OMVKY - OMV Aktiengesellschaft (OMVJF) Q1 2023 Earnings Call Transcript

2023-04-28 20:30:25 ET

OMV Aktiengesellschaft (OMVJF)

Q1 2023 Earnings Conference Call

April 28, 2023, 05:30 AM ET

Company Participants

Florian Greger - Head of Investor Relations

Alfred Stern - Chief Executive Officer

Reinhard Florey - Chief Financial Officer

Conference Call Participants

Joshua Stone - Barclays

Sasikanth Chilukuru - Morgan Stanley

Henri Patricot - UBS

Peter Low - Redburn

Raphael DuBois - Societe Generale

Karen Kostanian - Bank of America

Giacomo Romeo - Jefferies

Matt Lofting - J.P. Morgan

Bertrand Hodee - Kepler Cheuvreux

Presentation

Operator

Welcome to the OMV Group's Conference Call. [Operator Instructions]

You should have received the presentation by email. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio webcast is available on OMV's website.

At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates, and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will, [may or] (ph) occur in the future and are outside control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements.

OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations in future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV.

I would now like to hand the conference over to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.

Florian Greger

[Technical Difficulty]

Operator

Please go ahead.

Florian Greger

I think we have a technical challenge at the moment. Okay. I'll try it one more time. Now seems to work.

Yeah. As I just said, after the Alfred's presentation, both gentlemen will be available for questions.

And with that, I'll hand it over to Alfred.

Just wanted to double check before with the speech whether we can be heard.

Operator

Yes, please go ahead.

Florian Greger

Okay. Thank you. Alfred, over to you.

Alfred Stern

Thank you, Florian. Ladies and gentlemen, good morning and thank you for joining us.

The first quarter of 2023 was characterized by declining oil and gas prices, a weaker chemical market environment and strong refining margins. Brent crude oil prices fell to $81 per barrel on average for the quarter and European gas prices dropped by 44% on the back of high storage levels and the warmer than expected winter in Europe and the US. Refining margins more than doubled compared with the level of the first quarter of 2022 but they declined from the exceptional levels seen in the previous quarter.

The olefin margins in Europe decreased compared to the previous quarter, driven by an increase in naphtha prices as a result of more gasoline blending and lower imports following sanctions on Russian refined products. Compared to the prior year quarter, the ethylene indicator margin was higher, while the propylene margin decreased due to lower demand in import pressure.

Polyolefin margins held up better. Compared to the previous quarter, the polypropylene indicator margin was flat, while the polyethylene margin declined slightly. However, margins were substantially below the strong prior-year quarter when imports to the European market were constrained due to shipping bottlenecks.

At around €2.1 billion, our clean CCS operating result was strong, at a similar level to the previous quarter, but declined compared with the exceptional prior-year quarter. Our cash flow from operating activities rose by 87% to €2.7 billion compared to the previous quarter, supported by a significant release of working capital.

Looking at operations, polyolefin sales volumes went down slightly year-on-year, while fuel sales volumes were marginally up. The utilization rate of the European crackers and refineries is back to a high level at above 90%. Oil and gas production was significantly lower year-on-year primarily due to exclusion of Russian volumes. We continued to execute our strategy and further advanced with the transformation of our company.

In March, we formed a joint venture with Wien Energie, who operates Vienna's large district heating network to develop and utilize deep geothermal energy in the greater Vienna area instead of fossil energy. We had already worked together to explore the geothermal potential of the Eastern Vienna basin and have gathered comprehensive data. Based on further exploration and exploitation of the existing potential in the Vienna basin, we aim to develop deep geothermal plants with the first one starting up in 2026.

In April, we partnered with Aker BP and were awarded a license for CO2 storage in the Norwegian North Sea. The license will be operated by Aker BP and comes with a work program, which includes a 3D seismic acquisition and a drill or drop decision by 2025. The project could potentially provide storage of more than 5 million tonnes of CO2 per year, with the intention to inject CO2 captured from industrial companies in Northwest Europe including Borealis. According to the latest news received from the Norwegian Petroleum Directorate, OMV was awarded a 50% share in this license.

In line with our Strategy 2030, we decided to initiate the sales process for our E&P assets in Malaysia and New Zealand. The region has attractive gas growth projects, but the assets are very remote and thus are minimally integrated into our core business. We are now working on preparing the necessary documents to be able to officially start the divestment process next month.

Let's now turn to our financial performance in the first quarter of 2023. Our clean CCS operating result came in strong once again at €2.1 billion, stable quarter-on-quarter and 21% lower year-on-year. This was mainly driven by a drop of oil prices and chemical margins, partially offset by significantly stronger refining margins.

The clean CCS tax rate decreased to 39%, which was 7 percentage points lower than in the same quarter of the previous year, due to a lower contribution from countries with high tax regimes in the group profits. As a result, the clean CCS net income attributable to stockholders declined slightly by 4% to €1 billion. clean CCS earnings per share amounted to €3.13.

Let's now discuss the performance of our business segments. Compared to the first quarter of 2022, the clean operating result of Chemicals & Materials dropped sharply to €94 million. The result was impacted by a materially lower performance from the Nitro business, a slowdown of the chemical sector reflected in weaker margins, volumes and substantial negative inventory valuation effects, as well as lower contribution from the joint ventures.

The contribution from the Nitro business fell sharply by around €130 million from the exceptional high level of the prior year quarter as a result of substantial negative inventory effects following the gas price development, lower sales volumes and margins.

The ethylene indicator margin improved by 13% and the propylene indicator margin went down by 14%. The polyolefin indicator margins came down from the extraordinary levels of the first quarter of 2022. The polyethylene indicator margin declined by 20%, while the polypropylene indicator margin decreased substantially by 39%. As a consequence, in our European olefins and polyolefins business, we recorded a negative market impact of around €90 million compared to the first quarter of 2022 and inventory valuation effects of around €115 million.

The operational performance in our olefins and polyolefins business decreased as well, impacted by lower steam cracker utilization rate and reduced polyolefin sales volumes. As a result of increasing economic pressure in Europe, polypropylene sales volumes decreased by 7%, while polyethylene sales were flat. The decline in demand was seen mainly in the Consumer Products & Infrastructure segments, while volumes in mobility and energy increased.

The specialty business continued to perform strongly; while sales volumes decreased, the margins improved slightly. The performance of the JVs dropped to €1 million, driven by a negative contribution from Baystar and the lower contribution from Borouge. The Borouge result declined, driven by industry-wide pricing pressure, a lower share of OMV in the JV following the listing of the company in June 2022 and decreased sales volumes.

The planned turnaround at Borouge 2, which was completed in March, led to reduced sales volumes, which were only partially compensated for by the full ramp-up of the PP5 unit. Although we have seen polyolefin prices in Asia increasing compared to the previous quarter, the prices remained below the level of the first quarter of 2022 due to new production capacities and lower demand.

At Baystar, the cracker recorded a low utilization rate due to the shutdown triggered by the hard freeze in December and operational challenges. The results continued to be burdened by depreciation and interest expenses amid a weak market environment.

The clean CCS operating result in Fuels & Feedstock almost tripled to €581 million due to very strong refining indicator margins, improved margins in retail and commercial and a substantial higher contribution from ADNOC Refining and Trading.

OMV's refining indicator margin soared to $14.8 per barrel, resulting in a positive market impact of around €250 million compared to the first quarter of 2022. Significantly higher cracks for jet fuels, diesel and gasoline were only partly offset by lower heavy fuel oil and naphtha cracks.

Total sales volumes were slightly higher than in the first quarter of 2022. We have seen a very good development in the commercial business where the removal of market price regulations had a positive impact on sales volumes and margins. The performance of the retail business improved as well. Due to higher margins and the better non-fuel business, partially offset by higher costs and the divestment of the German retail network. In addition, the prior-year quarter benefited from customer stockpiling fuel volumes in anticipation of fast-rising pump prices.

The contribution from ADNOC Refining and Trading rose sharply from €20 million to €108 million, driven by higher refining margins.

The clean operating result of Energy declined by 23% to €1.5 billion on the back of lower realized commodity prices, decreased sales volumes, primarily due to the exclusion of Russia, and higher operational costs. The negative effects were partially compensated for by a stronger dollar and the considerable contribution from Gas Marketing & Power, which was 76% higher than in the first quarter of 2022. Starting from the first quarter of this year, both gas businesses, West and East, are now included in the Energy segment.

Compared with the first quarter of 2022, OMV's realized oil price decreased by 14%, and thus less than Brent, supported by the change of the transfer price in Romania from Urals to Brent in the second quarter of 2022. While the European gas hub prices dropped by 44% compared with the prior-year quarter, our realized gas price declined only by 7%.

The realized gas price in the first quarter of 2022 included hedged volumes at a lower price and around 70,000 BOE per day of Russian gas, half of which sold at very low domestic prices. Today, around 30% of our gas portfolio, namely the volumes in Norway and Austria, is exposed directly to the European hub prices. In Romania, the realized gas price was lower year-on-year, as most of the equity volumes were regulated.

Production volumes decreased by 80,000 to 376,000 BOE per day, primarily due to the change in the consolidation method of Russian operations as well as natural decline in Norway and Romania. Production increased in the United Arab Emirates after a revision of OPEC restrictions. Production costs rose by 25% to $9.3 per barrel, impacted by the exclusion of the low cost Russian gas volumes and global cost pressures. Sales volumes declined by 91,000 BOE per day in line with production.

The Gas Marketing & Power business increased by €155 million to €358 million, driven by a strong increase in the Gas West business. The result was supported by a very strong seasonal storage performance due to higher captured summer-winter spreads and the contribution from our LNG business, which has been included in our results since the previous quarter. These were offset by some losses caused by the volatility of the natural gas supply from Russia during January. OMV Petrom also had a very good performance, similar to the previous year quarter result, supported by strong margins from gas storage and power transaction outside Romania.

Turning to cash flow. Our first quarter operating cash flow excluding net working capital was €2 billion, 40% lower than in the first quarter of 2022. In the prior-year quarter, besides the very supportive macro environment, we temporarily benefited from the tax payment schedule in Norway, and we still had Russia consolidated for two months in our cash flow. This year, we received dividends from Borouge in the amount of €224 million similar to the prior-year quarter, and, in addition, the majority of the insurance compensation related to the Schwechat incident.

While in the first quarter of 2022, the net working capital effects generated a tremendously high cash outflow of around €700 million, in the first quarter this year, these effects reversed, generating a positive cash inflow of a similar size, triggered by a lower price environment, gas storage withdrawals and lower storage injections. As a result, cash flow from operating activities for the first quarter was around €2.7 billion and thus at the level of the prior-year quarter.

The organic cash flow from investing activities generated an outflow of around €850 million. This included the ReOil demo plant, the PDH plant in Belgium, the co-processing unit in Schwechat, maintenance of European refineries and E&P projects in Romania, New Zealand and the UAE. As a result, the organic free cash flow before dividends for the first quarter came in at €1.8 billion.

Moving onto the balance sheet, since the end of last year, we have been able to further reduce net debt by around €1.6 billion to €639 million. As a result, our leverage ratio decreased to 2%. At the end of March 2023, OMV had a cash position of €9.7 billion and €5.2 billion in undrawn committed credit facilities.

Let me conclude with the outlook for this year, which remains largely unchanged. Based on the development we have seen so far, our estimate for Brent oil price for the full year remains above $80 per barrel.

Looking at the gas situation, the storages in Europe exited March more than half full, well above the five-year average and with double the volumes compared to March 2022. Our storages in Austria are currently around 70% full. If we look at the current gas indicators, the THE price for the full year has a downside potential compared to our estimated range of €60 to €70 per megawatt hour. However, given the volatility of the market, we consider it is too early to change our guidance now. We maintain our average realized gas price forecast for the full year of around €35 per megawatt hour.

In Chemicals & Materials, our guidance for margins and volumes is unchanged. We expect to see some improvement in the olefin margins in the next quarter as industrial activity in Europe is picking up after a weaker macro outlook and outages at French refineries in the first three months of this year. For the full year, we continue to expect the ethylene indicator margins to be around €530 per tonne and the propylene indicator margins around €480. Our polyolefin margin guidance is also unchanged. We forecast the polyethylene indicator margin to be around €350 and the polypropylene indicator margin around €400 per tonne.

The utilization rate of our European steam crackers is unchanged at around 90%. We have a planned turnaround that the Schwechat cracker starting end of May for six weeks.

At Baystar, the new polyethylene plant with a capacity of 625,000 tonnes per year is mechanically completed and is expected to start up this quarter.

In Belgium, we finalized the re-tendering of the construction works for the Kallo PDH project, following the termination of all contracts with IREM Group, previously the main contractor as of August last year. It is now estimated that the plant will start up in the first half of 2025 and the updated project plan provides for a substantial increase in costs. Borealis is claiming compensation from the IREM companies to recover part of the additional costs incurred.

In Fuels & Feedstock, the refining indicator margin compressed recently as diesel supply is plentiful due to the re-routing of Russian volumes, additional refinery capacities and sluggish demand. Hence, from today's point of view, we see the refining indicator margin more towards the lower end of the previously communicated range of $10 to $15 per barrel for this year. The guidance for sales volumes is unchanged. Petrobrazi refinery started a planned six-week turnaround on April 21 with the total impact of around €40 million including OpEx and estimated margin loss.

In Energy, the guidance for the average production of around 360,000 barrels per day is unchanged. Total production in the second quarter is expected to be below the level seen in the first quarter, as there are planned maintenance works in Norway, Malaysia, and Romania. The planned turnaround for the power plant in Romania started at the beginning of March and has been extended until the end of June, because some additional parts need to be replaced. The results from the OMV Gas Marketing & Power business in the next quarters will reflect the extended downtime for the power plant in Romania and the usual seasonal cash injection period.

Let me give you an update on the Neptun Deep project. In March, we signed a contract for the delivery of natural gas from the Black Sea to the Romanian National Transport System with Transgaz. Assuming all key prerequisites are in place, we estimate the FID for the Neptun project in mid-2023.

The organic CapEx for full year will rise slightly from €3.7 billion to €3.8 billion due to an increase in C&M related to the Kallo project and later-than-estimated closing of the Nitro divestment.

Looking at cash flow, I would like to mention that our remaining 2022 tax liabilities in Norway amounted to around €1.3 billion and I expect it to be paid in the second quarter. In addition, in June, we will pay our record high dividends to OMV shareholders and minority shareholders amounting to around €2 billion.

With regards to cash inflows, we expect to receive dividends from Borouge of at least $468 million for 2023 in two tranches: one to be paid in the third quarter of 2023 and the remainder in 2024. The divestment of the Nitro business has reached a very important milestone. The European Commission approved the deal. We are now waiting for clearance from the French authorities and we are confident that we will close the transaction until end of June.

Regarding the divestment of the Slovenian marketing business, a further milestone has been reached. In March, the buyer signed an agreement to sell some existing filling stations as a prerequisite for obtaining the EU Commission's clearance and closing is expected until end of the second quarter. We expect the cash inflow of more than €1 billion upon closing the two deals.

The clean tax rate for the full year is now expected to be in the mid-40%-s due to a stronger Fuels & Feedstock contribution than anticipated.

Thank you for your attention. Reinhard and I will now be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We'll take our first question from Joshua Stone from Barclays. Please go ahead.

Joshua Stone

Thanks. Good morning, everyone. Two questions, please. Firstly, just on the cash flow, there's a very good cash result in the quarter. You've highlighted a couple of things about the Borouge dividend and the insurance payment. But can you maybe just reconcile where you think this very strong cash performance is coming from? In particular, cash taxes look a little bit lower than I thought. So, am I right there? And is there anything to say on that?

And then secondly, just maybe given where your balance sheet is, can you just talk about your -- how you're feeling about acquisitions and appetite in the current environment to do deals? Thank you.

Reinhard Florey

Happy to answer your question, Josh. This is Reinhard speaking. First of all, to reconcile a little bit of the cash flow. Indeed, there a was very good operating cash flow and also, as Alfred has mentioned, a positive cash flow from net working capital that we have in there. But within that, there are a couple, of course, effects that you would not see directly in the net income, which are corrected in our other line, which more or less show the non-cash allocations that are in the net income. And as you mentioned, for instance, we have a higher cash-in from Borouge than the result shows. This is around €140 million more.

We have around €150 million insurance payment also in the cash flow. And we have hedging effect in there of roughly €800 million, which are non-cash in the net income negative, so therefore, they add to the actual cash that came in from the operative business. Against that is negative delta of cash paid versus cash booked of around €170 million. So, in total, we paid some €950 million of tax, whereas the tax line in the P&L that is the booked tax shows about €780 million. So this delta of course is also an increase when you come just from the bridge net income versus operative cash flow. But indeed all the three segments contributed with the operative business positively to the cash flow and also the net working capital was positive in all three segments. I hope that clarifies a little bit the situation around the cash flow.

Regarding the balance sheet, yes, you're right, extremely strong performance. I think it is important that the strength of the balance sheet and of course also the cash held on the balance sheet is on the one hand side protection against uncertainties in the market and on the other hand enables us to of course go for all the capital allocation priorities that we have defined. So all the organic growth, all the progressive dividend, potential inorganic growth opportunities deleveraging and then the special dividend in the magnitude of 20% to 30% of our operating cash flow.

Alfred, any further comments?

Alfred Stern

I think Reinhard covered the main elements. I think your specific question was also around inorganic activities that we may do. As you may remember, we said in our strategy, if we find possibilities to accelerate our growth and our transformation through inorganic acquisitions, we will consider those. However, we have shown over the last month very good discipline and we will continue to do so in order to make sure that we meet the three key criteria for such activities.

Number one, it needs to be in line with our strategy in terms of sustainability, but also in terms of growth. Number two, it needs to be value creating and cash contributing and it needs to be additive to our ROCE of 12% target that we have. This, we will continue to have us criteria. And as it comes to size of such possible acquisitions, I would just -- look -- if you look back, right, Borealis, 39% was our biggest acquisition so far. And for us, this gives a little bit of room where we can -- where we felt comfortable up to now.

Joshua Stone

Got it. Okay. Thank you.

Florian Greger

Thanks, Josh. We now come to Sasikanth Chilukuru from Morgan Stanley. Sasi, please go ahead.

Sasikanth Chilukuru

Hi, thanks for taking my questions. I had three small ones, please. The first one, you highlighted that the updated plan for the Kallo PDH project now provides for the substantial increase in costs. I was just wondering if you could quantify what those additional costs are and particularly what that impact to CapEx would be -- 2024-2025 CapEx would be?

The second one, just wanted to check whether there were any capital equity injections into the JVs in 1Q, especially into Borouge? Also any expectations of equity injections for the rest of the quarters for the year as well?

And finally, you've lowered your guidance for the refining indicator margin now towards the lower end of the $10 to $15 per barrel range. I was just wondering what levels are you seeing right now. Thanks.

Alfred Stern

I will answer the first and the third question, and I'll ask Reinhard to answer the second question that you asked.

On Kallo, like I said in my speech, we expect a significant cost increase of the project, primarily due to the necessary re-tendering of the project work that follow up the termination of the contract with this main contractor, IREM Group. And compared to our previous plan, we now expect about €50 million to [€7 million] (ph) additional until the end of this year, but there will most likely also be higher CapEx for the next two years due to the delay of the project. Borealis is currently working quite intensively on mitigating the cost increases of the project and has also initiated a legal process against IREM to recover part of the additional incurred costs.

On your third question concerning the refining indicator margins, it's correct that for the first quarter, we have actually seen refining indicator margins that were more up on the higher level of the range that we have given. And due to the changes that we anticipate in the market, we have now -- we see that we will for the full year be more in an average towards the lower end of the range that we have given here.

I think three things that I would like to offer for consideration here. Number one, the indicator margins of course do not include any kind of utility cost or electricity cost and so on, and we see a lower environment in this, but the impact on the realized margins should be buffered by that. And secondly, we see a strong development of retail and commercial margins, where we have seen the elimination of price caps that have capped or reduced our retail and commercial margins in the last quarters.

And for the second question, I would ask Reinhard if he can help out.

Reinhard Florey

Sure. Sasi, you have asked about potential capital injections or equity injection into JVs. If we look at Baystar, we are not expecting any kind of capital injections there as we are already entering this stage of startup both on the cracker and hopefully soon also on the Bay 3 polyethylene plant.

In Borouge company as such, we are also not expecting any kind of equity injections into Borouge 4 project. We are currently expecting that the CapEx needed will be covered by external loans or by leveraging the company. So, we do not foresee major equity stress or anything like that for OMV or for Borealis, as such coming on there.

Sasikanth Chilukuru

Reinard, thank you so much.

Florian Greger

Thanks, Sasi. Next questions come from Henri Patricot, UBS.

Henri Patricot

Yes, hello, everyone, and thank you for the presentation. I have two questions, please. The first one on chemicals where you didn't change the margin guidance for the year. I was wondering if you can give us a sense of, to what extent you've seen improvements already in the quarter or whether we need to see further improvements for the margins to get to the level that you expect especially for olefins in Europe?

And then secondly, very good performance in the Gas Marketing & Power business this quarter. I understand [indiscernible] going into second, third quarter. But thinking about next winter, to what extent was this performance in the first quarter exceptional or is that something that we could expect to see in, let's say, standard first quarter going forward for this business? Thank you.

Alfred Stern

Okay. On the chemicals and materials, the first quarter, we have actually seen a bit of a mixed picture, if you want. On the ethylene margins we have actually seen through the quarter, some improvements and both in ethylene but also in propylene. We have seen also that going into the second quarter, and we believe that this may be caused by some pickup of activities and, therefore, we have maintained our guidance of €534 per ton ethylene and €480 per ton for propylene.

On the polyolefin side, polyethylene and polypropylene, we have seen in the first quarter, actually I guess I would call it a stabilization with -- and basically performance right around the guidance that we gave for the year. So, €350 for polyethylene and €400 for polypropylene. We then see -- in particular, in Asia, we have seen for the first quarter an average price in polyethylene and polypropylene, that was about a $50 above the Q4 average and we are also seeing that Q2, we have started in a similar range of this.

So, hopefully these are some good indications of a movement that we see in those areas. We do believe that Q2 will -- still on olefins, we see a bit of a brighter picture. On polyolefin, we still see some pressures, and hopefully then as we go through the year in the second half, we will see some light improvements.

On your second question, gas and power, I think the improved results are coming from different areas, definitely one area that I would think should be sustainable is around our long-term capacity bookings that we have on our LNG terminal in Rotterdam. And we had a very bad situation over the last years and that changed dramatically last year. And I would anticipate that Europe will continue to depend on LNG imports so that we can now use that -- those LNG capacities in a much more commercial way and we are also putting quite some effort in order to do that. I think that should be possible.

And of course, we also anticipate that again for next winter gas storage and filling gas storages will be essential pressure in order to provide security of supply. So I would anticipate that also we can have some good business. Currently at OMV, our storage is already about 70% full, and we have started storing now in the last few weeks and we will continue to put this into storage.

Henri Patricot

Thank you.

Florian Greger

Thanks a lot, Henri. We now come to Peter Low, Redburn.

Peter Low

Hi. Perhaps just ask the distribution question another way. So you committed to return 20% to 30% of cash flow to shareholders. Some of your peers have ended up moving above their guided ranges. And if you don't strike a deal this year, you would certainly be in a position to do so. Is 30% ceiling kind of a hard ceiling or could you be even above that if the circumstances allowed?

And then just secondly on the rising OpEx in Upstream, to what extent -- could you kind of split out kind of the two effects there so underlying cost pressure and then I guess the change in mix as Russia has dropped out? Thanks.

Reinhard Florey

Peter, I think we feel very confident with the strength of our balance sheet and also the way how we are proceeding with our strategic plans that we are also for next year in the position to stay within a range, below 30% of leverage level and therefore the range of 20% to 30% is absolutely within our comfort zone. So, I would really encourage to have a very, very positive view on that. And we feel absolutely comfortable with that. You can imagine that from a financial point of view, the strength of the balance sheet in troubled times is always a good cushion, but we will not keep a money storage and therefore are more than happy to also let our shareholders directly participate via the progressive dividend as well as the special dividend.

Regarding rising OpEx in Upstream, I think we have to see that, of course this goes up, this goes down. In some areas, we see some inflationary effect on the OpEx. We are fighting that with programs that are both cost savings programs, as well as efficiency programs in terms of procurement, in terms of administration and all of that. So the key effect actually is how efficient we can be in the portfolio management. We have announced that we will have some portfolio measures in Asia, and we are also looking into the portfolio management when it comes to all the investments into new capacities there, specifically when you look into the Neptun project in Romania, this certainly will also from the OpEx point of view be favorable one given the right boundary conditions that we are always looking for here. And with the decline in the overall rate of production, we will certainly also make choices when wells are too small and also take them out, so that specific increase of the operating cost in Upstream can be curved there.

Peter Low

Thank you.

Florian Greger

Thanks, Peter. The next questions will come from Raphael DuBois, Societe Generale. Raphael, are you there? If not, then we go to...

Raphael DuBois

Yes, hello?

Florian Greger

Now we can hear you.

Raphael DuBois

Sorry about that. I was congratulating you for the strong set of result. And my first question is about the Baystar JV. It looks like -- it's already two quarter where you seem to be having some technical issues there. Would you mind reminding us what those issues are? And maybe even quantify the opportunity cost in terms of lost EBIT for this first quarter of the year? That's my first question.

And then Gas Marketing & Power. There are many moving parts, not least this LNG business that you started booking results for last quarter. Looking at the sequential improvement in 4Q to 1Q, would it be possible to have more granularity on what's coming from this LNG business, and what is coming from the fact you receive more gas from Russia than what you were expecting, and also the gas that you are selling from storage? Thank you.

Alfred Stern

Thank you, Raphael. I will answer your first question, and I will ask Reinhard to answer the second question.

On the Baystar joint venture, I just want to go back and remind you of what the project there is, first of all, it's a 50-50 joint venture between Borealis and TotalEnergies. And the joint venture currently operates about 400,000 tonnes of polyethylene production and the project that we have there that we executed over the last few years is: number one, a 1-million tonne ethane cracker; and number two, Borstar polyethylene plant with 625,000 tonnes of production. So at the end of this, there should be a 1-million tonne ethane-based fully integrated ethane to ethylene to polyethylene complex with state-of-the-art Borstar technology there.

The cracker was -- mechanical completed somewhere in the middle in the second half of last year, we started it up. We had some good progress there. And then unfortunately in the fourth quarter, this Texas winter freeze created a situation where the cracker tripped and we had some damages in this strip that needed to be repaired. So a few months ago, we started to back up the cracker and still have some teething issues in getting that fully to run, but we see that we are making some progress towards that, and would anticipate that we are coming to a resolution of those issues.

Like I said, it's a 1-million tonne cracker, not completely unusual that there is a startup issues that have to be eliminated one by one and we'll have to work through that. What I can also report is, on the -- because that's the important part, that we can actually start the integrated operation in that joint venture. And in the meantime, the polyethylene plant is mechanically complete and we are now working toward starting up the polyethylene plant. And with this, we would then be in the situation to have that integrated setup there.

On the EBIT impact, we do not report that kind of detail, but what I could maybe say is that we have -- with the startup, we have started that depreciation of course of the plant. And if the plant is not running, this is not favorable the result of course.

Reinhard Florey

Raphael, to your second question about Gas Marketing & Power contribution and the parts of it, in Q1, we actually had a combined result of some €360 million from Gas East and Gas West. And of course, in Gas East and Gas West, you have different parts of profitability in there. Gas East is mainly the gas sales and trading as well as the power business in Romania. And please be aware that in the first quarter we had one month of shutdown of the power plant for maintenance reasons in there, so in this quarter, the contribution may have been a little bit less, but that was more than compensated by a very good sales and trading business in the country.

In Gas West, we have three parts that are contributing. The one is the normal sales and trading business. The second is the LNG business. And the third actually is the storage business. And in this quarter of course, the storage business had by far the biggest contribution, because we had, first of all, a very good storage loading from last year and you've seen that we've used quite some working capital to allow us for that. And with rolling some of the contracts from Q4 to Q1 as end of Q4, we had very low prices, and they had recovered in the beginning of Q1. We had good opportunities for margins.

LNG business is now a stable business, a profitable business and is taking part that will not fluctuate so much. And the sales of trading business is of course one that is more in Q4 and Q1, strongly contributing. So this is a seasonal business where we will see that the months where we will store in instead of taking gas from storage. We'll have less contributions clearly from that business and that of course is also the case for the storage business.

You mentioned also that we will get more gas from Russia than expected. No, that's not the case. We are getting what we expect in Austria. So, from our two contracts that we have with Gazprom, the contract flowing into Austria is now, I would say, adequately delivered to, whereas the contract in Germany is still at zero and we are not receiving any kind of gas from Gazprom in Germany. So, I hope this clarifies a little bit the situation.

Raphael DuBois

Thank you.

Florian Greger

Thanks, Raphael. We now come to Karen Kostanian from Bank of America.

Karen Kostanian

Yeah, gentlemen, thank you so much for your presentation. I have two questions. The first question about your six weeks maintenance on the refineries. Could you just remind me if this is the first time you're announcing it and whether that's going to also have a material impact on your expected refining margins in the second quarter?

And the second question on -- is more of a theoretical question on potential acquisitions. The chemicals margins are at the low, the valuations are at all, what is preventing you from pulling the trigger? Thank you.

Alfred Stern

I will start with your second question and then answer your first question after, and ask Reinhard for some help of potential impact as well. On the chemical and material acquisition, what we said is that we have very good growth project -- growth plan for our chemical and material business that is really based on organic growth projects. If you remember the three big growth projects that we had, Baystar project, which I just talked about before, the PDH project in Belgium Kallo, and the Borouge 4 project in Abu Dhabi. These three projects will all come online by 2025 and they will allow us about the 30% growth of our chemicals and materials business. So this is the big focus.

What we said, in addition to this is, that we will make the business more sustainable by increasing our circular business to about 2 million tonnes by 2030, most of those businesses, the circular business is -- there is no really big acquisitions that you can make at the moment in order to drive this forward. Borealis has made a smaller one in the last couple of months. They bought minority share in a company called Renasci in Belgium, which does chemical recycling or smart chain recycling, it's called. So, it's a mix of different recycling methods and they have actually increased their share recently to majority. They now own slightly more than 50% of Renasci.

So these are smaller acquisitions that can be made, but the big movements in the circular business is going to be organic, and we are currently building a ReOil plant in our Schwechat refinery, our own OMV technology that ReOil plant should come on stream later this year with 16,000 tonnes of production capacity that we will then bring on stream where you make the steps.

The third thing that we said in chemicals is inorganic acquisitions to diversify our portfolio. And you're absolutely right our balance sheet is strong enough that we can do that, but we did also make it very clear that we need to fulfill all three criteria. It needs to be moving with our strategy in terms of sustainability, in terms of growth perspective. It needs to be value enhancing for us and it needs to contribute to our ROCE of 12% target. And we are of course always open and looking around for those targets, but at the moment, I have nothing to announce here.

Reinhard Florey

And then maybe your question -- your first question regarding the maintenance in Petrobras in Romania, this is a six weeks' maintenance window. It has been previously announced. It is also the planned maintenance. And you may have followed that we did not have major shutdowns in Petrobras over the last year. So for the first time this refinery has been running on a five years' period and that also makes this maintenance period a little bit longer than to the normal four weeks now in six weeks, but this has been announced and has planned.

And you had asked for the impact, we are estimating the total impact of that six-week period at around €40 million. These include both OpEx as well as estimated margin loss. But the specific margin loss that you see of course you can't quite easily calculate, if you take the indicator margin and the missing volumes during that period. So with indicator margins now going down, maybe it's not the worst moment for that kind of a shutdown.

Karen Kostanian

Thank you very much.

Florian Greger

Thanks, Karen. Next is Giacomo Romeo, Jefferies.

Giacomo Romeo

Yes, thank you. So first question is going back to your earlier comments around the chemical acquisition's requirement. You made a comment about referring back to the acquisition of Borealis in 2020 and saying that that gives you an idea of the maximum. So I just wanted to get a little bit more of a comment here. It's -- obviously the acquisition price was $4.68 billion, but the net cash out was quite lower. So which one of the two should we see sort of the maximum size for a potential M&A here? And then related to that, are you -- would you be okay to let your leverage go above 30% or would you say 30% as the cap in terms of the size you will be happy to use for an M&A -- for M&A opportunities?

The second question is more general and it's around gas storage. You said they are at 70%, which is well ahead of the EU's intermediate target levels. I'm just trying to understand how do you see your progress towards the end of summer -- sorry, end of injection season target of 95%? Will you -- are you looking to sort of get there in as soon as reasonably possible in order to de-risk that -- the growth to that level, or are you happy to sort of slow it down and just make it grow it in hand and hand with what are the EU's intermediate target? Just trying to get a little bit better understanding what's your thinking there. Thank you.

Alfred Stern

Thank you, Giacomo. I will start with question number two and ask Reinhard to help on question number one.

The storage level that we are looking to achieve here, of course, we will again make sure that we reach high storage level as we had in the last year. As you could see from Q1 of this year now, it also creates a possibility to earn some money. We actually are going to look to commercially optimize our storage activities as we move towards the winter season again and make sure that we can use the opportunity also to lock in positive margins towards the winter season when we hit. So this will be a key driver for us how we move up on the storage.

Reinhard Florey

Yes. Giacomo, regarding the size and the impact of potential acquisitions, first of all, we always point to the fact that these kind of acquisitions are opportunistic and we are looking for best possible targets at the best possible time, and we concentrate of course pursuing our strategy with organic investments. But when it comes to the maximum size of what we are targeting at, I'm long enough in the M&A business to say you never announce a number or you never announced the target upfront. So therefore, I think it's important to see what Alfred has said. We are in a size that is digestible for us with the clear intention not to surpass the 30% of our leverage. So just to make sure we are not looking into a €10 or €15 billion acquisition. This is very clear. We are looking at clearly smaller sizes, if at all, at the right time, and we will let you know about successful approaches when the time is the right one.

Giacomo Romeo

Thank you.

Florian Greger

Thanks, Giacomo. We now come to Matt Lofting, J.P. Morgan.

Matt Lofting

Hi, thanks for taking the questions. Two, please, if I could, one strategic and one nearer term. On the former, bearing in mind the E&P disposal process around Malaysia and New Zealand, how committed is OMV to preserving vertical portfolio integration through Strategy 2030? And are you concerned the upstream divestments risk making good cash flows incrementally more cyclical around downstream trends as shown you in many ways by the chems and refining dynamics we've seen in recent months?

And then secondly, from a cash flow perspective, can you talk about where you see the trajectory your current macro on second quarter operating cash flow factoring macro trends including lower refining and E&P volumes that you highlighted Borouge and Schwechat inflow phasing from Q1 and high Norwegian cash taxes? Thank you.

Alfred Stern

I will start with question number one. Reinhard will take your question on cash flow expectations. The strategy of OMV is a strategy where we are saying today, we have three business segments with Energy, Fuels & Feedstock, and Chemicals & Materials. And they have integration value for us that is helping us to have a strong performance through the different cycles. I think the Q1 result that we just delivered does show the benefit of this. But more importantly from a strategic perspective, we see that in our transformation to become a sustainable fuels, chemicals and materials company, we do see integration value also on an operational level in order to make that transformation over time.

So, let me give you two -- or three examples of this. We just announced for the Q1, this Poseidon project together with Aker BP in Norway for carbon capture and storage. One of the CO2 emitters that we are considering that could store into this is Borealis, where we have activities in Northwestern Europe with access to exporting the CO2 potentially to this CCS activity.

The second one that I want to mention is our ReOil process. We believe our ReOil process is one that can be scaled to a very big commercial level. We are now finishing up this year our 16,000 tonne plant, but the full commercial scale would be 200,000 tonnes and this operation can be integrated into the refinery for additional efficiency and additional value creation from the production of such ReOil plant.

And the third example is that for our refineries, we will increase our chemicals integration. As road fuels reduce overtime, we will increase our integration into chemicals more and go up to 24%, 25% of chemical integration, and we believe those are good integration benefits that help us both to manage cyclicality, but also bring us some operational synergies across the portfolio. When it comes to the Malaysia and New Zealand, this is also a decision that was also driven to a degree that these are very remote assets that in our core portfolio has limited integration in that sense and this is for us, therefore, a driver to go into this.

And last, what I want to say if you look at the timeframe of 2019 to 2021, that is the time where we had Borealis already in after the acquisition, what you can see is we really one of the few companies that has a very balanced mix of contribution from the different business segments, about 30% coming from chemicals, 30% from refining 40%, from energy and over time. We will be able to move this in a growth direction. I really think we are one of the few companies that have such a balanced portfolio that allows this transformation.

Reinhard Florey

Yes. And then Matt, regarding your question regarding cash flow expectation Q2, first of all, we are expecting again a good operative cash generation. So, we have three strong segments there. However, we have to take into account of course that currently we have lower indicators for both gas prices as well as refining margins. We expect a slightly improved chems environment in second quarter. And then of course we have also to look into the net working capital, because, as Alfred has stated, we are starting already with storing gas again, so this is something where certainly there will be a negative net working capital effect to be expected in Q2.

On the positive side, we are expecting cash-in from our divestments, Nitro and possibly also the Slovenian retail business. But then of course, we see a stronger cash outflow on the tax side in Norway. There will be -- second quarter, the highest quarter in terms of tax payments, and of course I mean, good message to our investors, we will have the cash outflow from dividends and special dividends in Q2 and also the dividends from Petrom.

So, this is a little bit the overall picture where you can see what influencing factors will deviate between Q1 and Q2 as special situation, but in general cash generation really came in strong operative results.

Matt Lofting

Thank you.

Florian Greger

Thank you, Matt. There is another question from Bertrand Hodee from Kepler Cheuvreux.

Bertrand Hodee

Yes. Hello, everyone. Thank you for taking my question. Coming back on the Norwegian tax liabilities, you had €2 billion outstanding tax liabilities in Norway at the end of Q4. Now, it has been reduced to €1.7 billion. But can you quantify the cash tax payments you expect in Norway in Q2? I wanted to understand, and how does that compare with your cash tax payments in Norway in Q1? Just to make sure we properly model that cash tax lag in Norway.

And my second question is, you referred in your Gas Marketing business this quarter to some hedging losses in January 2023 because of erratic natural gas supply from Gazprom. Can you quantify that hedging losses impact in January? Thank you.

Reinhard Florey

Betrand, I will try my best regarding the tax guidance for Norway. So, as I have said, tax payments overall, in Q1, have been around €950 million, that of course is not only the Norwegian tax, but let's say two-thirds go in that direction. We have from the Norwegian tax regime, a situation where the tax relating to the past year is always three major tranches in the first half year, one in the first quarter, two in the second quarter. And as you can see from our balance sheet, tax liabilities are in the magnitude of slightly above €1.3 billion in there. So you can imagine that this is about the tax payments that we are expecting from Norway here as they are other liabilities that we carry from last year here. So I hope this gives you the guidance. So that's why I said the highest burden on tax payments from Norway will be in the second quarter.

When you were in your second question referring to the impact of hedging losses in January, we have given you last year an average number per month of around €50 million of the hedging losses if there is volatility. In January, the volatility has been a little bit higher, but there is nothing specifically to quantify here. All the kind of losses that we've made with these hedges have been more than compensated with our good gas management, with sales, with storage business. So I'm very happy to report that we are more than overcompensating this kind of negative impact, and this is really the good news about Q1.

Bertrand Hodee

Crystal clear, Reinhard. Crystal clear. Thank you.

Florian Greger

Thanks, Bertrand. We now come to the end of our conference call, and would like to thank you for joining us today. Should you have any further questions, please contact the Investor Relations team. And with that, thanks again, and have a good day.

Reinhard Florey

Thank you very much. I wish you a good afternoon.

Alfred Stern

Thank you.

For further details see:

OMV Aktiengesellschaft (OMVJF) Q1 2023 Earnings Call Transcript