OMV strategy overhaul: key priorities
- Written by Vlad-Adrian Iancu
During the latest meeting of the OMV Executive Board, Dr. Rainer Seele, OMV Chairman of the Executive Board and CEO, stated that the process of making the Group fit for the future of the industry has already started. Careful examining of the situation, market and following challenges has taken place and the wheels are already in motion: OMV is ready, come what may.
Key steps have been taken and the priorities for the company stand as follows: safeguarding cash flow, a sustainable resource base in the Upstream business, a further increase of competitiveness in the Downstream Oil division and restructuring the Downstream Gas business. The finish line for every project is, obviously, improved profitability.
The team at OMV stated from the very beginning that difficult years are ahead, not only for them, but for the whole industry, seeing as the price for oil is at an all time low and it continues to stagnate. Below, a list of options and focuses, as presented by Dr. Rainer Seele (photo), that will serve in making OMV a top contender for years to follow.
In regard to the matter of safeguarding cash flow it was made clear that the main focus will be on investments, exploration expenditure and operating costs. There is no target in sight for headcount reductions, but the option is not off the table for the time being. The first course of action will be to cut the investments still further so that by 2016 there will be a reduction of around 40% to 2.4 billion Euro, compared to 2014, the most recent year of high oil prices. In tandem with this, a drastic cut in expenditure for exploration and appraisal will be undertaken. This means a reduction of roughly 60% from 2014 to 2017, from 700 to 300 million Euro. Other cuts, measures and efficiency enhancements will yield around 300 million Euro by 2017. Non strategic assets will be sold in order to generate additional funds and stabilize cash flow. Pertaining to the matter is the announced sale of a minority stake of up to 49% in the regulated pipeline business Gas Connect Austria and selling of up to 100% in the Turkish subsidiary OMV Petrol Ofisi. The Turkey strategy is still on hold since the takeover in 2006. All these measures serve at generating a broadly neutral free cash flow after dividends.
On what concerns the upstream business, their goal is to secure sustainable production for OMV. In short, this means to fully replace all the reserves they produce. Core regions are Austria, Romania, the North Sea, Middle East and Africa. Ramping up production volume at any price is now obsolete. The focus is on highly profitable barrels: profitability has priority over production growth. The plan is that by 2020, 90 to 95% of upstream investment will go towards maintaining production at around 300,000 barrels per day and, depending on the political climate, it will also revive production in Libya and Yemen. 5 to 10% is set to be invested in the Achimov IV and V projects. A production increase of around 20% to 360,000 barrels per day can be achieved on condition that productivity in Libya and Yemen gets back on track and the entry in Russia is successful by way of an asset swap with Gazprom. Russia should be established as an additional core region by 2020 as a result of the planned entry into production in the cost efficient Urengoy field. Current data indicate that the company will acquire additional reserves of approximately 600 million barrels: the equivalent of more than five times the OMV production for 2015. More prospects are presently emerging from Iran and OMV is intensifying its close cooperation with IPIC, core shareholder in Abu Dhabi. The joint Shuwaihat project with ADNOC is just one of the additional prospects in the area.
Another core element of the OMV portfolio is the Downstream Oil segment. Following various restructuring measures, the goal is now to build on the division’s strong competitiveness. Downstream Oil is still a cash generator and the focus is the optimal capacity utilization of the refineries. Furthermore, Downstream Gas restructuring is already underway. If all goes according to plan, the full takeover of EconGas should lead to a streamlining of structures and a significant increase of gas sales volumes. This will allow greater capacity utilization of the recorded infrastructure capacities. Another investment is the Nord Stream 2, a project with an attractive, non regulated return, which increases security of supply to Europe. This is linked to the strengthening of Gas Connect Austria, as a large share of the gas that comes through Nord Stream 2 to Europe will be distributed via the Baumgarten gas hub.
The conclusion is a simple one: OMV Group has already taken safety measures in order to face a tumultuous future.