OMV held a conference call to discuss its 4Q11 results yesterday. We remain positive on both OMV and Petrom after recent developments, which include robust 4Q11 results, a faster-than-expected recovery in Libyan production, successful offshore exploration in Romania, attractive dividends and undemanding valuations. The highlights of the conference call were as follows:
(+) Largest gas discovery in OMV/Petrom’s history in offshore Romania: ExxonMobil and OMV Petrom confirmed a potentially significant gas discovery offshore Romania. The exploration well (Domino-1) encountered 70.7 meters of net gas pay, resulting in a preliminary recoverable resource estimate ranging from 1.5tcf to 3.0tcf (42bcm to 84bcm). This is very significant because if translated into reserves this would represent some 15-30% (or 23-45%) of the group’s (Petrom’s) current 2P oil and gas reserves. In terms of valuation, if translated to reserves, OMV (Petrom) would trade at EV/2P reserves of 10.8x-12.2x (4.5x-5.4x) versus the current 14.1x (6.6x). Although we continue to view this area as one of the most exciting plays within OMV/Petrom’s exploration portfolio, there are several questions that need to be answered and lots of money and working hours to be invested before production can start. OMV expects first production offshore Romania no earlier than the end of the decade, while the cost of exploration and development could reach several billion dollars. Moreover, there are no guarantees that the Neptun block will ultimately prove to be commercially viable. Admittedly, this depends as much on factors underground as above-ground (i.e. fiscal regime, natural gas prices in Romania, export opportunities, etc). However, it is in the interest of all stakeholders (i.e. Romania, neighbouring countries, OMV, ExxonMobile, etc.) to create a sufficient degree of security and confidence around the economics of the industry. Further steps, such as drilling follow-up wells, will be determined after the evaluation of the Domino-1 well results and the data collected through 3D seismic testing.
(+) Upbeat on Libya, downbeat on Yemen: Libyan production is now running at 85-90% of pre-crisis levels, significantly ahead of our estimate of 60% for full-year 2012. We estimate that a return to 90% of full production in Libya would represent roughly 7% upside to our 2012 EBIT forecast. OMV previously guided for 50% of pre-crisis levels in 2012 and as a result there could be even more upside to the consensus forecasts. While we expect to see earnings upgrades across the board, we are unlikely to see a pronounced increase in cash flow per barrel as each barrel of Libyan oil is heavily taxed. With an increase in volumes we also expect to see an uptick in the effective tax to around 30% (the higher end of the range) in 2012 versus an average 29% in full-year 2011. The security situation is Yemen is still uncertain and it remains to be seen whether OMV will be able to resurrect production and continue the development of the Habban field.
(=) Decision on Shah Deniz II commercial tender likely in mid- 2013: Recent information suggests a decision on the Azeri Shad Deniz II commercial tender will only arrive in mid-2013, implying a further significant delay in the Nabucco project. Moreover, we believe it is increasingly likely that the original Nabucco pipeline concept (i.e. from Austria to Turkey) will be challenged by the massive cost of the project and intensifying competition (i.e. TANAP, whose majority partner is SOCAR, the state oil company of the Azerbaijan Republic). This suggests Nabucco’s current route may be shortened to a section from Austria to Bulgaria rather than Turkey. The most recent cost estimates for Nabucco range from € 12bn to € 15bn, thus we would see the re-think (or even failure) of the pipeline as an opportunity for OMV: management and capital resources could be reallocated to upstream, which we believe would be welcomed by investors.
(=) After the test production incident, OMV expects the Brazi CCGT power plant (860MW) to start commercial operations in 2H12. Due to the import quota regulation, which stipulates that some gas used must be bought at import prices (20-30%) rather than solely using equity gas, we remain very conservative and estimate a € 20m (RON 100m) increase in EBIT in 2012.
(-) Petrol Ofisi’s performance is unlikely to improve in 2012 as margins look set to remain under intense pressure due to high oil prices and the disadvantageous fiscal environment (i.e. very high excise tax).
(=) Harsh weather in Romania will not have a significant negative impact on Petrom’s 1Q12 production, according to the company.