Welcome to the OMV's Group's Conference Call for the Q1 2015 Results. There will be a presentation of the results followed by the question and answer session. You should have received the presentation by e mail. However, if you do not have the copy of the presentation, the slides can be downloaded at www.omb.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. Davis. Please go ahead, Mr. Davis.
Thank you, and good morning, ladies and gentlemen. I have here with me Jaap Huskers Orsso, who at the end of my presentation will give you an update on what's been happening within E and P. I come to the first slide in my presentation, just a summary of the results highlights of the Q1 2015. Our Clean CCS EBIT was down by 50 percent to €333,000,000 The predominant reason for this being the oil price being also down by 50% from $108 last year to $54 this year in quarter 1. Production was also slightly lower, 300 and 3,000 barrels a day, down by 3%.
The two major factors here were Norway, which was 10,000 barrels a day higher. 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 Gulf of lifting in quarter 1 this year compared to 3 in quarter 1 2014. And that obviously had its impact on absolute quantum of the result.
We also had obviously lower liftings in Libya. The Downstream result was much stronger from €85,000,000 to €260,000,000 due in particular to the very strong refining performance. The refining margin we had in quarter 1 this year was $7.40 against US1.60 dollars per barrel last year. So obviously a significant improvement there. Year in ratio at 35% is actually slightly higher than our long term target.
And 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, quite significant decline over the last 12 months by 50%. And although we've seen some recovery in the Q2 so far, Clearly, we are a long way below where the levels we were enjoying only a year ago. It's been partly compensated by the very strong dollar against the euro, but this doesn't cover anything like the hit that we actually suffer 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, the price price of 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.
And of course, the Norwegian gas production is priced at a European level, which is very similar to the Central European gas head price. Remaining 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. But of course, 1 third of our gas is still sold into the regulated sector for private households.
We saw a decline in quarter 1 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. And unfortunately, that had a negative impact on the gas price that we realized in Romania. And of course, that fed into this overall realized gas price, which is shown by the orange line. The indicator of refining margin is shown on the right hand side. Clearly, in quarter 3 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 Petrobras refinery in Romania. This added $1 to our overall refining margin. But 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 2 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 23% compared to minus 63% last year. There's a number of factors which come into play here. Borealis had a better result by about €14,000,000 There was some interest that we paid on a tax provision which was about €11,000,000 last year which didn't happen this year.
And the fact that also which comes into play is that last year, we still had a relatively expensive euro bond, which matured in April last year. Clearly, we've refinanced that at a much lower interest rate and that also accounts for approximately €8,000,000 of the improvement. The taxes line is also rather unusual. Instead of an expense, we actually have a negative tax rate of charge of €16,000,000 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 well upstream profits have a big impact because tax rate 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% 25%. So that's clearly below our long term average. And 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 the in the U.
K. Where the ring fenced expenditure supplement incentive and the tax rate change from 52% to 50% caused us to recalculate certain deferred tax positions in quarter 1 and that led to an amount of income. And also, of course, at the level of oil price that we had in quarter 1, we had reported losses in Norway, which similarly attract high tax credit. So 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 $58,000,000 compared to $137,000,000 The vast majority of this is due to Petrom. Our share of their or rather the minority share of Petrom's profits falling from €117,000,000 last year to $38,000,000 this year. So that's the biggest reason for this decline here. Clearly, Petrom also suffering under the low price environment.
This brings us down to net income attributable to stockholders of £163,000,000 46 percent down on last year. If you convert that to clean CCS net income attributable to to stockholders when you remove the petrol effect and so on, then you come down to a €237,000,000 against €202,000,000 a decline of 22 percent which is also reflected of course in the clean CCS earnings per share of €0.73 against €0.93 a year ago. On the next page is special items of which 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 Q1 compared to last year in particular. And that's been a cost of €109,000,000 in quarter 1.
The next page shows the cash flow. Our net income of €221,000,000 down by 49% compared to last year. Depreciation and amortization are rather similar. Other items minus $67,000,000 against $35,000,000 is due mostly to the non cash items such as the contribution from Borealis. Sources of funds in total, therefore, down by 33%, 680,000,000 against €1,000,000,000 last year.
Net working capital was an outflow of €274,000,000 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 2 years do not have as big a benefit at the lower oil price as they previously had. And this of course also contributes to the negative swing in working capital in quarter 1. Cash outflow from investments was over €900,000,000 And clearly, this is the biggest reason for that we have the €570,000,000 net free cash flow after dividend, which is of course why the gearing ratio increased to 35% at the end of quarter 1. The €935,000,000 invested during quarter 1 is compared on the next page to the CapEx that was actually spent.
€707,000,000 what was booked at CapEx. We spent more in cash because of liabilities, which existed at the end of December, which were paid during quarter 1. Of the amount that we invested of €707,000,000 in quarter one, we stand with €754,000,000 with an EBITDA against that. So our operating performance by and large financed our capital investments and the balance of the line share as ever has gone into E and P €609,000,000 And you can see the right hand side the activities that we were investing in, in quarter 1, which led to this level of investment. Norway was the biggest.
The Groupe Aastahenstein and Edvard Grieg developments and ongoing investment in Gudvaksh and Gudrun as well accounted for just under just over €170,000,000 of the The next biggest area is in workers and field redevelopments in Romania, which was about €160,000,000 The next one after this is capitalized exploration, which is approximately €90,000,000 in quarter 1 and then other developments in Tunisia, New Zealand and the UK making up the rest. Downstream investments of $91,000,000 are compared against an EBITDA number of $378,000,000 so 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.
Quarter for 2014. Prominent on both of them is the realizations, which is down due to the oil price, €185,000,000 against quarter 4 last year. Of course, Q4 last already saw a much lower oil price than earlier in the year. But compared to the same quarter last year, the decline on realizations is much higher, €426,000,000 clearly. It's lower oil price by 50%, which plays a role here.
Compared to quarter 4 2014, we saw volume also of minus €146,000,000 and in terms of the same quarter since the terms of quarter 1, twenty nineteen decline was €124,000,000 And then, generally, the issue with liftings and Norway and Libya have clearly been the biggest part of this decline. The Norwegian liftings in particular we expect to improve quite considerably in quarter 2. So we'll see much of this come back. Low depreciation and production costs mainly in Norway and Romania have helped the reconciliation compared to quarter 4, whereas compared to quarter 1 last year, it's by and large lower exploration expenses. We had a number of fields which we ramped off in quarter 1 last year, which has not been 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 quarter 1 last year. Compared to quarter 4, it's down by 5%. The Norway production decreased due to the shutting in Gudrun, which has now come back on stream. Libya production shut ins have also had a big impact up here, whereas Romanian production was actually up slightly by 2,000 BOE per day.
The OpEx decreased quite considerably, dollars 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. And clearly, we've also taken measures following the connection in the oil price of the 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 out. However, just for Pedron, 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 and also the reduction of service and material costs generally, lower level of activity, much stronger focus on cost. And what we also see as a benefit here is the reduction in the asset tax, which was introduced 2 years ago in Romania, which thankfully they've now partly rescinded and that's obviously have their operating expenses here in Romania. So it's a very good performance on the OpEx side down in Peyblon. Then 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 Q1 $85,000,000 of CCSE EBIT, of which $49,000,000 was in the Refining and Marketing side and $36,000,000 was in Gas and Power. Refining margins have clearly been much stronger. As I said already, the OMB250 refining margin up to $7.40 compared to $1.60 in the same quarter last year and that's added about €156,000,000 The marketing contribution was broadly neutral.
However, this masks a strong performance in all of our markets with the exception of Turkey. The strong performance being something of the order of $17,000,000 higher than last year. This unfortunately was lost in Turkey where their relative performance went back with following the price ceiling introduced by the energy regulator during the Q1 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 Jet Logistics business was also better.
But 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 there's masks some movement going on here in Petrom. You see the blue block here is the utilization of the Romanian refinery, very high in quarter 3 quarter 4 last year.
And this was really compensating a very low position in quarter 2 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 compared to quarter 4 is therefore come from the refineries in Bordhows and Schvekar, which average 94%. Natural Gas sales volumes, as shown clearly Q4 and Q1 being the highest seasonally driven and natural gas sales volumes overall are up by 9% compared to the same period last year. CapEx is something we've talked about repeatedly so far this year.
The guidance that we are now giving is consistent with what were saying a few months ago. It's €2,500,000,000 to €2,800,000,000 is the guidance then. What we're now saying is we believe this year will be something of the order of €2,700,000,000 dollars predominantly going into the upstream, but overall down by approximately 30% compared to the $3,800,000,000 model that was invested in the same period last year. The exploration and appraisal budget has been similarly cut by €200,000,000 We're looking at reducing our operating costs and overhead by approximately €150,000,000 We have defined and agreed with our union representatives a headcount reduction program, again, to reduce our low oil price period. And as we've also said, a number of our non core assets are currently under review with regard to potentially exiting the overall portfolio.
So we've responded to the reduced oil price clearly. We've had a particularly strong impact as we've seen already with the average of only $54 in quarter 1. But 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.
But as we look forward to 2016 2017, as our major projects are starting to come on stream during that period, capital expenditure, all things equal, coming in to reflect that those projects are no longer being invested. And 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 Annual General Meeting is €1.25 per share. This is already been announced clearly with our quarter 4 results announcement. Our target here is to maintain the dividend policy with a long term payout ratio of 30% of net income, clearly at €1.25 We are higher than that, but we expect our earnings to improve following our E and P production increases as well as an improvement in the oil price over the medium term.
We bring that dividend back into line with this 30% target. Our credit rating is something that which we also placed some weight upon great weight upon maintaining a strong investment grade credit rating. It's been 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%.
And in terms of liquidity position, we are in quite a strong position as we have been for quite some time. Then before I hand over to Yap, the outlook for 2015, we expect the oil price to move between $50 $60 in terms of an average. The gas markets will remain challenging. And as I've said already, the portfolio that we have of gas assets is something that we're currently reviewing. 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 and 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 good in that number. CapEx will be about €2,700,000,000 and our exploration and appraisal expenditure something would be under €500,000,000 So that one, let me hand over to Jaap before we speak. No trouble when we get to the Q and A side. Thank you.
Thanks, David. A couple of project updates. Let me start with Norway. Norway has come up a couple of times. We've got both production and lifting issues in the Q1 in Norway.
The production issue was related to a leakage pipe that burst at Goodrin that's since been repaired, but has resulted in an outage of Goodrin for a little bit more than 4 weeks, which has an impact in the quarter of somewhere between 8,000, 10000 barrels a day. In addition to that, 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 Q1 into November last year and thereby we avoided a very low oil price in January and some other liftings have dropped out of the Q1 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. So we've seen an actual production shortfall and the lifting shortfall will correct itself in Q2 and will work for us production cost 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 Yunnan, a yard in Korea, both Aspen and Shealy are making good progress. Now that some of the other projects have left the yard and Shealy is looking good for sail away in November this year for installation in the field in 2016.
Mario, 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 Nevada, Indonesia, 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.
So that's now firmly ongoing. If you look at exploration on the next slide, we've had a few successful wells and this operation is ongoing. In Norway, we had a discovery in Sneglig North, which is really tied back potential to Astra Hansen. And in Romania onshore, we've had a success in a well called Piscuri D, still being assessed. We're in fact getting the well ready for testing later on in this quarter, but 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 fifty-fifty with our partner Repsol. On a high impact drilling, you've seen the news around the Bjaland well in the Barents Sea, which cannot dry. It was an outlier on the block, so a different seismic signature from the wells that we built so far, which we wanted to test. Clearly that didn't work.
It does help us define what's in that block, but 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 talk about security situation in Libya. Unfortunately, now we also need to update you on the security situation in Yemen. The news one of the escape to 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 Q1, but early April we closed in production. We've had some damage to our office in Yemen in Sanna, but we're managing to run an operational office from a guest house that we got in the field. 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.
So we're demobilizing rigs. We'll keep a workover rig on standby. The drilling rigs are being demobilized and also project staff is being demobilized. So 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, few weeks after we shut in production.
And for now that force majeure period will effectively last for half a year. And I wouldn't expect to be updating you on the financial status of our German operations until that 4th major period runs out somewhere towards Q4. On CapEx, you've seen the slide before in and the numbers were also highlighted again by David. We are projecting to decrease our spends from this rate about €3,000,000,000 in 2014 guidance to net 2015 guidance €2,000,000,000 to €2,400,000,000 In fact, 2015 CapEx for the 1st year of that 3 year average period, we expect to end at around €2,000,000,000 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, in, for example, Tunisia, you see CapEx in euro terms well above plan.
And euro terms well above plan. And 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 1 or 2 locations where it really does work against us. So that's the 1st year and 3 year average consistent with that as well.
And 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 3 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 as a lot of rig commitments that have to work its way their way out. So we will see activity levels dropping further during the year, but difficult to realize the 20% cut in spend. What in particular we're focusing on there is securing the long term health acreage position.
So we are still shooting seismic and we are still pursuing further acreage, but in particular key drilling commitments we're trying to push further out time. On OpEx, we 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 Q1. That's about a $3 about a $3 drop in OpEx on a dollar per barrel terms. And rough rule of thumb is that about 2 thirds of that comes from FX, but a bit more than a third actually comes from real underlying cost savings related to personnel levels, service amount of services that we buy in, but also the cost of which we buy those services in. And 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%. Libya is in fully. It drops our total operating cost by about $1 per barrel and clearly 25% would have been $0.25 and we're missing that this year. So Bolivia were to come back in, you'd expect the OpEx to drop further than the €13,900,000 that you see there.
Of course, our current expectation is that Libya will not return this year. Getting to Etienne, Romania. Great production performance in Q1. In fact, when you see Kazakhstan in the Q1, which of course is at the end of the Petrom operation. That's where we see those numbers coming through there.
What seeing these numbers here is only the Petrom production in the Q1, 174,300,000 which is great, very, very good. We are expecting some downturn during the rest of this year though, 1st of all because of reduced activity levels. And we say they're up to 4% in midterm decline year on year. Clearly, we're working very hard to minimize the impact of the savings that we push through. On the other hand, our drilling rig count 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 4 rigs in Romania. And clearly an upturn of 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, so not unscheduled planned shutdown activity in Romania for the rest of this year, both in Teteja, which is a 2012 exploration, new field exploration success, which is currently contributing some 50,000 barrels a day to our total. We will have to do some major work hours 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.
And we also have some shutdown activity again scheduled for Lazy project work offshore, which again will in particular affect gas deliverability, again planned during summer when gas demand in Romania is at its lowest. So those are the project high and low lines. Upstream priorities for 2015, I won't surprise you that 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 and production takes 3rd place instead of where it used to be at 2nd place, really focusing the organization on cash flow and what that means in particular in E and 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 and we're focused on all three of those. On production terms, we got some shutdown activities planned in the second half of the year, which we'll manage as fast as we can. Production performance in Q1 was affected by the Kugun outage. That is back now that the second quarter is up and running.
But of course, Yemen was still contributing some 7,000 barrels a day in the Q1. 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 and A, please.
The first question comes from the line of Mehdi Enabati from Societe Generale. Please go ahead.
Hi, good afternoon all. Thanks for taking my questions. Two questions. The first one regarding your E and P OpEx in dollar per barrel. So you said that you want to decrease your OpEx by 150 €1,000,000 This is your target.
I wanted to know how much does this represent in terms of dollar per barrel? And does this €150,000,000 takes into account any FX impact? And how much the decrease in construction tax from Romania represents in this €150,000,000 So 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 you after talking about OpEx. We don't give specific guidance on the individual divisions within our gas business. But clearly,
what we now are in a
position to do is trade profitably with the volumes that we're purchasing not only from GasBump, clearly predominantly from GasBump, 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 leak. And now that has gone they're all based on liquid European hubs of which the tech clearly is one of them. So we now have a margin above the price from the liquid from those liquid hubs. And as a consequence, we can trade profitably. But we haven't provided guidance on the absolute 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 historically because there's a very intense level of competition in these markets. I'm going to hand over to Jaap on the OpEx question.
Yes. Mehdi, there was an awful lot of details in that question around OpEx. So let me see if I can address some of them. And if necessary, Felix can come back to you with some details. But first of all, the €150,000,000 net saving is a group target.
So it's not only E and P, it's a group. So all of that then turns up in E and P through allocations and part of it is by E and P of course. So let me put that first. If you then take the €150,000,000 group that effectively translates into €13,900,000 that you see in E and P in dollars per barrel. So an outlook of €13,900,000 average for the year assumes that €150,000,000 is being realized and so far so good.
And you can see that in the actual dollar per barrel performance in Q1 I think. If you then go to details of the production tax, I've got a whole table of numbers with Pierre. But 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 of the rest of the portfolio. But we'll get you the precise numbers in an email follow-up please.
Okay. Thank you. But just to come back on the OpEx in dollar per barrel, if we so $13,900,000 in the guidance for the rest of the year. But if we remove the FX effect and if we remove as well this construction tax decrease, How much are you decreasing your costs?
So if you I would argue that the construction tax is also something that we manage, Marie. I mean we've lobbied very hard to make sure that this was reversed. But even if you leave that out, our actual underlying cost per barrel is down by a little bit more than $1 per barrel. Thank you
very much. So that's
how we've managed.
Thank you.
That's in 1 quarter.
The next question comes from the line of Hayton Rashid 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 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? And second question is just regarding your comments around portfolio reviews and disposal 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.
But in the Gas and Power and perhaps even the downstream areas, what is the market like at the moment? What do you see? Thank you.
Just to help you with the liftings, so to give you some understanding. We produced in quarter 1 303 1,000 BOE per day and our sales were 274,000,000 so 29,000 apart. In 2004 Q1, we produced 311,000 barrels a day and sold 307,000 barrels. And that kind of gap is more typical, more predictable as it were, because you always produce less than you more than you actually sell because of internal consumption and so on. So it was a particularly poor quarter for liftings.
And 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 1 and we already have scheduled 3 for quarter 2. So we'll see a lot of that coming back
to Which have actually happened already early April. Yes. So 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 and then Q4 will come back. So the liftings are quite and have quite an impact on our profit, but certainly Q1 was particularly badly impacted. Great. And as regards to disposals, I mean, you mentioned the point on E and P.
I mean, 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 O and V factor. If you look at LNG positions, look at the power stations, look at the rapid decline in profitability of storage assets now given the relatively high level supply in the market. We're not alone in this and clearly that complicates the potential strategy that you have to engage into at the disposal of an asset or find an alternative solution. So 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 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. Just first of all, David, on your CapEx that's booked versus the $923,000,000 cash flow used in investment activities. When I think about the cash cover your dividend at the full year, should I be thinking about €500,000,000 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?
2nd, relating slightly to that, but Jaap 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?
And my final question is just on the downstream. David, 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 by some sort of hedging program? Or do you guys just take spot exposure in your refining business?
The CapEx breakdown and you put the dividend into that question. I mean clearly there's 200,000,000 more cash going on in the books in quarter 1 and it was booked as capital expenditure. And that really reflects a very high level of activity we were finishing last year with. 4 major projects under active execution and a number of other significant projects on which appraisal expenditure is still being made. So the absolute quantum of activity was a lot higher than it will be this year.
And 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. So you booked a lot of liability last year and of course in the quarter 1 this year that we paid it. As we reduce our level of activity and clearly we spent $900,000,000 in quarter 1 and our guidance is for $2,700,000,000 So we spent a third of the year's guidance already in 1 quarter. Then clearly the activity in the rest of the year is going to
come down and we
clearly have stood quite firstly on the quite firstly on the brakes and you're going to see that in quarter 2, but more particularly in quarter 3, quarter 4. Then you also have to note of course is the dividend is paid out in quarter 2. So we expect our free cash flow in quarter 2 to be also quite negative. I think the operating cash flow will be higher, particularly the oil prices recover and we get this lifting and winding in Norway. But clearly, the dividend going out of the door is going to have an impact.
We stick to our guidance of 2 point $7,000,000,000 you'll really start to see the impact of it, however, in more particularly in the second half and to a lesser degree in quarter 2. The Downstream margins, I think, is there's 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. And as such that although clearly with a low level of oil and indeed the relatively strong level of demand for product as a consequence of the low oil price, we are still quite cautious that this over market will ultimately lead to some pressure on the margins.
But as you've said, we haven't seen it yet. Even in May, we continue to enjoy really quite encouraging margins. Then as we got hedging, hedging, Then as regards hedging, hedging our crack, particularly if you look at our crude mix, I mean, you can hedge Brent, but euros is a bit more challenging. Clearly, there's some big chunk of our refining margins are using our reference against euros. And then when you get into the product side of the market as well, they're not that liquid quite frankly.
They're clearly out there, but they're nothing like as liquid as or as deep or as long term as the crude market clearly as 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've done historically occasionally in the upstream is not something we're considering now.
Okay. On exploration basically we look at the budget and then we look at how much of that we capitalize. And then the business we capitalize you see turning up in our CapEx budget as well. But if you look at last year's exploration budget about €700,000,000 about 35% or so that was capitalized. And of course, the higher your success rate, the more you capitalize.
Long term, we assume some 30%. But for this year, we're actually running with about 40% and that's based on the success rate that we see in Q1 and also on the outlook of some of the other wells that we're drilling this year. So a little bit higher capitalization than the average. So on a reduced budget of a bit more than €500,000,000 that will lead us to capitalize a bit more than €200,000,000 And that €200,000,000 is reflected in our CapEx outlook of €2,000,000,000 So that €2,000,000,000 CapEx outlook is inclusive of that €200,000,000 a little bit more than €200,000,000 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 a rebound of 15,000 barrels a day corresponds with Petrone. That would imply you've had a lower proportion of the Petron 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 2 businesses? And then my second question is on Petrola FISI. Can you update us where the price ceiling is in Turkey today? Do you expect it to be updated? And 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. We just in terms of price. I mean, when you talk about 15,035, you could move 4,000 barrels either way and the percent 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 listen more later in the year, the allocation might well be different. So there's nothing too scientific. I would advise you to read into that. Petrola P, see, we've had a number of complications here. I can't give you a precise number of things that 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. So it goes right through into the refining side as well. One of the factors which particularly hurt us is that Turkey being predominantly served by the Black Sea and Mediterranean market, historically has used Mediterranean countries as their price reference. The regulator in 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.
But unfortunately, they have a lower price, and using that as a reference has obviously impacted our profitability. When we had relatively high prices in quarter 1, this year relatively high margins as the oil price came down, the regulator initially put in a 60 day price freeze. But the current murmurings in the marketplace is that the regulator is actually looking about not just implementing an occasional price freeze or margin cap, which is entitled to do if you feel there's some systemic noncompetitive activity taking place in the market, which is never argued, by the way, simply imposed this 60 day cap. What it's now looking at doing is enshrining this kind of margin control into legislation, which would make our situation far more challenging there. And 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 clearly it's 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 Petrofaci.
Thanks very much.
The next question comes from the line of Henri Patrico from UBS. Please go ahead.
Good morning, everyone. A couple of questions. The first one follow-up on the oil price hedges that you've put in place. Just wondering, because the cap for second half
of the year, $68,000 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? And the second one just on Avrilena and taxes.
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 $55 So we were looking at the oil price rising and seeking to get take advantage of Achilles. The oil price has risen. The pricing available in these 0 cost collar structures has changed. But if we always had a sort of precondition, we want to protect the floor of $55 hopefully, you'll interpret from that 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 $55 the challenges in terms of cash flow neutrality or 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 rolled on and try to communicate that as appropriately. But at the moment what we try to do is to get us some downside protection below a re arrival or reentry of our prices below $60 or $55 Then as regards to Romanian taxes, this is not something we're actively engaged in negotiations. We are clearly occasionally engaged with the politicians in terms of putting off what we do across. Our latest understanding is still being 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. But the actual outcome is something that we still have to wait and see. We simply don't know. But clearly, our primary target is to be really to secure consistency, predictability in 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 in confidence in terms of what the fiscal regime will actually be. So we look forward to ongoing dialogue and ultimately look forward to a solution being achieved that we can also get on with then hopefully from January next year.
Okay. Thank you.
The next question comes from the line of Alastair Syme from Citi. Please go ahead.
Hello, gents. David, can you make some observations on refining margins about is there anything you see in your business that might explain why you've gone from or why the market's gone from trough to peak in the last 12 months? And then secondly for Yap, 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 these take? Thank you.
On the refining margins, I mean the one factor Alastair, 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. And that goes even higher when you get into places like Romania and into Turkey.
So of course, high demand, lower prices, all of this helps. But the fundamental thing which hasn't really changed is the competitive environment and still the case in Europe. We have as much as 10% more capacity than the market can actually absorb. And 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. So we have no insight into where we think and when we think that change is going to come from.
But clearly, if you've got that sort of latent threat out there, it pays to be a little bit cautious. No more than that and no more science or insight that category, Amistur.
On Rosebank, what we've done and this has been an agreement with the operator Chevron as we've restricted the budget for this year and 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 an on stream date somewhere 2020, 2021, 2022. Now those schedule impacts at the moment are at least my concerns. What has been our key concern and where we have made good progress is to drive the cost down and clearly the current climate gives us more opportunities to drive the cost further down. There's some agreed cost targets in place with Chevron. And it looks like those are achievable.
And 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. So we're heading in the right direction. It's important to recognize that Rosebank would come on stream some 5, 6 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 FID decision to the Board is going to require some prediction what the oil price is going to be in 2021, 2022. That's going to be an interesting discussion and clearly one that will be difficult.
The divestment process is up and running. We got banks mandated. We're doing management presentations. So 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 Thomas Klectzer from FCBANK. Please go ahead.
Yes, good morning. I got two questions. First of all, you mentioned Gas and Power as 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. And my second question would be regarding your E and P performance in the Q1. You mentioned already the difference between your liftings and the production. Where would be your results if the lifting would be in line with the production in the Q1, so 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 under lift has been in Norway. Clearly, our lifting costs in Norway was the highest in the portfolio. So it wouldn't have been the bonanza that you would have seen had it been in Libya or somewhere like that. But it clearly would have been bad.
I'm not going to guide it in terms of specific amounts, but clearly when you're missing as many barrels as we were missing in quarter 1, then 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 Then clearly you've seen this. We had $54 in quarter 1 and despite a poor lifting quarter still managed to make a $33,000,000 operating profit. So it would have been higher, but at $54 wouldn't have been as high as it clearly will now be in quarter 2 because these listings are taking place in an environment where the oil price is closer to $70 rather than closer to $50 So that's also encouraging from that side. And 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, marginally acquired positions.
And by that what we mean is the 2 power stations that we have, the wind farm that we have in Romania, the storage 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 Davis for his closing comments. Please go ahead.
Once again, thanks for your attention. What's been a challenging Q1? 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. But 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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