OMV Petrom Group results for Q3 and January – September 2014

Mariana Gheorghe, CEO of OMV Petrom S.A.: “Our sound financial discipline in the last years and the strict capital allocation allowed us to deliver on our targets for the first nine months, despite recent oil price volatility. In E&P, we managed to broadly stabilize production in Romania and implemented our planned CAPEX projects. This year we have made the largest investments in the exploration activity since privatization, running a complex exploration program onshore and offshore, with 9 exploration wells drilled so far. In the Black Sea, we are processing the data from Domino-2, while the Ocean Endeavour rig is drilling the Pelican South-1 exploration well, to test a new geological structure of the Neptun Block. The completion of the Petrobrazi refinery modernization is delivering the planned increase of USD 5/bbl in the indicator refining margin which contributed to the improved R&M result. In turn, in the G&P business challenges remained due to lower gas market demand and depressed electricity prices. In light of the volatile and weaker market fundamentals we are reviewing our investment plans for 2015, which will be announced together with the Group’s fourth quarter and 201 preliminary results on February 19, 2015. A stable and predictable investment-friendly fiscal and regulatory environment remains a key prerequisite for our future CAPEX program.”

Business segments

Exploration and Production (E&P)

Third quarter 2014 (Q3/14) vs. third quarter 2013 (Q3/13)

• Clean EBIT impacted by lower oil prices
• Group hydrocarbon production slightly below Q3/13, but broadly stable in Romania
• OPEX in USD/boe increased mainly triggered by the new construction tax in Romania
• Exploration license for nine blocks was renewed
• Biggest investments in exploration activity since privatization
• Neptun Deep: Domino-2 drilling operations finalized; Ocean Endeavour rig testing a new geological structure

In Q3/14, the average Urals crude price decreased to USD 100.93/bbl, 9% lower compared to Q3/13. The average realized crude price also decreased by 8% to USD 89.77/bbl.  Clean EBIT decreased by 7% to RON 1,433 mn in Q3/14, mainly due to lower oil sales and slightly unfavorable FX rates (USD 1% weaker against RON) which offset the effect of the slightly higher gas sales and lower exploration expenses. When accounting for special items, mostly restructuring charges, reported EBIT stands at RON 1,355 mn, 12% below the level of Q3/13.  Group production costs (OPEX) in USD/boe went up 10%, mainly triggered by higher costs in Romania and lower production in Kazakhstan. In Romania, production costs increased by 11% in USD/boe, while in RON terms they were 10% above the Q3/13 level mostly reflecting the new construction tax introduced in 2014.  Exploration expenditures increased to RON 370 mn mainly related to the drilling of Domino-2 in the deep offshore Black Sea (using the Ocean Endeavor drilling rig) and successful drilling of Marina-1 well in the shallow waters. Exploration expenses amounted to RON 28 mn, 67% lower than in Q3/13, as the latter was related mostly to the relinquishment of some exploration blocks.  In September, the exploration license for nine blocks covering an area of approx.19,000 km2 has been prolonged until September 2017 and one block was relinquished. All nine blocks currently in exploration are under a single concession agreement for exploration, development and production. OMV Petrom has entered into partnerships with Hunt Oil for 2 blocks, and respectively with Repsol for 4 blocks.  Group daily hydrocarbon production was 178.1 kboe/d (of which 169.9 kboe/d in Romania) and total production stood at 16.4 mn boe, 2.4% below Q3/13, mainly reflecting lower production in Kazakhstan. In Romania, total oil and gas production stood at 15.63 mn boe, 0.8% below the Q3/13 level (15.75 mn boe). Domestic crude oil production was 7.0 mn bbl, 3.3% below the Q3/13 level (7.23 mn bbl) due to planned workovers. Domestic gas production was slightly higher at 8.6 mn boe, mostly supported by the new wells put on stream in the Totea and Mamu fields. In Kazakhstan, production amounted to 0.76 mn boe, 26% lower compared to the same period of 2013, mainly reflecting pipeline integrity issues as well as natural decline of key fields. Hydrocarbon sales volumes have decreased by 4% compared to Q3/13, as the slightly higher gas sales volumes in Romania were counterbalanced by the lower volumes in Kazakhstan and lower oil and NGL sales in Romania. In Q3/14, we finalized the drilling of 56 new wells and sidetracks, compared to 48 new wells performed in the same quarter last year.

Third quarter 2014 (Q3/14) vs. second quarter 2014 (Q2/14)

Clean EBIT increased by 8% in Q3/14 mostly due to lower operating costs, lower exploration expenses and favorable FX rates (USD 3% stronger against RON). Reported EBIT, advanced by 62% compared to Q2/14, the latter reflecting special items of RON (493) mn, mainly in relation to the impairment in Kazakhstan triggered by unsuccessful field redevelopment results in the TOC fields.  Group production costs in USD/boe decreased by 12% compared to Q2/14 level. Production costs in Romania decreased by 14% when expressed in USD/boe, and by 12% in RON/boe terms (RON 52.61/boe) mainly due to lower personnel costs, as Q2/14 was mainly influenced by costs (including one-offs) related to collective labor agreement negotiations.  Exploration expenditures increased by 13% to RON 370 mn on higher exploration activity mainly in the Black Sea.  Group daily production stood at 178.1 kboe/d while total production was 16.39 mn boe (Q2/14: 16.36 mn boe), with almost unchanged production in Romania and 6.7% higher production in Kazakhstan. Group sales volumes slightly decreased by 1% compared to the Q2/14 level, largely due to lower oil sales in Kazakhstan and Romania partly offset by higher NGL sales in Romania and higher gas sales in Kazakhstan.

Gas and Power (G&P)

Third quarter 2014 (Q3/14) vs. third quarter 2013 (Q3/13)

• Clean EBIT deteriorated due to negative contribution of both gas and power businesses
• Gas sales volumes below Q3/13 level, mainly due to lower demand from wholesalers
• Negative spark spreads led to low Brazi power plant utilization

Clean EBIT deteriorated significantly compared to Q3/13, reflecting the negative contribution of both gas and power businesses, triggered by adverse market conditions. In Q3/14, the gas business result was also impacted by the RON 6/MWh transportation tariff enforced by ANRE as of August 1, 2014 in connection with the gas volumes injected into storage, as well as by the RON 30 mn provisions booked for outstanding receivables.  National estimated gas consumption decreased by 9%, while OMV Petrom’s gas sales volumes dropped by 23% compared to Q3/13, when the company’s sales exceeded the average level for the period. The higher demand from the fertilizer industry and a broader portfolio of customers could not offset the lower demand from large wholesalers and the reduced Brazi power plant utilization compared to Q3/13.  At the end of Q3/14, the total volume of natural gas stored by OMV Petrom amounted to 552 mn cbm compared to 279 mn cbm at the end of Q3/13.  In Q3/14, the regulated domestic gas price for the non-household sector was set at RON 89.4/MWh, being at the same level as in Q2/14, while increasing to RON 53.3/MWh for household consumers. The average import gas price based on ANRE assumptions was USD 340/1,000 cbm (or the equivalent of RON 104/MWh).  In compliance with a new obligation in force as of July 15, 2014, gas producers started to sell a certain fraction of their domestic gas production on the Romanian centralized trading platforms.  The average import quota set by ANRE for the non-household sector was 4% in Q3/14, significantly lower compared to an average of 20% in Q3/13.  Romania’s estimated gross electricity production increased by almost 16% versus Q3/13 and the estimated national electricity demand by 2%, with record high power exports (2.3 TWh estimated export  – import net balance) in Q3/14. According to preliminary data published by OPCOM, the base load electricity price averaged RON 139/MWh, while the peak load electricity price averaged RON 161/MWh. The lower day-ahead market prices cumulated with the increased gas price due to the liberalization process led to negative spark spreads throughout the entire period. In this context, despite maximum plant availability, the Brazi power plant reached a net electrical output of 0.06 TWh.  In Q3/14, the Dorobantu wind park had a net availability of 91% and delivered a net electrical output of 0.01 TWh, 14% lower than in Q3/13. For the electricity produced and delivered to suppliers, OMV Petrom Wind Power S.R.L. received ~21,500 green certificates, half of which will become eligible for sale after January 1, 2018 (Q3/13: ~25,000 green certificates, half of them eligible for sale).

Third quarter 2014 (Q3/14) vs. second quarter 2014 (Q2/14)

Compared to Q2/14, Clean EBIT significantly deteriorated in Q3/14, due to the negative contribution of the gas business.  Estimated national gas consumption seasonally decreased by 24% versus Q2/14, while OMV Petrom’s gas sales volumes dropped by 23%.  The net electrical output of the Brazi power plant decreased by 31% compared to Q2/14 due to further deteriorated spark spreads. Net electrical output of the wind park Dorobantu seasonally decreased by 16%.

Refining and Marketing (R&M)

Third quarter 2014 (Q3/14) vs. third quarter 2013 (Q3/13)

• Clean CCS EBIT significantly improved on strong contribution from refining
• Record high refining margins, reflecting updated standard yields and higher product cracks
• Marketing result was supported by strict cost management, in spite of increased competition and higher fuels taxation

In Q3/14, clean CCS EBIT increased by RON 162 mn to RON 303 mn, supported by strong refining margins, improved operational performance after the refinery modernization and good marketing result. Decreased crude oil prices and lower product quotations led to a negative CCS effect of RON (125) mn, resulting in a reported EBIT of RON 179 mn.  Following the finalization of the Petrobrazi refinery modernization program, the opportunity has been taken to adapt the standard yield for the calculation of the indicator refining margin in Q3/14. The successful completion of this program added approx. USD 5/bbl to the standard profitability of the refinery prior to modernization (previously reported figures were not adjusted). The updated standard yield combined with higher spreads of all fuel products, mainly gasoline, brought the indicator refining margin at USD 5.11/bbl level.  The refinery utilization rate increased to 103% (90% in Q3/13), reflecting the temporarily higher throughput run after the scheduled refinery turnaround in Q2/14. Consequently, the total quantity of refining input increased in Q3/14 by 16% compared to the level recorded in Q3/13. Total refined product sales decreased by 12% as a result of lower market demand and optimization along the value chain after the completion of the planned shutdown in Q2/14.  Total group marketing sales volumes in Q3/14 were 9% below the Q3/13 level. Group retail sales, which accounted for 71% of total group marketing sales, decreased by 6% compared to Q3/13, mainly impacted by increased fuels taxation in Romania and higher competition. Commercial sales dropped by 16% compared to the same quarter last year, reflecting lower sales of diesel due to competition and a challenging bitumen market in the region. At the end of Q3/14, the total number of filling stations operated within OMV Petrom Group decreased by 6 units to 779 compared to Q3/13 mainly as a result of retail network optimization in Bulgaria.

Third quarter 2014 (Q3/14) vs. second quarter 2014 (Q2/14)

Clean CCS EBIT increased by RON 257 mn compared to Q2/14, as a result of better refinery operational performance after the planned shutdown, increased refining margins and seasonally higher marketing sales volumes.  The indicator refining margin increased to USD 5.11/bbl in Q3/14 from USD (1.88)/bbl in Q2/14 mainly as a result of improved refinery yield after the finalization of the Petrobrazi modernization program.  The marketing business result improved in Q3/14 due to seasonally higher demand.

Outlook 2014

Market, regulatory and fiscal environment

For 2014 as a whole, we expect the Brent oil price to average around USD 100/bbl, despite recent volatility in the market, whilst the Brent-Urals spread is anticipated to stay relatively tight.  OMV Petrom guidance with regards to the 2014 CAPEX plans and production targets remains broadly unchanged. Due to the recent lower oil prices, we have started a process of reviewing our CAPEX projects, which will be announced together with the Group’s fourth quarter and 2014 preliminary results on February 19, 2015.  The gas and power regulatory framework is undergoing significant changes, with a strong impact on the company’s financial and operating results.  In Romania, the gas price for domestic production to be paid by regulated non-household customers in Q4/14 was set at RON 89.4/MWh (EUR 20.3/MWh), unchanged since April 1, 2014. The price for the regulated household segment for Q4/14 has been frozen at the Q3/14 level, i.e. RON 53.3/MWh (EUR 12.1/MWh). According to a new ANRE order the gas price deregulation for non-household consumers will be finalized until December 31, 2014, whereas the new deadline for gas price liberalization in the household sector foreseen by the Electricity and Natural Gas Law is June 30, 2021, instead of December 31, 2018. In 2014, gas demand in Romania is expected to be below 2013, and not to recover in the short term, which, combined with the lack of interconnections with neighboring countries, might put pressure on gas producers.  In the power market, prices continue to be under pressure in the context of overall stable electricity demand and increased production from renewables  According to new legal provisions in force, OMV Petrom must build and maintain increased levels of compulsory stocks of oil products, which exceed our current optimal inventory levels, with an impact on our net working capital.  Marketing volumes are expected to be challenged by increased competition and fuels taxation in Romania.  Given the long term cycle of investments in the oil and gas sector, the changes in the fiscal regime have a direct impact on the company’s business. The fuels excise increases implemented in January and April 2014 put additional pressure on marketing volumes in Romania. The new tax of 1.5% applied to the gross value of constructions creates difficulties for oil and gas investment; in this respect the authorities are considering reducing it to 1% from January 1, 2015.  We anticipate discussions with the Romanian authorities to achieve a long term, stable and investment-friendly taxation and regulatory framework, discussions that will tackle hydrocarbon taxes and the new supplementary taxation.

OMV Petrom Group

• OMV Petrom plans to invest over EUR 1.3 bn in 2014, of which approximately 85% will be dedicated to E&P (drilling development wells, field redevelopment projects, workover activities / subsurface operations and the Neptun Deep project);
• OMV Petrom strives for high HSSE standards and aims to continue reducing the lost-time injury rate.

Exploration and Production

• In order to stabilize production in Romania, we will further progress field redevelopment, drilling and workovers as well as operational excellence initiatives, also taking into account the operating environment;
• Continue our intensive operational activities: perform more than 1,400 workovers; Deliver approximately 140 new wells, out of which almost 50% are part of complex field redevelopment projects and exploration wells within the onshore partnerships;
• In Kazakhstan – further pursue water injection schemes in both the TOC and Komsomolskoe fields in order to secure reservoir pressure support and slow down the natural decline of production;
• Drill 10 conventional onshore and shallow offshore exploration wells, including exploration drilling under partnerships with Hunt Oil and Repsol;
• Joint-ventures with ExxonMobil: Neptun Deep – Drilling of the Domino-2 exploration well finalized and data from the well are being evaluated; results are expected in early 2015; Ocean Endeavour rig is currently drilling the Pelican South-1 exploration well; Midia – ongoing 3D seismic data interpretation.

Gas and Power

• The gas value chain will be optimized in an integrated manner so as to dynamically address challenges in the market and maximize value creation;
• We anticipate continued pressure on spark spread leading to a negative result of the power business in 2014; we aim to mitigate this by further exploring the opportunities offered by the ancillary services and balancing markets, capitalizing on the power plant’s operational flexibility.

Refining and Marketing

• We will further capitalize on the successful completion of the Petrobrazi modernization along the whole value chain in R&M; moreover, the refinery will continue to deliver on energy efficiency improvement measures;
• We will continue our fuel terminal network optimization program: reconstruction works at the Cluj terminal started at the beginning of June with the aim of being finalized end of 2015;
• Further pursue cost discipline and optimization of the downstream business.

(bvb.ro, November 6^th)