BASF Conference Call Speech (including slides)

Transcription

1 BASF Conference Call Speech (including slides) September 28, 2018 BASF and LetterOne sign agreement to merge Wintershall and DEA Dr. Hans-Ulrich Engel, Chief Financial Officer, BASF Mario Mehren, Chief Executive Officer, Wintershall BASF Conference Call, Ludwigshafen September 28, 2018 Dr. Hans-Ulrich Engel Vice Chairman of the Board of Executive Directors and Chief Financial Officer, BASF Mario Mehren Chief Executive Officer, Wintershall The spoken word applies.

2 Page 2 Cautionary note regarding forward-looking statements This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors; they involve various risks and uncertainties; and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in the Opportunities and Risks Report from page 111 to 118 of the BASF Report BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. 2 September 2018

3 Page 3 Hans-Ulrich Engel Ladies and gentlemen, good morning and thank you for joining us on short notice. I am delighted to tell you more about the agreement we signed late last night with LetterOne on the formation of Wintershall DEA. We will create significant value for both shareholders of the joint venture by forming the leading independent European exploration and production company, seizing additional growth opportunities, generating synergies of at least 200 million per year and last but not least IPO Wintershall DEA. In the following, I will briefly highlight Wintershall DEA s main characteristics, the key elements of the transaction agreement and the corporate governance structure of the company. Mario will later provide you with further operational details.

4 Page 4 BASF Group s strategic rationale for the merger of Wintershall and DEA This merger is an important value-creating step on BASF s strategic path Value creation through additional growth opportunities, realization of synergies and the envisaged IPO Creating the leading independent European exploration and production company with strong international operations and significant scale Combined business with pro-forma 2017 sales of 4.7 billion, EBITDA of 2.8 billion and net income of 740 million Broadening and balancing the regional asset footprint: 2017 pro-forma production of 210 million boe and 2.2 billion boe 1P reserves Portfolio upgrading across the whole E&P lifecycle, leveraging strategic partnerships and technologies 3 September 2018

5 Page 5 [Chart 3: BASF Group s strategic rationale for the merger of Wintershall and DEA] Yesterday night, BASF and LetterOne signed a definitive transaction agreement to merge their respective oil and gas businesses in a joint venture, which will operate under the name Wintershall DEA. This merger is an important value-creating step on BASF s strategic path. By combining these two German-based entities, we create the basis for further profitable growth. Wintershall DEA will become the leading independent European exploration and production company with strong international operations and significant scale. In 2017, the combined business had pro-forma sales of 4.7 billion euros, EBITDA reached 2.8 billion euros and net income amounted to 740 million euros. We will strengthen the portfolio footprint of the combined business and realize synergies, thus creating significant additional value. Furthermore, BASF and LetterOne envisage to list Wintershall DEA through an Initial Public Offering (IPO). The merger will lead to a more balanced regional footprint with even stronger operating companies. In 2017, pro-forma hydrocarbon production totaled 210 million barrels of oil equivalent (boe); this equals a production of around 575,000 boe per day. Through leveraging strategic partnerships and sharing technological expertise, Wintershall DEA will enhance its access to growth opportunities.

6 Page 6 Creation of the leading European E&P Independent with international operations and significant scale: Wintershall DEA A clear strategy for profitable growth based on solid project pipeline with access to high-potential acreage Focus on core regions and activities with limited exploration risk World-class partnerships in key countries Success through operational excellence and technological expertise Track record as cost-efficient operator with low reserve replacement costs and low production costs High quality portfolio across the whole E&P lifecycle with strong free cash flow Major operator in the non-cyclical European gas transportation business 4 September 2018

7 Page 7 [Chart 4: Creation of the leading European E&P Independent with international operations and significant scale: Wintershall DEA] Wintershall DEA has a clear strategy for profitable growth based on a solid project pipeline. As a mid-size E&P company, the joint venture will continue to focus its activities on core and development regions where Wintershall and DEA built up specific know-how. Exploration activities are near- and greenfield and operated with a limited exploration risk profile. The company will further strengthen its world-class partnerships in key countries and leverage operational excellence and technological expertise. Wintershall DEA will be one of the most cost-efficient operators with low reserve replacement costs and low production costs. The joint venture will also be a major operator in the non-cyclical European gas transportation business which provides earnings stability. And last but not least, Wintershall DEA has a superior growth portfolio across the whole E&P lifecycle and generates strong free cash flows.

8 Page 8 Key elements of the definitive transaction agreement Existing shareholding structure 100% 100% Wintershall Holding GmbH DEA Deutsche Erdöl AG Post-merger shareholding structure BASF s oil and gas business is bundled in the Wintershall Group consisting of Wintershall Holding GmbH and its subsidiaries. LetterOne s oil and gas business comprises DEA Deutsche Erdöl AG and its subsidiaries. LetterOne will contribute all its shares in DEA Deutsche Erdöl AG into Wintershall Holding GmbH against the issuance of new shares to LetterOne. 5 67% (72.7%) 33% (27.3%) 5.7% Wintershall Holding, renamed: Wintershall DEA September 2018 DEA Deutsche Erdöl AG Ordinary shares Preference shares* BASF will initially hold 67% and LetterOne 33% of Wintershall DEA s ordinary shares reflecting the value of the respective E&P businesses of Wintershall and DEA. To reflect the value of Wintershall s gas transportation business, BASF will receive additional preference shares.* This will result in a total shareholding of BASF in Wintershall DEA of 72.7%. * Preference shares will be converted into ordinary shares in WintershallDEA no later than 36 months after closing but in all cases before an IPO. Initially, it was intended to reflect the value of the gas transportation business through a mandatory convertible bond.

9 Page 9 [Chart 5: Key elements of the definitive transaction agreement] To effect the merger, LetterOne will contribute all its shares in DEA Deutsche Erdöl AG into Wintershall Holding GmbH against the issuance of new shares of Wintershall to LetterOne. Wintershall will then be renamed Wintershall DEA. BASF will initially hold 67 percent and LetterOne 33 percent of Wintershall DEA s ordinary shares reflecting the value of the respective exploration and production businesses of Wintershall and DEA. To reflect the value of Wintershall s gas transportation business, BASF will receive additional preference shares following the closing resulting in a total shareholding of BASF in Wintershall DEA of 72.7 percent. No later than 36 months after closing but in all cases before an IPO, these preference shares will be converted into ordinary shares of Wintershall DEA. Initially, it was intended to reflect the value of the gas transportation business through a mandatory convertible bond. However, we now agreed to replace the bond with preference shares, which offer a higher degree of flexibility in terms of capital structuring. Closing of the transaction is expected in the first half of 2019, subject to approvals of merger control and foreign investment authorities as well as several mining authorities and the German Federal Network Agency. In the medium term, BASF and LetterOne envisage to list Wintershall DEA through an IPO.

10 Page 10 Three-tier corporate governance structure of Wintershall DEA Management Board Responsible for day-to-day operations and overall management in accordance with business plans and annual budget Supervisory Board Responsible for supervision of the Management Board Co-determination level of one third Shareholders Committee Shareholders will coordinate their interests based on the framework of a shareholders agreement 6 September 2018

11 Page 11 [Chart 6: Three-tier corporate governance structure of Wintershall DEA] BASF and LetterOne agreed on a corporate governance structure which leads to joint control and determines our reporting. Later on, I will explain the impact on BASF s statement of income in detail. BASF determined Mario Mehren as the Chief Executive Officer and the Chairman of the Management Board; LetterOne determined Maria Moraeus Hanssen as the deputy CEO and Chief Operating Officer of Wintershall DEA. In total, the Management Board will comprise five members with distinct responsibilities. Wintershall DEA will have a Supervisory Board with a codetermination level of one third. The Supervisory Board shall initially consist of four representatives of BASF, two representatives of LetterOne and three employee representatives. In preparation of an IPO, the Supervisory Board shall later be composed of four representatives of BASF, two representatives of LetterOne, four employee representatives and two independent members. The shareholders BASF and LetterOne will coordinate their interests in a Shareholders Committee. Wintershall DEA will be headquartered in Kassel and Hamburg. With that I hand things over to Mario, who will tell you more about Wintershall DEA.

12 Page 12 Focused activities along the whole value chain Upstream Midstream Exploration Development Production Transportation Growing profitably Contributing 1 with E&P activities 2 stable earnings 7 September 2018

13 Page 13 Mario Mehren Welcome to our call also from my side. [Chart 7: Focused activities along the whole value chain] Let me highlight Wintershall DEA s strategy, its strengths and key capabilities as well as the position of the company within the E&P industry. Wintershall DEA has a focused business model and is active in the exploration, development and production of natural gas and crude oil. Going forward, our strategy is to further profitably grow our upstream activities. We secure our lasting success by broadening our technological expertise. Our focus is on increasing the yield from producing fields as well as on operating as efficiently as possible. In addition to exploration and production, we are also running together with our partner Gazprom and other companies a wellconnected gas pipeline network in Europe, which contributes stable earnings.

14 Page 14 Strong financial and operational performance Combined KPIs (pro-forma) of Wintershall DEA Sales 2017 EBITDA P reserves** Production 2017*** DEA 31% DEA 27% DEA 23% DEA 22% 4.7 billion 2.8 billion 2.2 billion boe 210 million boe Wintershall 69%* Wintershall 73%* Wintershall 77% Wintershall 78% * Including the gas transportation business ** As of December 31, 2017 *** Thereof: 67% gas, 33% liquids 8 September 2018

15 Page 15 [Chart 8: Strong financial and operational performance] The following slide depicts the financial and operational performance of Wintershall DEA on a pro-forma 2017 basis. With sales of 4.7 billion euros and an EBITDA of 2.8 billion euros, the company will be the leading independent European E&P company. Total production amounted to 210 million boe in The merger leads to combined proven reserves of 2.2 billion boe and a healthy R/P ratio of 10 years on a pro-forma basis at the end of This is in line with our target range. The 2P and 1P reserves stood at 3.9 billion boe which lead to an R/P ratio of 18 years. Of these reserves, 46 percent are already developed and will support production growth in the mid-term.

16 Page 16 Geographically diversified footprint with significant growth potential in core regions Combined share of production and 1P reserves Norway by region, end of 2017 (pro-forma) Denmark U.K. Germany Netherlands Europe. 1P reserves: 30% Production: 35% Algeria Libya Mexico North Africa 1P reserves: 11% Production: 10% Egypt Russia 1P reserves: 52% Production: 43% Middle East Latin America 1P reserves: 7% Production: 12% Brazil Core region Development region Wintershall production activities DEA production activities Argentina 9 September 2018

17 Page 17 [Chart 9: Geographically diversified footprint with significant growth potential in core regions] When you look at the map on slide 9, you see the production asset footprint of the combined business. I would call it a perfect match with a strong presence in Western Europe, Russia, Latin America and in North Africa. Our strategy to concentrate on core regions will remain in place and we will further establish partnerships in each region or country and combine the regional expertise with our technological expertise to create value for our shareholders. Examples are Gazprom in Russia and Equinor (formerly Statoil) in Norway. In addition to our existing core regions that s where we are already producing we have so-called development regions. In these regions, we are evaluating projects and are conducting for example exploration activities.

18 Page 18 Leading position of Wintershall DEA in core regions Largest independent producer in North West Europe 2018E Largest international producer in Russia* 2018E kboe/d Wintershall DEA Chrysaor Centrica INEOS Engie Chevron OMV Apache EnQuest AKER kboe/d Wintershall DEA * Based on directly owned assets Shell ONGC OMV ExxonMobil Mitsui & Co Sinopec Mitsubishi Oil India Exillon Group Corporation Energy Largest independent producer in Argentina 2018E Among Top 5 international producers in North Africa** 2018E kboe/d Wintershall DEA Bridas Pampa Techint Pluspetrol CNOOC Sinopec DowDuPont Capsa Corporacion Energy Energia Group America Holdings kboe/d ** Excl. NOCs Eni BP Apache Wintershall DEA Source: Wood Mackenzie UDT. Note: North West Europe consists of production in UK, Germany, Norway, Denmark, the Netherlands; North Africa consists of production in Egypt, Algeria and Libya 10 September 2018 Shell Sinopec Group Repsol Total Equinor Gazprom

19 Page 19 [Chart 10: Leading position of Wintershall DEA in core regions] To dive a little bit deeper, the following benchmark shows Wintershall DEA s leading position in its core regions. Based on the expected production volumes in 2018, the company will be: the largest independent producer in North West Europe, the largest independent producer in Argentina, the largest international producer in Russia and among the top 5 international producers in North Africa.

20 Page 20 Balanced portfolio across the whole E&P lifecycle Exploration Development Production Europe Norway: ~22,000 km² exploration acreage with 50 licenses NL/DK/UK: ~5,500 km² offshore exploration acreage with 35 licenses Norway: Asta Hansteen, Nova, Dvalin, Snorre Norway: Njord area, Skarv, Vega, Gjøa, Maria, Edvard Grieg, Brage Germany: Mittelplate, Emlichheim, Völkersen Russia Yuzhno Russkoye, additional layers Yuzhno Russkoye Turonian Achimov blocks 4 and 5 Yuzhno Russkoye Cenomanian Achimgaz Wolgodeminoil North Africa/ Middle East Libya: Exploration wells in the Cyrenaica Plateau, Sirte Basin Abu Dhabi: Appraisal of the Egypt: Giza, Fayoum and Raven in West Nile Delta Algeria: Reggane Nord development phase III Egypt: West Nile Delta, Disouq, Golf of Suez Algeria: Reggane Nord gas/condensate field Shuwaihat Libya: Concessions NC193 and NC195 Libya: Al Jurf C137, C96/97 Latin America Argentina: Exploration Mendoza CN-V Argentina: Cuenca Marina Austral 1 follow-up Brazil: Seven offshore exploration projects (Fenix, Leo) and significant growth licenses potential in Vaca Muerta shale play Mexico: Four exploration licenses shallow water Gulf of Mexico Argentina: Cuenca Marina Austral 1 (Canadon-Alfa, Carina-Aries, Vega Pleyade), Aguada Pichana Mexico: Ogarrio oil field 11 September 2018

21 Page 21 [Chart 11: Balanced portfolio across the whole E&P lifecycle] Wintershall DEA has a solid project pipeline with access to highpotential acreage. Along the whole E&P value chain from exploration, development and production, the company has a balanced portfolio of producing assets and projects, which will fuel future growth. Let me briefly mention some of the major projects: Together with our partners, we will develop the Turon layers of the giant gas field Yuzhno Russkoye and thus prolong the plateau production for several years. Another example is the Nova oil discovery in Norway. Wintershall will develop the project as operator. To secure a cost efficient and an environmentally friendly development, we will use a subsea tie-back and the existing infrastructure in this area. As both companies did in the past, Wintershall DEA will continue to actively manage and upgrade its portfolio. The combination of the portfolios offers further possibilities to enhance the value of the assets. We will apply our technological expertise, further increase the share of own-operated assets and ultimately optimize the free cash flow.

22 Page 22 Well-positioned to further grow production Wintershall DEA production growth (pro-forma) Wintershall DEA production growth vs. international peers Production CAGR kboe/day 1, DEA Wintershall DEA Wintershall 600 ~ ~ * % 3% 5% 8% 10% 13% 15% Wintershall DEA Wintershall DEA 12 * Restated: 51% Libya onshore, incl. 50% Achimgaz Source: Wood Mackenzie, Wintershall September 2018

23 Page 23 [Chart 12: Well-positioned to further grow production] Based on the underlying E&P projects, I would like to give you an indication on the growth opportunities of Wintershall DEA within the next years. Through the merger, the company is on track to reach a production level of 750,000 to 800,000 boe per day by 2021 to 2023 from currently 575,000 boe per day. This equals an annual production growth rate of 6 to 7 percent. If you compare this to our peer group, you can see that we are well positioned with respect to future growth. To deliver shareholder value, Wintershall DEA will set the focus on project execution and operational excellence.

24 Page 24 Competitive cost position supported by high reserve replacement ratio Production costs* US$/boe; five-year average Wintershall Wintershall DEA Reserve replacement ratio %; five-year average % DEA** 224% DEA** 11.1 Wintershall DEA 189% Wintershall 171% Peers Average peers 0% 50% 100% 150% 200% 250% 13 * Production costs include also transportation expenses and production relevant taxes; ** DEA figures only available for the last 3 years; Source: IHS, own calculation. Peer group represents an average of the E&P industry September 2018

25 Page 25 [Chart 13: Competitive cost position supported by high reserve replacement ratio] Cost efficiency is key for Wintershall. We strictly manage our costs and we are one of the companies with the lowest production costs in the industry. We have several initiatives in place which target to further reduce our costs. This focus will also be kept in the merged entity. Both companies, Wintershall and DEA, continuously invested in the reserve replacement and also secured their leading positions with respect to the reserve replacement. Strict cost management for investment projects and stringent selection criteria for new projects are also key to replace the reserves in a profitable manner.

26 Page 26 Merger offers synergy potential of at least 200 million per year* Portfolio upgrading through combining businesses and active portfolio management - Focus on most profitable assets and most promising discoveries - Cash flow and capital expenditure optimization Cost synergies through joint procurement, exploration and R&D Combination of operating companies in Germany and Norway Combination of corporate functions 14 * As of the third year following the closing of the transaction September 2018

27 Page 27 [Chart 14: Merger offers synergy potential of at least 200 million per year] By combining the German-based companies Wintershall and DEA we will be able to realize significant synergies. Through active portfolio management, we will focus on the most profitable assets and the most promising discoveries. The cash flow and capital expenditures will be optimized. Synergies are also targeted through joint corporate functions, procurement, exploration and R&D activities. Especially the portfolio overlap of the operating companies in Germany and Norway offers substantial cost synergy potential. We will form a joint headquarters with two locations. In total, we expect a synergy potential of at least 200 million euros per year as of the third year following the closing of the transaction.

28 Page 28 Pipeline network connecting major European distribution hubs with stable earnings contribution Major operator in the non-cyclical European gas transportation business - Germany as distribution hub for Europe; direct connections to European hubs - GASCADE is number two in the German market with a pipeline grid of ~2,400 km - Participation in Nord Stream 1 (15.5%), OPAL (40%), NEL (25.5%) - Financing of Nord Stream 2* Gas transportation business generates stable earnings and cash flows - Non-regulated pipelines: long-term ship-or-pay contracts; earnings independent from demand fluctuations - Regulated pipelines: fixed tariffs 15 * Gazprom is the sole shareholder of Nord Stream 2 AG. ENGIE, OMV, Shell, Uniper and BASF/Wintershall have committed to provide long-term financing for 50% of the total cost of the project, which is currently estimated to be 9.5 billion. Each European company will fund up to 950 million. September 2018

29 Page 29 [Chart 15: Pipeline network connecting major European distribution hubs with stable earnings contribution] In addition to our exploration and production activities, the natural gas transportation business of Wintershall is also part of the merger. Wintershall DEA with its partner Gazprom and other companies will be active in the construction and operation of natural gas pipelines in Europe. Our pipeline network is well connected to major European hubs, and the transit pipeline Nord Stream 1 is contributing to supply security in Europe. We form a major part of the German gas distribution hub for Europe. As a major operator in the non-cyclical gas transportation business, Wintershall DEA will generate stable earnings and cash flows from its regulated and non-regulated pipelines.

30 Page 30 Solid financial policy for Wintershall DEA Wintershall DEA is committed to long-term profitable growth with appropriate financial resources. The company targets an investment grade credit rating. Its capital structure will be consistent with the rating target. The joint venture will be financed on a stand-alone basis through third-party loans and/or bonds effective from closing; shareholder loans will be repaid. An Initial Public Offering (IPO) is envisaged in the medium term. Following the IPO, Wintershall DEA strives to offer an attractive dividend to its shareholders. 16 September 2018

31 Page 31 [Chart 16: Solid financial policy for Wintershall DEA] Let s now move on to the financing strategy of Wintershall DEA. First of all, Wintershall DEA will be committed to long-term profitable growth, which will be supported by appropriate financial resources. Following the closing, Wintershall DEA targets an investment grade rating. To achieve such a rating target, the capital structure will be set up accordingly. The joint venture will be financed on a stand-alone basis through diversified debt financing instruments such as third-party loans and bonds. Shareholder loans will be repayed. As already mentioned, in the medium term an IPO is envisaged by the shareholders BASF and LetterOne. Going forward, Wintershall DEA strives to offer an attractive dividend to its shareholders. And with that, back to Hans.

32 Page 32 Expected timeline and next steps of the Wintershall DEA merger Letter of intent signed Transaction agreement signed Merger to be closed* Integration to be finalized Envisaged IPO December 2017 September 2018 H H H2 2020** Preparation and implementation of integration Preparation of IPO readiness 17 * Subject to approvals of merger control and foreign investment authorities as well as several mining authorities and the Bundesnetzagentur; ** At the earliest September 2018

33 Page 33 Hans-Ulrich Engel [Chart 17: Expected timeline and next steps of the Wintershall DEA merger] Thank you, Mario. Now let s have a brief look at the expected timeline and next steps of the merger. As we have signed the business combination agreement, we are now entering the approval phase of the merger, which is expected to take at least 6 months. Approvals are required by merger control and foreign investment authorities as well as several mining authorities and the German Federal Network Agency. We expect closing to take place in the first half In parallel, we start with the detailed preparation of the integration phase. We expect that the integration will take roughly 12 months after the closing. We will also work on preparing the IPO readiness. We expect that a going public will not take place before the second half of The exact timing will obviously depend on market conditions.

34 Page 34 Impact of the merger on BASF s statement of income As of signing of the transaction agreement As of closing of the merger Statement of income BASF Group Sales revenue Gross profit on sales Income from operations Financial result Income before taxes and minority interests Income taxes Income before minority interests Income from discontinued operations Minority interests Net income Oil & Gas segment s sales and earnings are no longer included in sales and EBIT of BASF Group retroactively as of January 1, Prior-year figures will be restated. Earnings will be presented in the income before minority interests of the BASF Group as a separate item, income from discontinued operations. Between signing and closing, depreciation will be suspended. Oil & Gas will not be reported as a segment of BASF Group anymore. Other Sales Income from operations before depreciation and amortization (EBITDA) Amortization and depreciation 2 Income from operations (EBIT) Special items EBIT before special items Thereof costs for cross-divisional corporate research costs of corporate headquarters other businesses foreign currency results, hedging and other measurement effects miscellaneous income and expenses BASF s share of net income generated by Wintershall DEA will be accounted for at equity and will be reported in the EBIT before special items of Other. At-equity consolidation (share of net income shown in EBIT before special items) 18 September 2018

35 Page 35 [Chart 18: Impact of the merger on BASF s statement of income] Let me also explain the impact of the merger on BASF s statement of income and how we will account for our share in Wintershall DEA in future. The signing has immediate effect on the reporting of BASF Group: Sales and earnings of Oil & Gas are no longer included in BASF Group s reporting retroactively as of January 1, 2018 and with the prior-year figures restated. Until closing, which is expected in the first half of 2019, earnings will be presented in the income before minority interests of BASF Group as a separate item: income from discontinued operations. From the transaction closing date, BASF will account for its share in the joint venture Wintershall DEA using the equity method and include its share of Wintershall DEA s net income in EBIT before special items of the BASF Group. The gain from the transition from full consolidation to the equity method will be shown in income from discontinued operations as of the closing of the transaction.

36 Page 36 Outlook 2018 for BASF Group* Outlook 2018 Now Previous Sales Slight increase Slight increase EBIT before special items Slight decline Slight increase EBIT Considerable decline Slight decline 2017 Restated (continued operations) Previous Sales 61.2 billion 64.5 billion EBIT before special items 7.6 billion 8.3 billion EBIT 7.6 billion 8.5 billion 19 *Following the changed reporting of WintershallGroup after the signing of the definitive transaction agreement between BASF and LetterOne. For sales, slight represents a change of 1 5%, while considerable applies to changes of 6% and higher. For earnings, slight means a change of 1 10%, while considerable is used for changes of 11% and higher. September 2018

37 Page 37 [Chart 19: Outlook 2018 for BASF Group] As a result of the changed reporting of Wintershall Group following the signing of the definitive transaction agreement, BASF Group s outlook for the full year 2018 is adjusted. We continue to expect a slight increase in sales compared to the adjusted 2017 figure. We now expect a slight decline in EBIT before special items compared to the adjusted 2017 figure, while EBIT is now expected to decline considerably. Before taking the accounting effects of the transaction into consideration, a slight increase in sales and EBIT before special items and a slight decline in EBIT was expected. And now, Mario and I are glad to take your questions.