89%. The remaining refinery has increased from 92% to 94%. Part of the reason for the decline in utilization in the Q1 was an unscheduled external power outage in the Sverkut refinery, which caused production to stop for quite some time. And what, of course, you don't yet see is the planned maintenance shutdown, which just started right at the end of Q1, but, of course, will have a bigger impact in Q2. The Schrecker Refinery, of course, now is back on stream, having completed the planned turnaround.
The natural gas sales volumes, clearly, you see the seasonal improvement as you go through from Q3, Q4 and into Q1. But as you look from Q1 2016 back to Q1 2015, you see that our natural sales gas volumes decreased by 14%, and this is in very large part due to the unusually warm weather that we had during this recent winter. And of course, also in Romania, where we are seeing some of the large industrial customers, particularly in the fertilizer space, not being as active as they had been previously. Then finally, to the last slide, our expectations for the current year. We've not changed our oil price assumption.
Clearly, we were below the $40 in Q1, but thankfully, the oil price has improved somewhat during Q2, and we're currently operating above that average of $40,000,000 I hope that it continues for the balance of the year, clearly. Refining margins, we expect, as we've said repeatedly, to be below the 2015 levels, and this is certainly coming about in more recent weeks also burdened by the fact that the oil price has been relatively strong. So an improved position in the upstream has hurt the downstream somewhat. Retail volumes are being supported by lower product prices. Clearly, we're most definitely seeing that.
No question also that the gas markets are going to remain challenging. Our overall production will be around the 300,000 barrel level. We're clearly higher than that right now, but we have a number of expected shutdowns in the balance of the year, which we think will bring us in roundabout the $300,000 level. Capital expenditure, dollars 2,400,000,000 in total, which clearly the majority continue to be spent in upstream and our exploration and appraisal expenditure, something of the order of $450,000,000 So lower, as we've said repeatedly, than we've done previously as we clearly seek to reduce our level of activity in that area in the current very difficult environment. So that, ladies and gentlemen, is the presentation.
If you have any questions you'd like to ask, then clearly, we're at your disposal. Thank you.
The first question comes from the line of Mehdi Enabasi from Societe Generale. Please go ahead.
Hi. So good morning all. First, just would like to say thank you very much David for all those years of explanations understanding of all the business. And I wish you all the best during your retirement. And I will ask 2 questions.
First, regarding your CapEx. So David, you highlighted that accounting CapEx in Q1 were €4 67,000,000 cash flow statement in the cash flow statement CapEx were above €700,000,000 So you explained this, that's fine. I just wanted to know if for the rest of the year, the accounting CapEx should be more in line with the CapEx accounted in the cash flow statement, meaning that we should have on a quarter on quarter basis a material decrease? 2nd question regards with your organic free cash flow. So you've had Q1 organic free cash flow of minus €138,000,000 Given that oil price is improving and given that normally your cash flow CapEx should decline, is it fair to consider that we should observe a material improvement in your organic free cash flow, maybe not in Q2 because you have some maintenance, but from Q3.
And you highlighted during the strategic meeting in February that, paradoxically, when the oil price will start going up, you will have some working capital release. So is it still do you still do you confirm this what you've said during the strategic meeting? And finally, so you said that you are doing maintenance at Petrobras in May. If I remember well, most of your Romanian oil production goes to your refinery. So what will be the impact on your oil production or maybe on your Petrom oil sales in Q2?
Should we expect a material impact there or no? Thank you.
Thank you, Mehdi. And I think it's the 57th time that you've actually got into the first question. So congratulations on that. At the end of the year, our guidance, as we've said just a moment ago, was $2,400,000,000 for capital expenditure. And by the end of the year, I think the cash and the accounting CapEx, they're not going to be materially apart, quite frankly.
And if we hit that number of €2,400,000,000 clearly on a cash basis having spent over €700,000,000 in Q1, then you would expect to see the cash side actually, yes indeed, come down. But given that the accounting side, as it were, was only just under $500,000,000 you may actually see some increases in that. So that's what's going to bring them broadly into line. But cash flow wise, yes, I think that would be a fair point. And if that was the case last year, we had a strong cash flow negative in Q1, over $900,000,000 in CapEx last year.
And clearly, you saw Q2, Q3 and Q4 come down. The free cash flow of €130,000,000 I should point out, of course, is after dividend. And of course, we don't pay the OMV dividend during Q1. We pay during Q2. So as in every Q2, we clearly will have the cash outflow of the dividend, which is going to be something around €330,000,000 which we're going to have to absorb.
So that obviously needs to be baked into your expectations. But clearly, as the oil price improves, we will see some benefit potentially in working capital because we saw some negatives from that because we had a number of structured financing programs around our working capital, which were based on barrels. And clearly, if the value of the barrel goes down, then the benefit of that program goes down. Similarly, the value of the barrel goes up, then clearly, we'd also be able to take advantage of that as that improves. But the real improvement of the cash flow from an improving oil price is clearly hopefully going to come from an improving level of cash contribution from the operations in the Upstream.
It may impact negatively on the Downstream. As we clearly see during times of rising oil prices, it's more challenging to actually get the prices through into the marketplace. So the downstream tends to suffer, But clearly, the upstream will benefit more from that. Then you're right, absolutely, in terms of our production of oil in Romania. It goes the vast, vast majority of it goes into our refinery in Petrobras for processing.
And of course, what we do ahead of the stock is work feverishly on the logistics to make sure that we can continue to produce. The crude is stored during the stock period. Clearly, it's not being consumed. What we then start to do is work down the stock of product that we've generated ahead of the stock to make sure that we can keep the market satisfied. And of course, once the stop is then over, we work very quickly on building our stock levels back up of product and of course, getting the crude level of inventory down in the refinery.
So it should not have an impact on production during the quarter. It never has had so far. Where it can have an impact, of course, is the valuation of the volume and values of inventories move up and down. We clearly have to get clever with the calculation of the inter divisional profit elimination in Romania, which is always something of a challenge. But given that it should be back on stream in May, by the end of June, hopefully, we'll have reached the most sort of stable position in terms of the total working capital.
So that shouldn't have a significant impact, I would hope.
Thank you very much, Fadi.
Thank you.
The next question comes from the line of Nitin Sharma from JPMorgan. Please go ahead.
Good morning, David. Thanks for the presentations. Two questions from my side. First one on taxes, please. So you touched on negative tax rate and the driver being the earnings mix.
But could you maybe explain the implications of that negative tax rate on operating cash flow if it were to carry on? The second question is more around the Brent Urals differential and the outlook statement suggesting that you expect this differential to remain wider compared to some prior years. Correct me if I'm wrong, but I think a wider discount is a negative for Petrom upstream earnings, but is a positive for your downstream oils business. So could you maybe give us some color on the earnings sensitivity from this wider differential? And finally, best wishes to you and Felix for your future endeavors.
Thanks.
Thanks for the latter, Nitin. Much appreciated from both of us. In terms of your questions, the tax benefit that was recorded in Q1 was a noncash tax benefit. It was all deferred taxes, which is basically recognizing the losses, which were predominantly in the U. K.
And in tax terms when profits start to rise in the future. And clearly, you have to make a conservative cautious assessment of when you expect the businesses to return to profit based on the expectations we do have in the medium term of the oil price rising as profits then start to be earned in those markets, the losses that you've booked Prior to that, you've been offset against those. So the tax benefit in terms of cash will only start to show up in the future once the businesses generate profits to absorb these losses, and it will show up in cash to the extent that the tax that you book, you will not be paying in cash because you've set it off against the losses that you've made. So they are noncash effective tax incomes that we've booked, and they're purely a function of the deferred tax asset that we've created as a consequence of the losses. The Brent Yuriel, you're absolutely correct.
The reference price for the crude from upstream into the refinery in Romania is Brent Euros sorry, is euros. And the reason, of course, we do that is that is basically the benchmark crude that's processed in Romania. It obviously impacts the downstream prices and margins as well. So negative, yes, to the upstream, positive to the downstream. But I think it really rather depends on the absolute amount of the thing.
If it's a dollar, what's our capacity at the Petrobras refinery? 4.5. 4,500,000 tonnes, 7 barrels in a tonne. So if it was a dollar difference, all things being equal, you probably have a 30,000,000 euros sorry, dollars 30,000,000 difference between upstream profit and downstream profit, all things being equal, assuming, of course, that the downstream margins, we're able to pass it through. Understood.
Thank you. The
next question comes from the line of Josh Stone from Barclays. Please go ahead.
Hi, good afternoon, David, and thanks for the presentation. I've got 2 questions, please. 1 on the indicator refining margin. If I look at the breakup between East and West, I noticed that East is quite a large premium to West and has been the best part of the year. I suspect part of it's related to the Petrobrasie upgrade, but also the outages you've experienced in the West part.
But with for the rest of this year, how did you expect is it something structural there? And do you expect that premium between West and East to continue for the rest of this year? And then secondly, a small one on the corporate charge, came in quite low at around €4,000,000 Is there anything going on there? And how do you expect that to trend?
Thank you.
This is
the operator speaking. Unfortunately, the speaker line has been disconnected and they haven't dialed in yet. Thank you for your patience. Please wait while we reconnect the line.
Hopefully, I'm back in again. I'm sorry. I don't know what happened there, and I apologize for that. Josh, I don't know whether you heard my answer. I mentioned that the refining margins in Petrobras clearly do now reflect the fully completed turnaround program.
And of course, the product yield as a consequence is a premium compared to what it was previously, and this is clearly a major driver of the improved refining margin situation. And also, of course, to the question of knitting, although the spread is quite volatile, the crude that's going into the Petrobras refinery is being basically priced against euros, which clearly still is at a discount to Brent and that helps also.
The next question comes from the line of Thomas Adolff from Credit Suisse. Please go ahead.
Hi, David. An attempt for early retirement, I guess. A few questions. Actually, before the questions, I always wanted to say, I appreciated your transparency and I don't want to be harsh to other CFOs, but sometimes I always felt other CFOs have been too promotional. And you've been always very, very transparent, so thank you for that.
Questions maybe looking out maybe 1 or 2 years when you've completed your disposal of PetroDofici and Gaustec as well, How should I think about capital allocation given that your balance sheet assuming the oil price will continue to reset given that your balance sheet will look quite healthy then. Staying on with the point the question on Petro or FISI, you said you've hired investment bankers and you're now approaching potential buyers. I wondered whether it's fair to assume that potential buyers have to be Turkish entities or at least a Turkish entity has to be part of a consortium? And my final question, I guess, is on Iran where you've signed an MoU. And I was a bit surprised because, okay, it's only an MOU, but still we haven't seen the IPC being finalized.
So on what basis was this done?
Well, thank you, Thomas, and thank you also for the kind words you mentioned at the beginning. I mean, as I said at the strategy presentation we did earlier in the year in London, Clearly, with the disposal program, if it's successfully executed and of course, also, if our expectations come to fruition, that the oil price will improve, albeit slowly but improve nevertheless as we go into next year and the year after, then the cash flow position and as a consequence, the balance sheet will clearly become stronger. At that point in time, of course, we will also have we'll be up to our Russia and hoping for production to come on stream a year or 2 thereafter. And that's really going to help us start to be able to address what is a challenge for us, particularly in this environment where we're cutting back on investments of profitably replacing the reserves that you're consuming, which, as you are well aware, more recently, in particular, has been quite a challenge for us. Clearly, in the long term, I'm not going to be around in any case, but the structure of the balance sheet, as you rightly say, would improve given the disposal program being successfully executed.
And of course, how the management then chooses to structure that, I'd really rather leave it to them. But it's important that we have the opportunity through this program to make sure that the balance sheet strength improves. We're in a relatively strong position today. In terms of Petro Lofisi, we have had expressions of interest already from both Turkish entities and non Turkish entities, and it certainly wouldn't be ourselves who would set any criteria in terms of what kind of structure the buying consortium or the buying individual needed to have. Clearly, historically, and this was also the case for our first investment in Petrobras PC itself, it has not been unusual for non Turkish partners to partner up with Turkish players.
But frankly, we'll see what the process flows forward. As I say, we have had interest expressed preliminary inquiries, of course, at this stage from both Turkish entities and non Turkish entities. And the MoU on Iran, I mean, it's clearly extremely early stages. There will certainly be a lot of water to flow under the bridge in terms of determining how the profitability could actually work there and the conclusion of an agreement, which actually gives you some degree of comfort and certainty that you can invest there profitably is clearly going to be a prerequisite for any projects that we ultimately get involved in. It's in a very early stage MOU.
We hope that things will progress to enable us to actually invest, but the precondition is clearly got quick that we can generate profit there.
Thank you. Can I particularly ask another question very straightforward one? Nord Stream 2, you seem in the press release very, very confident that you can take FID later this year despite the fact the EU Parliament having its doubt around this project. And I just wanted to better understand where this confidence is coming from.
Well, I think Reiner clearly would be a better person to speak to on that. But his experience with the Nord Stream 1 project and the fact that the transit countries involved in Nord Stream 2 are politically very strongly aligned to facilitate this project leads to that confidence. There's clearly a political process, which any project like this would need to go through, and that support needs to be shown for the project to happen. But the strong support of the nations that are actually hosting the pipeline investments is a fairly good starting point.
Perfect. Thank you very much, David.
Thank you.
The next question comes from the line of Henri Patricot from UBS. Please go ahead.
Yes, David. Thank you for the presentation. Just a couple of quick questions for me. The first one, just on the clean tax rate, where do you see that moving over the next few quarters, assuming that the oil price remains fairly close to the current level of $45 per barrel? And then secondly, just want to go back to Jesper's question on the corporate charge in the Q1, which was very low at €4,000,000 Was there anything special going on there?
Thank you.
On the corporate charge, I mentioned it a moment ago, I mean, if it's going to be about €40,000,000 this year instead of €4,000,000 in quarter 1, it should have been €10,000,000 and the €6,000,000 that isn't there is basically stuck in the businesses, and that will be addressed during the course of the year. So it's not materially different in absolute quantum. A lot percentage wise, it does look a bit unusual. Then what was the other question?
On the clean tax rate.
Yes, the clean tax rate, sorry, yes. I mean particularly from such a high negative tax rate in quarter 1, albeit the level of profit was quite low, it's hard to really see how it's going to be significantly positive in actual expense by the time we get to the end of this year even with an improving oil price environment. So I would expect it not to be as dramatically as high as it was in quarter 1. Hopefully, we've seen in quarter 2 a higher level of profit or indeed a level of profit from Upstream business, which should change that picture somewhat as well. But I'd rather suspect it's going to be negative by the end of the year.
But certainly nothing like as high as we currently have. I don't believe it's very unusual. It's very challenging also because, of course, you have to be cautious in booking deferred tax assets because you have to have a degree of confidence that you can recover them in the foreseeable future. And that, of course, makes the whole calculation very much subject to judgments. Clearly, all the deferred tax assets that we have as a group are not recognized.
We have not fully recognized them. There are assets which are not booked, as it were, because, of course, the future environment is so uncertain. But we believe those that we book, particularly in Norway and the U. K, will be recoverable as the price of oil improves. And of course, in the U.
K. As our production in Shehelion comes back on stream in the medium term as well. But it makes it very challenging to actually give clear sensible guidance on what our tax rate is going to be at the moment, basically making losses in Upstream and profits in Downstream complicates the tax rate quite considerably for our integrated business.
Okay. Thank you. And all the best for the future.
Thank you very much.
The next question comes from the line of Hamish Clegg from Bank of America. Please go ahead.
Good morning. A few quick questions from me. Just first of all, I wondered if you could elaborate on the North Sea swap now. We seem to have sort of moved from potentially gas assets back into upstream assets for the swap. Would you could you tell us maybe how that could be shaped?
Sort of would it be a spin out co? Secondly, within that, would you consider using cash from the Afifi sale to contribute towards that asset swap to balance it in any sort of way? Or will that cash be used to pay down debt? My second question is just on upstream volumes. You guided us quite clearly that Romania and Austria would see declines with lower CapEx.
On my numbers, it looks like year on year minus 5% and minus 10%, respectively. Can we see this trend continuing with the current CapEx outlook or accelerating or stabilizing? 3rd question, still in Up Exploration, the expenses are quite low levels in terms of exploration expense this quarter, 30%. Could you maybe suggest what the sort of risk is within the exploration portfolio? I know it's sort of much lower than it was previously and what we're looking forward to.
Also, and this is the final one, I promise, elaborating more on what Thomas is asking about Nord Stream 2, I've been reading that the U. S. Has been opposing the project. I wondered what OMV would say in terms of how much sort of political influence do you feel the U. S.
Has over a project like this? And obviously, thanks a million for all your and Felix's help over the years.
Thanks for that, Hamish. Let's see if I can finish this by the end of business today. In terms of the assets moving from gas and downstream, we never actually said anything about the assets. There's been a lot of speculation, and we simply haven't commented upon So what's moved, frankly, has really been the speculation rather than anything that we were feeding into. I don't want to go into too much detail in terms of the particular asset because I think we've been sufficiently certain spec by saying a Nordsee subsidiary and not which particular one.
So I'd really rather leave it at that. But clearly, what we're talking about is selling a stake in that subsidiary. So we would actually find that Gazprom would become a co owner of that subsidiary. We're not talking about assets being spun out of any of the subsidiaries. Then clearly, the decline in upstream production, particularly in Romania and to a degree in Austria, is clearly being impacted negatively by the reduced level of CapEx.
But in fairness, what we're also doing and having to do, of course, in a very low oil price environment is really filter through loss making wells. If we have wells which at these low prices are cash negative, then clearly, we'll have to be aggressive and put the production as a consequence. We've said fairly consistently that the natural decline rate could be around about the 5%, and that clearly is more or less where we are right now. And of course, there is a risk, of course, with this lower level of CapEx and also the contribution from the low oil price that actually comes to fruition in those core markets. Then the exploration risk in the portfolio, I mean clearly there's always risk until you actually redefine an investment decision given what you've capitalized.
But given where most of our CapEx has been actually going in exploration over the last couple of years has really been into the Black Sea activity with Exxon. I think that's relatively low risk. Of course, clearly, we haven't taken any investment decisions there, but we're very encouraged by the results of the drillings that we did, the exploration wells that we've drilled. The majority of them were discoveries. So that gives us a degree of confidence.
But of course, until you've actually taken a final investment decision, there's always a risk that there's a write off associated with it. And then I'm not a politician. Clearly, the U. S. Has something it's going to have.
They're going to get engaged in it, but I can't really quantify what impact that would have. Think the primary impact is always going to be the host nations of the pipeline, quite frankly. Brilliant. Thanks. Appreciate everything.
You're welcome. Cheers.
The next question comes from the line of Mark Koffler from Jefferies. Please go ahead.
Hi, everyone, and thanks for taking my questions. 2 remaining, please. Just coming back to Nord Stream and the transition of the strategy towards Russia. Is it right to think of Nord Stream to FID and the Achimov asset swap as 2 mutually exclusive events? Or should we be thinking about them as in some way related?
And then secondly, just on the Downstream, I was hoping you could give us any sort of line of sight on the indicator of refining margin into the 2nd quarter And perhaps if you have any observations around trading opportunities in the Q2 and as we head into the summer, both on the crude and the product side, that would be especially helpful.
When the first LOI was signed as regards to Nord Stream 2, which I think was in June last year, it was announced simultaneously not only that we would engage in the Nord Stream 2 project, but that we were also signing an agreement with Gazprom to actually swap and acquire a stake in the Asimov field. There's no physical relationship between the two projects. Clearly, gas will produce in the Achimov field, and much of that gas will find its way into Europe, potentially through the military and pipelines. But there's no the pipeline has to be built to enable the development of acumor to take place. That isn't the case.
But clearly, our interest in one was also in parallel with our interest in the other. So to that degree, there's clearly a relationship between the 2. Downstream margins in quarter 2 have been a little weaker, and that's also impacted by the fact that the oil price is recovering. As I mentioned earlier on, clearly, that puts pressure on refining margins and marketing margins as well. The market, although very efficient, is not quite as effective at getting the prices through instantaneously as they go up and down for that matter.
But it's clearly having some impact on downstream margins. Then as regards to trading opportunities, I mean, we clearly are involved in trading, but the vast majority of our trading activities is basically ensuring a functioning and efficient supply of crude into our own refineries basically in terms of open positions and such like. That's really not what the business is about.
That's great. Thanks very much and all the best in the future.
Thank you very much.
The next question is a follow-up question from the line of Mehdi Enabati from Societe General. Please go ahead.
Thanks very much. Just a follow-up question on Bouygues. So you said, David, that Bouygues paid EUR 33,000,000 dividend in Q1 related to 2015. That represents roughly 1 third of the profits that you booked from Borealis in 2015. Should we then consider for the future that the dividend you will receive from Borealis every year will be around 1 third of the profits that you book from this company, meaning there is a kind of different policy here or no?
2nd question related to Borealis again. Last year, you've made very strong, let's say, earnings from Borylice. Should we consider that this year should be even higher than that, given that versus Q1 last year, you are almost doubling your earnings from the release?
A third of the profits is roughly equivalent to our share in the company clearly. So that means it distributed close to 100% of the profits that it's made. And in the long term, you wouldn't really company to be able to sustain that level of distribution. The situation with Borealis, however, is a little different in that it has a the investments in Barouge, of course, which it's booking its share of the profits, but it's not receiving cash dividends from Berouge yet because clearly, Berouge is paying down its debt. Berouge is very profitable even at low oil prices.
Clearly, as oil prices improve, its profitability will also improve. But once cash starts to flow out from Bruges into Borealis, there is the potential that the dividend paid out from Borealis starts to lose a direct relationship with the profit it's earning because, of course, it will be receiving finally dividends from Barouz, which it wasn't receiving previously. Previously, it only gets relatively low dividends at the moment from Barouz. And the capacity for Barouz to pay dividends at a much higher level in the future clearly is growing as its debt position improves and also as the oil price improves. We have seen strong petrochemical margins and as a consequence an improved performance in that continuing strong performance from Borealis in Q1.
It's very impressive and not just in Vermouth, but also the European petrochemicals business is also relatively strong. The outlook for the year is rather more difficult to project. I think it would be fairly aggressive to suggest that we'll have a better year this year than last year though because last year was very good, but we'll see.
Okay. Just one clarification. So the €133,000,000 dividend
It was €153,000,000 by the way, maybe.
Okay. 153,000,000 percent, this is for 100 percent of Borealis or your share?
No, that's the cash we received. So it represents a 36% share of Borealis as a dividend.
Okay. Okay. Thank you very much.
Thank you.
That was the last question. I will now hand back to David Davis for his closing comments. Please go ahead.
Well, as again, I said at the beginning, it's been a tremendous honor and privilege to have the opportunity to represent the company vis a vis the investors and the analysts. And all good things come to an end. And I'd like to thank you for your support. It's been great dealing with you and your predecessors, which of course have been many over the last 14 years. Thanks very much.
And as ever, if you do have any questions in the interim call, Felix and the Investor Relations team and from the 1st June, Mrs. Moll will be with us and she'll be able to take over. Thank you very much. Bye bye.
That concludes today's telephone conference call. A replay of the call will be available for 1 week. The number is printed on the telephone conference invitation. Or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers.