OMV Aktiengesellschaft (OMV) Earnings Call Transcript

Welcome to the OMV Q3 2023 Results Conference Call. [Operator Instructions] You should have received a presentation by e-mail. 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 or may occur in the future and are 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 would now like to hand the conference over to Mr. Florian Greger, Senior VP, Investor Relations and Sustainability. Please go ahead, Mr. Greger.

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

Thank you, Florian. Ladies and gentlemen, good morning, and thank you for joining us. The third quarter of 2023 was characterized by supply concerns in a tight oil market, strong refining margins and lower gas prices. The chemical market remains challenging due to only a muted economic recovery and high inflation. Brent crude oil prices increased by 11% compared to the previous quarter, but were 14% below the average level of the same quarter in 2022. Prices were supported by an improvement in seasonal demand, and the supply reduction of close to 1 million barrels per day imposed by OPEC+. European gas prices dropped by 9% compared to the prior quarter and 83% versus the third quarter of 2022. The main reason for this was the high filling level of storage facilities across Europe, which impacted market sentiment. Supply concerns fueled by the strikes at Australian LNG export terminals provided some support. Refining indicator margins in Europe rebounded and almost doubled compared to the prior quarter. This was primarily attributable to solid demand during the driving and holiday season, a series of refinery outages in the Atlantic Basin as well as reductions in refinery runs caused by the heat. Gasoline, middle distillates and fuel oil were very strong, while naphtha remained weak. In Chemicals, end-market demand remained lackluster. Olefin indicator margins further declined, due to subdued demand and economic activity. Polyolefin indicator margins declined as well, albeit to a lesser degree than olefins, impacted by the cost of living crisis and significant destocking. Despite supply being more balanced with demand due to reduced operating rates in Europe, a structural oversupply remained. This was more pronounced for polypropylene, as a result of weak demand for durables. While low domestic prices discouraged imports into Europe, Chinese prices showed some signs of recovery, supported by higher naphtha prices, while weak demand and overcapacity persisted. At EUR 1.3 billion, the clean CCS operating result was 13% higher than in the second quarter, but dropped significantly from the exceptionally high level of the prior year quarter. Cash flow from operating activities amounted to EUR 1.7 billion in the quarter, impacted by decreasing commodity prices. Looking at operations, polyolefin sales volumes were 11% higher year-on-year, while fuel sales volumes rose by 16%. The utilization rate of our refineries and European crackers was lower than the typical level of 90% plus, due to planned turnarounds in Petrobrazi and at the chemical-related facilities in Schwechat and Porvoo. Oil and gas production was slightly lower year-on-year, primarily due to lower production in Norway and Romania. We continue to further diversify our cash supply sources. We signed a 5-year agreement with Equinor starting October this year to receive an annual volume of 12 terawatt hours. The new agreement builds on the long-standing relationship between the 2 companies, and adds to the volumes under existing contracts. In October, we signed an agreement for the worldwide commercial licensing of our proprietary ReOil technology with Wood, a global leader in consulting and engineering solutions in the energy and materials markets. The companies have established a joint delivery team to support clients through the whole process of adopting and successfully implementing the technology at their sites. In addition, Wood will work with ReOil licensees to provide full asset life cycle support globally. ReOil is our patented chemical recycling technology that converts end-of-life plastic waste into pyrolysis oil, which can serve as feedstock for new high-performance plastics. At our integrated refinery and chemical site in Schwechat, we are currently in the process of finalizing the construction of a 16,000-ton ReOil plant. And this morning, we announced that we have joined forces with Interzero to build an innovative sorting plant with an annual processing capacity of up to 260,000 tons in Walldurn, Germany. Interzero, formerly called Alba Recycling, is one of the largest sorters of light packaging waste in Germany. OMV will invest more than EUR 170 million and will hold a share of around 90% in the newly formed joint venture. This sorting plant will be the first of its kind on a large industrial scale, and will produce sustainable feedstock for our chemical recycling plants. The new plant will use mixed plastic waste that has previously not been recyclable, especially from the yellow bag and yellow bin waste collection in Germany. Start-up is expected in mid-2026. At the beginning of October, we announced the start-up of the third polyethylene plant at our Baystar joint venture in the U.S. The new polyethylene unit has a capacity of 625,000 tons per year, more than doubling the total capacity. With the completion of this project, Baystar now runs an integrated ethane to polyethylene complex in Texas, with a capacity of 1 million tons per year. The complex comprises a world-scale ethane cracker at the TotalEnergies platform in Port Arthur and 3 polyethylene production units at Baystar site in Pasadena. The new PE unit, referred to as Bay 3, features the latest third-generation proprietary Borstar technology, which has been licensed for the first time in North America. The Borstar technology delivers advanced value-added polymers with enhanced sustainability by enabling, light-weighting and the incorporation of larger amounts of post-consumer recycled materials in end products, serving the energy, infrastructure and consumer products industries. Expanding and steepening our footprint in North America enables us to better serve customers by offering improved access to Borstar-based products produced locally. The new integrated complex is very competitive as it is positioned in the top quartile on the U.S. cost curve, and has well established logistics infrastructure around Houston. As usual, in the process of starting up such a large industrial complex, the focus in the beginning is to ramp up the utilization rate. We will then optimize the product portfolio by gradually increasing direct domestic sales and the share of specialties. Let's now turn to the financial performance in the third quarter of 2023. Our clean CCS operating result improved by 13% to EUR 1.3 billion compared to the second quarter of this year. However, compared to the very strong prior year quarter, the results decreased, primarily due to the substantially lower price environment. The performance of energy dropped sharply by around EUR 2.1 billion, Chemicals & Materials declined by around EUR 200 million, while and Fuels & Feedstock increased. The clean CCS tax rate decreased from 54% to 47% due to a significantly lower contribution from countries with high tax regimes to the total Group profits compared with the same quarter of the previous year. The Clean CCS net income attributable to stockholders declined to EUR 431 million. Clean CCS earnings per share amounted to EUR 1.32. Let me now come to the performance of our business segments. Compared to the third quarter of 2022, the clean operating result of Chemicals & Materials dropped sharply to minus EUR 11 million. This was driven by substantially lower margins, the missing contribution from the recently divested Nitro business and a materially lower performance of the Borealis JVs. The Nitro business had an exceptionally strong contribution of EUR 113 million in the prior year quarter due to temporary special market conditions in 2022. In the second quarter of this year, the Nitro business was loss-making. The ethylene indicator margin declined by 26%, and the propylene indicator margin went down by 43%. In turn, the polyethylene indicator margin remained almost stable, while the polypropylene indicator margin declined by 7%. As a consequence, we recorded a negative market effect of around EUR 150 million in our European olefins and polyolefins businesses compared to the third quarter of 2022. Primarily due to higher naphtha prices, inventory valuation effects were less negative by EUR 125 million compared with the prior year quarter, and thus largely offset the negative market effect. However, they still negatively impacted earnings in the third quarter of this year. The operational performance of our chemical business declined overall, showing a mixed picture. The contribution of the olefins business increased, while the performance of polyolefins weakened. The olefin contribution was driven by higher sales volumes as a result of a higher cracker utilization rate and the material larger light feedstock advantage at our Nordic crackers. While in the third quarter of this year, we had planned turnarounds at Schwechat and Porvoo, the prior year quarter was significantly impacted by the incident at the Schwechat refinery and the maintenance turnaround at Burghausen. In polyolefins, the sales volumes in Europe rose compared to the prior year quarter when they were impacted by the reduced feedstock availability in Schwechat. However, the increase was seen mostly in consumer products, where margins are currently weak. In the specialty business, we were able to increase margins, but sales volumes declined. The positive impact of higher sales volumes was more than offset by lower realized margins and higher costs, in light of the Schwechat turnaround and inflationary environment. The performance of the JVs dropped to EUR 44 million due to a lower contribution from Borouge and a negative contribution from Baystar. The Borouge result declined, driven by significantly weaker margins compared to the third quarter of 2022. However, sales volumes increased by 18% compared with a relatively weak prior year quarter when China was still in lockdown. At Baystar, the utilization rate of the ethane cracker improved, but operational challenges could not be fully resolved. The result continued to be burdened by depreciation and interest expenses amid the weak market environment. The clean CCS operating result in Fuels and Feedstock increased by EUR 79 million to EUR 418 million, Thanks to a significant recovery in the operational activity of our refineries as the prior year quarter was impacted by the reduced utilization rate at the Schwechat refinery, following a technical incident. At $14 per barrel, the refining indicator margin was very strong, and reached almost the same level of the excellent prior year quarter. Total sales volume increased by 16%, driven by commercial customers, partially offset by lower retail volumes following the divestment of the Slovenian business in June 2023. The excellent development of our commercial business was driven by higher volumes and margins due to the removal of price caps and better term prices. The retail contribution reduced significantly, primarily due to lower fuel unit margins, which were impacted by the substantial increase in oil prices. In addition, the divestment of the Slovenian network and higher costs due to inflation impacted the result. The contribution from ADNOC Refining and Trading decreased to EUR 73 million, driven by lower refining and trading margins. The clean operating result of energy dropped considerably to EUR 942 million from the extraordinarily strong prior year level, primarily due to decline in oil and substantially lower gas prices. Diminished sales volumes and the reduced contribution from Gas Marketing and Power also weighed on the result. The Brent price came down by 14% compared to the prior year quarter, while European gas hub prices declined sharply by 83%. OMV's realized oil price decreased slightly more strongly than Brent by around 18%, and the realized gas price declined less than the hub prices by 69%. As a result, we recorded a negative market effect of almost EUR 1.5 billion versus the prior year quarter. Compared with the third quarter of 2022, production volumes decreased by 18 to 364,000 barrels per day, mainly due to unplanned shutdowns in Norway, natural decline in Romania and Norway and maintenance work in Malaysia. Production costs increased to $9 per barrel due to lower production volumes and the adverse development of currency exchange rates. Sales volumes decreased by 46,000 barrels per day, following the production decline and the lifting schedule in Libya and Norway. The Gas Marketing and Power result amounted to EUR 20 million, a decline of EUR 79 million. The contribution of Gas Marketing West improved, despite the booking of a provision for impending losses connected to newly secured pipeline capacity to Austria for the next 5 years of around EUR 80 million. The prior year quarter was burdened by curtailments of the natural gas supply from Russia. In Romania, the contribution of the Gas and Power business declined in the context of significantly lower gas and power market prices and additional regulatory interventions introduced after September 2022. Turning to cash flow. Our third quarter operating cash flow, excluding net working capital effects, amounted to around EUR 1.9 billion, a decrease of 35% compared with the previous year's quarter, primarily driven by lower commodity prices. This includes dividends from Borouge of around EUR 220 million. Net working capital effects generated a cash outflow of EUR 163 million in the quarter, mainly due to increased prices and volumes in fuels and feedstock, and partially offset by lower prices in chemicals and materials. As a result, cash flow from operating activities for the third quarter came in at EUR 1.7 billion. The organic cash flow from investing activities was around EUR 800 million. This included the PDH plant in Belgium, the ReOil demo plant, the coprocessing unit in Schwechat and the turnaround in Schwechat and Porvoo. As a result, the organic free cash flow before dividends for the third quarter came in at EUR 880 million. The inorganic cash flow from investing activities generated an inflow of around EUR 570 million, supported by the cash inflow of EUR 661 million related to the divestment of the Nitro business. Looking at the 9-month picture, cash flow from operating activities, excluding net working capital effects, amounted to EUR 3.5 billion. Supported by a sizable cash inflow for the net working capital effects, cash flow from operating activities in the 9 months amounted to EUR 4.6 billion, down by 27% compared to the first 9 months of 2022. After payment of record dividends of EUR 1.9 billion, the organic free cash flow amounted to EUR 200 million. Moving on to the balance sheet. We reduced our net debt to EUR 1.7 billion, and our leverage ratio at the end of September decreased to 6%. This reduction was supported by the cash inflow of EUR 661 million coming from the divestment of the Nitro business, which we closed in July. At the end of September 2023, OMV had a cash position of EUR 7.8 billion and unchanged EUR 5.2 billion in undrawn committed credit facilities. Let me conclude with an updated outlook for this year. As usual, we will present our outlook for next year with our fourth quarter earnings in February. We now expect the Brent oil price in 2023 to average above $80 per barrel on the back of a strong third quarter, continued voluntary OPEC+ cuts and heightened geopolitical uncertainty. The average realized gas price forecast remains unchanged at around EUR 30 per megawatt hour. In Chemicals & Materials, we now estimate that the ethylene indicator margin will be slightly below the previous guidance at around EUR 510 per ton, while the propylene indicator margin remains unchanged. In polyolefins, we forecast a slightly better polyethylene indicator margin at around EUR 320 per ton and an unchanged polypropylene indicator margin. The steam cracker utilization rate is expected to drop slightly to around 80%. As demand remains subdued, we now forecast polyolefin sales volumes of around 3.6 million tons for this year. In Fuels and Feedstock, we have seen the refining indicator margin averaging at around $12 per barrel in the first 9 months. In October, it started to retreat from recent highs as the driving season came to an end. We are now expecting the refining indicator margin for the full year to be in the range of $10 to $12 per barrel. The utilization rate of our refineries is now anticipated to be around 85%, driven by a longer-than-planned turnarounds that are now completed. 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 fourth quarter is expected to be slightly lower than in the third quarter, impacted by planned maintenance activities in Romania. The clean tax rate for the full year is expected to be in the mid-40s. Before we come to your questions, I would like to address the topic of royalties in Romania. Last Friday, an Emergency Ordinance introducing higher royalty rates for oil and gas was adopted by the government in Romania. According to our preliminary estimates, based on our current understanding, these new rates apply prospectively to the future concession agreements. Thus, we expect no impact on short-term. Thank you for your attention. And now, Reinhard and I would be happy to take your questions.

Thank you, Alfred. Let's now come to your questions. [Operator Instructions] The first question comes from Henri Patricot, UBS.

Two questions, please. The first one, I was hoping you could give us a bit of an update on the Borealis-Borouge potential combination with this venue you can say around the time line et cetera? And then just secondly, I wanted to ask about the cash tax payments, which [ convert ] better cash flow generation than underlying earnings this quarter. It looks like attributed to some of the extraordinary taxes, including the solidarity contribution. Can you remind us what we should expect in terms of cash tax payments over the next few quarters, in particular, when it comes to these solidarity contribution?

Thank you, Henri. I will start with Borealis-Borouge question, and Reinhard will answer the cash tax payment question solidarity contribution. We are effectively in negotiations with ADNOC to negotiate a potential combination of Borealis and Borouge. On the industrial logic, we would do something like this because that combination would provide growth platform that would also be one of the leading polyolefins companies globally, and we could build on a long-term partnership with our partner, ADNOC, to then continue to grow this. What we are aiming for is an equal share equal right partnership in a company that will also be stock listed. Now we are in the middle of these negotiations and hence, cannot make any detailed comments on the progress of those. But of course, we are aiming for the best possible outcome for OMV in these negotiations.

Yes. And Henri, to your questions regarding cash tax payments, you have seen that cash tax rate as such has come down from Q3 -- from Q2 to Q3. The main impact, of course, is lesser payments in Norway due to the different price levels in Q1 and Q2. We had still payments referring to the price levels of 2022, that has eased out now. We will not see those kind of impact anymore in Q4 this year or we are also not expecting this to reoccur in 2024, as the prices overall, specifically for gas have come down significantly. Please note that in Q3 we also had less taxes paid than booked in an amount of roughly EUR 150 million, that's part of our other adjustments that you have seen here. This is normally the deferral of some periods of the payments that you have, so I'm just mentioning that to you. And on the other hand, we have the solidarity contribution in Romania and Austria together around some EUR 100 million for Q3. This have not been paid out, as they always are due for payment only in the consecutive year, but of course, they have been booked. So this has been around EUR 75 million for Romania and the rest of the -- around EUR 100 million for Austria. So when you were looking at the outlook for that, of course, it's very hard to predict. In Q4, we would see that level of tax rate probably stays in the same range as we have seen in Q3, as we are not expecting too much of a difference in the commodity prices, which are the main drivers actually for the tax rate. And in next year, let's see, we don't expect for the beginning of the year a major change. Maybe we see if there's a cold winter, some of the gas prices going up a little bit. But other than that, we are not expecting any special topics here. When it comes to solidarity tax payments, we are expecting Q4 the payments to be slightly lesser than in Q4. However, for 2024, there is not any of those taxes to be booked expected, so we will just pay the taxes for 2023. But for 2024, there is no basis in the EU to prolong this, and we do not have any indication that this would be the case.

Thanks, Henri. We now come to Michele Della Vigna, Goldman Sachs.

Two, if I may. First, I wanted to see if you could give us an update on the potential divestment of your Malaysian asset, and what you think the time line could be there? And then secondly, given your unique position in the chemical value chain to see what's going on in the global economy at the moment, I was wondering if you could comment on whether you're seeing any specific areas with signs of life and recovery and on the other side, if there are some areas that are showing a slowdown versus what we've seen year-to-date?

Thank you, Michele. I will start with your question around the divestment of Malaysia and New Zealand assets. We are following the process as we have communicated it earlier, and we have now received bids for these assets and we are in the middle of the evaluation of these bids, and will then make some decisions in the coming weeks before the end of the year. Then the second question around the chemical market. That is, of course, a little bit more complicated as we see a very mixed kind of bag of different indications. I will start with maybe saying that, as you may remember, through Borealis, we have a portfolio where we are looking at about 45% of the sales volumes, being specialty type of polymers, that go into higher value applications, and the rest going more into productivity more commoditized areas. And we see a different type of behavior in those different areas. Throughout the last couple of months, we have actually seen on the specialty areas, good robust demand in automotive. We have also seen good demand in wire and cable insulations, and we have seen weaker demand around the more commoditized areas. I don't know if this is actual sign for the future, but what we have been encountered in the third quarter is that we were able to increase our sales volumes also in the more productivity area to make sure that we can also use high utilization rates of our assets, in particular, also in Borouge. We have seen versus a year ago that they were able to increase their sales volume quite dramatically actually. Of course, the comparison is difficult because a year ago, there was still some lockdown restrictions in China. So compared to the industry, we are actually able to run high utilization rates in our assets, where we see more pressure still is on the pricing side where we have seen that this is now kind of flattening out, but still difficult environment where we see. So some progress in being able to move volumes, but still a difficult environment.

Thank you, Michele. We now come to Sasi Chilukuru, Morgan Stanley.

I had 2 please. First of all, regarding the polyolefin market side, you highlighted the persistence of structural overcapacity and weak demand. Looking into next year, I was wondering if you could provide some color on how you see the dynamics changing from a supply perspective, whether you see an overall increase in the supply capacity, if yes, whether it was possible to quantify it and provide some color on where you're seeing these increases? Or will it likely stay flat? Just wanted to check if you would -- we should expect the utilization rates of the European plants to remain low in early 2024 as well. The second question was related to M&A. Just wondering, are you currently actively looking to acquire more in the chemical space? If you could comment on your appetite for deals beyond the potential Borealis-Borouge combination, that would be helpful as well.

Thank you, Sasi. Let me try and address your question around the polyolefin market where we have seen in the last couple of years, significant capacity additions. And with the current low demand situation that leads to overall low capacity utilization, which is creating the situation as it is. I want to relate this more to an OMV perspective and look how that can affect us. We have actually made quite a lot of work, in order to make sure that we have well-positioned crackers and with this and also polyolefin plants on the different cost curves. And Borouge, of course, is a very big part of that, that based on ethane crackers on advantaged feedstock costs we are supplying into Asia with differentiated technology, differentiated product. So that leaves us in a good position to also make sure we can run high capacity utilization. The Baystar polyethylene plant that we -- that Borealis just brought onstream. There, we will have to do some work in the next couple of months to fully ramp it up and to -- then further high-grade the product portfolio. But again, that cracker is, of course, positioned very well, taking advantage of U.S. ethane prices that are significantly advantage. And finally, in Europe, on the Nordic crackers, we have invested a lot in feedstock flexibility. In Sweden for example, we're even bringing over ethane from the U.S. to use that cost advantage. And with this, we can also use higher utilization rates. So that's one lever that we will pull and, of course we also use that the products that we make, demanded in the markets and we will see over time, the growth picking up again. And then on the specialty side, I think this is where we make a significant part of our margin. As I mentioned before, there we see more differentiation, and we, of course, need to see how the economy continues to develop. But one area that is our highest margin contributor in specialties is around wire and cable insulations. I really think clear, we have a long-term growth perspective also driven by the energy transition and transformation that we see globally. Your second question around M&A, I would want to say that we are, of course, fully focused and in the process at the moment to drive forward our discussions together with ADNOC on a potential combination of Borouge and Borealis, and we want to make sure to optimize here the results for OMV and to drive it forward as quickly as possible. Beyond this, we have always said that if we can find ways how to accelerate our transformation, we will also consider inorganic investments. But at this point, I have nothing specific I can report to you there.

Thanks, Sasi. We come now to Ram Kamath from Barclays.

I have a couple, please. If I look at refining performance, it was not quite there despite better headline margins. And ADNOC contribution was also lower. Wonder if you could talk a few things about this? And then the contribution from the gas and marketing business, which is less in this quarter. I understand that there was some provision, which negatively impacted margin, but how do you see it going forward into the fourth quarter?

Yes. Ram, happy to answer your questions here. When it comes to the refining performance, we have to take into account a couple of topics that were relevant in this quarter. First of all, we had in the total F&F, not only refining but also retail. And in the retail part, we have seen that there has been, of course, the lack of the Slovenian retail assets that lowered the business income in general. But we have also seen that not as high retail margins as we have seen in the third quarter of last year that were exceptionally high because of a rebound situation from the COVID, were actually on their way. When it comes to refining as such, we have seen that the refining utilization as such has been not at its full height. We have seen a refining utilization at 84%, mainly impacted by the Petrobrazi turnaround still in July. So that brought down in July, our utilization to below 80%. That improved then for August and September, and we have now also some impacts from the turnarounds on the chemical side, also coming back to the refinery in Q3. In Q4, there will be none of that. So we will certainly see a little bit of a rebound of that utilization level on the refineries. And then your question was on the contribution from gas. Yes, indeed. There have been 2 impacts actually on the gas side. One was that due to the high level of storage and on the other hand, dropping prices. There have been some impairments of gas inventories in the magnitude of [ 60 million ]. And in addition, you may have seen, there has been a mark-to-market adjustment of the contracts with the pipeline capacities, that's actually pipeline capacity contracts for the next 5 years in the magnitude of [ 80 million ]. This is simply a mark-to-market valuation, does not take into account that, of course, this will be a profitable business when the volumes ultimately will be used and will be sold, else we wouldn't do it. So those are some special effects that you have seen that lowered the income in general, both on the gas side as well as on the F&F side for this month. You were looking into an outlook, specifically also on the gas trading business. I think gas trading business always -- it depends a little bit of the weather. We have high storage levels, which allow us, of course, to take care of all the needs and demands when winter kicks in and when there is increased trading activity. So we actually are certainly in a situation seasonally where there is rather an uplift Q4, Q1 in the gas trading results in gas trading business.

Thank you, Ram. The next questions come from Irene Himona of Societe Generale.