Welcome to the OMV Group's conference call for the Q1 2015 results. There will be a presentation of the results, followed by the question and answer session. If you would like to ask a question after the presentation, you may register your request by pressing the star one button on your telephone at any time during the actual presentation or during the question and answer session itself. You should have received the presentation by email. However, if you do not have the copy of the presentation, the slides can be downloaded at www.omv.com. Additionally, simultaneous to this conference call, a live audio webcast is available on OMV's website. I would now like to hand the conference over to Mr. Davies. Please go ahead, Mr. Davies.
Thank you, and good morning, ladies and gentlemen. I have here with me Jaap Huijskes, also who at the end of my presentation will give you an update on what's been happening in E&P. I come to the first slide in my presentation, just a summary of the results highlights of the first quarter 2015. Our clean CCS EBIT was down by 50%, so EUR 333 million. The predominant reason for this being the oil price being also down by 50% from EUR 108 last year to EUR 54 this year in quarter one. Production was also slightly lower, 303,000 barrels a day, down by 3%. The two major factors here were Norway, which was 10,000 barrels a day higher, and unfortunately, for reasons which are very familiar, Libya, 13,000 barrels a day lower. In particular, this quarter, we had lower oil sales volumes.
The difference between what we produced and what we sold was quite significant, particularly in Norway, where we had no Gullfaks lifting in quarter one this year compared to three in Q1 2014. That obviously had its impact on the absolute quantum of the result. We also had obviously lower lifting in Libya. The downstream result was much stronger, from EUR 85 million to EUR 260 million, due in particular to the very strong refining performance. The refining margin we had in quarter one this year was $7.40 against $1.60 US dollars per barrel last year. So obviously, a significant improvement there. Gearing ratio at 35% is actually slightly higher than our long-term target. I'll come on to say more about that when we come to talk about the cash flow. The economic environment is shown on the next slide.
The oil price is quite clear, a quite significant decline over the last 12 months, like 50%. Although we've seen some recovery in the second quarter so far, clearly we are a long way below the levels we were enjoying only a year ago. This has been partly compensated by the very strong dollar against the euro, but this doesn't cover anything like the hit that we actually suffer under from the reduced oil price. In the middle, you see a slightly different chart to that which we previously presented. The yellow line represents the European gas price as priced at the Central European Gas Hub. This is where the vast majority of our domestic production outside of Romania is priced. Clearly, the Russian contracts are priced here now. The domestic Austrian production is priced here.
Of course, the Norwegian gas production is priced at a European level, which is very similar to the Central European Gas Hub price. Romanian gas production, of course, is not priced at this hub. It's still in a largely now deregulated market. In the industrial sector, we now have a market price, which is slightly below the level of the Central European Gas Hub. Of course, a third of our gas is still sold into the regulated sector for private households. You saw a decline in quarter one this year, which in large part was due to the domestic heating companies in Romania now being classified as part of the private sector rather than the non-regulated sector. Unfortunately, that had a negative impact on the gas price that we realized in Romania.
Of course, that fed into this overall realized gas price, which is shown by the orange line. The indicator refining margin is shown on the right-hand side. Clearly in quarter three this year, there was a very strong increase. This was due to our recasting the calculation of the refining margin following the completion of the remodernization of the Petrobrazi refinery in Romania. This added $1 to our overall refining margin. Even ignoring that, quite frankly, you can see a very significant increase over the last 12 months in refining margins, which so far in quarter two has also continued. Coming now to a summary of the results on the next slide. The EBIT on a reported level was down by 66%. Financial result was only minus EUR 23 compared to minus EUR 63 last year. There is a number of factors which come into play here.
Borealis had a better result by about EUR 14 million. There was some interest that we paid on a tax provision, which was about EUR 11 million last year, which didn't happen this year. A factor also which comes into play is that last year we still had a relatively expensive euro bond, which matured in April last year, and clearly we refinanced that at a much lower interest rate, and that also accounts for approximately EUR 8 million of the improvement. The taxes line is also rather unusual. Instead of an expense, we actually have a negative tax rate of a charge of EUR 16 million income. There are a number of reasons behind this, and this is going to be a challenge, particularly reporting or calculating and guiding on what the expected tax charge will be this year.
Clearly, the very low upstream profits have a big impact because the tax rates on the upstream is much higher. Our downstream profits are taxed either in Romania or in Austria, typically, where you have tax rates of respectively 16% and 25%. That's clearly below our long-term average. With a poor upstream performance, that also plays a role. The reason it went negative, however, has a number of factors, the biggest of which, of course, is in the U.K., where the Ring Fence Expenditure Supplement incentive and the tax rate change from 52% to 50%, caused us to recalculate certain deferred tax positions in quarter one, and that led to an amount of income. Also, of course, at the level of oil price that we had in quarter one, we had reported losses in Norway, which similarly attract a high tax credit.
An unusual tax quarter, which we don't expect to continue. However, our tax rate this year is certainly going to be a long way below what we would otherwise have guided with a more normalized oil price. It's going to be somewhere in the 30% range, probably towards the lower end of that. Minorities and hybrid capital owners, clearly much lower than last year, down to EUR 58 million compared to EUR 137 million. The vast majority of this is due to OMV Petrom. The minority share of OMV Petrom's profits falling from EUR 117 million last year to EUR 38 million this year. That's the biggest reason for this decline here. Clearly, OMV Petrom also suffering under the low oil price environment. This brings us to net income attributable to stockholders of EUR 163 million, 46% down on last year.
If you convert that to clean CCS net income attributable to stockholders, when you remove the OMV Petrom effect and so on, you come down to EUR 237 million against EUR 202 million, a decline of 22%, which is also reflected, of course, in the clean CCS Earnings Per Share of EUR 0.73 against EUR 0.93 a year ago. On the next page is special items of which there are a few to report. The only item of significance on this chart is the amount of the CCS losses we incurred as the oil price has been declining during the first quarter compared to last year in particular. That's been a cost of EUR 109 million in Q1. The next page shows the cash flow. Our net income at EUR 221 million, down by 14% compared to last year. Depreciation and amortization are rather similar.
Other items, minus EUR 67 million against EUR 35 million, is due mostly to the non-cash items such as the contribution from Borealis. Sources of funds in total, therefore, down by 33%, EUR 680 million against EUR 1 billion last year. Net working capital was an outflow of EUR 274 million. We have a number of positions here, tax liabilities at the end of last year, which were paid in the beginning of this year. What we also noticed in a much lower oil price environment, the benefits of some of the things that we did in terms of working capital reduction over the last two years do not have as big a benefit at the lower oil price as they previously had. This, of course, also contributes to the negative swing in working capital in Q1. Cash outflow from investments was over EUR 900 million.
Clearly, this is the biggest reason, therefore, that we have the EUR 517 million net free cash flow after dividends, which is, of course, why the gearing ratio increased to 35% at the end of Q1. The EUR 935 million invested during Q1 is compared on the next page to the CapEx that was actually spent, EUR 707 million what was booked as CapEx. We spent more in cash because of liabilities which existed at the end of December, which were paid during Q1. Of the amount that we invested of EUR 707 million in Q1, we stand with EUR 754 million with an EBITDA against that. Our operating performance, by and large, financed our capital investments. The lion's share, as ever, has gone into E&P EUR 609 million.
You can see the right-hand side, the activities that we were investing in in Q1, which led to this level of investment. Norway was the biggest. The Gullfaks, Aasta Hansteen, and Edvard Grieg developments and the ongoing investment in Gullfaks and Gudrun as well accounted for just over EUR 170 million of the total. The next biggest area is in workovers and field redevelopments in Romania, which was about EUR 160 million. The next one after this is capitalized exploration, which is approximately EUR 90 million in Q1, and then other developments in Tunisia, New Zealand, and the U.K. making up the rest. Downstream investments of EUR 91 million are compared against an EBITDA number of EUR 378 million. A particularly strong quarter from the downstream. The next page shows the performance in upstream.
Two reconciliations here comparing the Q1 this year with the Q1 last year on the right-hand side and on the left-hand side, the Q1 this year compared to the previous quarter, i.e., Q4 2014. Prominence on both of them is the realizations, which is down due to the oil price, EUR 185 million against Q4 last year. Q4 last year already saw a much lower oil price than earlier in the year. Compared to the same quarter last year, the decline on realizations is much higher, EUR 426 million. Clearly, it's a lower oil price by 50%, which plays a role here. Compared to Q4 2014, we saw volume also of minus EUR 146 million. In terms of Q1 2015, the decline was EUR 124 million.
I mentioned already the issue with liftings, Norway and Libya have clearly been the biggest part of this decline. The Norwegian liftings, in particular, we expect to improve quite considerably in Q2, we'll see much of this come back. Lower depreciation and production costs mainly in Norway and Romania have helped the reconciliation compared to Q4, compared to Q1 last year, it's by and large lower exploration expenses. We had a number of fields which we wrote off in Q1 last year, which is not being repeated in the current year. The next page shows a couple of KPIs on the upstream side. Our production, as we've mentioned already, is down by 3% compared to Q1 last year. Compared to Q4, it's down by 5%. The Norway production decreased due to the scheduling Gudrun, which has now come back on stream.
Libya production shut-ins have also had a big impact here, whereas Romanian production was actually up slightly by 2,000 BOE per day. The OpEx decreased quite considerably, $13.95 per barrel now OpEx. FX has clearly played a big role here, the strong dollar, given that a lot of our costs are not in dollar, clearly with the Austrian and the Romanian activities being the biggest part of this. Clearly, we've also taken measures following the collapse in the oil price, so service and material costs are much lower due to the lower level of activity generally. On the next chart, you see the same KPIs shown, however, just for Petrom. Production, more or less stable, in fact, slightly higher, as we've already mentioned. The OpEx here has come down really quite considerably, and there's a number of factors here. Clearly, the foreign exchange is also playing a role here.
Also the reduction of service and material costs, generally lower level of activity, much stronger focus on costs. What we also see as a benefit here is a reduction in the asset tax, which was introduced two years ago in Romania, which thankfully they have now partly rescinded, and that obviously helped our operating expenses here in Romania. So a very good performance on the OpEx side down in OMV Petrom. The next chart shows the same sort of analysis for the Downstream. The Downstream business, as from January this year, was consolidated together. So Refining and Marketing, and Gas and Power are now shown here added together. Last year, we produced in the first quarter, EUR 85 million of clean CCS EBIT, of which EUR 49 million was in the Refining and Marketing side, and EUR 36 million was in Gas and Power. Refining margins have clearly been much stronger.
As I said already, the OMV refining indicator margin up to $7.40 compared to $1.16 in the same quarter last year, and that has added about EUR 156 million. The marketing contribution was broadly neutral. This masks a strong performance in all of our markets, with the exception of Turkey. The strong performance being something of the order of EUR 17 million higher than last year. This, unfortunately, was lost in Turkey, where their relative performance went backward following the price ceiling introduced by the energy regulator during the first quarter this year. Downstream Gas had a slightly better quarter than last year. Supply, marketing, and trading benefited from better sales performance in both volumes and in margin, whereas the logistics business was also better.
Unfortunately, their performance was offset by a weaker power performance, where margins in both Turkey and Romania have adversely impacted the performance of the power plants there. Key performance indicators. Firstly, on the next slide, the refining utilization at 92% is up by 3% overall. Although this masks some movement going on here in OMV Petrom. You see the blue block here is the utilization of the Romanian refinery. Very high in quarter three and quarter four last year, and this was really compensating a very low position in quarter two as it went into the turnaround. So clearly had a large volume of crude on inventory to actually process, hence the very high levels of utilization, which have now declined now to a more normalized level of 86%. The improvement really compares to quarter four has therefore come from the refineries in Burghausen and Schwechat, which average 94%.
Natural gas sales volumes is shown clearly Q4 and Q1 being the highest, seasonally driven. Natural gas sales volumes overall are up by 9% compared to the same period last year. CapEx is something we have talked about repeatedly so far this year. The guidance that we are now giving is consistent with what we were saying a few months ago. It is EUR 2.5 billion to EUR 2.8 billion with the guidance then. What we are now saying is we believe this year will be something of the order of EUR 2.7 billion, predominantly going into the Upstream, but overall down by approximately 30% compared to the EUR 3.8 billion run that was invested in the same period last year. The exploration and appraisal budget has been similarly cut by EUR 200 million. We are looking at reducing our operating costs and overhead by approximately EUR 150 million.
We have defined and agreed with our union representatives a headcount reduction program, again, to reduce our cost during this low oil price period. As we've also said, a number of our non-core assets are currently under review with regard to their potentially exiting the overall portfolio. We've responded to the reduced oil price. Clearly, we've had a particularly strong impact, as we've seen already with the average early $54 in quarter one. As we look forward into the longer term, our financial priorities are shown on the next slide. What we aim to achieve is a broadly neutral free cash flow. That will not be the case this year.
As we look forward to 2016 and 2017, as our major projects are starting to come on stream during that period, our capital expenditures, all things equal, coming in to reflect that those projects are no longer being invested. That will enable us to continue to pay an attractive dividend and to achieve a broadly neutral free cash flow position over that medium-term period, albeit with some improvement also in the oil price expected as we've already started to see this year. The dividend we will propose tomorrow to the annual general meeting is EUR 1.25 per share. This has already been announced, clearly, with our quarter four results announcement. Our target here is to maintain the dividend policy with a long-term payout ratio of 30% of net income. Clearly, at EUR 1.25 we are higher than that.
As we expect our earnings to improve following our E&P production increases, as well as an improvement in the oil price over the medium term, we will bring that dividend back into line with this 30% target. Our credit rating is something that which we also place some great weight upon maintaining a strong investment-grade credit rating as being the linchpin of our financial strategy over these last 10 years. We have a strong balance sheet. Our long-term gearing ratio target remains at or below 30%. In terms of liquidity position, we are in quite a strong position as we have been for quite some time. Before I hand over to Jaap, the outlook for 2015, we expect the oil price to move between $50 and $60 in terms of an average.
The gas markets will remain challenging. As I've said already, the portfolio that we have of gas assets is something that we're currently reviewing. The refining margins are expected to decline from the highs that we've experienced so far this year. Marketing volumes are expected to be supported by the lower overall oil price. We've certainly seen that so far this year. Our production guidance remains intact at around about 300,000 BOE per day, with no contribution from Libya or Yemen assumed within that number. CapEx will be about EUR 2.7 billion, and our exploration appraisal expenditure, something of the order of EUR 500 million. At that point, let me hand over to Jaap, before we speak later on when we get to the Q&A set. Thank you.
Thanks, David. A couple of project updates. Let me start with Norway. Norway's come up a couple of times. We've got both production and lifting issues in the first quarter in Norway. The production issue was related to a leakage, a pipe that burst at Gudrun. That's since been repaired, but as a result, there's been an outage of Gudrun for a little bit more than four weeks, which has an impact in the quarter of somewhere between 8,000 and 10,000 barrels a day. In addition to that, we had a lifting issue in Norway, but in a lot of ways, that's worked out very well for us. We accelerated the lifting out of the first quarter into November last year, and thereby we avoided the very low oil price in January, and some other liftings have dropped out of the first quarter into the start of the second quarter.
Again, basically on a better place in the oil price curve than they otherwise would have been. That's a bit of luck. Of course, you don't plan those things, but that's how the liftings have worked out. We've seen an actual production shortfall, and the lifting shortfall will correct itself in Q2 and will work for us, oil price-wise. Other updates, Edvard Grieg is basically ready, sitting on the barge and should be lifted on its jacket sometime in June, really waiting for the lifting barge to turn up now. In Ulsan, a yard in Korea, both Aasta Hansteen and Schiehallion making good progress. Note that some of the other projects have left the yard, and Schiehallion is looking good for sail away in November this year for installation in the field in 2016. Maari, we now finally got a second big producer on stream.
In fact, as we speak, a third producer is being put on stream today. It's currently cleaning up, and in the Nawara in Tunisia, we're busy with the gas project. You see a picture there on the right top-hand corner, where we're actually stringing pipe and starting to weld it. That's now firmly ongoing. If you look at exploration on the next slide, we've had a few successful wells and there's operations ongoing. In Norway, we had a discovery, in Snefrid North, which is really tieback potential to Aasta Hansteen. In Romania onshore, we've had a success in a well called Piscarii Deep. Still being assessed. We're in fact getting the well ready for testing later on in this quarter. Looking very promising.
Well, it's not on the high impact wells because it didn't start out as that sort of size, but it's starting to look very, very nice, subject to test. That's a well that we share 50/50 with our partner, Repsol. Other high impact drilling, you've seen the news around the Wisting well in the Barents Sea, which came up dry. It was an outlier on the block, so a different seismic signature from the wells that we drilled so far, which we wanted to test. Clearly, that didn't work. It does help us define what's in that block. Clearly, a slight reduction from what it otherwise could have been. In the Black Sea, meanwhile, we're continuing to drill, and we expect to be able to give you an update on the resource potential for the block towards the end of the year.
On the next slide, we often talked about the security situation in Libya. Unfortunately, now we also need to update you on the security situation in Yemen. The news won't have escaped you that there is essentially a full-blown war now going on in the country. We still managed to produce in Yemen, albeit less than planned, in the first quarter, but early April, we closed in production. We've had some damage to our office in Yemen, in Sanaa, but we're managing to run an operational office from a guest house that we got. In the fields, however, we see no damage up to this point in time, so we're still able to produce should the situation improve. What we have done, though, is we've started demobilizing project-related resources quite aggressively. We're demobilizing rigs.
We'll keep a workover rig on standby, but drilling rigs are being demobilized, and also project staff is being demobilized. We are preparing for a long downturn in activities in Yemen. Consistent with that, we declared force majeure for operations towards the end of April, a few weeks after we shut in production, and for now, that force majeure period will effectively last for half a year. I wouldn't expect to be updating you on the financial status of our Yemen operations until that force majeure period runs out somewhere towards Q4. On CapEx, you've seen this slide before, and the numbers were also highlighted again by David. We are projecting to decrease our spends from this about EUR 3 billion in 2014 guidance to now 2015 guidance EUR 2 billion to EUR 2.4 billion.
In fact, 2015 CapEx for the first year of that three-year average period, we expect to end at around EUR 2 billion. Whereas on revenue and production costs, the FX helps us. Here, of course, the FX works against us, where all our projects in dollar terms are staying the same, but in euro terms, becoming more expensive. In particular, if, for example, Tunisia, you see CapEx in euro terms well above plan. That is not because we're not trying to save money, it's because FX rate there works against us. On balance, FX rate helps, but on CapEx, you see one or two locations where it really does work against us. That's the first year and three-year average consistent with that as well.
The main cuts we talked about before are the drilling and workover programs in Austria and Romania, deferral of activities in the key projects, in particular Rosebank, pushing that further out, but also assuming a later start of project activity elsewhere in the portfolio, which pushes it towards the end of that three-year period. Exploration spend, we are struggling to bring expenditure down. I think you'll see that in the rest of the industry as well. There's a lot of rig commitments that have to work their way out. We will see activity levels dropping further during the year. Difficult to realize the 20% cut in spend. What in particular we're focusing on there is securing the long-term health acreage position.
We are still shooting seismic, we are still pursuing further acreage, in particular, key drilling commitments we're trying to push further out in time. On OpEx, you saw the detail in David's slide. The headline number is that we're looking for the year at an OpEx level, roughly the same as what you've seen in the first quarter. That's about a $3 drop in OpEx on a dollar per barrel terms. A rough rule of thumb is that about two-thirds of that comes from FX, a bit more than a third actually comes from real underlying cost savings related to personnel levels, amount of services that we buy in, but also the cost at which we buy those services in. Clearly, we're working very hard to lock those savings in long term. There's some other shifts in OpEx as well.
In 2014, we still had Libya in for about 25%. If Libya is in fully, it drops our total operating cost by about $1 per barrel. Clearly, 25% would be $0.25, we're missing that this year. If Libya were to come back in, you could expect the OpEx to drop further than the 13.9 that you see there. Our current expectation is that Libya will not return this year. Getting towards the end, Romania, great production performance in Q1. In fact, when you see Petrom performance going up in the financial slides that David ran through earlier, you see the good Q1 performance in Petrom, also good performance production-wise in Kazakhstan in the first quarter, which is at the end of the Petrom operation. You see those numbers coming through there.
What you see in these numbers here is only the Petrom production in the first quarter, 174.3, which is great. Very, very good. We are expecting some downturn during the rest of this year, though. First of all, because of reduced activity levels. We say they're up to 4% in midterm decline year on year. We're working very hard to minimize the impact of the savings that we push through. Our drilling rig count is reducing significantly. I think I quoted those numbers to you in previous calls, but we are dropping from about 12 to, at the end of the year, about four rigs in Romania. Clearly, an upturn on that is subject to the oil price recovering further. The other thing you're going to see during the rest of this year is that we have some shutdown activity planned.
Not unscheduled, planned shutdown activity in Romania for the rest of this year, both in Pitești, which is a 2012 new field exploration success, which is currently contributing some 50,000 barrels a day to our total. We will have to do some major workovers in some of those production wells in the second half of the year. We'll time that such that we do those when gas demand in Romania is at its lowest. We also have some shutdown activity, again, scheduled related to project work offshore, which again, will in particular affect gas deliverability, again, planned during the summer when gas demand in Romania is at its lowest. Those are the project high and low lights. Upstream priorities for 2015, they won't surprise you. They're consistent with what David ran through.
First of all, we want to run an operationally effective and safe operation around the world. We manage our cash. Production takes third place instead of where it used to be at second place. Really focusing the organization on cash flow. What that means, in particular in E&P, is managing our cash out. Our cash in is managed by production levels. The cash out is, as we said, CapEx, exploration spend, and OpEx. We're focused on all three of those. On production term, we've got some shutdown activities planned in the second half of the year, which we'll manage as best as we can. Production performance in Q1 was affected by the Gudrun outage. That is back now that the second quarter is up and running. Of course, Yemen was still contributing some 7,000 barrels a day in the first quarter.
That, unfortunately, is now out with no outlook of that returning in the very short term, albeit our facilities there are completely intact. That was it for the project updates. With that, I'll hand back to the moderator for Q&A, please.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star one again. You will be advised when to ask your question. The first question comes from the line of Mehdi Ennebati from Societe Generale. Please go ahead.
Hi. Good afternoon, all. Thanks for taking my questions. Two questions. The first one regarding your E&P OpEx in dollar per barrel. You said that you want to decrease your OpEx by EUR 150 million. This is your target. I wanted to know how much does this represent in terms of dollar per barrel. Does this EUR 150 million take into account any FX impact, and how much the decrease in construction tax from Romania represents in this EUR 150 million? This is the first question. The second question regards with the gas and power division, and particularly, the supply marketing and trading subdivision. Now you've negotiated fixed margins with Gazprom. Could you please guide us on the EBIT you expect from this subdivision on a yearly basis, please? Thank you.
Let me take the second part of that question first, before I hand over to Jaap to talk about OpEx. We don't give specific guidance on the individual divisions within our gas business. Clearly what we now are in a position to do is trade profitably, with the volumes that we're purchasing, not only from Gazprom, clearly predominantly from Gazprom, but also from Statoil and from a number of the smaller suppliers, which of course a few years ago were causing us some pain because of their oil link. Now they're gone, and they're all based on liquid European hubs, of which CEGH clearly is one of them. We now have a margin above the price from those liquid hubs. As a consequence, we can trade profitably. We haven't provided guidance on the actual quantum of that profit.
What we have said, however, is that clearly, even though this has got the massive headache away that we had from the upside-down contracts, the level of profit in this business is clearly now a lot lower than it used to be historically because there's a very intense level of competition in these markets. Let me hand over to Jaap on the OpEx question.
Mehdi, there was an awful lot of details in that question around OpEx. Let me see if I can address some of them, and if necessary, Felix can come back to you with some details. First of all, the EUR 150 million net saving is a group target. It's not only E&P, it's a group. A lot of that then turns up in E&P through allocations, and part of it is by E&P, of course. Let me put that first. If you then take the EUR 150 million group, that effectively translates into $13.9 that you see in E&P in dollars per barrel. An outlook of $13.9 average for the year assumes that EUR 150 million is being realized, and so far, so good. You can see that in the actual $ per barrel performance in Q1, I think.
If you then go to details of the asset tax, I've got a whole table of numbers with me here. Let me take that out and ask Felix to drop you an email with the actual impacts of the construction tax in Romania, which of course was significant in Romania. It then reduces when you average it out over the rest of the portfolio. We'll get you the precise numbers in an email follow-up.
Okay, thank you. Just to come back on the OpEx in dollar per barrel, so at $13.9, the guidance for the rest of the year. If we remove the FX effect, and if we remove as well this construction tax decrease, how much are you decreasing your costs?
I would argue that the construction tax is also something that we manage, Mehdi. We lobbied very hard to make sure that this was reversed. Even if you leave that out, our actual underlying cost per barrel is down by a little bit more than a dollar per barrel.
That's great.
That's something we've managed.
Yes. Thank you.
That's in one quarter.
The next question comes from the line of Haythem Al-Ashry from Morgan Stanley. Please go ahead.
Thank you. Good afternoon, gentlemen. Thanks for the presentation. Two questions from my side, please. Firstly, just on the fall in sales volume and the impact you mentioned, obviously, coming from Libya and Norway. Could you perhaps give us just a bit of a split there about how much of that fall in sales volume is specifically Norway, just to get a sense of how much that could reverse out in 2Q? Second question is just regarding your comments around portfolio reviews and potential disposals as we look ahead. Obviously, in the presentation you highlight gas and power as an area where you are reviewing the portfolio. Could you give us perhaps a sense of what the market is like at the moment? We've heard from some peers that at least in the upstream market, bid-ask spreads remain quite wide.
In sort of the gas and power, and perhaps even the downstream sort of areas, what is the market like at the moment? What do you see? Thank you.
Just to help you with the liftings, to give you some understanding. We produced in quarter one 303,000 BOE per day, and our sales were 274,000. 29,000 apart. In 2004 Q1, we produced 311,000 barrels a day and sold 307,000. That kind of gap is more typical, more predictable as it were, because you always produce more than you actually sell because of internal consumption and so on. It was a particularly poor quarter for liftings. About half of that gap, slightly more than half of that gap, is down to Norway. Norway is quite chunky. As I said, we only had one lifting in quarter one, and we already have scheduled three for quarter two, so we'll see a lot of that coming back too.
Which have actually happened already, early April.
Yeah. We would see a lot of that come back, if not all of it in Q2. From our current level of expectation, however, we expect to see Q3 be weak again, Q4 will come back. The liftings are quite chunky and have quite an impact on our profit, but certainly Q1 was particularly badly impacted.
Great.
As regards disposals
You mentioned the point on E&P. Clearly, in terms of gas and power assets, the impact that we've seen across the portfolio has unfortunately been reflected across the industry. This isn't a unique OMV factor. If you look at LNG positions, look at power stations, look at the rapid decline in profitability of storage assets now, given the relatively high level of supply in the market. We're not alone in this, clearly that complicates the potential strategy that you have to engage in to either dispose of an asset or find an alternative solution. It's not particularly a buyer's market. That needs to be understood. However, we do have interest for certain positions in the assets. It's whether or not that really meets our objectives that we're wrestling with right now.
Okay. Thank you very much.
The next question comes from the line of Hamish Clegg from Bank of America. Please go ahead.
Good morning, gents. A couple of questions from me. First of all, David C. Davies, on your CapEx that's booked versus the EUR 923 cash flow used in investment activities. When I think about the cash to cover your dividend of the full year, should I be thinking of that €500 million of negative free cash flow that you're talking about or adjusting it? I wondered if you could maybe deconstruct the differential between your book CapEx and your cash flow used, and what available cash you have for spending on the divvy. Second, relating slightly to that, but Jaap Huijskes might want to take, is on exploration. I know it was sort of fairly flat quarter-on-quarter, but quite a bit high year-on-year. Could you tell us a little bit about what you're expensing versus what you're capitalizing and what you feel is a sensible run rate to expense?
Was this a particularly high quarter in terms of exploration, and how we can think about that going forward? My final question is just on the downstream. David C. Davies, you alluded to belief that downstream margins where they are, which have been absolutely brilliant, are not that sustainable. Can you see those being locked in via some sort of hedging program, or do you guys just take spot exposure in your refining business?
The CapEx breakdown, you've really brought the dividend into that question. Clearly, there's €200 million more cash going out of the books in quarter one than was booked as capital expenditure, and that really reflects the very high level of activity we were finishing last year with. Four major projects under active execution and a number of other significant projects on which appraised expenditure is still being met. The absolute quantum of activity was a lot higher than it will be this year. As a consequence, when you do your normal sort of highly disciplined close, you're making sure that you've got everything provided for that you've actually incurred. You booked a lot of liability last year, and of course in quarter one this year that we paid it.
As we reduce our level of activity, clearly we spent EUR 900 million in quarter one, our guidance is for EUR 2.7 billion, we spent a third of the year's guidance already in one quarter. Clearly the activity in the rest of the year is going to come down, we clearly have to quite fiercely on the brakes, and you're going to see that in quarters, but more particularly in quarter three, quarter four. Thing you also have to note, of course, is the dividend is paid out in quarter two, we expect our free cash flow in quarter two to be also quite negative. I think the operating cash flow will be higher, particularly as the oil prices recover, and we get this lifting and winding in Norway. Clearly the dividend going out of the door is going to have an impact.
We stick by our guidance of EUR 2.7 billion. You will really start to see the impact of it, however, more particularly in the second half and to a lesser degree in quarter 2. The downstream margins, I think there is no insight there in terms of our expectation. The European market remains over-refined. There has been some capacity reduction over the last couple of years, but our fundamental belief is that it remains over-refined. As such that although clearly with a lower level of oil price and indeed a relatively strong level of demand for product as a consequence of the low oil price, we are still quite cautious that this oversupply in the market will ultimately lead to some pressure on the margins. But as you have said, we have not seen it yet. Even in May, we continue to enjoy really quite encouraging margins.
As regards hedging, our crack, particularly if you look at our crude mix, you can hedge Brent, but Urals is a bit more challenging. Clearly some big turns of our refining margins are referenced against Urals. When you get into the product side of the market as well, they are not that liquid, quite frankly. They are clearly out there, but they are nothing like as liquid as, or as deep or as long-term as the crude market clearly is, the Brent market clearly is. We do look occasionally at locking in specific cracks, and we have done some of that. But a strategic hedge along the lines of what we have done historically occasionally in the Upstream is not something we are considering now.
Okay.
On exploration, basically we look at a budget and then we look at how much of that we capitalize, and then the bit that we capitalize you see turning up in our CapEx budget as well. But if you look at last year's exploration budget, about EUR 700 million and about 35% or so that was capitalized. Of course, the higher your success rate, the more you capitalize. Long term, we assume some 30%, but for this year, we are actually running with about 40%, and that is based on the success rate that we see in Q1 and also on the outlook of some of the other wells that we are drilling this year. So a little bit higher capitalization than the average. On a reduced budget of a bit more than EUR 500 million, that will lead us to capitalize a bit more than EUR 200 million.
That EUR 200 million is reflected in our CapEx outlook of EUR 2 billion. So that EUR 2 billion CapEx outlook is inclusive of that a little bit more than EUR 200 million capitalized exploration spend.
That's very clear. Thanks, guys.
The next question comes from the line of Joshua Stone from Barclays. Please go ahead.
Hi, good afternoon. I have two questions, please. First question on the oil price hedges. I see of the 50,000 barrels a day hedged, only around 15,000 barrels a day corresponds with Petrom. That would imply you've hedged a lower proportion of the Petrom volumes than the core business. I was wondering what that relates to, if that was just due to practical reasons or if there's something different between the free cash flow profiles you expect of the two businesses. My second question's on Petromservice. Can you update us where the price ceiling is in Turkey today? Do you expect it to be updated? How you expect profitability to trend through the rest of this year? Thank you.
On the split of the oil price of the oil hedge, Joshua, there's been nothing as scientific or as clever as that, really. When you talk about 15 and 35, you could move 4,000 barrels either way, you get a perfect landing in terms of percentages. We haven't tried to do anything like that, to be perfectly honest. We simply took a look at where it was appropriate to allocate it. If we did some more later in the year, the allocation might well be different. There's nothing too scientific I would advise you to read into that. Petromservice, we've had a number of complications here. I can't give you a precise number saying the ceiling is here. One of the difficulties we've had is the regulator has taken quite an aggressive view in terms of the profitability and structure of the industry.
It goes right through into the refining side as well. One of the factors which has particularly hurt us is that Turkey, being predominantly served by the Black Sea Mediterranean market, historically, it has used Mediterranean countries as their price reference. The regulator in his wisdom decided to change that to include markets such as Germany and the U.K., which are clearly not part of that market set and have a completely different competitive structure as well. Unfortunately, they have a lower price, and using that as a reference has obviously impacted our profitability. When we had relatively high prices in Q1 this year, relatively high margins as the oil price came down. The regulator initially put in a 60-day price freeze.
The current murmurings in the marketplace is that the regulator's actually looking about not just implementing an occasional price freeze or margin cap, which he's entitled to do if he feels there's some systemic non-competitive activity taking place in the market, which he's never argued, by the way, simply imposed this 60-day cap. What he's now looking at doing is enshrining this kind of margin control into legislation, which would make our situation far more challenging there. That's something we're looking at with considerable trepidation. It's not yet embodied in law. I don't know what the precise status is, but it clearly is something that we're looking at with some considerable interest, because it could severely impact the profitability of the market for all competitors, not simply Petromservice.
Thanks very much.
The next question comes from the line of Henri Patricot from UBS. Please go ahead.
Good morning, everyone. A couple of questions. The first one to follow up on the oil price hedges that you've put in place. Just wondering, because the cap for the second half of the year, EUR 68 a barrel, is quite close to the current price. I was wondering if the oil price goes up in the short term, would you be looking to add to these 50,000 barrels a day of oil that you've hedged? What kind of policy can we expect from you? The second one, just on Romania and taxes. Obviously, some good news on the construction tax. I was wondering if you could give us an update on your discussions with Romania on the royalties. Thank you.
As regards going forward on oil price, oil hedging, you'll see the common factor that each of the quarters that we've hedged had is that there's a floor protected at EUR 55. We were looking at the oil price rising and seeking to take advantage of that. Clearly, as the oil price has risen, the pricing available in these zero-cost collar structures has changed. If we always had a sort of precondition, we want to protect the floor of EUR 55, hopefully you'll interpret from that what we've really been trying to achieve is not sort of second-guessing the upside, but it's really protecting the downside, because clearly below EUR 55, the challenges in terms of cash flow neutrality are all the stronger. We've got no strategy in place to do more beyond what we've done.
We don't exclude that, clearly, and would look at that as time rolls on, and clearly communicate that as appropriately. At the moment, what we're trying to do is to get us some downside protection below a re-arrival or re-entry of oil prices below EUR 60, around EUR 55. As regards Romanian taxes, it's not something we're actively engaged in negotiations. We're clearly occasionally engaged with the politicians in terms of putting our point of view across. Our latest understanding has still been that what they want to do is go into something that would start in January next year. It would be split between existing activities and future activities. The statements are also consistent with what we've always argued for, that there needs to be sufficient headroom to allow us to continue to carry out the necessary investments profitably.
The actual outcome is something that we still have to wait and see. We simply don't know. Clearly, our primary target has been really to secure consistency, predictability for the market so that you can plan with confidence, with no confidence clearly in terms of what the oil price might deliver, but at least with confidence in terms of what the fiscal regime will actually be. We look forward to an ongoing dialogue and ultimately look forward to a solution being achieved that we can all sort of get on with then, hopefully from January next year.
Okay, thank you.
The next question comes from the line of Alistair Ryan from Citi. Please go ahead.
Hello, gents. David, can you make some observations on refining margins? Is there anything you see in your business that might explain why the market's gone from trough to peak in the last 12 months? Secondly, for Jaap, on Rosebank, you mentioned, I think in your dialogue about being pushed further out. Can you update us on what that means around sort of timing and design and what you want to do with your stake? Thank you.
On the refining margins, the one factor, Alistair, which is undoubtedly new this year compared to, let's say, 15 months ago, is that the oil price is considerably lower. That does have a direct impact on the reported margins, clearly because oil consumption is correspondingly cheaper. We've also seen strongly supported demand. We've actually seen some growth even in the Western markets in terms of product demand year-on-year. That goes even higher when you get into places like Romania and into Turkey. Of course, high demand, lower prices, all of this helps. The fundamental thing which hasn't really changed is the competitive environment. It's still the case that in Europe, we have as much as 10% more capacity than the market can actually absorb.
Once you've got a factor like that, even though you're enjoying the current environment, you've always got to feel that it can start to change at some point in time. We have no insight into where we think and when we think that change is going to come from. Clearly, if you've got that sort of latent threat out there, it pays to be a little bit cautious. No more than that. There's no more science or insight than that currently, Alistair.
Okay.
On Rosebank, what we've done, this has been in agreement with the operator, Chevron, is we've restricted the budget for this year. What that does is it delays some of the engineering activity into next year and therefore has pushed a potential FID date into the back end of 2016, and a on-stream date somewhere 2021, 2022. Those scheduling impacts at the moment are the least of my concerns. What has been our key concern and where we have made good progress is to drive the cost down, clearly the current climate gives us more opportunities to drive the cost further down. There's some agreed cost targets in place with Chevron, it looks like those are achievable. If indeed they are achieved, then we're looking at a total cost that's going to be below what we assumed when we originally acquired Rosebank.
We're heading in the right direction. It's important to recognize that Rosebank would come on stream some five, six years from now, and therefore the current oil price, of course, is helping in respect to the fact that it drives the market cost down. Of course, taking an FID decision to the board is going to require some prediction of what the oil price is going to be in 2021, 2022. That's going to be an interesting discussion, clearly one that will be difficult. The divestment process is up and running. We've got banks mandated. We're doing management presentations. The divestment process to dilute our share in Rosebank is now up and running.
Okay. Thank you very much.
The next question comes from the line of Tamás Pletser from Erste Bank. Please go ahead.
Yes, good morning. I got two questions. First of all, you mentioned gas and power of the main area of divestment. Does it include potentially any Austrian assets you consider to divest, or do you rather consider assets outside of Austria? That would be my first question. My second question would be, regarding your E&P performance in the first quarter. You mentioned already the difference between your liftings and the production. Where would be your result if the lifting would be in line with the production in the first quarter? What would be the difference compared to the reported figures, and the real figures?
Let me take that second question also. I mean, clearly one of the big areas of underlift has been in Norway. Clearly, our lifting costs in Norway are amongst the highest in the portfolio. It wouldn't have been the bonanza that you would have seen had it been in Libya or somewhere like that. It clearly would have been bad. I'm not going to guide it just in terms of specific amounts, but clearly when you're missing as many barrels as we were missing in quarter one, clearly that would have had a favorable impact. What was also encouraging as well, of course, is that going back to the statement that we made at the trading statement, that the vast majority of our portfolio was profitable at $50.
Clearly you've seen this, we had $54 in quarter one, and despite a poor lifting quarter, still managed to make a EUR 33 million operating profit. It would have been higher, but at $54, wouldn't have been as high as it currently will now be in quarter two because these liftings are taking place in an environment where the oil price is closer to $70 rather than closer to $50. That's also encouraging from that side. As I think we said last year, in terms of the assets in gas and power, the assets that are more critically under the microscope, as it were, are the more recently acquired assets, more recently acquired positions.
By that, what we mean is the two power stations that we have, the wind farm that we have in Romania, the storage position that we have in central Germany, and of course, the GATE position that we have in Rotterdam. That's where the primary area of focus is actually being placed at the moment.
That's clear. Thank you very much.
Thanks.
Thank you. That was the last question. I will now hand back to David Davies for his closing comments. Please go ahead.
Once again, thanks for your attention, for what's been a challenging first quarter. Hopefully things will now improve somewhat, as the market seems to be showing a little bit more bullishness than we experienced in January to March. Thanks for your attention as ever, and if you do have any more detailed questions, then don't hesitate to contact Felix and his team in the investor relations group. Thank you.
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