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Edited Transcript of OMV.VA earnings conference call or presentation 31-Jul-19 9:30am GMT

Q2 2019 OMV AG Earnings Call

Vienna Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of OMV AG earnings conference call or presentation Wednesday, July 31, 2019 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Florian Greger

OMV Aktiengesellschaft - VP & Head of IR

* Rainer Seele

OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO

* Reinhard Florey

OMV Aktiengesellschaft - CFO & Member of Executive Board

* Thomas Gangl

OMV Aktiengesellschaft - Executive Board Member for Refining & Petrochemical Operations

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Conference Call Participants

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* Alwyn Thomas

Exane BNP Paribas, Research Division - Analyst of Oil and Gas

* Bertrand Hodee

Kepler Cheuvreux, Research Division - Head of Oil and Gas Sector Research

* Christopher Kuplent

BofA Merrill Lynch, Research Division - Head of European Energy Equity Research

* Henri Jerome Dieudonne Marie Patricot

UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst

* Irene Himona

Societe Generale Cross Asset Research - Equity Analyst

* Jason Gammel

Jefferies LLC, Research Division - Equity Analyst

* Joshua Eliot Dweck Stone

Barclays Bank PLC, Research Division - Analyst

* Matthew Peter Charles Lofting

JP Morgan Chase & Co, Research Division - VP

* Michael J Alsford

Citigroup Inc, Research Division - Director

* Peter James Low

Redburn (Europe) Limited, Research Division - Research Analyst

* Thomas Yoichi Adolff

Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director

* Yuriy Kukhtanych

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Operator [1]

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Welcome to the OMV Group's 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 of 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 like to now hand the conference over to Mr. Florian Greger, Head of Investor Relations. Please go ahead.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [2]

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Thank you. Good morning, ladies and gentlemen, and welcome to OMV's Earnings Call for the second quarter 2019.

With me on the call are Rainer Seele, OMV's Chairman and CEO; Reinhard Florey, our CFO; Hans Pleininger, Deputy COO and in the Board responsible for Upstream; and Thomas Gangl, who recently joined the Executive Board and is responsible for refining and petrochemical operations.

Always, Rainer Seele will walk you through the highlights of the quarter and will discuss OMV's financial performance. Following his presentation, all 4 Board members are available to answer your questions.

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

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [3]

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Yes, thank you. Good morning, ladies and gentlemen, and thank you for joining us.

Well, despite a challenging macro environment in the second quarter of 2019, OMV delivered a strong operational performance and a substantial increase in earnings.

Let me start by briefly reviewing the economic environment. In the second quarter of 2019, the Brent oil price averaged $69 per barrel, 9% up from previous quarter, but 7% lower than in the same quarter last year.

The increase quarter-on-quarter masks in fact a very volatile quarter, Brent traded in the range of $70 to $75 per barrel until mid-May driven by an over-compliant implementation of the OPEC-Plus production cuts and concerns about supply tightness. It then fell below $65 per barrel, triggered by the escalation of the U.S.-China trade conflict and the more pessimistic global macro outlook, only to rise again towards the end of June after the escalation of the U.S.-Iran conflict.

European spot gas prices further declined in the second quarter with the CEGH spot prices reaching a 9-year low in June. On average, prices were 27% lower year-on-year and 20% down quarter-on-quarter. The price decline was caused by lower demand following a very warm winter and substantial LNG volumes diverted into Europe.

The refining indicator margin decreased by 39% year-on-year and by 21% quarter-on-quarter. Naphtha continued its downfall with a lot of cracker capacities off-line for maintenance and very low LNG -- LPG prices leading to feedstock switching where possible.

In addition, middle distillate cracks further declined amid lower demand. The only product that improved in the quarter was gasoline, mainly due to the reduced utilization rates of some refineries, which were affected by the contamination issue at the Druzhba pipeline.

The ethylene and propylene margin improved by 16% year-on-year due to the lower naphtha prices. Compared to the first quarter, the margin increased by 5% due to the market tightness resulting from the cracker turnaround season. The European market for butadiene remained soft throughout the quarter. Benzene margins recovered as a result of shortening supply amid improving demand.

Despite the volatile and weaker market environment, OMV delivered a very strong clean CCS operating result of more than EUR 1 billion, 44% up versus the same period a year ago. Clean CCS net income attributable to stockholders rose by 88% versus the same period in 2018.

Our quarterly cash generation remained very strong, with a cash flow from operating activities, excluding net working capital effects, of more than EUR 1 billion.

At the operational level, in Upstream, we further increased our production to 490,000 barrels per day, mainly as a result of acquisitions and reduced the average production cost to $6.9 per barrel. In Downstream, we continued to run our refineries at the very high level of 96% and increased the sales volumes.

We also made further progress in delivering on our strategy. In June, we reached another important milestone in the execution of our strategy. We agreed with Gazprom on the purchase price of EUR 905 million for the 24.98% interest in the Achimov 4/5 phase development in Russia. We are expecting to sign final transaction documents until the end of 2019 and have the closing at the beginning of next year.

The acquisition will add approximately 600 million barrel to OMV's reserves and more than 80,000 barrels per day to OMV's production at plateau. The operator expects production to start up at the end of 2020 and to reach plateau in 2026. OMV's share of total investment is expected to amount to approximately EUR 950 million until the end of 2044, including approximately EUR 75 million compensation for the past cost incurred in the years 2017 and 2018.

Within the framework of cooperation with Gazprom, OMV also extended the agreement regarding the annual delivery of 1.2 billion cubic meters of LNG beyond 2020 by Gazprom. This will contribute to the diversification of our sources of supply and help us safeguard security of supply in Europe.

In July, we signed a Memorandum of Understanding with Verbund, Austria's leading electricity company and one of the largest hydropower producers in Europe. We aim to intensify our strategic energy cooperation, and we already agreed on the first joint project, building Austria's largest photovoltaic plant with a capacity of 16 megawatt peak.

We also took FID for the construction of the high-purity isobutane unit in Burghausen. The project is the first application worldwide of a new technology developed in collaboration with BASF. The new unit will be integrated into the existing refinery metathesis plant, which is responsible for the energy-efficient manufacturing of propylene for the plastic industry.

And as announced this morning, we closed the deal regarding the acquisition of a 15% share in ADNOC Refining and the global Trading Joint Venture. With this transaction, OMV increases its refinery capacity by 40% and olefin capacity by 10% and establishes a strong integrated position in Abu Dhabi along the value chain, spanning from upstream production to refining and trading and petrochemicals.

Last but not least, as you know, starting July, the structure of our Executive Board was changed. The Downstream division was divided into 2: The Refining and Petrochemicals Operation Division headed by Thomas Gangl, today with us on the call; and the Marketing and Trading Division, which I manage on an interim basis. In light of future market challenges, it is crucial that both the production facilities and the trading business enjoy the highest level of attention in the company.

Let us now turn to more details of our financial performance in the second quarter of '19. Our clean CCS operating result rose substantially from EUR 726 million in the second quarter of last year to EUR 1.047 billion. Both business segments contributed with their strong operations to this excellent result.

In Upstream, our earnings were 42% higher year-on-year, mainly due to the significantly higher sales driven by portfolio changes and higher realized oil prices.

In Downstream, earnings increased by 26%, although the indicator margin fell by 39% year-on-year. The results demonstrate the benefit of OMV's integrated portfolio as the negative refining and gas market effects in Downstream were more than offset by the stronger commercial and retail business and by a better petrochemicals result.

Clean CCS net income attributable to stockholders increased from EUR 272 million to EUR 510 million, supported by higher earnings and a lower clean tax rate year-on-year. The clean tax rate was 39%, 10 percentage points below the previous year's quarter. This was due to a proportionally lower upstream contribution from high tax rate fiscal regimes and a comparatively higher Downstream result contribution from Romania, where the prior year quarter was impacted by the planned turnaround at the Petrobras refinery. Clean CCS earnings per share rose strongly to EUR 1.56.

Let me now come to the performance of our 2 business segments. The Upstream clean operating results increased by EUR 192 million to EUR 650 million compared to the second quarter of 2018 due to higher oil sales volumes and higher realized prices.

Market effects had a positive impact of EUR 71 million, a result of the higher realized oil price and a stronger U.S. dollar partially offset by weaker gas prices. OMV's realized oil price rose by 9%, while the realized gas price decreased by 5%. The gas price weakened to a lesser extent than the European spot prices, as only approximately 40% of our gas sales portfolio is directly linked to European hub prices.

Realized gas prices in Romania increased quarter-on-quarter. However, the realized prices decreased year-on-year due to the price cap for gas sold to households effectors -- effective as of May this year.

Production went up by 70,000 to 490,000 barrels per day, mainly driven by the acquisitions in New Zealand, Abu Dhabi and Malaysia as well as the production ramp-up of Aasta Hansteen in Norway. Production in New Zealand recovered from the first quarter maintenance and contributed 41,000 barrels per day in the quarter. Production of the SARB and Umm Lulu fields in Abu Dhabi amounted to 22,000 barrels per day. Production in Malaysia increased to 15,000 barrels per day, as the acquisition was fully reflected in the second quarter. Almost 50% of the SapuraOMV production is gas. The security situation in Libya improved, and we were able to produce 36,000 barrels per day in the second quarter, more than in the same period of last year.

Our overall sales volumes were 24% higher year-on-year due to an increased production and a catch-up effect in sales in Libya. We remind you that the barrels produced in Libya in the first quarter were lifted in the second quarter due to the security situation.

We reduced our production costs by 9% to $6.9 per barrel on the back of higher production and favorable currency development.

Depreciation increased by EUR 118 million due to our acquisitions in Abu Dhabi and Asia Pacific.

In Downstream, the clean CCS operating result increased by EUR 89 million to EUR 428 million. The Downstream Oil result rose 34% to EUR 427 million, despite a significantly lower refining margin.

Our operational performance was strong, reflected by the refining utilization rate of 96%, higher sales volumes and stronger commercial and retail margins. In the second quarter of last year, our utilization rate was only 77% due to the planned turnaround of our Petrobras refinery.

The commercial retail business benefited from a tight supply situation following a refinery outage and regional reduced production due to the Druzhba pipeline contamination issue.

At EUR 78 million, the petrochemical result rose substantially by 42%, supported by a higher ethylene and propylene net margin.

The contribution from Borealis increased to EUR 118 million driven partly by a positive impact coming from the settlement of tax cases in Finland. The integrated polyolefin margins were on a healthy level, and the performance of the fertilizer business improved on the back of lower gas prices.

The clean CCS operating result in Downstream Gas declined from EUR 20 million to 0 due to a weaker storage result and lower power result in Romania. Following a very warm winter, part of the storage volumes were not withdrawn and was shifted into the next winter season, of course, negatively impacting the results. A similar effect is expected in the third quarter of this year. We anticipate a reversal of these negative effects in the next winter season, when the gas will be withdrawn from the storage.

Let's now continue with cash flow. In the first half of 2019, the cash flow from operating activities, excluding net working capital effects, amounted to EUR 2.2 billion, an increase of EUR 228 million compared to the first half of last year. The positive development is driven by acquisitions and a good operational performance.

In the first half of 2019, we recorded negative working capital effects in the amount of EUR 234 million, which represents a change of approximately EUR 0.5 billion compared to the first half of 2018. This was mainly driven by positive effects in Downstream Oil partly offset by negative effects in Downstream Gas. At EUR 855 million, our organic cash flow from investing activities was slightly below the same period of 2018.

The organic free cash flow before dividends amounted to $1.1 billion. The decrease versus the same period of last year stem from the negative net working capital effects. Our organic free cash flow was more than sufficient to cover the payment of dividends in the amount of EUR 772 million.

The inorganic cash flow from investing activities was EUR 551 million, mainly reflecting the acquisition of SapuraOMV.

OMV's balance sheet remained very healthy and showed strong liquidity with a cash position of EUR 3.7 billion at the end of the second quarter of 2019. Net debt slightly increased from EUR 3.2 billion to EUR 3.3 billion.

At the end of June, we issued 2 tranches of senior bonds totaling EUR 1 billion. One tranche was a 6-year issue with a coupon rate of 0%, which is the tightest 6-year yield for a corporate issuer since 2016. The second tranche was a 15-year issue with a coupon rate of 1%. The proceeds are intended to partially finance the acquisition of the 15% share in ADNOC Refining and the global Trading Joint Venture.

Following the bonds issue, our financing cost decreases by 40 basis points to 1.9%. Despite the payment of the annual dividends, our gearing ratio remained almost flat at 21%, well below our long-term target of max 30%.

Let me conclude with an update of the outlook for the full year. We reconfirm our 2019 market assumptions for Brent oil at $65 per barrel and gas prices below the level of 2018.

Based on the developments in the first half year, we expect the total 2019 production to be slightly below 500,000 barrels per day. Libya is anticipated to produce above 35,000 barrels per day in the second half of 2019. We expect production in the third quarter at the similar level as in the second quarter, with planned maintenance works in Russia, Norway and Austria. Production in the fourth quarter is anticipated to be stronger, driven by seasonally higher volumes in Russia and the expected production start-up of Nawara in Tunisia.

In Downstream, we saw a very volatile refining margin in the first half year, averaging $3.6 per barrel. We estimate an increase in the second half of the year as the market prepares for the IMO legislation being enforced in 2020. However, for the full year, we estimate the refining margins to stay below $5 per barrel.

For petrochemicals, we now project the full year margin to be at the similar level as 2018, following a strong performance in the first half of 2019.

Thank you for your attention. And now my colleagues and I are more than happy to take your questions.

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Questions and Answers

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [1]

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Thank you, Rainer. Let's now come to your questions. (Operator Instructions) The first question comes from Josh Stone, Barclays.

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Joshua Eliot Dweck Stone, Barclays Bank PLC, Research Division - Analyst [2]

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I've got 2, please. Firstly, you recently signed an MOU in Indonesia on the petrochemical sector. I wonder if you could talk about that? And what you're looking at, are you leaning more towards sort of greenfield or brownfield opportunities in petchem? And any insight into potential timing of when a decision might be made, would be great.

And secondly a question for Thomas, congratulations on your new role. I was wondering if you could talk about how you see OMV's Downstream business today and what your priorities are over the next several years?

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [3]

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Well, Josh, the MOU which we have signed in Indonesia, let me call, is in a very embryonic stage, yes. So we have just started the discussion, and we will look together with Mubadala into that project.

When we are talking about a project, we are talking about an investment project and new capacities. And that's the main interest we do have.

From a strategic point of view, we would like to create a captive market behind our 15% shareholding in ADNOC Refining. In ADNOC Refining, what we are doing to invest into the complex will create lots of naphtha. And naphtha, we need to find then captive outlet. As we see crackers on the site being ethylene crackers, of course, we would like to have a captive naphtha demand behind our engagement in ADNOC Refining. And that's the reason why we, together with our partner in Abu Dhabi, are looking for a captive market.

And one of the potential markets in Asia could be Indonesia. We will look into that together with our partner. And I would say when we have a higher maturity, I will present firmer numbers to you. It only tells you that petrochemicals are getting a higher weight in our activities, but following our execution of our strategy, this was just [planned]. As you remember, we would like to double the petchem capacities. And that's one option we have created in our portfolio.

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Thomas Gangl, OMV Aktiengesellschaft - Executive Board Member for Refining & Petrochemical Operations [4]

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Thank you, Josh, for the congratulations. It's really great to be in this round. How do I see Downstream today? I'm very proud of what we have achieved over the last years. When you look back in terms of utilization on all of these KPIs, I think we have done quite some work on improving and stepping up.

Also in benchmarking, we have a strong position achieved. So we are in a very healthy position and well positioned in Europe.

What is on the long run there? I mean you know our strategy, obviously. So we are driving the portfolio more towards the petrochemicals. You have seen the ISO C4 investment decision, which is one of these steps to drive that more into petchem and also jet fuels. These are the topics where we still see a lot of growth potential, even in Europe.

And we are looking beyond Europe, of course. And it's a perfect day to talk about it because today, we have the closing of the Abu Dhabi deal that's adding 40% in the refining capacity, more than 7 million tonnes. So this is compared to our existing asset base, quite significant, and we are looking beyond that.

So those topics will be on my agenda. That will be investments in our existing refineries, but also looking into opportunities beyond that.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [5]

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The next question is from Jason Gammel, Jefferies.

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Jason Gammel, Jefferies LLC, Research Division - Equity Analyst [6]

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Congratulations on a great result. I was hoping to ask a couple a little more on a macro basis. You made reference to your commercial and retail operations in the Downstream Oil business doing well as a result of the tightness in refined products from the Druzhba issue. Would you expect that, that tightness is going to continue into 3Q? Or has that essentially resolved itself?

And then the second question on Downstream Gas. We did see, obviously, a lot of weakness in the European hub prices. You referenced the resilience in your own price as a result of less exposure to those hubs. But how do you actually see the macro developing? It seems like we could be in an oversupply situation for a relatively long period of time in Europe as regards gas.

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [7]

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Okay, I catch both questions. First of all, the commercial and retail business, we're expecting also a strong contribution from commercial and retail business in the third quarter. I don't see a sign that there will be a slowdown of the performance, but it's less driven by the pipeline, the Druzhba contamination. It's more driven by the water level in the Rhine. We see, of course, a very nice spread in Southern Germany. And this spread, I still see also in the third quarter.

So I also would say that commercial and retail business, the indication is a good one. It's also supported by the driving season. The driving season, the holiday season is a season I like. Second most, I like the winter season because it's cold. But the driving season is really bringing good numbers into commercial and retail business.

And I also would like to pay your attention that roughly 40% of the profits we are generating in that business is nonpure business, yes, which is an increasing number.

The Downstream Gas, the macro. What I see is -- you talk about only one side of the medal, to be honest, Jason, and you are talking about the demand side. When I talk about the demand, I first of all would say it's a little bit depending, and we both have to sit and wait a little bit what's happening in Germany, yes? The step-out of coal and that climate discussion and when Germany said we are supporting the Nord Stream 2 pipeline project because we need more gas because for the change of the energy mix in Germany, we need more gas.

So if this switch from coal-to-gas is coming earlier, I would have a different view on the market, on the demand development in the European gas market.

Second it's a -- the situation we do see right now in Europe is more or less not the demand development, the oversupply, some of the demand development in Europe, per se, it's also the very weak market in Asia, sending some cargoes into our market which we haven't anticipated in our plans.

Do we have to deal with a longer oversupply market? I think that the import demand of the European gas market will increase further than the demand in the market by self. So the decline of the gas production level in Europe is much, much stronger. Sometimes, I also read in the press that some companies are hesitant to further invest into additional production. We need that gas in the market besides all the climate discussion.

So that's the reason why I think in short term, we have to sit and wait how the climate debate in all over Europe will result into potentially higher demand in gas. If this is going to happen, I think we are talking about a healthy gas market. If this is not going to happen, I'm hoping for a sharp and quick decline of European gas production. That's the only thing which can help.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [8]

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Next question is from Peter Low, Redburn.

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Peter James Low, Redburn (Europe) Limited, Research Division - Research Analyst [9]

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You've kept full year CapEx guidance unchanged at EUR 2.3 billion. That implies a step-up in spending in the second half. Can you give us any color on what is causing that?

And then second was just on your petrochemical earnings. They've been very resilient, especially versus peers, you've been citing soft industry margins. What would you attribute your outperformance in that area to?

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [10]

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This is Reinhard, Peter. Regarding the step-up of the spending, you're right that we have been proportionately lower than our anticipation for the full year in the first half. But that is also a little bit of OMV's pattern in spending; that we have the first 2 quarters, traditionally on a lower level of CapEx spend compared -- if we are talking organic CapEx, of course, compared to the third and fourth quarter.

Why is that? Because, of course, the activities start in the new year. Regarding E&A activities, there we are a little bit behind our overall development that we foresee. We have also seen that we have less spending as normally anticipated because there is the delay of the Neptun project, and we have positive developments, both in Abu Dhabi as well as in Malaysia, that some of the spendings are lower than anticipated, as well as delayed or shifted to the second half or even part of that into next year.

So in total, we still believe in the EUR 2.3 billion as we have anticipated, and there will be some catch-up effect in the second half.

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [11]

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All right. Peter, part of our secrets I would like to keep, why we are so successful in petchem, yes? So I try to answer your question a little bit in a philosophic way. The -- one of the reasons is, if you look into the performance of petchem, you'll have to look into, first of all, the utilization rate of different companies. In petchem, we were close to 100% utilization. So our operations were running without any second of interruption.

The second point is, what is the feedstock for your crackers. Some of our competitors were -- their cracker went into maintenance, stabilizing, of course, the ethylene propylene prices in Europe, and that was a very positive demand call on our petchem business.

And secondly, the cracker feed, we are very much naphtha-based. When you talk about Burghausen, is a petchem naphtha site. And therefore, we benefited from the low prices in naphtha, whereas our competitors, if they are running a higher share of ethylene, could not benefit from the lower naphtha prices.

All in all, we have to say that especially OMV has, of course, one specialty of a further integration down the value chain. And that's, of course, the benefit from Borealis, yes? So we are not only the producer of the monomers, we have also the polymer business and Borealis performed very nicely. And as far as I can see, the first weeks in Q3, we don't see any signals that I should change my outlook. I have presented to you that the petchem business, we confirm that this is a healthy environment.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [12]

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We now come to Henri Patricot, UBS.

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Henri Jerome Dieudonne Marie Patricot, UBS Investment Bank, Research Division - Associate Director and Equity Research Analyst [13]

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Two question for me. The first one, on the updated production target for the full year, so slightly below 500, can you just comment on the drivers of this change in the guidance? And whether there are any implications we should have in mind for next year for 2020?

And secondly, I wanted to know on NOC refining, obviously you just closed the transaction. Has there been any change in your views on the contribution from the business, given recent changes that we're seeing in the market of the crude market and then also [the other product's] outlook?

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Unidentified Company Representative [14]

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Regarding production targets. So what you have seen is in the first quarter, we have produced 474,000 boe. In Q2, we increased the production to 490,000 boe, resulting in a half 1 production of 482,000 boe. What you can expect is Q3 will be similar production as in Q2, so plus/minus 490,000 boe. Q4 should go up with the production regarding Nawara will come on stream; Russia, the winter season should come in, meaning Urengoyskoye should go up with the production.

And what we expect is also that we bring earlier than anticipated [Gulaba] in Malaysia onstream. So this will push the production at around 500,000 boe or beyond 500,000 boe, and that's what you could expect. And also for 2020, production beyond 500,000 barrels per day.

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [15]

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Henri, our view on ADNOC Refining in Abu Dhabi hasn't changed, yes? So you can see what we have said earlier, this year, 2019, we see only a small positive contribution into our numbers, yes? I repeat that on average, we do see a dividend yield out of our participation which is at least 10%, yes?

So this will not start this year because this year, we are not expecting to get any dividend payments, yes? So this will contribute then in 2020. And I have to say that this is an average indication for you because we have to invest into the refinery to upgrade the integrated margins, and this is still ongoing in the next years.

So I wouldn't expect that the dividend yield of 10% will start on the first day.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [16]

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Next is Matt Lofting, JPMorgan.

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Matthew Peter Charles Lofting, JP Morgan Chase & Co, Research Division - VP [17]

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Two please. Firstly, just on Downstream, I mean, I think we should congratulate you on strong results against difficult macro variables.

Can you talk a bit more about where you think the company outperformed the market and also expectations in the quarter and how meaningful that ability to monetize the Druzhba related market tightness was to the quarter?

Secondly just around Romania, if there's an update on negotiations with the government on the offshore fiscal framework, implications for the status of Neptun and also if you have any comment on recent reports out of Romania that Exxon could be considering exiting the project?

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Unidentified Company Representative [18]

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Okay, starting with Romania, the question. So as you have seen there were some changes also in the government. So we are still negotiating and discussing with the government about terms and conditions for the offshore for development of Neptun. So, so far, we haven't got any official information from Exxon Mobil, neither from the government if there is any change in the shareholding of the project. So if we get this, then we will come back to you.

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Thomas Gangl, OMV Aktiengesellschaft - Executive Board Member for Refining & Petrochemical Operations [19]

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So you asked the first question about the outperformance. When you look into the figures, you see that we had an extremely good utilization. This is, of course, something that helps a lot. And this in combination with some market effects. And there -- I would say, there are always market effects. So there is the Druzhba pipeline, there is the Philadelphia refinery, there is the Rhine level which is now again down, so they can load only 70% -- 80%. And our indication is that next week, they will go down maybe even to 70%.

So there are always some chances to gather additional profits. And I think this is something we have done in the past, and we will continue with that.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [20]

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We now come to Alwyn Thomas, Exane BNP Paribas.

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Alwyn Thomas, Exane BNP Paribas, Research Division - Analyst of Oil and Gas [21]

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I just wanted to follow up, I guess on sort of the strategic view and the sort of 2025 plan. It looks like you're moving ahead, sort of well ahead of expectations on deals and prices and the closing of deals as well.

I was wondering when, I guess on your sort of gearing targets at year-end, now the deals are beginning to close for this year, given good performance on gearing in the second quarter, where you expect that to be around year-end now, given the outlook? And I guess when we should perhaps expect some update on what your thoughts are on sort of additional shareholder returns in the future, and perhaps where you'd like that to be?

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [22]

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Alwyn, you are very right that we are very well progressing in our 2025 plan.

Regarding the gearing, by the end of the second quarter, we are at 21% gearing, which leaves us very good headroom also considering the expected good cash flow generation for the third and fourth quarter, still this year. So that we expect that with the acquisition that is now closed in July on the Abu Dhabi side, we will still manage to be at or slightly below 30% gearing, including the IFRS 16 effect.

This assumes that we will not be able to close the Achimov 4/5 deal, ultimately in this year, that may be shifted to early days in 2020, but that's still not out as we are on the final negotiation side with Gazprom, and that's actually progressing well.

Regarding the general expectation on the organic cash flows, we still are in the situation that we follow our EUR 2.3 billion target of organic cash flow in 2019 and to continue with a spend of EUR 2 billion to EUR 2.5 billion for the years to come.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [23]

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And we come now to Irene Himona from Societe Generale.

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Irene Himona, Societe Generale Cross Asset Research - Equity Analyst [24]

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My first question, back to the Downstream, if I may. You oversee marketing and trading directly. Could you perhaps give us a sense of the importance, the contribution of trading to the Q2 results, and if you have any particular ambitions? It's a business that is making some very meaningful contribution to other companies downstream.

And secondly, any guidance, please, on the cash tax rate, either for the full year or the second half?

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [25]

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Regarding the tax rate, you have seen that we came out in second quarter with a clean tax rate of 39%, and with an effective tax rate of 38%. This comes despite of higher volumes from Libya, where we have high taxes; on the other hand, with a very good contribution from the Downstream side, where we have an average lower taxes than in Upstream, that made up for that and kept our tax rate below 40%.

We still would guide for the full year at a full year tax rate of at or slightly below 40% for the group company.

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [26]

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Irene, I'm very sorry, but we are not releasing any numbers in particular about the contribution of trading activities. But I would like to elaborate a little bit on your question about the importance of trading.

As you can see, we have closed our transaction with ADNOC this morning. It's not only a 50% share in the refinery and the assets, it's also a 50% share in a trading and marketing company. So we will be engaged with the 70% -- roughly 70% of the Ruwais volumes being exported into the different markets, and we have to bring trading know-how into the joint venture because we think that we can stretch the dollar in the refinery.

And this is not only the sales of the product; I think we can contribute with our oil trading expertise enormously into that cooperation because we are used to create a good [predor] in our refineries, whereas in Abu Dhabi, we are operating only with single [mellow] grades.

That's the reason why we have this high-priced Abu Dhabi crude in the refinery, and we would like to mix it a little bit, and then we can optimize the feedstock basis of the refinery. Giving you an idea that this is a part of very important trading. So it will go into the overall result. But to give you a precise number for that, it's very, very difficult.

It's an important contribution in natural gas trading. That's also why we call it trading because we are operating at the different hubs. And if you look into the price differentials at the different European hub prices, let's call a TTF versus the CEGH hub prices. And given the fact that we do have an infrastructure in place that we do have different sources of import volumes at different locations, we have to play with that overall picture to optimize it.

It only makes sense to start these kind of trading activities if you have a certain size of the portfolio. With small nitty gritty, you can't optimize this trading. But given the fact that we have a very big, [large] portfolio, that's also one of the reasons why we have intensified our efforts to increase our market share in Germany and the Netherlands because we have a very strong, high sales volume in natural gas in Eastern -- Southeastern Europe, whereas the volumes in Northwest Europe are going to increase substantially, just also to create that arbitrage potential in trading in our natural gas business.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [27]

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The next question is from Yuriy Kukhtanych, Deutsche Bank.

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Yuriy Kukhtanych, Deutsche Bank AG, Research Division - Research Associate [28]

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Two questions from me, please. Rainer, I think both will be for you. First one on the Russian gas transmission via Ukraine. Could you please update us, how do you think about Gazprom and Naftogaz transmission deal? And how will it progress following the recent, very unusual elections outcome in Ukraine, and how different outcomes may affect your business?

And the second question on the Ruwais refinery particularly. So considering China slowdown and the increasing risk of Chinese refineries supplying more oil products to international markets, do you still see plain vanilla valuation of Ruwais refinery acquisition as value-accretive for your minorities?

And perhaps you can talk a little bit more about the dividend guidance that you provide for Ruwais. What is the implicit refinery margin in that guidance? And what's your floor for the refinery margin in order to execute that dividend guidance?

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [29]

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Yuriy, you are asking questions where I really have to think twice what should I say, yes? The gas transmission in Ukraine. It's very difficult to give you an answer because I'm not sitting at the table. And I don't have any crystal ball where there's a Gazprom player telling me anything how this is going to progress. I think you have to talk to these guys sitting at the table and negotiate, they can give you a more precise idea what's really going to happen.

From OMV's point of view, we are supporting a continuation of the gas transit in the Ukraine for different reasons. First of all, we would like to back and finance the Nord Stream 2 project because it's a diversification of the import route and not a substitution of existing import routes. Then the security of supply situation wouldn't be increased and in favor of the European market.

The second is we would like to keep that second route because the vast majority of the volumes we are right now importing into Austria is coming via the Ukrainian transit route. So therefore, as every second cubic meter of gas here in Austria is coming via that route, we do have a certain interest that this route will be busy also in the future.

What I can see is all what I read in the newspapers, and I don't want to repeat it, but I think what I can see is that now it is, of course, already a successful development that the parties have decided to sit together again and to restart the discussion on booking the transit.

Do I expect that this will be a deal signed tomorrow? I don't think so. I think the way they are talking, they have to find the right language to talk to each other, and it will take time.

The Abu Dhabi refinery. Well, first of all, in principle, we have said, we take a break in any kind of acquisitions, yes? It doesn't matter whether we talk Downstream, petchem or any acquisition on the moon. I have no further acquisitions, yes? We have to take a break. We would like to recover from the big money Reinhard has transferred today into the pocket of ADNOC and therefore, we would like to take a break to consolidate, especially our balance sheet. So that's a clear message as we speak about M&A activities.

When we talk about the refining margins, I have to make reference to the confidentiality agreement we have signed with ADNOC. It really gives me not a big room to give any indications what we have signed. All I can give to you, Yuriy, is what I have said earlier, is the dividend yield we have agreed with ADNOC, we can make reference to give you an idea to evaluate our shareholding in that refinery project.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [30]

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We now come to Chris Kuplent, Bank of America Merrill Lynch.

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Christopher Kuplent, BofA Merrill Lynch, Research Division - Head of European Energy Equity Research [31]

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First one, would I be right, just looking for confirmation, that as we have been able to observe that your achieved gas price has obviously improved the discount relative to the European spot price, that that is a trend that should continue as more and more gas production is coming online that has nothing to do with the European spot price?

And the second question, I suppose, is a wider question, Rainer. It wasn't so long ago at your Capital Markets Day that you said, "Don't call me a utility." And we've now seen a cooperation with Verbund where you are, I guess, investing in power projects. And I wonder how much -- whether you can give us an idea whether that, over the coming years, is significantly increasing in CapEx and what the strategic rationale is behind that cooperation?

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [32]

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Chris, I'm going to be short, as you started to quote me, yes, telling me that I don't want to be a utility. You're absolutely right. I, of course, will not say anything in contradiction to that.

But to your first question, yes, you're absolutely right, as we are investing into new gas, for example, in Asia, in Malaysia, this has nothing to do with the European hub prices. And therefore, the trend you have described is correct.

Second, Verbund. Well, I can -- I will clearly say the following: OMV is not striving to become a power company. We have burned our fingers and we have lost a lot of money, and we have identified that we have not the DNA, neither in power trade nor in power generation whatsoever.

So the cooperation with Verbund is not a new business activity in our overall portfolio. It is an optimization of our energy costs for our production site in Austria. With that cooperation, we can substantially reduce our power costs, and we're talking about 10% of the power demand we have in our operations here in Austria, we can substantially reduce the cost.

And the reason is because we are producing the power next to our operation, and we don't have to pay anything for the infrastructure. So no entry exit fees, and it's purely an economic optimization. That's what's first running in my head when we are talking about the project with the photovoltaic investment. We are not talking about bigger substantial investments into power generation. But OMV has an interest, and that's more in combination in the context of sustainability that the majority of the power we are using in our operations is going to be clean power.

In some countries, we have not an energy mix like in Austria, and it has a different dimension. And that's the reason why we have also announced that OMV will touring with Verbund into the regions where we are an active producer, and maybe one of the other projects we are doing together. And we are sharing the costs because OMV could also invest a 100% and enjoying then the lower energy cost on 100% basis.

But we have said because it's not a strategic business, we are joining with an electricity company, and then we can also optimize because they do have the DNA in power trade in case we have oversupply of renewable powers in our photovoltaic project, for example.

So all in all, I'm still the same. I haven't changed my mind, Chris.

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Christopher Kuplent, BofA Merrill Lynch, Research Division - Head of European Energy Equity Research [33]

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Very clear, Rainer. So that to me sounds like any CapEx related to this cooperation with Verbund, we should treat very much as organic CapEx within your divisions.

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [34]

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And it's an extremely small number, yes.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [35]

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We now come to Michael Alsford, Citi.

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Michael J Alsford, Citigroup Inc, Research Division - Director [36]

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I've just got a couple left. If you don't mind, if you can remind us what you're up to in terms of exploration activity. I see that the budget's gone up a little bit for this year. I know you were drilling quite actively in New Zealand, but if you could maybe provide a broader update and to the resource potential that you're targeting would be great.

And then just secondly, just on Nord Stream 2, apologies if I've missed it, but if you could maybe update on the progress of the project and how you see it playing out for the rest of the year?

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Unidentified Company Representative [37]

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Mike, regarding exploration, as you know, we did some acquisition in the recent times. So this would require also then we have a bigger exploration portfolio than we had some 2 years ago. So we will invest also some exploration money in Southeast Asia, together with Sapura. This is already included here. So we are drilling some wells in Malaysia, and we will start our drilling campaign in New Zealand in the second half of the year, where we see some big potential in the Taranaki Basin and Great South Basin.

So this is mainly the reason why we increased our exploration budget. This is according to our acquisition, and this is also according to our production increase, yes, because we're producing right now, 500,000 some years ago, where we spent EUR 300 million, we were producing 300,000 barrels. So this is, I would say, going hand in hand with our growth in Upstream.

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [38]

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Michael, in terms of Nord Stream 2, around 70% of the pipeline is already constructed. The construction works are continuing according to plan. We do see no real time delay. We are now constructing the pipeline. The 2 ends will meet the territorial waters of Denmark, and we are waiting for the last remaining permit from Denmark. This decision will decide about the timing. Right now, we are in -- within plan and time. We don't see to change our time line and our time expectation for first gas in. We are planning with the first gas in end of this year, so at latest 31st of December '24.

So Nord Stream 2, we have also continued financing in the second quarter of this year. We have now a total finance volume of EUR 687 million, end of second quarter. The financing will be reduced for the remaining quarter, as we are dealing -- as we see only pipe lay activities left, the vast majority of the project is financed, and the biggest cost position is, of course, the production of the pipes. The pipes are all on the site, and we have only 30% of pipe lay activities left.

The concept is that we are going to build until the Danish waters, and then we have 130 kilometers in that economic zone which we are going to build the day we are going to receive the permit from the Danish authorities.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [39]

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We now come to Thomas Adolff, Crédit Suisse.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [40]

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Three questions for me, please. Just firstly on your longer-dated production target of 600 KBD. I was wondering whether that is achievable without -- not Neptun? And whether you have other option within the portfolio today that could offset the potential loss of Neptun if the economics just don't work.

Secondly, I think you mentioned on the conference call that about 40% of the retail earnings come from the nonfuels business. I wondered whether you can drive that higher? And if so, is it 50%, 60%? And how do you plan to achieve that?

And then finally, just if you don't mind reminding me how much of your gas production is linked to spot prices, how much contracted? And on the contracted portion, how does the pricing formula roughly work?

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Unidentified Company Representative [41]

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Regarding our 2025 target, what you see already that we have achieved already in June, the 500,000 barrel. So next year, as I mentioned before, we'll go beyond the 500,000 barrel. This would include already Nawara and this would include the increase of production partially in Malaysia.

But in Malaysia, as you know, we are producing right now around between 13,000, 15,000 barrels per day. So we will go up next year beyond 30,000 boe. And the target for Malaysia is until 2023, 2024, to go beyond 60,000 barrels per day with the current portfolio, which does not include any exploration success, neither in Malaysia, nor in Mexico, where we have some good prospects and leads with SapuraOMV.

Another reason is Achimov, we will close the deal until end of the year, beginning of next year. This would deliver also a plateau production until 2025, 2026, of 80,000 barrels per day. And if you make the math where we are right now, 500,000 barrels with Nawara; in the first step in Malaysia will go beyond 500,000 barrels; then plus 70,000 barrels, 80,000 barrels from Achimov.

And then more than doubling from next year's production, what we expect in Malaysia, 20,000 barrels to 60,000 barrels or beyond 60,000 barrels; we are easily already at the 600,000 barrels per day. So if in addition Neptun will come onstream and what we expect right now, if we take FID next year, Neptun will come on stream around 2024, 2025, this would mean another 70,000 barrels per day.

So Neptun, for us, we see already as an upside, we would achieve the 600,000 barrels, most likely without Neptun.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division - Head of European Oil & Gas Equity Research and Director [42]

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And you don't assume any declines in your portfolio?

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [43]

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We assume also the guidance, but what I have not mentioned here is that we see some potential in other areas. And of course, this is already included. But what we have not -- what I have not mentioned is, for example, in Nafoora, if we develop Nafoora field in Libya, so this will bring additional barrels there. With discovery in Norway, which we will [have brought]stream. I'm not talking about Wisting because Wisting would take maybe a little bit longer; Hades & Iris, which we can easily bring onstream before 2025, which is not in this calculation, which would cover the decline.

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [44]

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Thomas, making reference to your question about the retail business. The -- we don't have any target setting about a share we would like to have as nonfuel business. But I would like to work on -- elaborate your question a little bit further to give you some information, what is really going on.

On the one hand side, we have some activities where we would like to increase the share of nonfuel business. We have in the -- we have a very strong interest, especially as we talk about the OMV stations where, to change them more and more into service stations, so which means that besides the shopping business, we have an interest also to introduce something like banking business or that you can sign for your car insurance, for example, yes? And we have lots of partners knocking at our door, that they would like to cooperate with us, especially taking the change happening in the mobility that also one or the other e-car will stay for 20 minutes, recharging the battery. The average time staying in our job is increasing, and then the business might increase as well. So it's the upside potential.

The upside potential for fuel business is coming from our discount stations. And what we are heavily investing now at discount stations, as this is a very successful business model we have introduced in the Southern German market, for example, with in cooperation with Aldi and Hofer in Austria. We also would like to expand this as a business model towards the Eastern European countries. And this will, of course, increase our fuel business in retail and commercial.

So all in all, on both sides, we do have an upside to increase that business. As it is a very profitable business, it comes more in the focus of OMV also to spend further money in that business segment.

I regret that I can't give you more precise information about gas prices and our contractual formulas. We have secrecy agreements. I only can say that 40% of our contractual agreements are linked to European hub prices. And when I say European hub prices, I'm talking about different hub pricing from TTF, NBP to CEGH, you find it all in our contractual contracts, but I can't give you any more information about the pricing formulas. And I hope on your understanding.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [45]

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The next question is from Bertrand Hodee, Kepler Cheuvreux.

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Bertrand Hodee, Kepler Cheuvreux, Research Division - Head of Oil and Gas Sector Research [46]

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I've got one left. Looking at your Slide 13 where you're making a bridge of the Upstream operating performance. When we look at production, it was up Q-on-Q by 16,000 barrels per day. So that's roughly plus 1.4 million boe. Then we understood that you recovered from the under lifting of Libya volumes in Q1. So that's another 1.4 million boe, sorry for the long calculation. And I noted that Q2 versus Q1, you mention plus 6 million boe in sales. Have you ended up in Q2 with an over lifting position, so that we should assume that Q3 sales should be down with stable production?

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [47]

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Let me give you just the indication because if you take just Q2, then of course, you see over-lifting in terms of the number of liftings in Libya because we were catching up liftings from the first quarter. So in first quarter, while still producing for a month, we were not able to do any liftings. So those liftings have been shifted into Q2. So therefore, there is proportionate in Q2 a higher number of liftings in Libya. Other than that, we do not expect that we have any disproportionate situation in Q2.

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Bertrand Hodee, Kepler Cheuvreux, Research Division - Head of Oil and Gas Sector Research [48]

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Okay. But sorry, but maybe I did not understand, but you had 15,000 barrels per day of production in Libya in Q1. So that's roughly 1.4 million boe. And you indicated that Q2 versus Q1, your sales volumes is up 6 million. So I don't get it. There is a gap of 3 million here. Sorry if -- but I need to understand because otherwise, I will not be able to fix the model.

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [49]

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But, Bertrand, I think it's a very detailed question. We'll look into that and get back to your or just hang on one second...

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [50]

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But just take into account, we have Malaysia, we have Abu Dhabi, we have Aasta Hansteen, 3 areas that have not been fully ramped up in Q1 that came in with capacity in Q2. So there is a couple of effects also contributing to this increase.

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Reinhard Florey, OMV Aktiengesellschaft - CFO & Member of Executive Board [51]

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Yes, maybe more in detail. So Libya is, of course, one reason where we had no production in first 2 months, where we started out in March, which was producing then beyond 30,000 boe. Aasta Hansteen, we had a delayed production start-up. Aasta Hansteen is producing right now or after 2 months, also with 20,000 boe per day.

We had also some difficulties in New Zealand with our pipeline repair. So New Zealand is producing also since Q2, above or around 40,000 boe per day.

And what we ramped up also is UAE, which is producing right now, constantly around 22,000 boe per day.

So I think this is -- so we had a weaker Q1, and Q2 was then already, including Aasta Hansteen, including full production in New Zealand, including full production in UAE. Maybe this explains.

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Florian Greger, OMV Aktiengesellschaft - VP & Head of IR [52]

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Good. Then with this, we are at the end of our conference call, and would like to thank you for your attention in joining us today. Should you have any further questions, please contact the Investor Relations team. We will be happy to help you. Have a good day, and goodbye.

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Rainer Seele, OMV Aktiengesellschaft - Chairman of the Executive Board, CEO & CMO [53]

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Bye.

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Operator [54]

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That concludes today's conference call. A replay of the call will be available for 1 week. The number is printed on the teleconference invitation, or alternatively, please contact OMV's Investor Relations department directly to obtain the replay numbers. You may now disconnect.