OilVoice - OMV Reports 2009 Second Quarter Results

OMV Reports 2009 Second Quarter Results

Wednesday, August 05, 2009

• Challenging environment weighs on Q2/09 results: Clean CCS EBIT decreased by 83% to EUR 151 mn; Clean CCS net income after minorities was EUR 94 mn influenced by a financial result significantly below Q2/08
• Continued focus on cash flow preservation: OMV is securing its strong liquidity position by extending oil price hedging strategy into 2010 and continuing cost-cutting effort
• Outlook for 2009: We expect the main market drivers to remain highly volatile; in E&P production should be supported by new field developments; after signing of the intergovernmental agreement in July, an open season process is planned for the Nabucco gas pipeline project; in Petrom the planned refining investment is currently under review

Wolfgang Ruttenstorfer, CEO of OMV:
“E&P’s performance improved as a result of higher oil prices and new oil and gas fields coming on stream, notably Komsomolskoe in Kazakhstan, and the further ramp-up of Maari (New Zealand). In refining, however, we faced an adverse environment with middle distillate spreads falling to their lowest level for many years. Higher crude prices further burdened refining margins, particularly in Romania, due to the higher costs for own crude consumption. We are particularly pleased that the Nabucco gas pipeline project passed a significant milestone with the signing of the intergovernmental agreement in July. This paves the way for further important steps such as the open season tendering process and project financing negotiations. While continuing to navigate in a challenging economic environment, OMV remains committed to its financial discipline and cost cutting efforts to maximise operational efficiency and earnings strength.”

Second quarter 2009 (Q2/09)
In Q2/09, results reflected the strong year-on-year decline in crude prices and in refining margins. The average Brent price decreased by 51% compared to Q2/08 and the OMV indicator refining margin dropped by 76%. The Group’s reported EBIT of EUR 237 mn was therefore significantly below the level of Q2/08. For the same reasons the contribution of Petrom to reported EBIT fell to EUR 50 mn.

The net financial result was below the Q2/08 level, due mainly to the absence of the MOL dividend following the sale of our stake as well as a lower contribution from Borealis and Petrol Ofisi. Net income after minorities of EUR 144 mn was down compared to EUR 684 mn in Q2/08. Clean CCS EBIT was down by 83% at EUR 151 mn excluding net special charges of EUR 51 mn. The Clean CCS EBIT is stated after eliminating inventory gains of EUR 137 mn. Petrom’s clean CCS EBIT was EUR 16 mn. Clean CCS net income after minorities was EUR 94 mn and clean CCS EPS after minorities was EUR 0.31. At the end of June, net debt of the Group was EUR 2,717 mn and the gearing ratio stood at 28.1%.

In Exploration and Production (E&P), clean EBIT decreased by 67% compared to Q2/08 to EUR 276 mn due to significantly lower oil prices and negative hedging results for parts of the 2010 oil production. Gains and losses relating to the time value of these hedging instruments will revert to zero over their life, i.e. to the end of 2010. The Group’s oil and gas production was 315,000 boe/d, 1% above the level of Q2/08.

In Refining and Marketing (R&M), clean CCS EBIT was negative at EUR (103) mn, versus EUR 45 mn in Q2/08. The refining business was heavily impacted by declining middle distillate spreads. The clean marketing result was similar to the level of Q2/08. Retail sales volumes were stable, however overall marketing volumes declined affected by the weak economic environment. Decline in volumes could be compensated by improved cost position.

In Gas and Power (G&P), clean EBIT increased by 14% to EUR 49 mn compared to Q2/08 with good results coming from gas supply, marketing and trading despite lower volumes. Logistics business showed a positive business development.

January - June 2009 (6m/09)
In 6m/09, the average Brent price in USD was 53% lower than in 6m/08. Overall, the Group suffered from the drop in the oil price and in refining margins, with EBIT and net income below last year’s level. The Group’s EBIT of EUR 503 mn was 71% below the level of 6m/08; the EBIT contribution of Petrom amounted to EUR 127 mn, a decrease of 75%. The net financial result decreased, reflecting mainly the drop in dividend income after the MOL sale and the lower contribution from associates. Net income after minorities of EUR 185 mn was 84% below last year’s level. Clean CCS EBIT was 70% lower, at EUR 491 mn excluding net special charges mainly relating to the impairment of the Meteor field (UK). The Clean CCS EBIT is stated after eliminating inventory gains of EUR 55 mn. Petrom’s clean CCS EBIT contribution stood at EUR 109 mn, down by 79%. Clean CCS net income after minorities was EUR 220 mn and clean CCS EPS after minorities was EUR 0.73, 79% below 6m/08.

In E&P, clean EBIT decreased by 68% compared to 6m/08, mainly reflecting generally lower price levels, slightly lower volumes and the negative hedging results for parts of the 2010 production. Gains and losses relating to the time value of these hedging instruments will revert to zero over their life, i.e. to the end of 2010. The Group’s oil and gas production stood at 311,000 boe/d, 1% below last year.

In R&M, clean CCS EBIT was a negative EUR (81) mn, compared to EUR 39 mn in 6m/08 reflecting the depressed margin environment in refining. The marketing result came in above the level of 6m/08.

In G&P, clean EBIT increased by 3%, mainly coming from gas supply, marketing and trading which was supported by portfolio and storage optimization and lower import quota in Romania.

Significant events in Q2/09
On April 21, OMV announced the discovery and successful testing of an oil well in the exploration Block NC202 in Libya, located in the offshore Sirte Basin, 40 km southwest of Benghazi. The well tested a natural flow rate of up to 1,300 bbl/d. This is OMV’s first oil discovery in offshore Libya.

On April 24, OMV announced along with its joint venture partners Pakistan Petroleum Limited, ENI and Government Holdings Private Limited, the start of the extended well test of Tajjal-1 in Pakistan with an initial gas rate at around 25 mn scf/d (4,000 boe/d, OMV share 35%).

On May 13, OMV’s AGM approved a dividend of EUR 1.00 per share, and re-elected the members of the company’s Supervisory Board. Furthermore the Supervisory Board elected Mr. Peter Michaelis as its president, while Mrs. Alyazia Al Kuwaiti and Mr. Rainer Wieltsch were elected Vice Presidents.

On May 17, OMV signed an agreement with the sellers Crescent Petroleum Company International and Dana Gas PJSC to acquire a 10% share in Pearl Petroleum Company Limited, a company which is set up to appraise, develop, and produce the world class multi TCF (trillion cubic feet) Khor Mor and Chemchemal gas fields in the Kurdistan Region of Iraq.

On May 27, OMV was awarded two additional offshore exploration licenses in Norway, located in the Barents Sea. OMV (Norge) AS will operate PL 537 in a joint venture with Idemitsu, Spring Energy and SDØE. OMV is participating in a joint venture with Eni (operator), DONG and Wintershall at PL 529.

On June 25, Petrom started oil production at Komsomolskoe field located in the Mangistau region of western Kazakhstan. The initial production is approx. 1,000 bbl/d and will increase steadily as further wells are opened for flow. The plateau rate of 10,000 bbl/d is expected to be reached in 2010. The proved and probable reserves are estimated to be at 34 mn bbl.

Outlook 2009
In 2009, we expect the main market drivers (crude price, refining margins and the EUR-USD exchange rate) to remain highly volatile. In recent months the oil price has recovered strongly from early year’s lows but is expected to remain well below the average of 2008. The Brent-Urals spread is likely to remain below the 2008 level. Overall we are anticipating a weaker EUR vs. USD, and a more volatile but broadly decreasing RON vs. USD and EUR, compared to the average 2008 levels. The deterioration of the global economic environment is having an impact on OMV’s relevant markets. Refinery margins in particular are anticipated to be much lower than the 2008 level and the petrochemicals business will also suffer from the economic downturn.

OMV as an integrated energy company with low leverage has the financial strength to cope with the challenges and opportunities of the current market. The Group’s planned investments had been appropriately prioritized to reduce CAPEX to levels consistent with the current challenging environment.

To protect the Group's cash flow from the negative impact of lower oil prices, derivative instruments have been used to hedge earnings in the E&P segment for 65,000 bbl/d in 2009. Should average oil prices per quarter stay below USD 65/bbl in 2009, the hedge would pay out USD 15/bbl to actual oil prices. From USD 65/bbl to USD 80/bbl the hedge secures USD 80/bbl. The put spreads were financed via calls in order to avoid initial cash outlay (zero-cost structure), whereby the Group would not be able to benefit from oil prices above USD 110/bbl in 2009 for the above stated volume. To partly protect the Group's cash flow from EUR-USD volatility, derivative instruments have also been used to hedge an exposure of approx. USD 1 bn securing that exchange rate movements only affect results within the range of EUR-USD 1.32 to 1.15.

To protect the Group's cash flow in 2010, OMV entered into further crude oil hedges in Q2/09 for a volume of 63.000 bbl/d of next year’s production securing a price floor of USD 54/bbl via the sale of a price cap of USD 75/bbl (zero cost collar).

In the E&P segment, for the year as a whole overall production will be similar to that of 2008 and daily production levels in the second half of the year are expected to exceed those of the same period last year. The start up of production in new fields as well as production enhancement measures should compensate the natural production decline, changes to OPEC quotas, shutdown of production in Schiehallion (UK) due to the refurbishment of the FPSO unit (Floating Production, Storage and Offloading) as well as the exclusion of inert gases in the production reporting in Austria and Pakistan. Oil production in Maari (New Zealand) started in February and will gradually increase during the year. The oil field Komsomolskoe in Kazakhstan started production end of June. Ramping up of production is ongoing albeit at a slower pace than planned due to requirements imposed by the authorities. In Romania, drilling in the Mamu gas field and development of the Delta oil field will contribute to production. The Romanian gas demand is significantly lower than last year due to reduced industrial consumption, particularly in the chemical industry. Furthermore, an increase in the import rate later in the year could adversely affect Petrom’s gas production. In Romania, the further integration and restructuring of the oil service business of Petromservice, acquired in February 2008, will be one of the key activities. The successfully completed well modernization program, the increase in operational efficiency and streamlining of the organization will positively influence the operating costs of Petrom in 2009. The business focus will further be on tight cost control and project prioritization to tackle the volatile environment.

Exploration and Production (E&P)

Second quarter 2009 (Q2/09)
• Year-on-year decrease in oil price burdened Q2/09 results; a stronger USD mitigated this effect to some extent
• Production volumes at Q2/08 level: Lower production in Libya due to lower OPEC quotas compensated by significant volumes from the new oil field Maari, New Zealand
• Positive OPEX development: A stronger USD had a positive effect on OPEX in USD/boe, supported by an improved overall cost situation

Since Q1/09 OMV reports its segment results before taking into account the necessary elimination of intersegmental profits. The change in these unrealized profits is reflected in the consolidation adjustment.

Segment sales decreased significantly in Q2/09 - despite a stronger USD - mainly due to the weaker oil price environment. The Brent price in USD was 51% below the Q2/08 level, while the Group’s average realized crude price fell by 56% to USD 48.78/bbl reflecting also the negative hedging results for parts of the 2010 oil production. The Urals crude price, the reference oil price in Romania, decreased by 50%. The Group’s average realized gas price in EUR was 14% below Q2/08 reflecting the gas price decline lagging behind the oil prices. EBIT fell by 68% compared to Q2/08 mainly due to the weak price situation and despite lifting volumes at Q2/08 level. Higher volumes in New Zealand and Yemen helped compensate for a significant volume reduction in Libya due to lower OPEC quotas, as well as for lower volumes in Romania. Exploration expenses including the write-off of both the unsuccessful well Deep Banff (UK) and a Russian exploration well were 33% below the Q2/08 level. The result was further burdened by the unrealized time value loss for hedges entered in Q2/09 for parts of the 2010 oil production (EUR 108 mn). Gains and losses relating to the time value of these instruments will revert to zero at the end of 2010. Hedges established in 2008 for parts of the 2009 oil production resulted in a gain of EUR 49 mn in Q2/09. The stronger USD had a positive effect on oil revenues, while the weakening of the RON against the EUR (compared to Q2/08) had a strong favorable impact on RON-denominated costs in EUR terms. Romanian gas prices in EUR terms were adversely affected by the weakening of the Romanian currency since they are fixed in RON. Excluding net special charges of EUR 27 mn, clean EBIT was 67% below last year’s level. Special charges related to the impairment of the Meteor field (UK).

Production costs excluding royalties in USD/boe (OPEX) decreased by 21% versus Q2/08. At Petrom, OPEX/boe was even down by 24%. The positive effect from the stronger USD and weaker RON as well as cost saving effects more than compensated for the negative volume effects at Petrom. Exploration expenditure declined by 37% to EUR 52 mn compared to Q2/08, mainly due to lower exploration activities in Romania, Australia, Austria and Tunisia and despite more activities in Libya, Yemen and the Kurdistan Region of Iraq.

Total production of oil, NGL and gas was up by 1% versus Q2/08 at 315,000 boe/d. Oil and NGL production was slightly above Q2/08 primarily due to a higher contribution from Maari (New Zealand, production up by 9,000 bbl/d) and Habban (Yemen), which compensated for the decrease in Romania as well as in Libya (production down by 6,000 bbl/d mainly as a result of the lower OPEC quotas). Gas production came in at Q2/08 levels. Volumes were impacted by the partial shutdown of the local fertilizer industry in Romania. Also since Q1/09, non-hydrocarbon gases (inert gases) in Austria and Pakistan are no longer shown as part of production. However, these effects were offset by additional volumes from the Strasshof and Ebenthal field developments, which were start-ups in Austria in Q3/08.

Lower sales volumes in Libya and Romania were compensated by higher volumes in Yemen and New Zealand; thus the total sales quantity was at Q2/08 level.

Compared to Q1/09, clean EBIT increased by 21%. The positive effects of higher oil prices (Brent and Urals up by 33%) and slightly higher volumes in Q2/09 mitigated the negative hedging result for parts of the 2010 oil production. Sales volumes were up, mainly due to higher volumes in New Zealand and Libya. Oil production increased mainly due to Maari (New Zealand) and Habban (Yemen) that could offset the decline in Romania. Gas volumes slightly increased as higher volumes from the Austrian fields Strasshof and Ebenthal could compensate for the reduction in Romania. Gas volumes in Romania suffered from a normal seasonal reduction in gas demand, which was further exacerbated by the partial shutdown of the local fertilizer industry.

January - June 2009 (6m/09)
Segment sales decreased significantly due to lower price levels and sales volumes, despite stronger USD FX-rates. The Brent crude price decreased by 53% compared to 6m/08, the Group’s average realized crude price was USD 47.54/bbl, a decrease of 53%. The Group’s average realized gas price was down by 12%, mainly reflecting the falling overall gas price level.

EBIT fell by 69% compared to 6m/08 mainly due to significantly lower prices, slightly lower volumes and negative hedging results for parts of the 2010 oil production that were mostly offset by the positive hedging results for parts of the 2009 oil production. EBIT included the above-mentioned net special charges of EUR 27 mn. Clean EBIT was 68% below last year’s level.

Production costs excluding royalties in USD/boe (OPEX) decreased by 17% compared to 6m/08. At Petrom, OPEX was down by 19%, due to FX-effects (the RON weakened by 33% against the USD) despite the negative impact of lower production volumes on unit costs. Exploration expenditure was down by 27% on 6m/08, mainly driven by decreased activities at Petrom. Total production of oil, NGL and gas fell by 1%. Oil and NGL production was at the same level as 6m/08, mainly due to increased production in Yemen and New Zealand, which compensated for lower volumes in Romania, Libya and the UK. Gas production decreased by 3% mainly due to the partial shutdown of the Romanian fertilizer industry and reduced volumes in Pakistan, where non-hydrocarbon gases are no longer shown as part of production.

Refining and Marketing (R&M)

Second quarter highlights
• OMV indicator refining margin was heavily burdened by weak middle distillate spreads due to weak demand and high stock levels
• Increasing crude prices in the course of Q2/09 resulted in positive CCS effects of EUR 137 mn in refining
• Market share gain kept retail volumes stable, however overall marketing volumes declined affected by the weak economic environment

Gas and Power (G&P)

Second quarter highlights
• Higher results for gas supply, marketing and trading business compared to Q2/08 due to portfolio optimization despite lower volumes due to the economic downturn
• Storage business positively affected by high demand
• Result of Petrom’s fertilizer plant Doljchim was affected by low demand