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OMV bets on chemicals

The Austrian company is accelerating its pivot from the upstream to the down

Central European oil and gas firm OMV completed at the start of November the $4.7bn acquisition of an additional 39pc share in Austrian chemical company Borealis, increasing its stake to 75pc. The deal makes OMV the largest producer of olefins in Europe and one of the largest polyolefin producers worldwide.

The firm’s CEO, Rainer Seele, hails the move as “a decisive step in our transformation to position OMV successfully for the future”, both for its diversification and also as a lower-carbon strategy for a producer that is largely eschewing a significant move into renewables.

“On the one hand, we are convinced that chemicals and polymers will be without any doubt… needed in 2050 and beyond,” says Seele. “On the other hand, with this transaction our portfolio changes towards non-energy low-emission products, as [the fossil fuels] are not burned. Chemicals are an important pillar of our scope three emissions intensity reduction strategy.”

$4.7bn – OMV acquisition of additional Borealis stake

OMV sees expansion down the value chain into chemicals not just as greater penetration into an attractive growth market but also as improving its natural hedge against cyclicality. In the first nine months of 2020, the firm’s operating cash flow (excluding Borealis dividends) amounted to €2.3bn ($2.7bn), down by c.20pc, mainly due to a lower contribution from its upstream business. In contrast, Borealis’ operating cash flow was 6pc higher year-on-year.

Refining pain

And the protection of what Seele calls “our integrated and diversified value chain” is particularly important given a continuing difficult outlook for a number of the firm’s divisions, not least refining. At slightly below $1/bl, OMV’s European refining indicator margin reached its lowest level in ten years in the third quarter of 2020—a decline of 84pc compared with the third quarter of 2019 and down by 61pc quarter-on-quarter.

The main reason for the refining margin’s collapse, says Seele, is significantly lower middle distillate cracks, which in September reached their lowest level in 20 years. With air traffic still subdued, high jet blending while refinery utilisation rates have remained resilient has led to a significant oversupply situation.

Nor is OMV expecting rapid improvement. The record third-quarter low dropped the refining indicator margin for January-September 2020 as a whole to $2.70/bl. “As we do not expect an increase in jet fuel demand, which burdens the middle distillate spreads. We now assume an indicator refining margin of c$2.50/bl for the full year,” says Seele.

The firm was able to run its refineries at 90pc of capacity in the third quarter, up from just 79pc in Q2 on a demand recovery in retail and petrochemicals. But the run-rate was still below the 96pc achieved in the third quarter of 2019. Similarly, total refined product sales improved quarter-on-quarter but remained down by 16pc year-on-year, driven mainly by a significant drop in jet fuel volumes.

“With this transaction our portfolio changes towards non-energy low-emission products, as [the fossil fuels] are not burned” Seele, OMV

“The integration of our strong retail network and the forward integration into petrochemicals, which allowed us to crack jet fuel into monomers, enabled us to run our refineries above the European average of around 70pc,” says Seele. But, for 2020 as a whole, he expects the utilisation rate of OMV’s European refineries to be c.85pc, with a planned three-week turnaround at its Schwechat refinery impacting on fourth-quarter rates.

Sell-off

The splurge on chemicals has increased gearing that OMV will now look to reduce through divestments. In late September, it followed the popular oil producer strategy of selling off non-core infrastructure, signing an agreement to sell its 51pc stake in pipeline network Gas Connect Austria to utility firm Verbund, reducing its net debt by more than €570mn when the deal closes in the first half of 2021.

But the upstream is a significant focus for divestment. In New Zealand, OMV expects to close the sale of the Maori field by the end of this year. It is “also making good progress regarding the intention to sell our Kazakhstan assets, as well as the oil fields in Malaysia”, says Seele.

It has received binding offers and started negotiations with a shortlist of interested parties for its retail fuel network in Germany and expects a sale by the end of this year. And Seele will also “start a dialogue with the Borealis management”, with a view to announcing by the end of 2020 or early in 2021 a package of non-core assets it might sell from its new acquisition.

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