OMVJF - OMV Aktiengesellschaft (OMVJF) Q2 2023 Earnings Call Transcript

2023-07-28 12:25:02 ET

OMV Aktiengesellschaft (OMVJF)

Q2 2023 Earnings Conference Call

July 28, 2023, 05:30 ET

Company Participants

Florian Greger - SVP and Head, IR & Sustainability

Alfred Stern - CEO & Chairman

Reinhard Florey - CFO

Conference Call Participants

Irene Himona - Societe Generale

Sasikanth Chilukuru - Morgan Stanley

Alastair Syme - Citigroup

Henri Patricot - UBS

Henry Tarr - Berenberg

Bertrand Hodee - Kepler Cheuvreux

Matt Lofting - JPMorgan Chase & Co.

Tamas Pletser - Erste Group Bank

Presentation

Operator

Welcome to the OMV Conference Call results, January to June Q2 2023. [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 could be downloaded at www.omv.com. Simultaneously to this conference, a live audio webcast is available on the OMV's website. At this time, I'd 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 the nature, forward-looking statements are subject to risks and uncertainties that will or may occur in future and outside the 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 and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV. I'd like to turn the call over to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.

Florian Greger

Yes. Thank you. Good morning, ladies and gentlemen, and welcome to OMV's earnings call for the second quarter 2023. With me on the call are our CEO, Alfred Stern; and Reinhard Florey, OMV's Chief Financial Officer. As always, Alfred will walk you through the highlights of the quarter and discuss OMV's financial performance. Following his presentation, both gentlemen will be available to answer your questions. And with that, I'll hand it over to Alfred.

Alfred Stern

Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. The second quarter of 2023 was characterized by increasing concerns about the global economic situation and tightening monetary policies across major economies. As a consequence, we've seen prices and margins decreasing compared to the previous quarter, Brent crude oil prices declined slightly to $78 per barrel on average for the quarter.

And European gas prices dropped by 31% on the back of higher storage levels in seasonality. Refining margins almost halved compared with the exceptional level of the first quarter to $7.6 per barrel, driven by a sharp drop in naphtha prices and lower middle distillate cracks. The flexibility of Chinese refiners to process Russian and crude at discounted prices has pushed naphtha prices down compared to the previous quarter.

In chemicals, end market demand remained under pressure with slower-than-expected recovery in China and weak industrial activity in Europe, while supply increased with new capacity additions in Asia. Olefin margins in Europe increased supported by lower naphtha prices while polyolefin margins continued to decline. Weaker consumer activity, a squeeze on affordability and continued destocking combined with pressure from imports have kept order levels depressed. The clean CCS operating results declined from the exceptional high level of the prior year quarter to around €1.2 billion. Our cash flow from operating activities in the quarter fell to €226 million, impacted by decreasing commodity prices, combined with high tax payments in Norway related to 2022 earnings.

Looking at operations, polyolefin sales volumes were lower by 7% year-on-year, while fuel sales volumes rose by 5%. The utilization rate of our refineries and European crackers was lower than the typical level of 90% plus due to planned turnarounds in Petrobras and at the chemical-related facilities in Schwechat. Oil and gas production was slightly higher year-on-year primarily due to the commissioning of new wells in New Zealand and the force majeure in Libya in the prior year quarter. We continued to execute our strategy and further advanced with the transformation of our company.

In June, our long-standing collective efforts at multiple levels came to fruition, and we announced the final investment decision for the natural gas project, Neptun Deep, a key milestone in our strategy 2030. The project is expected to provide a reliable and secure source of energy while strengthening our group's position in the Black Sea region and in Southeastern Europe. OMV Petrom will be the operator of the project, together with Romgaz, the largest producer and main supplier of natural gas in Romania, we will jointly invest up to €4 billion in the development phase of the project. With around 100 billion cubic meters of recoverable resources, Neptun Deep is one of the largest natural gas projects in the European Union. First production is estimated for 2027 and production at the plateau will be approximately 140,000 BOE per day for around 10 years.

In our low carbon business, we acquired a minority stake in the Canadian company Eavor Technologies, the world's leading closed-loop geothermal energy solutions provider. As this technology is truly scalable and applicable in various types of geological structures, it will complement our existing portfolio enabling us to offer solutions for district heating networks outside of the normal hydrothermal areas. Our initial focus in deploying this technology will be Austria, Romania and Germany.

In chemicals, we signed an agreement to acquire Rialti, one of the European market leaders specialized in the production of sustainable polypropylene compounds with a focus on mechanically recycled feedstock from waste. With over 30 years of experience, Rialti is making compounds with applications in different industries including automotive, appliances and construction.

The addition of Rialti to our portfolio will increase our annual sustainable polyolefin production capacity by around 50,000 tonnes to around 200,000 tonnes, strengthening our ability to support our customers in meeting their sustainability ambitions.

Moreover, we have been actively driving forward the diversification of our gas supply sources and supply routes. We worked on the diversification of our gas transport routes, which for historical reasons, have been primarily focused on the supply route from the East via the Baumgarten hub. OMV was awarded capacity of around 40 terawatt hours per annum until 2026 and around 20 terawatt hours per annum for additional 2 years for transportation routes via Germany and Italy.

And -- we signed a long-term agreement to purchase 1 million tonnes per year of LNG from starting from 2026 for 10 years. In addition, we announced this morning a new gas discovery in Austria with a preliminary evaluation of potential recoverable resources of around 28 million barrels of oil equivalent.

We also made significant progress in our active portfolio management and closed the divestment of our Slovenian business to the MOL Group in June and the divestment of the nitro business to AGROFERT in July. Both divestments together generated a cash inflow of more than €1 billion with the lion's share only booked in the third quarter.

The sale process of our E&P assets in Malaysia and New Zealand is progressing as planned. The marketing phase started in the second quarter, and we are seeing active interest from many potential buyers for both assets. Two weeks ago, we announced that we will pursue negotiations with ADNOC on a potential combination of Borealis and Borouge. The transaction would create a global polyolefin company with a material presence in key markets and potential for growth. We are aiming for equal terms under a jointly controlled listed platform. Please understand that we cannot give any further details at this point in time. Let's now turn to our financial performance in the second quarter of 2023.

Our Clean CCS operating result came in at around €1.2 billion. Substantially lower quarter-on-quarter and year-on-year, driven by significant price drops across all commodities from the exceptionally high levels seen in the prior year quarter. The Clean CCS tax rate increased from 36% to 46% due to a higher contribution from countries with high tax regimes in the total group profits compared with the same quarter of the previous year. As a result, the Clean CCS net income attributable to stockholders declined to €472 million. Clean CCS earnings per share amounted to €1.44.

Let's now discuss the performance of our business segments. Compared to the second quarter of 2022, the clean operating result of chemicals and materials dropped sharply to €7 million. The Nitro business turned negative to minus €35 million and the performance of the polyolefin business declined as well, impacted by the slowdown of the chemical sector. The result was burdened by substantial negative inventory valuation effects, weaker margins and volumes and the materially lower results from Borealis JVs.

The contribution from the Nitro business fell by around €150 million from the exceptional high level of the prior year quarter, as a result of lower margins and negative inventory effects following the gas price development. The ethylene indicator margin declined by 14%, and the propylene indicator margin went down by 32%. The polyolefin indicator margins decreased by around 30% from the extraordinary levels of the second quarter of 2022. As a consequence, in our European olefins and polyolefins business, we recorded a negative market impact of around €200 million compared to the second quarter of 2022 and negative inventory valuation effects of around €200 million.

The operational performance of our olefins business improved, supported by a higher utilization rate of the Stenungsund cracker, which was in turnaround in the prior year quarter and a higher light feedstock advantage. The polyolefin business of Borealis, excluding JVs, suffering from sluggish demand. Polyethylene sales volumes decreased by 9% while polypropylene sales volumes declined by 4%, reflecting depressed demand in consumer products and the decline in energy, infrastructure and health care applications.

Mobility volumes increased returning to pre-COVID levels due to the need to catch up on long placed vehicle orders and better supply of semiconductors. Our specialty business continued to provide a resilient earnings contributions, as you can see in the appendix of the presentation. We were able to maintain margins, but sales volumes declined due to subdued demand.

The performance of the JVs dropped to €29 million due to a lower contribution from Borouge and the negative contribution from Baystar. The Borouge result declined driven by oversupply and subdued demand in Asia as well as a lower share of OMV in the JV following the listing of the company in June 2022. Sales volumes decreased due to slow demand, partially offset by the new PP5 plant, which was ramping up in the prior year quarter. At Baystar, the ethane cracker recorded a low utilization rate due to operational challenges. The results continued to be burdened by depreciation and interest expenses amid the weak market environment.

The Clean CCS operating result in fuels and feedstock decreased to €283 million, primarily due to a substantially lower contribution from refining, partially offset by a significantly higher retail and commercial results. The refining margins pulled back from the extraordinarily strong level of the prior year quarter when refining earnings had surged in the wake of the Russia-Ukraine war. Cracks for jet fuel, diesel and gasoline dropped significantly, while naphtha remained very weak.

OMV's refining indicator margin in Europe fell from $20.5 to $7.6 per barrel but remained above historical levels. The refinery utilization rate increased from 58% to 73% despite the Petrobras turnaround as the prior year quarter was affected by the Schwechat refinery turnaround and the incident.

As a result, in total, the performance was impacted negatively year-on-year by around €300 million. Total sales volume rose by 5% compared to the second quarter of 2022 despite the divestment of the German retail network last year. We have seen a very good development in the retail business, driven by higher fuel unit margins and a better nonfuel business, partially offset by the missing contribution from Germany.

The commercial business improved as well, driven by stronger margins and increased sales volumes following stronger demand and an upswing in the aviation sector. Following the global trend, the refining margins in the Middle East fell as well from the record levels of last year. However, the contribution from ADNOC Refining and Trading remained strong and was only slightly lower compared to the second quarter of 2022, supported by a partial reduction of a decommissioning provision.

The Clean operating result of energy halved to €895 million compared with the second quarter of 2022, primarily due to lower commodity prices partially offset by better performance of gas marketing and power. While in the prior year quarter, the Brent price averaged $114 per barrel and the European gas hub price €102 per megawatt hour in the second quarter of 2023, the Brent price came down to $78 per barrel and the gas hub price to around €38 per megawatt hour.

OMV's realized oil price decreased in line with Brent while the realized gas price declined less than the hub prices by 50%. Around 30% of our gas portfolio, namely the volumes in Norway and Austria, is exposed directly to the European hub prices. The other countries follow more local pricing. As a result, we recorded a negative market effect of €866 million versus the prior year quarter. Compared with the second quarter of 2022, production volumes increased slightly to 353,000 BOE per day, primarily due to new wells in New Zealand, running production in Libya without interruption, partially offset by natural decline and planned maintenance in Norway and Romania.

Production costs rose by 20% to $9.9 per barrel as a consequence of general price inflation and the positive one-off effect related to a tax audit in Romania in the prior year quarter. Sales volumes increased in line with production. The gas marketing and power result rose by €83 million, driven by a better performance of gas waste. The prior year quarter result was negatively impacted by hedging losses due to the volatility of the natural gas supply from Russia.

In addition, the LNG business is now included in our Clean operating result and contributed positively. In Romania, the Gas and Power business contribution declined in the context of significantly lower market prices. Extended regulatory and fiscal interventions and the planned turnaround of the Brazi power plant for the entire quarter. The result was supported by the reversal of a provision related to taxation in Romania.

Turning to cash flow. In the second quarter, we had very high cash outflows due to the one hand -- due on the one hand, to the annual payment of dividends and on the other hand, to unusually high tax payments. We paid record regular and special dividends to OMV shareholders related to the full fiscal year 2022, amounting to €1.65 billion. In addition, we paid our remaining 2022 tax liabilities in Norway of around €1.2 billion, as well as taxes related to the solidarity contribution for 2022 in Romania and Austria amounting to €350 million.

Combined with the declining macro environment, our second quarter operating cash flow, excluding net working capital effects, turned negative to minus €375 million. This includes dividends received from ADNOC Refining and Trading in the amount of €274 million. Net working capital effects generated a positive cash inflow of €600 million in the quarter, triggered by a lower price environment. As a result, cash flow from operating activities for the second quarter was €226 million.

Looking at the half-year picture, cash flow from operating activities excluding net working capital effects, amounted to €1.6 billion. While in the first half of 2022, the net working capital effects generated a cash outflow of around €2.6 billion in the first half of this year, these effects were partially reversed, generating a positive cash inflow of around €1.3 billion. As a result, cash flow from operating activities for the first half of 2023 was 2.1 -- sorry, was €2.9 billion, 7% lower than in the first half of 2022.

The organic cash flow from investing activities generated an outflow of around €1.7 billion in the first half year. This included the ReOil demo plant, the PDH plant in Belgium, maintenance of refineries and E&P projects in Romania and Norway. As a result, the organic free cash flow before dividends for the first half year amounted to €1.2 billion. After the payment of the annual dividends to shareholders, minorities and bondholders, the organic free cash flow turned negative to minus €649 million in the first 6 months of 2023.

The inorganic cash flow from investing activities generated an outflow of around €100 million. The cash inflow of €272 million related to the divestment of the business in Slovenia was more than offset by investments in debt instruments, additional loans granted to Borouge and Baystar and the acquisition of a stake in Eavor.

Moving on to the balance sheet. Our leverage ratio at the end of June temporarily increased to 11% following a heavy cash outflow quarter when we had to pay the record annual dividends and the outstanding taxes in Norway. However, if we consider the cash inflow of around €850 million coming from the divestment of the Nitro business, which we closed in July, our leverage ratio would be around 8%; well below our threshold of 30%. At the end of June 2023, OMV had a cash position of €6.5 billion and unchanged €5.2 billion in undrawn committed credit facilities.

Let me conclude with an updated outlook for this year. Based on the developments we have seen so far, our estimate for the Brent oil price for the full year is now between $75 to $80 per barrel. Looking at the situation in gas, the storages are filling up fast in Europe, having already passed the 80% threshold, which is earlier than expected. Therefore, we now estimate the price for the full year to be around €40 per megawatt hour. As a consequence, we are adjusting our average realized gas price forecast for the full year to around €30 per megawatt hour.

In Chemicals & Materials, supported by reduced naphtha prices, we continue to expect the ethylene indicator margin to be around €530 per tonne. However, the propylene indicator margin is now expected to be lower at around €400 per tonne due to high supply availability. In polyolefins, the demand remains weak as the ongoing cost of living crisis is impacting consumer spending and industrial activity. We now forecast the polyethylene indicator margin for the full year to be around €300 per tonne, and the polypropylene indicator margin around €350 per ton.

The guidance for polyolefin sales volumes is unchanged at around 3.8 million tonnes. The utilization rate of our European steam crackers is estimated to be around 85%. We have a planned 6-week turnaround at the Porvoo cracker starting mid-August. At Baystar, the new Borstar polyethylene plant with a capacity of 625,000 tons per year is mechanically completed and is expected to start up in the next weeks. In fuels and feedstock, we are now expecting the refining indicator margin for the full year to be in the range of $8 to $10 per barrel. The utilization rate of the refineries is expected to be around 90%.

The guidance for fuel sales volumes and margins is unchanged. In energy, the guidance for the average production of around 360,000 barrels per day for the full year is unchanged. Total production in the third quarter is expected to be only slightly higher than in the second quarter as there will again be planned maintenance works in various countries such as Romania, New Zealand and Norway.

With regards to cash inflows, we expect to receive dividends from Borouge of $468 million for the fiscal year 2023 in 2 tranches, half to be paid in the third quarter of 2023 and the remainder in 2024. The Clean tax rate for the full year is expected to be in the mid-40s.

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

Question-and-Answer Session

A - Florian Greger

Yes. Thank you, Alfred. Let's now come to your questions. I'd like to ask you to limit your questions to only two at a time so that we can take as many questions as possible. You can, of course, always rejoin the queue for a follow-up question. The first questions come from Irene Himona from Societe Generale.

Irene Himona

My first question is on the cash taxes paid in the quarter in Norway and also solidarity taxes in Romania and Austria. You said in your prepared remarks that these relate to 2022. I wonder if you can please remind us -- how much remains to be paid in the rest of the year in these countries? And then is there any guidance you can provide for the 2024 normalized cash tax rate.

And my second question, you referred in your speech to operational challenges at Baystar, the cracker there and the negative contribution. Can you say what has gone wrong with the equipment? And is there a time line for repairing it, please? Thank you.

Reinhard Florey

Yes. Hi, Irene, this is Reinhard speaking. Regarding your question to the taxes, the tax regime in Norway that is relevant for this, I would say, unusually high taxes is that there is a delay of taxes if the prognosis of the overall oil prices and gas prices come to a different development. So normally at the beginning of the year, in the tax regime, there's an assumption of oil and gas prices, and therefore, the tax payment levels are being determined. Now we have seen in 2022, significantly rising oil and gas prices.

So therefore, the predetermined payments for tax have been much lower than the actual tax liabilities that arise from the operative business. You could also observe this in our balance sheet where the tax liabilities actually rose by the end of 2022 to a level of €2.4 billion. Now this has come down by the payments in Q1 and specifically in Q2 of the additional delta of these taxes come down again to an almost normal level of €0.8 billion in the tax liabilities.

So therefore, we can assume that for the rest of the year, tax payments will be significantly lower and on a normal level because as of quarter 3, we are more or less paying taxes that refer to the year 2023 with the respective lower oil and gas prices here. Regarding the solidarity tax, the solidarity tax that we have paid in Q2, actually, some €300 million for the year 2022 in Romania as well as some €80 million for the year 2022 in Austria is a onetime effect that will only take then a much lower level for the year 2023, but that will be paid only in 2024.

So you will not see any solidarity tax payments on top of what has been done in Q2 in the year 2023. Then you had asked for a guidance of the 2024 normalized tax rate, I think this is a little bit too far away for us to anticipate. What we have heard also in Alfred speech is that we see for the rest of the year, the Clean tax rate at mid-40s range, 40 percentage range, and this is as far as we can guide for the moment.

Alfred Stern

And I will take the second part of the question, Irene, around Baystar joint venture. We are talking there about 2 different pieces of equipment. One is a steam cracker for a million tonnes of ethylene out of ethane, and the second one is Borstar polyethylene production with 625,000 tonne polyethylene production. This integrates with an already existing 400,000 tonne of polyethylene production lines to make a fully integrated 1 million-ton production complex. And the cracker and the Borstar polyethylene plant have been built over the last couple of years. The cracker has actually been mechanically completed for longer now. And we had some start-up issues, teasing issues, which are partially normal for bringing a big machine like this on production. However, here, it has been taking a little bit longer due to some issues like external influences like the winter freeze that we had earlier in the year and so on.

But the fact is that now, we are continuously improving the production, but we are not yet at the full production rate. So the utilization rate is still lower than what we anticipated, but it's continuously ramping up. for the Borstar polyethylene plant, the status is such that it's mechanically complete now, and we are now taking this into production. So also there, we will see over the next couple of weeks and months, some production that is not yet at the level, but continuously ramping up that complex to produce a marketable product.

Florian Greger

Thanks, Irene. We now come to Sasikanth Chilukuru from Morgan Stanley, Sasi?

Sasikanth Chilukuru

I had two, please. The first was on the potential sale of E&P assets in Malaysia and New Zealand. You highlighted active interest from potential buyers for both assets. I was just wondering if it was possible to provide a timeframe for this process, maybe potentially for binding offers or completion of sale. Also any indication of the size of the divestment in terms of value would be helpful.

The second one was dividends to minority partners. Is it possible to provide any color on the expected dividend payments to minorities in the second half this year, especially any dividend payments to Borealis minority shareholders, given no payments so far this year and also the dividend payments to the Petrom minority shareholders, including the special dividend that's been announced, I suppose yesterday?

Reinhard Florey

Sasi, regarding the potential sale of our assets in Malaysia and New Zealand. Indeed, we can confirm that the sales process is going well. We are facing a very strong interest for the assets. Regarding the timeline, you can read a little bit from the fact that we have not taken these assets yet as it is held for sale or nonoperative business, that we think that the timeframe would still take around 12 months or a little more to close. Of course, we are expecting that binding bids come in earlier and even we might have underwriting here earlier but for a closure with all the administrative topics around the countries of Malaysia and New Zealand, we expect that this at least takes 12 months.

Regarding dividends to minorities, there are dividends from Borealis that we are expecting to come out in third quarter. This is some €300 million to €400 million out of which a quarter would go to the co-owner ADNOC 25% and therefore, leave our balance sheet, respectively, our cash here. Regarding Petrom's special dividend, Petrom has announced today that there would be a special dividend that will be payable. I think it's in the September timeframe that this payment will go out and the announced volume of Petrom has been done today. So this is the major part because all the other areas of minorities have actually already happened. Thank you very much.

Florian Greger

Thanks, Sasi. We now come to Alastair Syme from Citi.

Alastair Syme

Alfred, can you talk a little bit about what you're seeing in the gas business on the demand side? I note that sales in your West business were about 17 terawatt hours this quarter. I mean if you go back to 2Q '21, you were over 30 terawatt hours. So can you sort of bridge that? And I'm particularly interested in the color you might have on what's going on in the industrial sector, given that's an important customer. I mean, are you seeing any signs whatsoever that now that gas prices have settled down a bit, that industrial customers are willing to pick back up on consumption? Or are we still too early on that?

Alfred Stern

So on the gas market, we have seen in 2022 that across Europe there was a significant reduction of gas demand, gas use. I think 3 big drivers that were observed there. That 1 was increasing amounts of power generation with renewables. The second was fuel switching, partly because of security of supply, but partly also because of cost economics, some fuel switching and the third one was in industrial sectors where -- there was -- where the gas has a significant share in the total cost of the production, we saw curtailment of production. I think some of these changes are probably temporary. Others, I think, will be -- will have a lasting effect that we see here some of the industrial consumers where you specifically asked, I think you have probably seen some announcements around ammonia producers in Western Europe that are [indiscernible] plants, other high-energy consumers. There was a number of announcements also around production reduction. So I think 1 has to count on that some of these effects will be permanent. However, I can also tell you from own experience, we have done a lot in our refineries last year.

Again, same thing, one is security of supply; secondly, cost management. Last year, we have switched away from gas, our German plant, we were able to run completely without natural gas. And in our Austrian plant here, we reduced down to 30% of cash. Some of this has now gone back because of the more attractive prices like you say. So some of this will swing back, but probably not all of it.

Alastair Syme

But can you say in your own plant, are you fully back to gas? Or are we still only part of the way?

Alfred Stern

Yes. In our own plants, we are going back to gas, right? I mean, it's economics. The second piece is also, of course, with gas, having a more attractive CO2 footprint than some of the other alternatives. Okay.

Alastair Syme

And so finally, even though prices have settled down a little bit. I mean, that was before, it is still high, but do you think we're a long way from any of these high energy-consuming industries coming back?

Alfred Stern

So our outlook for 2023 on the TAG is now €40. If you remember, the average of last year was €121. So this is a big drop, like you say, However, it's still double of what it used to be in the pre-Ukraine period, right? It was around 20 over the last decade approximately. And with €40, I think we also need to be aware that it's not just double of what it used to be, it's also 4 to 5x the value of Henry Hub comparison. So this has made it more attractive, but it's still not a low-cost kind of location.

Florian Greger

Next questions come from or Henri Patricot, UBS.

Henri Patricot

Two questions, please. The first one, I want to come back to the discussions for potential combination between Borouge, Borealis. Can you give the details? But I was hoping could you give us a sense of why you see that potential combination with Borouge is the best way forward for OMV to deepen the exposure in chemicals?

And then secondly, I wanted to ask about this discovery in Austria, quickly, you can reach the plateau production level and whether there's some follow-on potential more exploration wells that you plan that could increase further your production in the country.

Alfred Stern

I start with the potential combination of Borealis and Borouge, where we announced that we will pursue negotiations with ADNOC to explore if such a potential combination can be interesting. I'm sure you understand that it's somewhat limited what I can say here because we are still in the middle of negotiations, but I would like to make maybe a few points. So let me start with the industrial logic and the industrial logic of this potential combination of Borouge and Borealis that it has a compelling logic and the 2 businesses would provide us with interest in market-leading global polyolefin powerhouse.

And this is the underlying logic that makes it interesting, where we could also through the partnering with a long-term partner, ADNOC, we could -- this would allow us to share risks in a very large market. And with this, also go after larger scale businesses and build a world-class global leading business. And if you look at it, right, you can obviously see in Borealis and in Borouge, we can look back at the 25-year partnership where we have done something like this successfully. And this is why we think this is worth exploring and see if there's potential in there.

Our aim would be by being an equal partner under a jointly controlled listed platform would provide also potential for further growth acquisitions. And doing that together with an established successful partnership with ADNOC opens up opportunities in my opinion, that by us alone, we couldn't pursue in such a way. But also, I want to say here, right, we said we were going to pursue negotiations, the outcome of these negotiations is open, and we will keep you updated about any progress that we can make in it.

On your second question on Vitol, what I would want to say is you detected correctly, this exploration drilling was a result of one of Europe's largest or maybe the largest seismic campaign that we did here in the Vienna Basin about 5 years ago. And through the evaluation of this seismic campaign, we identified potential resources and Vitol was here, our first exploration campaign that we now drilled over the last 5 months approximately.

And we were then very excited and happy that this was actually positive. And that we could show that it is actually a gas find. We estimate the resources to be about converted into terawatt hours, about 48 terawatt hours, and that would increase our gas production in Austria about 50%; the OMV gas production in Austria, about 50%. We produce about 8,000 barrels per day today.

Henri Patricot

Okay. I guess it's fair to assume that this 50% increase can be done fairly quickly.

Alfred Stern

Of course, in the situation that we have now, this is our aim. There's, of course, a few things that we need to make. The most notable is we need to make a connection to our gas treatment plant in a place close to the site, it's about 10 kilometers, and that is going to be the speed determining step. But I think you're correct, we are trying to make this happen as quickly as possible.

Florian Greger

Thanks,. Next is Matt Lofting, JPMorgan.

Matt Lofting

Two, if I could, please. First, chemicals, I think you referenced earlier, end market demand still under pressure, slower-than-expected recovery in China. Could you just share a sense of perhaps how the current baseline compares to where you thought it might be at the beginning of the year and what lead indicators OMV is looking to for early signs of recovery kicking in?

And then secondly, on the Upstream business coming back to the transaction in Malaysia and New Zealand, given that you indicated you've seen active industry interest for those assets. Should we expect to see the company making further portions of the international upstream business available for sale?

Alfred Stern

Okay. Let me start with the Chemicals outlook. I will start here with the indicator margins for polyethylene and polypropylene in Europe, we -- both of these on -- so the total polyolefin indicator margins, we took down by €50 per tonne. And that is driven mainly by slower demand pickup than we anticipated and good availability in the markets, also some imports into Europe.

But what I need to say here is, of course, these are indicator margins which apply more to the commodity type of business. If you look at the end of our presentation, we put in the attachment an update of our business portfolio where 40% of the volumes, specialty sales and this indicator margins don't apply to the specialty sales. This 40% specialty volume create about 60% of our sales margins.

And as you can see in that chart there, the margins in the specialty sector have held up very well. We have some -- seen some softening in some segments on volume, but the total absolute margin still on the strong side, right? That's what you can see there. In particular, automotive, we have seen that this is actually growing above last year. So it looks like some catch-up demand in automotive. We also see in this energy sector, wire and cable insulation and so on that is related to the energy transition.

So wind, photovoltaic, that this continues to have strong market performance. And in that energy segment, we are actually a global market leader, so looks differentiated, right, so the overall market. Then I would want to go a little bit also to the Asian markets and developments there because that is relevant for our Borouge joint venture. What we have seen there is that there was actually in quarter 1 and coming out of quarter 1, it looks like the business was going to pick up a little bit. But in the end, China in particular, disappointed with weaker-than-expected demand so that we, in the end, saw more of a sideways down movement in the second quarter in the Asian market.

The indicators that we can look there is that we -- in those markets, right, where we see a weaker demand that's mainly in the construction market. Some of these materials go into the production of all types of pipes; water pipes, gas pipes, sewage pipes, and that goes into the construction market. And there, of course, we see that with increasing interest rates, some slowdown in those construction markets and also a significant amount of this material, more the commodity type or the productivity part goes into packaging applications.

And there, we see -- we also see that customers more hand-to-mouth, managing inventories very closely and some weaker indicators to extrapolate what we can see on the way forward.

Reinhard Florey

Yes, Matt, maybe taking your second question on the divestment of our upstream assets in Malaysia and New Zealand, you had asked whether there is any further sales steps planned. No, we do not have any further sales steps in that dimension planned. Of course, we are looking into portfolio optimization steps in that area. But if we look at our 2030 target that we have given, it is around 350,000 BOE and if you take our production that we planned for this year, 360,000 BOE, you can see we're taking out some 70,000 BOE of Malaysia and New Zealand, adding some 70,000 BOE by Neptun, we are around this dimension.

And what we have to manage is the natural decline that we have, of course, in some of the maturing fields. And therefore, some portfolio optimization will happen, but no further divestments of that dimension plan.

Florian Greger

Thanks, Matt. We now come to Henry Tarr from Berenberg.

Henry Tarr

I have two. Just coming back on the gas supply business, I guess you're still buying a reasonable amount from Gazprom in Q2, I think, 4.9 terawatt hours. Is there any view on the -- has there been any change to the reliability or the risk to gas flows through the Ukraine? And then kind of how much of this -- if there was a disruption, do you think you could cover from the diversification efforts, the new LNG, et cetera? And are you working on the other side to change the sort of supply contracts you have to take some of this potential variability into account?

And then my second question is just to come back on the potential Borealis-Borouge consolidation or merger, you talk about sort of jointly controlled or aiming for being jointly controlled. Would that mean you'd still consolidate that business presumably not just to check.

Alfred Stern

Okay. Let me start, Henry, with the gas supply question. And I want to explain that we have 2 Gazprom supply contracts, 1 in Germany and 1 in Austria. The German supply contract with Gazprom has not received any gas supply for the last many months, right? So somewhere around half of last year, the gas supply stopped, and we have not received any since then. The Austrian gas supply contract in the second half of last year was very volatile. We received anything between 20% and 70% of the contractually agreed quantities, which created at that time, quite a lot of management effort and the issues.

Since the beginning of February, Gazprom has stuck to 100% of the contractually agreed quantities and is supplying this reliably. So we have not -- since then in -- after January we have not seen any of this volatility. The -- of course, the cash flows, so both from our experience with Gazprom last year, but also because the gas is supplied through the Ukrainian pipeline. One -- we at OMV consider this to be unreliable supply source. And because of that, since March last year, we are running a diversification strategy to make sure that we have non-Russian gas and the transport capacities so that we can distribute it to our customers. We are today in a position that we have sufficient non-Russian gas quantities volume. So that's from the LNG terminal in Rotterdam, that's from Norwegian production, and that's from third-party contracts in Norway and in Italy.

So with those quantities and the transport capacities that we have now, we can supply all of our customer obligations even if Gazprom stops supplying. Concerning the contracts, I want to also mention here that we have and continue to spend quite a lot of time to develop a legal strategy, how we address those things. We have quite some -- we are quite clear what we want, but I do not want to communicate this publicly at this moment.

Reinhard Florey

And Henry to your second question around Borealis-Borouge, of course, all the details are currently under negotiation, and we cannot go to final conclusions here. However, just to explain, as also Alfred did, the idea is to run this as a combined growth platform as equal partners and that on first plans, of course, implies 2 things. The first is that, ultimately, OMV will own less of Borealis but more of Borouge. And the second is if you have then a listed platform with 2 equal partners, that would not imply any kind of majority that would allow for any of the party a full consolidation.

Florian Greger

Thanks, Henry. The next questions come from Tamas Pletser, Erste Bank.

Tamas Pletser

I got only one follow-up regarding your asset divestments in New Zealand and Malaysia. Do you consider to sell these assets separately -- or do you plan to sell this as 1 entity? I just asked because I may see that you may have potentially more interest for the Malaysian assets. Could you confirm that? Also, can you remind us what is the potential valuation for these assets?

Reinhard Florey

Tamas, I'm happy to comment on that. The clear intention also what we are discussing at the moment is to have a package deal between both assets that we are selling. And you will understand that I'm not commenting on any target value that we are currently discussing. This is open process, and therefore, I cannot give you an indication in that direction.

Florian Greger

Thank you, Thomas. Next is Bertrand Hodee from Kepler Cheuvreux.

Bertrand Hodee

Yes. I have two left. The first one is on your first answer to Irene's question related to taxes. You mentioned that no further solidarity taxes payment, cash payment is due in 2023, but the remainder will be paid in 2024. Can you share with us -- what is the amount that remains to be paid in 2024?

And related to -- second question relates to the divestment process again on New Zealand and Malaysia. Can you remind us what is the book value of those assets into OMV books, probably also adjusted to the fact that you own only 52% of Sapura.

Reinhard Florey

Yes, Bertrand. To your first question regarding the taxes. The 2024 payments for taxes would refer to 2023 applicable volumes. And therefore, we do not have value yet because we don't know how the full year looks like. And we have to pay it for a full year, not in tranches. So what I can say is that we have booked a pro rata in Romania for the first half year of €100 million, not knowing exactly what will happen in the second half. Of course, as this in Romania is relating to oil consumed in the refinery with turnaround that we had in Petrobras. This was a little bit lower.

But as we don't know how this actually will continue with the price levels with the production levels in the second half, it would be premature to give you a number there. In Austria, it was only a very small number, and we have to look into how the situation, which is under a different regime than in Romania is with this lower prices expected for the second half then developing.

And your second question, book value of New Zealand and Malaysia. We have never disclosed single asset book values. So therefore, I unfortunately cannot give you that information.

Florian Greger

Thanks, Bertrand. We now come to the end of our conference call. Thank you for joining us today. If you have further questions, please contact the Investor Relations team. We're happy to help. Happy -- have a good afternoon and a good weekend. Thank you. Bye.

Alfred Stern

Thank you for joining. Bye, bye.

Reinhard Florey

Thank you.

Operator

Thank you very much. Ladies and gentlemen, that concludes today's teleconference call. A replay of the call will be available for 1 week. The number is printed on the telephone conference invitation or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers. Have a good day, and goodbye.

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OMV Aktiengesellschaft (OMVJF) Q2 2023 Earnings Call Transcript