OMV Aktiengesellschaft

Transcription

1 FIXE D INCOME RESEARCH COR P O R A T E S OMV Aktiengesellschaft Underweight FIBER SCORE: A3 The Oil Prince amongst Kings MOODY'S S&P FITCH A3 - A- Sven-Erik Schipanski Senior Analyst sven-erik.schipanski@berenberg.com Theresa Süsser Research Assistant theresa.suesser@berenberg.com 1 July 2013 Mid cap: oil & gas ISSUE R PROFILE

2 For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.

3 Table of contents The Oil Prince amongst Kings 1 Executive summary 2 Background information 2 Strengths and weaknesses 3 Credit Metrics 4 Investment drivers 5 Purpose 5 Payback 6 Risk & competitive analysis 7 Structure 11 External ratings and FIBER Score 12 Valuation 14 Financial health checklist 16 Growth 18 Company background 20 Financial statement 25 Contacts 31

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5 OMV Aktiengesellschaft Mid cap: oil & gas (full coverage) MOODY'S/ S&P/ FITCH: (A3/ --/ A-) The Oil Prince amongst Kings OMV AG, Austria s largest listed industrial company, operates in Exploration & Production, Gas & Power and Refining & Marketing of oil and gas, mainly in Southeastern and Central Europe as well as the Middle East. Key success factors in the by supermajors and majors dominated integrated oil & gas industry are access to licenses, proven reserves and financial strength. Mid-sized OMV s competitive quality in this market is based on long-standing experience and success rates in exploration leading positions in its core markets Austria, Romania and Turkey its excellent location to become Western Europe s major energy hub but hampered by i) pressured gas and oil downstream markets in recessionary Western Europe ii) low proven reserves and an insufficient reserve replacement rate iii) size-related cost disadvantages which the company countervails with i) investments in attractive growth markets (Turkey and CEE/SEE) ii) high impact targets (high risk/ high return) iii) the strategic shift to ROCE strong E&P Besides these business risks, the exposure to political, legal and social instable markets significantly threatens OMV s production. The issuance of bonds was initiated in 2009 under the EMTN program in order to strengthen OMV s financial position reflected by o competitive participation in the existential granting of licenses o the solid investment grade rating by Moody s (A3) and Fitch (A-) o Berenberg s A3 FIBER Score fund acquisitions and will be paid back as a mixture of cash flows and refinancing. OMV s ASW trades significantly below the spread levels of some sector peers in the same rating class, although proven reserves, reserve life index and RRR are below industry average. Berenberg therefore initiates the coverage with an underweight recommendation. Y/E Dec. 31, EURm e 2014e Sales 17,917 23,323 34,053 42,649 43,178 44,157 EBITDA 2,735 3,905 4,120 5,139 4,975 5,299 EBIT 1,410 2,334 2,494 3,104 2,986 3,244 Net profit ,079 1,363 1,206 1,408 Y/E gross debt (cash) 4,573 6,476 5,891 5,811 5,724 5,638 Y/E net debt (cash) 3,843 5,436 5,512 4,328 3,528 3,480 Adj. Y/E net debt (cash) (1) 5,303 6,860 6,913 5,855 5,135 5,068 Equity ratio 46.9% 42.8% 45.9% 46.4% 47.1% 48.0% Adj. equity ratio (2) 46.8% 40.3% 43.4% 44.0% 44.9% 45.8% Adj. net debt/ EBITDA 1.8x 1.7x 1.6x 1.1x 1.0x 0.9x Adj. EBITDA/ interest 8.6x 11.1x 11.3x 12.9x 12.3x 13.7x FFO/ gross debt 43.8% 37.6% 41.8% 48.7% 49.7% 49.2% Gross margin 16.7% 16.7% 13.1% 12.5% 10.9% 12.0% EBITDA margin 15.3% 16.7% 12.1% 12.1% 11.5% 12.0% EBIT margin 7.9% 10.0% 7.3% 7.3% 6.9% 7.3% RoE 7.1% 10.1% 10.3% 11.8% 10.0% 11.0% RoCE 7.9% 11.8% 11.2% 13.2% 12.3% 13.0% Operating cashflow 1,847 2,886 2,514 3,813 3,851 3,509 Free cashflow (3) ,328 1, FFO 2,004 2,974 3,046 3,576 3,643 3,558 Capex 2,206 2,088 2,462 2,485 2,799 2,702 Rating history (4) A3/A- A3/A- A3/A- A3/A- A3/A- -- Source: Company data, Berenberg; Remarks: 1) Net debt incl. op. lease & pension provisions 2) post goodwill 3) post maintenance capex 4) the lower respective agency rating/ Berenberg s FIBER Score FIBER Score: Outlook Bond/recom. A3 st. ASW/Price/Yield Vol. OMVAV 4 3/8 02/20 36/112.1/ Underweight OMVAV 5 1/4 06/16 50/114.7/ Underweight OMVAV 4 1/4 10/21 60/114.3/ Underweight OMVAV 2 5/8 09/22 63/100.5/ Underweight (Pricing: 28/06/2013 BGN Close) Moody's Rating/ Outlook: A3/ st. S&P Rating/ Outlook: --/ -- Fitch Rating/ Outlook: A-/ st. Financial calendar: Q2 Aug. 13 Changes 2013E 2014E old % old % Sales EBITDA ND/ EBITDA 1.0x +0.0x 0.9x +0.0x Bloomberg: OMVAV 4 3/8 02/20 Cash bond vs. peers (Source: Bloomberg) Historic spread development: 1y 6M 1M -38 bps -16 bps +3 bps Business activities: Exploration & Production of oil and gas Gas & Power Refining & Marketing Additional data: Market capitalization (EURm): Total bond vol. outst. (EURm): Authorized capital (m pcs): 50.6 Management: Gerhard Roiss (CEO) David C. Davies (CFO) Supervisory Board: Rudolf Kemler (Chairman) Wolfgang C. Berndt (Deputy Chairman) Shareholder structure: 31.5% ÖIAG (Österr. Industrieholding AG) 24.9% IPIC Intl Petrol. Investm. Co. Abu Dhabi 0.3% Own shares 43.3% Free float 1 July 2013 Sven-Erik Schipanski sven-erik.schipanski@berenberg.com 1

6 Executive summary Background information The OMV Group, a leading integrated oil and gas company, operates worldwide, with focus on Europe, in three core fields: o Exploration & Production o Gas & Power o Refining & Marketing Strengths and weaknesses Credit metrics clearly in line with investment grade The Vienna-based OMV Group is Austria s largest stock listed industrial company in terms of sales ( 43bn), employees (ca. 29,000) and market capitalization ( 12.2bn). Business activities include the exploration and production of oil and gas (13% sales share), the operation of a gas infrastructure (25%), and the supply of energy (62%) via filling stations and refineries. Austria s largest listed industrial company Source: Company data, Berenberg Fixed Income Research; *incl. consolidation 2

7 Established in 1956 as a state owned company, OMV has developed to an internationally operating company with leading positions in its core markets Central and Southeastern Europe, following a series of acquisitions. Although OMV operates worldwide, Austria, Germany, Romania and Turkey accounted for 77% of total sales in OMV s Profitable Growth strategy focuses on upstream (E&P) growth, integrated gas (G&P) and downstream (R&M) restructuring. Regional Sales Rest of world 8% Segmental Sales Co&O* 1% E&P 12% Domestic 37% G&P 25% Rest of Europe 55% R&M 62% Source: Berenberg Fixed Income Research, Company data; *incl. consolidation E&P accounted for 13% of sales and the bulk (87%) of EBIT in E&P focuses on two core countries (approx. 70% of total production), Austria and Romania, and has a balanced international portfolio. In 2012, OMV produced 303k boed/d on average and had proven reserves of 1,118m boe at year end. While G&P generated 25% of sales, its EBIT share amounted to only 1% in G&P is positioned in Central and Southeastern Europe and main operator of Austria s gas infrastrucutre. In 2012, one third of Russia s gas exports to Western Europe flowed through Austria. Ca. 437TWh of gas were sold in In 2012, R&M accounted for 62% of total sales and contributed 417m to the Group s EBIT, equivalent to a share of 13%. R&M has a refining capacity of 22m t annually and operated refineries in Austria, Germany and Romania as well as a network of 4,400 filling stations in 13 countries by the end of Strengths and weaknesses Strengths Weaknesses Sensible focus on and majority of investments in E&P (26% ROACE) and downsizing of R&M (6% ROACE) Geographical focus on attractive European growth markets (Turkey and CEE/SEE) OMV is a major player in its core markets Romania, Austria and Turkey Excellent location to be the major hub for energy provided by Eastern Europe and consumed by Western Europe Capital intensive industry entails high entry barriers and thus prevents emergence of new competition Comfortable cash position secures financial flexibility Large excess free cash flow after CAPEX and dividend payments Very sound leverage ratios: OMV generates sufficient funds to meet financial obligations; 1x leverage in 2012 OMV is a rather small international top 30 player with above average production costs Relatively low proven reserves replacement rate (RRR) compared to other players Exposure to political and social instable regions (e.g. 10% of total production in Libya) has already led to production disruptions and business deteriorations in the past (nevertheless 80% of production is in and OECD countries) Relatively low gross profit margin because cost of goods sold react more immensly to commodity price fluctuations than sales Pressured profitabiliy in gas and downstream markets, driven by oversupply and the decoupling of long-term oil-linked contract and hub prices Recovery of recessionary Western Europe not in sight Growth is dependent on commodity prices, hence, sales fluctuate with variations in oil and gas prices Source: Berenberg Fixed Income Research 3

8 Credit Metrics In the course of the crisis, OMV s sales sharply dropped, mainly oil price related, in 2009 (-30% vs. 2008), but recovered in 2010 and went back on its growth path in subsequent years, thanks to investments in Southeastern Europe and the Caspian region. In line with the drop in sales, EBITDA declined in 2009, but steadily increased again during the coming years. The company started the refinancing of its bank debt by the issuance of bonds in Net debt exceeded 5bn in 2010 and 2011, mainly because further bonds were issued to finance major acquisitions. Consequently, Adj. net debt/ EBITDA increased to 1.8x in 2009, quickly recovered and declined to 1.1x in 2012 EBITDA/ gross interest expenses sharply declined to 8.1x in 2009, then steadily improved again to 12.4x in 2012 Overall, OMV s leverage ratios are very sound, indicating that the company owns sufficient funds to meet its financial obligations. Net debt/ EBITDA and adj. net debt/ adj. EBITDA peaked at 1.4x and 1.8x, respectively, in Leverage quickly recovered, followed by a sharp decline to 0.8x and 1.1x, respectively, in 2012, mainly because of a reduction in short- and long-term liabilities to banks due to working capital inflows. 8,000 Net debt / EBITDA 2.0x 8,000 Adj. net debt/ adj. EBITDA 2.0x 6, x 6, x 4, x 4, x 2, x 2, x Net debt (in EURm) EBITDA (in EURm) Net debt/ EBITDA (rhs) Source: Berenberg Fixed Income Research, Company data 0.0x Adj. net debt (in EURm) Adj. EBITDA (in EURm) Adj. net debt/ adj. EBITDA (rhs) 0.0x Gross interest expenses show a continuous slight increase over time. Because of the decline in EBITDA in 2009, EBITDA/ gross interest expenses dropped but then slowly recovered, reaching 12.4x in FFO/ gross debt bottomed out at 37.6% in 2010 following a capital increase and the issuance of a hybrid bond. Gross debt started to decrease again in 2011, while FFO steadily increased in line with an increase in net profit, resulting in a shorter payback period. Overall, the level of FFO/ gross debt (52.1% in 2012) looks very comfortable. 8,000 FFO/ Gross debt 80% 6,000 EBITDA/ Gross interest expenses 16.0x 6,000 60% 4, x 4,000 40% 3, x 2,000 20% 1, x FFO (in EURm) Gross debt (in EURm) FFO/ gross debt (rhs) Source: Berenberg Fixed Income Research, Company data 0% EBITDA (in EURm) Gross int. exp. (in EURm) EBITDA/ Gross int. exp. (rhs) 0.0x 4

9 Investment drivers Purpose Senior bonds strengthened financial profile after the crisis in 2009 The 2010 & 2011 issues funded external and organic growth The 2011 hybrid bond improved the equity ratio The 2012 issues optimized the debt maturity structure OMV initiated the issuance of bonds in 2009 and has currently six Senior and one hybrid bond outstanding with a combined amount of 4,200m. The company s debt comprises: 700m, issued in 04/09 with a coupon of 6¼% p.a., due 04/14 250m, issued in 06/09 with a coupon of 5¼% p.a., due 06/16 500m, issued in 02/10 with a coupon of 4 3 / 8% p.a., due 02/20 750m hybrid bond, issued in 05/11 with a coupon of 6¾% p.a. until 04/18, reset fixed rate until 04/23, thereafter floating fixed rate with a 100bp step up 500m, issued in 10/11 with a coupon of 4¼% p.a., due 10/21 750m, issued in 09/12 with a coupon of 2 5 / 8% p.a., due 09/22 750m, issued in 09/12 with a coupon of 3½% p.a., due 09/27 The bonds, issued under the Euro Medium Term Note program (EMTN) of 4bn, mostly served the purpose of strengthening the company s financial profile after the crisis, funding acquisitions and investments for future growth, and optimizing the debt maturity profile. In line with the equity raising in 2011, the issuance of the hybrid bond mainly intended to increase equity and hence to improve the equity ratio in order to preserve the single A rating. Major expansions in the last decade included the acquisition of majority stakes in the Romanian oil and gas group Petrom in 2004 and in the Turkish oil and gas company Petrol Ofisi in 2006 and 2010, the acquisition of the exploration and production businesses of Preussag Energie in 2003, of Petronas (Pakistan) in 2010, and of Pioneer (Tunisia) in 2011, and the entry into the power business Debt maturity structure 8% 4% Yield curve 750 6% 3% 500 4% 2% 250 2% 1% Bonds in m German Loan Notes in m US Private Placements in $m Bond coupon Source: Berenberg Fixed Income Research, Company data 0% 0% Mid yield to maturity 5

10 Payback Positive free cash flow after dividends paid expected 30% gearing ratio target leaves room for further leverage Generally, OMV generates a solid free cash flow and has already exceeded its gearing ratio target. Berenberg expects the maturing debt obligations to be paid back out of a mixture of cash flow and refinancing. The company s commitment to maintain a strong investment grade rating and to achieve a ROACE of 13% under average market conditions coupled with a solid free cash flow most probably ensures the payback of maturing debt obligations. OMV set a long-term gearing ratio target of less than or equal to 30%. The gearing ratio adjusted by Berenberg (including short-term other financial liabilities and partly the hybrid bond) nearly reached this target in 2012 (31%) and is expected to lie below it (27%) in The reported gearing ratio of 15% in the first quarter of 2013 leaves room for a higher leverage within the company s gearing target. 60% 45% 30% 15% Gearing Ratio % Q1 2013/ e Gearing ratio as reported 2013e Free cash flow Gearing ratio adj. by Berenberg* Dividends paid Free cash flow after dividends Source: Berenberg Fixed Income Research, Company data; *incl. short-term other financial liabilities and partly the hybrid bond With the exception of 2011, OMV was able to generate a positive free cash flow, even after dividends paid, during the last three years. The company s long-term payout ratio target is set at 30% of net income. The relatively low free cash flow in 2011 was mainly driven by a large increase in W/C. The asset sale in the R&M business in 2012 led to a W/C reduction of 690m and resulted in a substantial increase in free cash flow ( 1,328m). OMV is expected to generate a relatively high free cash flow after dividends in the future, mainly because further asset sales in R&M of up to 1bn are planned ( energize OMV ) until The excess free cash flow ( 702m in 2012) can be used to largely payback the maturing obligations. However, it could also be utilized in case of the emergence of good acquisition opportunities. OMV is partly owned (31%) by the Austrian government. When push comes to shove, the government has already shown its commitment with its participation in the capital increase in 2011 due to OMV s substantial role as an energy provider, which may indicate also future support for the company if necessary. 6

11 Risk & competitive analysis In the by supermajors and majors dominated oligopolistic integrated oil & gas industry, the competitive quality of midsize OMV in exploring, producing and refining a scarce commodity product is based on o long-standing experience and success rates in exploration o leading positions in its core markets Austria, Romania and Turkey o its excellent location to become the major hub for Eastern energy The competitive quality is hampered by o the low proven reserve life coupled with an insufficient reserve replacement ratio (RRR) o the competitive granting of licenses o partly political, legal and social instable business regions Berenberg views shareholder driven strategic changes as key risk to bond holders Once hydrocarbon resources are identified and exporable, it is a fine market to be in given that oil and gas are the world s major, highly demanded energy sources. On the other hand, most resources are found in regions of high political instability or deep water regions, making production both risky and capital intensive. Currently stagnating Western European markets, a pressured gas business and demanding oil downstream markets leave companies with the challenge to The big picture in a nutshell find reserve rich exploration targets to secure production and proven reserves strategically focus on high return segments to countervail pressured margins invest in attractive growth markets outside Western Europe Size matters as differentiation in a commodity market is virtually non-existent, i.e. output prices are dictated by the market place (commodity brent oil and linked to that gas). Therefore, cost control is crucial. In such a market, the key success factors are a) access to licenses newly or re-contracted in order to be able to explore and discover hydrocarbon resources b) proven reserves and a sufficient reserve replacement ratio (RRR) in order to sustainably grow and secure long-term energy production c) financial strength especially an efficient and stable cost structure, in order to endure the costly process of licenses granting and profitably explore hydrocarbon resources OMV, as mid-sized player in an oilgopolistic and highly capital intensive industry, seems to be in an unfavorable position regarding most of these success factors. However, the company tackles these issues by its new strategy. 7

12 High impact targets shall increase the key success factor proven reserves Proven reserves secure the survival of companies in the oil & gas industry and are hence a key success factor. To sustain the life and thus the level of proven reserves, a 100% reserve replacement ratio (RRR) is necessary. OMV is, with a proven reserves life of 10 years (2012), rather below industry average. The current 3-year average RRR amounts to 79% (thereof 60% Romania & Austria and 122% international), resulting in a steady decline of proven reserves a major business risk. OMV responds to this risk by ambitiously targeting a 100% RRR for In order to achieve this target, OMV, next to applying new technologies in mature fields, increasingly focuses on investing into large, high impact (high risk/ high reward) targets that are totally unexplored and eventually turn out to be game changers. These targets however, encounter a higher risk of non-discovery and thus imply a lower success rate (10-20% compared to favorable 60% for exisiting fields). Berenberg thinks that high impact targeting is inevitable regarding OMV s competitive position in terms of proven reserves. Focus on game changer targets to increase RRR lowers success rate year average (RRR) 125% 15 Proven reserves life in years (2011) % % Reserves in bn boe Group RRR Austria & Romania RRR International RRR Source: Berenberg Fixed Income Research, Company data 50% 0 ExxonMobil BG Group BP Total Eni Occidental Shell Chevron Hess Apache OMV Tullow Anadarko Talisman Statoil Sufficient financial power in competitive license granting Being awarded exploration licenses is critical for future growth. Large players in the oil and gas industry with great financial resources and thus high financial flexibility increase competition in the process of exploration license granting. However, OMV s sound credit metrics reflect the company s healthy financial profile and therefore sufficient financial strength in order to be able to keep up with the competition. The financial power, also indicated by the stable A Rating, makes OMV a serious bidder in auctions for exploration licenses. The uncertainty of probable reserves makes it difficult to derive the optimal license price. To prevent overpayment, calculations are based on a 13% ROACE. Granting of licenses process requires financial strength Business disruptions caused by political, legal and social instability As a consequence of its geographic focus on primarily Southeastern Europe and the Middle East, OMV is exposed to political, legal and social instability causing: Disruptions in the exploration and production of oil and gas Dependence on the award of exploration licenses in Libya, Tunisia, Egypt, Pakistan, Yemen and the Kurdistan Region of Irag and Kazakhstan Corruption, bureaucratic inefficiency and lack of transparency Deficiencies of the legal system Political, social and legal instability may disrupt OMV s business 8

13 Berenberg especially views the company s high exposure to Libya (10% of total production) as problematic. OMV already had to lay down operations in North Africa and the Middle East during the Arab Spring, which entails the risk of a repetitive 10% production loss in the future. Baumgarten ideal to become major hub for Eastern energy OMV has an excellent location (Baumgarten) to become the major hub for energy provided by Eastern Europe and the Middle East and consumed by Western Europe. Due to the disappointing decision about Nabucco West by the Shah Deniz II consortium, the realization potential to become the major European energy hub has been attenuated. Potential to become major hub for Eastern energy Strategic ownerships and shareholdings enable new growth opportunities Next to possible support by the Austrian government, OMV s strategic cooperations enable growth in new markets. The second largest shareholder, IPIC, strengthens the company s position in the Middle East and serves as foundation for political relationships with the United Arab Emirates. A change in shareholdings is viewed as major business risk by Berenberg. Changes in shareholdings could threaten political relationships Strategic focus on E&P to strengthen OMV s cost structure Sales in the oil & gas industry are primarily driven by commodity price fluctuations and variations in the USD exchange rate. Accordingly, rising crude oil and natural gas prices lead to industrywide increasing sales and vice versa, indicating little to none differentiation potential and emphasizing the importance of careful cost management. Production costs above average, partly owing to size-related lower economies of scale, hence weaken OMV s competitive quality. In this context, the strategic shift (of future investments) to the E&P segment, which has the highest ROCE (26% compared to 9% G&P and 6% R&M), is sensible if not necessary to stengthen the company s competitive quality. Low differentiation potential due to commodity price driven sales 60,000 Oil Price and Sales 120 9,000 Segmental ROCE 40% 40,000 20, ,000 3,000 30% 20% 10% e 2014e Sales in m Costs of goods sold in m Crude oil price in $/bbl Average realized crude oil price in $/bbl Source: Berenberg Fixed Income Research, Company data 0 0 E&P G&P R&M EBIT in m (3-year average) Segmental sales in m (3-year average) ROCE 0% Pressured gas and oil downstream markets Especially the gas storage market is momentarily challenging because the gas oversupply at all European trading spots lowers the demand for additional storage capacity. In the last years, hub market prices decoupled from oil-indexed New equity gas options might elevate the European gas market 9

14 contracts and led to a strong pressure on margins in the gas industry. Hub prices are expected to increasingly influence market prices over oil-linked gas prices. The continuing wide spread might be partly offset by OMV s new equity gas options, which are opening up opportunities for growth. The EU-27 oil product market has been pressured for some time. Contrary to recessionary Europe, growth in the CEE/SEE region and Turkey increased slightly. OMV has already invested stronlgy in these attractive growth regions and is thus able to partly countervail the negative growth effect of recessionary Western Europe. In Porter s five forces framework, Berenberg views 1) the exisiting competition as intensive. There are a lot of large established players with great financial resources as well as state-related entities in the oil and gas industry. However, OMV established major positions in its core markets Romania, Austria and Turkey. The company is the number one crude oil producer (40% of demand) in Romania (56% of total production) via Petrom. In G&P, OMV serves ca. 34% of the market in Romania, 61% in Austria and 2% in Turkey. Generally, the company has leading positions in its R&M operating regions. It is the number one fuel distribution company in Turkey via Petrol Ofisi and has a market share of 36% in Romania via Petrom. 2) the substitution potential as low because alternative energy sources are still too embryonic to sufficiently serve the whole energy demand. The gap between classic energy sources and so-called green energy has widened and OMV seeks to exploit it via natural gas. 3) entry barriers as high because the oil and gas industry is capital intensive. Substantial investments in infrastructure are needed in order to enter the market and thus prevent the emergence of new competition. However, state-related entities, financed by the government, could come forth, especially in countries with probably substantial oil reserves, and deter the existing competition. 4) supplier power as highly important. Being awarded exploration licenses is a key success factor in the oil & gas industry in order to secure hydrocarbon production and proven reserves. 5) buyer power as limited given that output prices are dictated by the market place (commodity brent oil and oil-linked gas). OMV hedged the risk of falling oil prices and has therewith realized a substantially lower Group average crude oil price compared to the actual crude oil price in the last years (-10.6% in a three-year average; -8.1% in a five-year average). Porter's five forces Existing competition Substitution threat Threat of new competition/ entry barriers Buyer power Supplier power Source: Berenberg Fixed Income Research, Company data 10

15 Structure Organizational structure Ranking of the senior unsecured bond Organizational structure OMV AG is the holding that in additon to the fully owned subsidiaries OMV Exploration & Production GmbH, OMV Refining & Marketing GmbH, OMV Gas & Power GmbH and OMV Solutions GmbH, directly or indirectly owns a stake of 96.98% in Petrol Ofisi, 51.01% in Petrom, 36.00% in Borealis, 59.26% in EconGas, and 45.00% in Bayernoil. OMV sold Petrom LPG as well as the marketing business in Bosnia-Herzegovina in 2012, its lubricants business in 2013 and will sell its stake in Bayernoil until OMV AG holding does not have any operating activities and therefore depends on the performance and upstream guarantees of its operating subsidiaries. The company s organization is structured by business units and thus, reflects OMV s three business divisions: Exploration & Production, Refining & Marketing, and Gas & Power. Source: Berenberg Research, Prospectus of OMV s perpetual bond offering 2011; *Partly via holding companies not shown in the chart, **10% thereof held directly by the issuer, ***3.33% thereof held directly by the issuer Ranking of the senior unsecured bond The bonds are issued under OMV AG and are ranked pari passu among themselves and pari passu with all other unsecured and unsubordinated obligations of the holding, except for any obligations preferred by law. A negative pledge is provided by the terms and conditions of the bonds and tax gross up applies. Cross default comes into effect at an amount of more than 25m or its equivalent. 11

16 External ratings and FIBER Score Rated A3 by Moody s and A- by Fitch Berenberg assigns an A3 FIBER score to OMV o The quantitative scoring, externally provided, puts an A3 to OMV AG o Our internally developed qualitative soft-fact score is BBB1 OMV s A3 Rating with Moody s Moody s initiated on OMV with a stable A3 Rating in September The hybrid bond was assigned a Baa3 Rating in June Major threats to downgrade are: Reduction in the Baseline Credit Assessment (BCA), which indicates credit strength in the absence of extraordinary government support, from 9 to 10 Decrease in the Austrian government s ownership Further geographic diversification away from Austria Generally, the upgrade potential of OMV is limited due to substantial capital expenditures as well as a challenging reserve replacement rate. OMV s A- Rating with Fitch: Fitch initiated on OMV with an A- Rating and a stable outlook in September In June 2011, Fitch assigned a BBB Rating for the hybrid bond. The company s A- Rating with a stable outlook was affirmed in OMV s A3 FIBER Score with Berenberg: Berenberg initiates on OMV with an A3 FIBER Score and a stable outlook. The compound FIBER score is a result of the externally provided A3 quantitative score and Berenberg s internally developed soft-fact score of BBB1. FIBER Score: Fixed Income Berenberg Research Score The soft-fact score views OMV s business risk profile as solidly positioned within the investment grade. In particular, the company s comfortable financial position combined with a qualified and experienced management in a capital intensive industry support the score. In terms of capacity, the score is weakened by the threat of political instability in OMV s operating markets and large, well established competitors. High entry barriers offset the weakening effect of commodity price driven revenue on the company s competitive position. Management quality and experience, an excellent track record and a clearly defined strategy add to the company s score. The covenants score is largely driven by OMV s sound financials. 12

17 Source: Berenberg Fixed Income Research Berenberg assigns a blended FIBER Score of A3 to OMV AG. Berenberg input Agency ratings E xternal input Soft-fact Qual. Est. default Credit Risk Credit Risk FIBER Company Moody's S&P Fitch Score Score frequency Level Trend Score OMV AG 2.44 BBB1 A3 -- A % Low Stable A3 Source: Berenberg Fixed Income Research, S&P s Global Credit Portal Berenberg s FIBER Score is not a rating. Whilst the established agencies usually apply a through-the-cycle approach in rating companies, Berenberg s fixed income research score is much more short-term oriented. This concept aims at allowing investors to benefit from short-term spread movements as the quality of a credit improves or deteriorates due to certain news flow and short-term cycles. The impact of short-term fluctuations in credit quality is usually mitigated in an official rating by the agencies through-the-cycle approach. 13

18 Valuation Berenberg recommends to UNDERWEIGHT the bond OMV s ASW trades substantially below peers Modest compensation offers low spread tightening potential Berenberg s valuation approach reflects the idea that investors purchase those corporate bonds which offer the most attractive asset swap spreads in their respective peer group. The peer group is designed in such a fashion that it resembles a similar risk category defined by sector or market place characteristics, similar ratings, and similar maturities to derive appropriate benchmark spread curves. On top, if available and equipped with sufficient liquidity, suitable company or sector CDS curves are included. If the company in question does not obtain an agency rating, Berenberg may use the proprietary FIBER score as a proxy. If the spread difference to the appropriate benchmark curve looks to offer sufficient tightening or widening potential relative to peers, Berenberg will over- or respectively underweight the bond. The peers included can be widely recognized as appropriate sector peers, even if most of them are larger than OMV in terms of revenue, total production and total proven reserves. Issuer OMV AG PGNIG FINANCE AB REPSOL INTL FINANCE SNAM SPA BG ENERGY CAPITAL PLC GAZPROM (GAZ CAPITAL SA) ENI SPA GAS NATURAL CAPITAL STATKRAFT AS Source: Berenberg Fixed Income Research, Bloomberg data Moody's S&P Fitch A3 -- A- Baa2 BBB- -- Baa3 BBB- BBB- Baa1 A- -- A2 A- A /*- Baa1 BBB BBB A3 A A+ Baa2 BBB BBB+ Baa1 A- BBB+ As the pick-up between OMV 02/20, OMV 10/21 and OMV 09/22 is only marginal, bonds with a shorter maturity are more attractive. OMV s ASW trades significantly below the spread levels of some sector peers in the same rating class, although proven reserves, reserve life index and RRR are below industry average. Berenberg therefore initiates coverage with UNDERWEIGHT. Source: Berenberg Fixed Income Research, Bloomberg data 14

19 Berenberg believes that OMV s low country risk driven by its Austrian headquarter and the partly ownership of the Austrian government cause the company s bonds to trade substantially below the itraxx and iboxx. Current yield levels only offer a modest compensation for the company-specific risk, limiting relative spread tightening potential. Further diversification away from Austria and a lower stake of the government in OMV might trigger a rating downgrade, making spread levels appear even less attractive on a relative basis. Source: Berenberg Fixed Income Research, Bloomberg data, iboxx data 15

20 Financial health checklist Quick overview on historic financial performance and development of key ratios 60% 45% 30% 15% 0% e 14e Equity ratio before goodwill Goodwill/equity (rhs) 40% 30% 20% 10% 0% Whilst this chart suggests a stable equity ratio, the ratio was only sustained by a capital increase in As of 2011, the hybrid bond is accounted 50% as equity, thus lifting the equity ratio that year on top of the equity raising. Goodwill increased significantly in 2010 because of the acquisition of a major stake in Petrol Ofisi. In the following years, goodwill is expected to remain stable while equity is expected to increase slightly. Accordingly, goodwill/equity is expected to decline marginally in 2013 and % 75% 50% 25% 0% e 14e Net gearing Average net gearing Overall, net gearing, i.e. the ratio of net debt to equity, is relatively low compared to the average in our coverage universe. In 2010, OMV raised additional bank liabilities in order to secure financial flexibility and fund the above acquisitions. The good de-gearing effort with the equity raising in 2011 was further underscored by reductions in W/C. The company was able to reduce net gearing further, down to 25.1% in 2012, mainly driven by a reduction in W/C. In 2013 and 2014, equity as well as net debt is expected to increase e 14e Bonds (long-term) long-term liabilities to banks short-term liabilities to banks Liquid assets (rhs) OMV has a comfortable cash position, mainly driven by bond issues in 2009 and subsequent years. The cash position sharply declined in 2011 because of repayments of long-term borrowings and acquisitions of subsidiaries, but then impressively increased in 2012 as a result of a strong op. CF, driven by a reduction in W/C. The company is financed rather long-term. Berenberg expects an increase in liquid assets again due to reductions in W/C that will further support the op. CF e 14e Op. CF before maintenance CAPEX CAPEX FCF Op. CF before maintenance CAPEX fluctuated between 2009 and 2012, mainly driven by changes in W/C. The energize OMV program is expected to lead to further reductions in W/C. Hence, CAPEX are expected to increase slightly (to 2.8bn in 2013) leading to a marginal decrease in FCF. Overall, op. CF exceeds CAPEX, i.e. is sufficient to fund CAPEX requirements. 16

21 e 14e With an operating leverage of 1.7x (2012), OMV is relatively low operationally geared. Consequently, the company is less exposed to sharp economic downturns or business cycle swings. The operating leverage is expected to remain stable in 2013 and 2014 because Berenberg does not anticipate any significant changes in the cost structure of OMV. Operating leverage Avg. operating leverge 20% 15% 10% 5% 0% e 14e The gross profit margin declined to 12.5% in Sales as well as cost of goods sold move with the crude oil price. OMV hedged the risk of falling oil prices and the therewith realized Group average crude oil price has been increasingly below the actual crude pice over the last years (-10.7% in 2012 vs % in 2009), resulting in a declining gross profit margin. Gross profit margin e 14e EBITDA Net debt/ EBITDA (rhs) Average Net Debt/ EBITDA 4x 3x 2x 1x 0x After the drop of EBITDA in 2009 as a sequel to the crisis, EBITDA substantially increased until The net debt/ebitda ratio declined to less than 1x in 2012, primarily because financial liabilities remained stable while liquid assets and EBITDA increased. Berenberg expects an EBITDA and net debt stabilization in 2013 and Accordingly, net debt/ EBITDA are expected to remain stable e 14e Dividends paid Free cash flow dividend/ free cash flow 12.0x 8.0x 4.0x 0.0x -4.0x FCF sharply declined in 2011, because of a large increase in W/C, while the div. payout ratio was kept stable In 2012, following a substantial reduction in W/C, FCF exceeded dividends paid. However, excess FCF might be an indicator for the non-availability of good investment opportunities. This may change with OMV s goal to invest more into E&P. Berenberg expects div. to continue moving with net income as no change in the div. policy is expected. 16% 12% 8% 4% 0% e 14e Gross capex as % of sales Gross capex as % of sales declined continuously, driven by higher oil price induced sales numbers. In 2012, 5.8% of sales were spent on capex, compared to 12.4% in While this might indicate that capex have become more efficient, OMV might as well not invest enough in future growth. Gross capex, in absolute numbers, alternates with acquisition payments. Maintenance capex as % of sales 17

22 Growth Focus on Turkey and E&P as consequence of low growth environment Oil price driven top and bottom line growth Growth is a mixture of organic investments and acquisitions In 2012, the world economy lost momentum and GDP growth declined globally. The European gas market s profitability is strongly pressured because of gas oversupply and the decoupling of long-term oil-linked contract and hub prices. Whilst the demand outlook for Western Europe is rather flat, SEE is supposed to grow moderately (1.8% p.a.) and Turkey strongly (3.6% p.a.). Within the currently demanding downstream market, the EU is expected to decline by 10% from 2012 to 2021, Turkey and CEE/SEE to grow by 10% and the petrochemcial business by 5%. OMV responds to this low growth environment with: divestments in R&M a focus on more attractive growth markets like Turkey and CEE/SEE investments in the E&P segment, the company s growth driver Low growth environment in Western Europe; attractive growth potential in Turkey and CEE/ SEE GDP growth for selected markets World Industrialized markets Emerging markets EU Germany Austria Romania Turkey Source: Berenberg Fixed Income Research, Company data GDP growth (%) in 2012 pp change vs Oil price fluctuations directly affect sales growth as well as cost of goods sold and also largely drive net income. 60,000 Oil price driven top line growth 120 6,000 Oil price driven bottom line growth , , , , , , e 2014e Sales in m Cost of goods sold in m Crude oil price in e 2014e Net income in m Operating cash flow in m Crude oil price in - Source: Berenberg Fixed Income Research, Company data 18

23 However, the Group s average realized crude oil price, attained by hedging against falling oil prices, has been substantially below the actual crude oil price (- 10.6% in a three-year average). The negative hedging effect has been increasing since 2009 with the result of a decreasing profit margin. Top and bottom line growth run mostly through to operating cash flow. In 2011, the decline in operating cash flow was driven by a substantial increase in W/C. The W/C reduction in 2012 is expected to be followed by farther reductions until 2014, mainly driven by divestments in R&M. Oil price driven top and bottom line growth, largely running through to operating cash flows 20% Oil price inversely driven profit margin 120 4,000 W/C and operating cash flow 15% 90 3,000 10% 60 2,000 5% 30 1,000 0% e 2014e e Profit margin Crude oil price in Operating cash flow in m W/C in m Source: Berenberg Fixed Income Research, Company data Before OMV initiated the issuance of bonds in 2009, growth was mainly funded by bank liabilites and internally generated cash flows. The oil production and refining industry is commonly thought of as capital intensive. OMV, however, achieved to increase its capital employed turnover over the last three years (1.8x in 2012 vs 1x in 2009). Thus, future growth should result in higher returns. Debt funded growth 8000 Interest-bearing liabilities in m 60,000 Capital intensity 2.0x ,000 20, x e Bank liabilities (short-term) Bonds Bank liabilities (long-term) Other Source: Berenberg Fixed Income Research, Company data e Sales in m Capital employed in m Capital intensity 0.0x OMV grew mainly organically until the mid-eighties, but then trod a, still persisting, path of growth through acquisitions. The company plans to grow organically 2% p.a. and per acquisitions 2% p.a. (based on 2010) until Organic growth will mainly be achieved by investments in E&P, e.g. the continued maturation of field development projects. In 2012, OMV already acquired stakes in the Aasta Hansteen gas field development and in the Edvard Grieg oil field development. Berenberg expects OMV to have substantial potential for future growth due to a solid level of proven reserves a large number of projects in pipeline new growth opportunities from equity gas coupled with room for higher leverage within its gearing target and rating category. Growth is a mixture of organic and external growth via acquisitions OMV has capacity to grow 19

24 Company background History at a glance Management Shareholder structure Geographical set-up Segments Strategic Focus History at a glance The OMV Group was founded 1956 as state-owned Österreichische Mineralölverwaltung Aktiengesellschaft. Starting with the first local refinery in 1960, OMV has developed into Austria s largest listed industrial company with leading positions in oil and gas markets worldwide. OMV entered into oil sales in 1965 and signed its first gas supply contract in In 1985, the company began its international expansion with operations in Libya. OMV grew mainly organically until the mid-eighties, but then trod a path of growth through acquisitions, starting with the acquisition of Burghausen refinery in In 1990, the company s first filling station opened. ÖMV was renamed to OMV in During the past decade, OMV acquired stakes in several companies, thereby expanding its E&P business, e.g. through the acquisition of Pioneer in Tunisia, extending its filling station network, upgrading its petrochemicals position, entering into the power business and participating in new growth markets, e.g. in Pakistan and Turkey by acquiring Petronas and Petrol Ofisi, respectively. The acquisition of a 51% stake in the Romanian oil and gas group Petrom in 2004 marked the largest acquisition in the company s history. OMV was restructured into a management holding in In 2009, the company started trading on the CEGH Gas Exchange at the Vienna stock exchange. In 2012 OMV operated internationally with a network of 4,400 filling stations, thereby supplying more than 200m people with energy. The company employed 29,147 people and generated sales of 42.6bn in More than two thirds of the former state-owned company are publicly held today. The ONE OMV umbrella unites the three enterprises, OMV, Petrom and Petrol Ofisi. Founded 1956 as Österreichische Mineralölverwaltung Acquisitions shape OMV s growth path OMV expands into growth markets The ONE OMV umbrella unites OMV, Petrom and Petrol Ofisi Management Gerhard Roiss, chairman of the executive board, was appointed CEO of OMV AG in He started his industrial career at OMV in 1990 as head of marketing and held several positions within the company before his appointment as CEO. Most recently, he was responsible for Refining & Marketing. He holds a degree in economics. 20

25 David C. Davies joined OMV AG in 2002 as CFO and was appointed deputy chairman of the executive board in Before joining OMV, he was financial director of various companies in the UK, covering the beverages, food, and health industry, and worked as an auditor. Mr. Davies holds a degree in economics. Jaap Huijskes, member of the executive board, is responsible for Exploration & Production since He started his career path in various technical and commercial positions at Shell, lastly appointed executive vice president for projects in the exploration and production division. He holds a degree in mechanical engineering. Hans-Peter Floren is member of the executive board and responsible for Gas & Power at OMV since He began his career at Ruhrgas AG, where he held several positions including his appointment as member of the management board of E.ON Ruhrgas. He holds a degree in both mechanical engineering and economics. Manfred Leitner, member of the executive board, is responsible for Refining & Marketing since He joined the Exploration & Production division of OMV AG in 1985 and, following a position as finance manager, returned to OMV in At last, he was employed as business unit manager for Refining & Marketing. He holds a degree in economics and business. Shareholder structure The company has currently 326.2m shares outstanding (2012). The volume traded on the Vienna Stock Exchange in 2012 was 3.98bn. OMV s two major shareholders are IPIC (Abu Dhabi) and ÖIAG. Shareholder structure IPIC 24.90% Free float 43.30% ÖIAG 31.50% Own shares 0.30% Source: Berenberg Fixed Income Research, Company data Geographical set-up The OMV Group is headquartered in Vienna (Austria) and has a regional focus on Central and Southeastern Europe (Austria, Germany, Romania and Turkey had a 77% sales share in 2012). In E&P, OMV s core countries are Romania and Austria and its international portfolio includes New Zealand, Pakistan, the Middle East, North Africa, the CEE region and the North Sea. Core markets in Austria, Germany, Romania and Turkey 21

26 Source: Berenberg Fixed Income Research, Company data G&P operates gas infrastrucutre mainly in Germany, Austria, Italy, Hungary, Romania and Turkey. Gas infrastructure Source: Berenberg Fixed Income Research, Company data R&M runs approximately 4,400 service stations in 12 European countries and Turkey and operates four refineries in Austria, Germany and Romania. Network of 4,400 service stations 22

27 Source: Berenberg Fixed Income Research, Company data Segments Exploration & Production (E&P) explores, develops and produces oil and gas. Approximately two thirds of production come from OMV s two core countries, Romania and Austria. Total production is split evenly between oil and gas, which are primarily sold within the OMV Group. In 2012, total sales increased by 22% to 6,075m and EBIT by 31% to 2,743m (vs. 2011). Capital expenditures declined by 23% from 2,066m in 2011 to 1,598 in The cool off of the Arab spring led to an increase in production by 6%. At the same time, production costs declined by 11%. Gas & Power (G&P) operates along the entire gas value chain. Gas supply consists of gas produced at own fields, complemented by contracted volumes and is brought to the market and sold via own pipelines and storage facilities. The CEGH has become an important gas trading platform and also operates as gas exchange. In 2012, total sales increased by 70% to 11,883m (vs. 7,000 in 2011). EBIT declined by 82% from 239m in 2011 to 43m in 2012, mainly due to the decoupling of hub market prices from oil-indexed contracts. Capital expenditure declined by 25% to 351m (vs. 2011). OMV was able to increase natural gas sold, total gas transporation sold and storage volume sold by 60%, 2% and 3%, respecitvely. Refining & Marketing (R&M), including petrochemicals, operates refineries in Austria, Germany and Romania and a 4,400 filling stations network in 13 countries. It operates under the retail brands OMV, Avanti, Petrom and Petrol Ofisi. In 2012, total sales increased by 12% to 29,608m (vs. 26,4729m in 2011) and EBIT by 48% to 417m. Capital expenditures declined by 24% to 435m in 2012, compared to Total refined product sales and marketing sales volume declined by 2% and 5%, respectively (vs. 2011). 23