OMV Petrom Group: results for January – March 2017

Highlights Q1/17

• Strong free cash flow of RON 646 mn
• Clean CCS  Operating  Result  at  RON  767  mn;  more  than  half  from Upstream
• OPEX reduced to USD 5/boe

Mariana Gheorghe, CEO of OMV Petrom S.A.:

“In Q1/17, we were able to convert improved market fundamentals into a solid operational and financial performance. We recorded a substantially improved operating cash flow of RON 1.3 bn, which together with CAPEX reduction led to a free cash flow of RON 646 mn. Increased oil prices and higher retail demand for fuels, coupled with our continued cost discipline, were reflected in a Clean CCS Operating Result of RON 767 mn, almost half of the entire 2016 figure. In Upstream, we further reduced production costs, while production decline was in line with our 2017 guidance, helped by the contribution from the Lebada Est NAG project. The Downstream Clean CCS Operating Result increased by 3% yoy, due to improved overall performance, strict cost management, and supported by strong refining margins. Our Q1/17 Operating  Result  was  also  supported by  fiscal  easing  in  Romania,  in particular  the  elimination of the tax on special constructions starting January 2017. Overall, our  strong Q1/17 performance shows delivery in terms of operational excellence in all business segments, in line with our strategic objectives to enhance competitiveness in the existing  portfolio.”

Group performance

First quarter 2017 (Q1/17) vs. first quarter 2016 (Q1/16)

Compared  to  Q1/16,  sales  increased  by  27%,  supported  by  significantly  higher  oil  prices  and  increased gas and power sales volumes, which more than  offset  the  slightly  lower volumes of  petroleum  products sold and the decrease in gas prices. Downstream Oil represented 69% of total consolidated sales, while Downstream Gas accounted for 28% and Upstream for 2%  (sales  in  Upstream  being  largely  intra-group sales rather  than  third-party sales).

The  Clean  CCS  Operating  Result  of  RON  767  mn  improved  compared  to  RON  412  mn  in  Q1/16,  as  a consequence of a more favorable market environment and better demand. Clean CCS Operating Result for Q1/17 is stated after eliminating special income of RON 5 mn, and inventory holding gains of RON 26 mn.  In  turn,  the  Q1/16  figure  was  stated  after  eliminating  net  special  income  of  RON  111  mn  and inventory  holding  losses  of  RON  (177)  mn.  Starting  with  Q1/17,  special  items  include  temporary  effects from commodity  hedging  (in order  to  mitigate  Income  Statement volatility).

The  Group  Operating  Result  for  Q1/17  increased  to  RON  798  mn,  compared  to  RON  346  mn  in  Q1/16, driven mainly by higher sales revenues and the elimination of the tax on special constructions starting 2017,  while  Q1/16  benefitted  from  a  special  income  in  relation  to  the  final  court  decision  to  reduce  the fines  imposed  by  the  Competition Council in 2011.

The  net  financial  result  deteriorated  from  a  loss  of  RON  (3)  mn  in  Q1/16  to  a  loss  of  RON  (56)  mn  in Q1/17,  as  Q1/16  was  influenced  by  the  positive  outcome  of  the  company’s  appeal  to  the  fiscal  review decision  in the  Kazakh branch.

As a result, profit before  tax for Q1/17 of RON 742 mn was significantly higher compared with RON  343 mn recorded in Q1/16.

The  Income  tax  was  at  the  amount  of  RON  (124)  mn,  while  the  effective  tax  rate  was  17%  in  Q1/17 (Q1/16: 16%).

Net income attributable to stockholders of the parent was RON 619 mn, while clean CCS net income attributable  to  stockholders  was  RON  586  mn.  EPS was  RON  0.0109 in Q1/17  vs.  RON  0.0051  in Q1/16, while Clean CCS EPS was RON 0.0103 compared to RON 0.0058 in Q1/16.
Cash flow from operating activities increased to RON 1,262 mn from RON 888 mn in Q1/16, mainly as a result of higher profit before tax. Free cash flow after dividends showed an inflow of funds of RON 646 mn (Q1/16: outflow of RON 118 mn).

First quarter 2017 (Q1/17) vs. fourth  quarter  2016 (Q4/16)

Consolidated  sales  in  Q1/17  amounted  to  RON  4,653  mn,  1%  lower  compared  to  Q4/16,  mainly  due  to seasonally lower sales volumes  of petroleum  products,  as  well  as  lower volumes  of electricity  sold, which more than offset the positive  effect of higher quotations and of  increased  quantities of natural gas sold,  caused  by  colder  weather conditions.

The Clean CCS Operating Result increased from RON 453 mn to RON 767 mn, mainly reflecting lower exploration expenses and operating costs, as well as the elimination of the tax on special constructions starting 2017. The Clean CCS Operating Result is stated after eliminating special income of RON 5 mn and  inventory  holding  gains  of  RON  26  mn  (Q4/16:  special  charges  of  RON  (193)  mn  and  inventory holding gains of RON 75 mn).

The  Group  Operating  Result  increased  to  RON  798  mn  (Q4/16:  RON  335  mn),  as  the  Q4/16  result  was also influenced by special charges, mainly in relation to the reassessment of receivables and provisions.

The  net  financial  result  improved  from  a  loss  of  RON  (102)  mn  in  Q4/16  to  a  loss  of  RON  (56)  mn  in Q1/17, influenced by the lower FX negative effect in relation to bank loans denominated in EUR.

As  a  result,  profit  before  tax  for  Q1/17  of  RON  742  mn  was  well  above  the  RON  233  mn  recorded  in Q4/16.

Net income attributable to stockholders of the parent in Q1/17 was RON 619 mn, compared to RON 162 mn  in  Q4/16,  while  clean  CCS  net  income  attributable  to  stockholders  increased  to  RON  586  mn  from RON 263 mn in Q4/16. EPS was RON 0.0109 in Q1/17 vs. RON 0.0029 in Q4/16, while Clean CCS EPS was RON 0.0103 compared to RON 0.0046 in Q4/16.

Cash  flow  from  operating  activities  amounted  to  RON  1,262  mn,  higher  than  the  Q4/16  level  of  RON 1,070 mn. Free cash flow after dividends amounted to RON 646 mn (Q4/16: RON 432 mn).

Statement of financial position and capital expenditure

Capital   expenditure   decreased   to   RON   353   mn   (Q1/16:   RON   769   mn),   mainly   due   to   reduced expenditures from Neptun Deep and the finalization of some FRD projects in 2016.

Upstream  investments  in  Q1/17  were  RON  324  mn,  compared  to  RON  710  mn  in  Q1/16.  Downstream investments  amounted  to  RON  29  mn  (Q1/16:  RON  59  mn),  thereof  RON  28  mn  in  Downstream  Oil (Q1/16: RON 58 mn). Corporate and Other CAPEX was RON 1 mn (Q1/16: RON 1 mn).

Compared to December 31, 2016, total assets increased by RON 186  mn,  to  RON  41,600  mn,  mainly  driven by a higher cash and cash equivalents position, which  more  than  offset  the decrease in  non-  current assets. The slight increase in intangible assets by RON 21 mn, which is mostly related to the operations at the Neptun  Deep block in the  Black Sea, was more  than  offset by  the  net decrease  of  RON 462 mn in property, plant and equipment, as depreciation and  impairments  exceeded investments  during  the period.

Equity increased to RON 27,329 mn as of March 31, 2017 compared to RON 26,706 mn as of December 31, 2016, as a result of the net profit generated in the current period. The Group’s equity ratio of 66% as of end-March 2017 was slightly higher than at end-December 2016 (64%).

Total interest bearing debt slightly increased from RON 1,550 mn as of December 31, 2016 to RON 1,570 mn as of March 31, 2017.

The Group’s liabilities other than interest bearing debt decreased by  RON  457  mn,  predominantly  as  a result of  lower  trade  payables,  broadly reflecting  the  reduction in capital expenditure.

Due  to  the  significant  cash  balance  at  March  31,  2017,  OMV  Petrom  Group  maintained  a  net cash position of RON 872 mn (December 31, 2016: RON 237 mn).

Cash flow

In Q1/17, the inflow of funds from profit before tax, adjusted for non-cash items such as depreciation and impairments, net change of provisions and other non-cash adjustments, as well as net interest and income  tax  paid,  was  RON  1,438 mn  (Q1/16:  RON  942 mn),  while  net  working capital generated  a cash outflow of RON 176 mn (Q1/16: RON 54 mn). The Cash flow from operating activities increased by RON 374 mn compared to Q1/16, reaching RON 1,262 mn.

In Q1/17, the cash flow from investing activities resulted in an outflow of RON 616 mn (Q1/16: RON 1,007 mn) mainly related to payments for investments in intangible assets and property, plant and equipment.

Free cash flow (defined as cash flow from operating activities less cash flow from investing activities) showed an inflow of funds of RON 646 mn (Q1/16: outflow of RON 118 mn). Free cash flow less dividend payments resulted in a cash inflow of RON 646 mn (Q1/16: outflow of RON 118 mn).

The  Cash  flow  from  financing  activities  implied  a  net  inflow  of  funds  amounting  to  RON  9  mn  (Q1/16: outflow of RON 41 mn), reflecting higher cash pooling balances payable to  the  associate  (OMV  Petrom  Global Solutions), which more than offset the repayment of the tranche from the loan from the European Investment Bank.

Risk management

The scope of OMV Petrom’s business activity, both existing and planned, and the markets in which the company  operates  inherently  expose it to significant  commodity  price,  foreign  exchange,  operational   and other risks. A detailed description of risks and risk management activities can be found in the 2016 Annual Report (pages  55-57).

In 2017, the main uncertainties which can influence the company’s performance remain the commodity price risk, operational risks as well as political and regulatory risk. The commodity price risk is being monitored constantly for developments and, when appropriate, protective measures are undertaken (e.g. entering into hedging agreements).

Through the nature of its business of extracting, processing, transporting and selling hydrocarbons, OMV Petrom is inherently exposed to safety and environmental risks. Through the company’s HSSE and risk management programs, OMV Petrom remains committed to be in line with industry standards.

In terms of political and regulatory risk, the company is in  dialogue  with  the  Romanian  authorities  on  topics of  relevance for  the industry.

Also refer to the Outlook section of the Director’s report for more information on current risks.

Outlook for the full year 2017

•  Market, regulatory and fiscal environment
• Average Brent oil price expected to be USD 55/bbl; Brent-Urals spread  anticipated  to  slightly decrease  yoy;
• Gas demand in Romania estimated to remain broadly flat yoy, with high competition and margin pressure;
• Starting April 1, 2017, gas producers are released from the obligation to supply households with priority. ANRE will no longer set the price at  which  domestic production will be sold by producers; however, the regulator will  continue  to  set  the  end  prices  for  households  until  June  30, 2021;
• Power demand  anticipated to  be  relatively  stable yoy, with  positive  average spark  spreads;
• Refining margins projected to be on a similar level yoy; following a strong performance in Q1/17, refining margins are expected to trend downwards for the rest of the year; lower product prices resulting from fiscal easing in Romania will continue to support market demand;
• Taxation:

1. Starting April 1, 2017, the RON 72/MWh floor considered for computing the 60/40 tax on revenues from gas price liberalization was replaced with the realized gas price;
2. Further developments are expected with respect to upstream oil and gas taxation, with public consultations  still to  take place;
3. A stable, predictable and investment-friendly fiscal and regulatory framework is a key requirement for  our  future  investments,  both onshore  and offshore

OMV Petrom Group

• OMV Petrom expects to generate  a  positive free cash flow after dividends,  through  continuous cost  discipline;
• CAPEX (including capitalized  exploration  and  appraisal)  currently  anticipated  to  be  around EUR 8  bn, about 40%  higher  yoy, with  approximately 85%  dedicated to Upstream;
• We aim  for  a sustainable cost base with  potential  upside from ongoing efficiency programs.

Upstream

• Daily average production  decline  up to  3% yoy,  not  including portfolio  optimization  initiatives;
• Portfolio optimization: closing the 19 marginal fields transfer by mid year; initiating further field divestments;
• Production and development: estimated 1,000 workovers and around 70 new wells for 2017;
• Exploration: ten wells  planned to  be  spudded until  year

Downstream

• Maintaining a refinery utilization rate above 90%;
• We strive to maintain gas sales volumes at around 50 TWh, against the backdrop of overall lower offtake by the Brazi power plant;
• Due to the steam turbine transformer failure on April 21, 2017, coupled with the previously announced failure of one gas turbine transformer, the Brazi power plant is currently unavailable. From today’s perspective, we will be able to resume operations in Q3/17;
• Dorobantu wind  park divestment: aimed to be finalized until  year-end.