OMV AG

Yes. Thank you.

Good morning ladies and gentlemen. Welcome to OMV's earnings call for the third quarter 2020.

We hope you are well and your families too. With me on the call are; Rainer Seele OMV's Chairman and CEO; and Reinhard Florey our CFO.

Rainer Seele will walk you through the highlights of the quarter. And as we have just this morning completed the Borealis transaction, both gentlemen will provide more context on what that means for OMV.

After that we are happy to answer your questions. And with that I'll hand it over to Rainer.

Yes. Thanks Florian and good morning ladies and gentlemen and thank you for joining us today.

The third quarter of 2020 has been another challenging quarter for our industry, however with a recovery in oil and gas prices versus previous quarter. Upstream improved from the previous quarter lows on the back of higher oil prices while downstream proved resilient and this despite the lowest refining margin in a decade.

Let me start by providing a brief review of the economic environment. In the third quarter at $43 per barrel the Brent price was 31% lower compared to the same quarter of last year, but recovered from the lows seen in the second quarter.

On average it was 45% higher than in previous quarter. The price recovery was driven by improved market fundamentals both on the demand and the supply side.

While global oil demand in the second quarter was down by almost 16 million barrels per day, it improved in the third quarter on the back of loosened restrictions and increasing global mobility, but was still 7 million barrels per day lower compared to average levels. The OPEC+ supply discipline continued to take significant volumes off the market supported by reductions in non-OPEC supply.

We have seen a similar development in gas prices. At €8.8 per megawatt our Central European gas prices were 32% higher than in the previous quarter, but 21% lower than in the same quarter of 2019.

Driven by the easing of lockdowns and increased economic activity, European gas demand returned to the previous year's level starting in August. Significant price support came from the reduced import LNG volumes into Europe, mainly driven by decreased U.S.

production. European net storage injection was slowed down, but filling levels remain substantially above the long-term average.

At slightly below $1 per barrel the European refining indicator margin reached its lowest level in 10 years. This was a decline of 84% compared to the third quarter of 2019 and 61% versus the previous quarter.

The main reason for the collapse of the refining margin was significantly lower middle distillates cracks which in September reached their lowest level in 20 years. As air traffic is still very subdued high jet blending and resilient refinery utilization rates have led to a significant oversupply situation.

Ethylene and propylene margins recovered from the low levels seen in June. On average the margins were 15% lower versus the third quarter of 2019 and 5% lower than in the previous quarter.

Benzene and butadiene margins further decreased from the already low levels in the second quarter. Demand for packaging remained robust and the slow recovery was seen in the construction sector which provided some support to the petrochemical demand.

Despite a challenging demand environment in the third quarter, we were able to achieve quite, a resilient result due to our integrated and diversified value chain. Our clean CCS operating results amounted to €317 million and thus more than doubled versus the second quarter.

However, it remained 67% below the same quarter of last year. We were able to deliver a quarterly cash flow from operating activities of almost €800 million demonstrating the strength of our integrated portfolio.

At 444,000 barrels per day our upstream production was 7% lower than in the same quarter of last year mainly due to the shutdown of our operations in Libya. The decreased production volumes portfolio mix and one-off items negatively impacted our cost which increased this quarter to $7.5 per barrel.

Going forward, we expect the cost to go down again to below $7 per barrel. In Downstream, we were able to run our refineries at 90% supported by stronger demand in retail and petrochemicals.

Gas showed again an excellent performance as we were able to benefit from favorable summer/winter spreads in the storage business. Given the outlook for the macroeconomic environment and long-term supply and demand fundamentals, we revisit our long-term oil price planning assumptions.

This resulted in non-cash net impairments of around €600 million post tax which are classified as special items in the quarterly results. In the third quarter, we took a first major step in our divestment program.

On September 23, we signed the sale agreement with VERBUND for the 51% stake in Gas Connect Austria. This will lead to a substantial deleveraging effect.

Let's now come to our financial performance in the third quarter of 2020. Our clean CCS Operating results decreased by €632 million versus the prior year quarter, primarily due to a sharp decline in upstream of €474 million caused by the adverse market environment.

Downstream earnings were down €155 million versus the prior year quarter. This was due to lower margins and volumes in all markets, partially offset by a positive hedging contribution and a very strong performance by our gas business.

The clean CCS tax rate increased to 38%, which was 2 percentage points higher year-on-year. This was the result among other factors of a higher downstream tax rate due to a lower result from the major equity accounted investments.

Clean CCS net income attributable to stockholders decreased by 83% to €80 million, clean CCS earnings per share was $0.24. Let me now discuss the performance of our two business segments.

Compared to the third quarter of 2019, the Upstream operating result decreased sharply to minus €24 million. The main drivers were negative market effects of €398 million, a direct reflection of substantially lower oil and gas prices and the missing contribution from Libya.

OMV's realized oil price decreased by 37%, thus slightly more than Brent. This includes discounts and lifting effects as well as a negative impact from operational hedging instruments, which we had placed in spring as a downside protection for the third quarter.

The realized gas price declined by 32%, and thus more than the decrease in Austrian hub prices. This was due to a more steeply decline of gas prices in Romania and in Malaysia and the two-month time lag effect for half of our Russian gas volumes.

Production decreased by 36,000 to 44,000 barrels per day due to the shutdown in Libya, lower demand in New Zealand and natural decline in Romania. This was partially offset by higher production in Malaysia, as a result of the start-up of the SK408 gas fields.

The total sales volumes declined by 43,000 barrels per day and thus roughly in line with the decrease of production. Depreciation was €87 million lower than in the third quarter of 2019 due to reduced production and the lower asset base as a result of impairments.

Downstream earnings were more resilient than Upstream. The clean CCS operating result declined by 32% to €335 million, primarily due to significantly weaker refining margins.

A positive contribution from margin hedges, a strong performance of the gas business and improved retail margins supported the results. The utilization rate increased from 79% in the second quarter to 90%.

However, utilization was below the third quarter of 2019, when we recorded a rate of 96%. 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 70%.

Total refined product sales improved from the previous quarter, but remains 16% below the third quarter of 2019, mainly driven by the significant drop in the jet fuel volumes. Sales volumes at our retail stations recovered and were almost at the prior year's level.

The strong performance of retail was supported by improved margins. The commercial business decreased year-on-year due to lower volumes.

In the petrochemicals business, our sales volumes were 4% higher, but the result decreased by €12 million to €47 million due to lower margins. Naphtha prices more than doubled versus the beginning of the second quarter, and the higher feedstock cost could not be passed through entirely to the market in the same period.

The contribution from Borealis decreased from €75 million to €59 million driven by lower integrated polyolefin margins and lower fertilizer result, partially offset by positive inventory effects and increased sales volumes. We recorded an increased demand in healthcare and packaging.

Automotive demand recovered, but it is still below that of the prior year quarter. The performance of Borouge was impacted by weaker polyolefin prices in Asia.

The clean CCS contribution of ADNOC Refining and Trading, dropped by €40 million due to the significant decline of refining margins and a lower utilization rate as a consequence of lower demand. Our gas business showed once again an excellent performance and contributed € 78 million to our results, which is an increase of €50 million versus the prior year quarter.

This was due to a better storage result and significantly higher earnings from the Power business in Romania. Gas sales volumes rose by 22% on account of increased sales in Germany in the Netherlands, Hungary and Austria, which were slightly offset by lower sales in Romania.

At €687 million, third quarter cash flow from operation activities, excluding net working capital effects was up 60% from the lows of the previous quarter. However, it declined compared with the strong prior year level.

Net working capital effects generated a cash inflow of €104 million. Consequently cash flow from operating activities came in at €791 million for the quarter.

Looking at the nine-month picture, cash flow from operating activities, excluding net working capital effects, amounted to €2 billion, a decrease of €1.3 billion compared to the first nine months of last year. This was mainly attributable to Upstream, which was severely impacted by the decline in oil and gas prices.

Cash flow from operating activities decreased by 20% to €2.5 billion as net working capital effect showed a big positive swing. While in the first nine months of 2019, we recorded an outflow of €227 million, we had an inflow of €502 million in the same period of this year.

Organic free cash flow before dividends came in at €1.1 billion for the first nine months of the year. While this is a clear decrease versus previous year, the result shows the quality and resilience of our integrated business portfolio in this very, very challenging environment.

OMV's balance sheet remained very healthy and showed strong liquidity with a cash position of €7.3 billion and €3.2 billion in undrawn committed credit facilities at the end of September. The cash position includes the proceeds from senior bonds of €3.25 billion and the proceeds from the hybrid bonds of €1.25 billion, which were issued in the second and third quarter of this year to refinance the committed facility for the acquisition of the additional shares in Borealis.

Compared to the second quarter of 2020 net debt, excluding leases decreased to €1.8 billion. Consequently, our gearing ratio excluding leases defined as net debt to equity was reduced to 11%.

The impairments recorded in the third quarter due to the revision of our long-term oil price planning assumptions only had a minor impact on our gearing ratio. I would like to give you a quick update on our portfolio measures.

As mentioned in the beginning of the presentation, we signed the sales agreement with VERBUND for the 51% stake in Gas Connect Austria. This transaction is an important step in our efforts to deleverage the company, following the acquisition of the additional stake in Borealis.

It will reduce OMV's net debt by more than €570 million. Closing is expected in the first half of 2021.

As already indicated in the previous quarter earnings call, there is a great interest for the sale of our retail network in Germany. We have received binding offers and started negotiations with a short list of interested parties.

We expect signing by the end of this year. Last but not least, we are also progressing with our divestments in Upstream.

In New Zealand, we expect to close the sale of the Maori field in New Zealand until end of this year. We are also making good progress regarding the intention to sell our Kazakhstan assets, as well as the oil fields in Malaysia.

Let us now come to the outlook. Based on the developments we have seen, so far we maintained our forecast of an average Brent oil price of $40 per barrel for 2020.

Despite the recent positive developments in gas price, we assume that the average realized gas price will remain below €10 per megawatt hour for the full year. We expect average production in upstream to be between 450,000 and 470,000 barrels per day in 2020, depending on the security situation in Libya.

The production of the Sharara field in Libya restarted on October 11 and is ramping up. And what I can say also in addition, we have lifted the first cargo yesterday.

So we are not only producing barrel we are also getting some euros into our pocket. Excluding volumes from Libya production in the fourth quarter is estimated to be at a similar level as in the third quarter of 2020, due to the divestment of the Maori field in New Zealand, as well as maintenance in Malaysia and Norway.

The refining indicator margin averaged $2.7 per barrel in the first nine months of the year with a significant decline in the third quarter. 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 around $2.5 per barrel for the full year.

As guided before, we expect a positive contribution from margin hedging in the amount of a mid-range double-digit million euro figure in the fourth quarter, which is not reflected in the indicator margin. For petrochemicals, we estimate the 2020 ethylene/propylene net margin to be slightly below the previous year's level.

The utilization rate of our European refineries is expected to be around 85% in 2020. In the fourth quarter, we are undertaking scheduled maintenance works at Schwechat refinery for roughly three weeks.

We anticipate product sales to remain below the level of last year. Retail sales volumes have recovered to almost 2019 level in the third quarter but we expect a decline versus the prior year level in the fourth quarter.

Jet demand will remain subdued with many airlines canceling flights in winter. Based on the developments in the first nine months retail margins will likely be higher than in 2019, while commercial margins are expected to remain at the levels of the previous year.

Organic CapEx is projected to come in at around €1.7 billion excluding Borealis consolidation after closing. Exploration and appraisal expenditures are expected to be €250 million.

The claim tax rate for the year 2020 is estimated to be in low to mid-30s excluding Borealis consolidation effect. All right.

Now it goes. Ladies and gentlemen, this morning following completion of all regulatory approvals we closed the acquisition of the additional 39% share in Borealis, thus increasing our stake to 75%.

The purchase price of the transaction amounts to $4.68 billion. Based on closing adjustments, the cash out for OMV, net of cash acquired is €3.8 billion.

The adjustments include the first quarter dividends to which OMV is entitled based on the increased shareholding in the amount of $129 million. Currency effects and the cash position of Borealis at closing.

Following the successful issuance of senior and hybrid bonds of €4.5 billion, OMV paid the entire amount in full at closing. Through this acquisition OMV becomes the largest producer of olefins in Europe and one of the largest polyolefin producers worldwide.

This is a decisive step in our transformation to position OMV successfully for the future. On the one hand, we are convinced that chemicals and polymers will be without any doubt also needed in 2050 and beyond; on the other hand with this transaction our portfolio changes towards non-energy low-emission products, as they are not burned.

Chemicals are an important pillar of our Scope three emissions intensity reduction strategy. As already announced at signing, we expect to achieve material synergies from the combined businesses.

Following the work of joint teams to identify synergies in the last six months, we now increase the synergy potential from €700 million to more than €800 million until 2025. The synergies will come from operational cost savings, combined purchasing, debottlenecking, increased capital efficiency and tax benefits.

Expanding the value chain not only enables us to participate in an attractive growth market but also improves our natural hedge against cyclicality. Let us have a look at the cash generation ability of both OMV and Borealis.

As I already mentioned, in the first nine months of 2020 OMV's operating cash flow excluding Borealis dividends amounted to €2.3 billion. Compared to the same period of 2019, the operating cash flow decreased by around 20%, mainly driven by a lower contribution from Upstream.

As you can see, Borealis delivered a very resilient operating cash flow including the dividends from Borouge of €1.1 billion, despite the difficult macro environment, that is 6% higher, than the same period of last year. Borealis has been a highly profitable business with strong cash flows in the last five years, and we believe that the long-term fundamentals of the business will continue to be strong.

The challenging year has demonstrated how vital Borealis products are in our everyday life, especially in a crisis such as the COVID-19 pandemic and also has confirmed Borealis competitive advantages, strong and diversified customer portfolio, and resilient specialty products. Just to give you an example of such products, Borealis holds a global market share of approximately 15% of the pipe market.

Capital discipline is an essential lever for high free cash flow generation. OMV has proven to be very disciplined in recent years, and we will maintain this focus also going forward.

While OMV's operating cash flow increased from €3 billion to around €4 billion in the period from 2017 to 2019, our organic capital spending averaged €1.9 billion. In 2020, as a measure of -- to safeguard our financial strength, we decreased the organic CapEx by approximately 30% to below €1.7 billion.

Borealis is also a highly cash-generative company as you have seen in the previous slide, but one with a relatively low capital intensity. The company achieved an operating cash flow including Borouge dividends of around €1.3 billion per year on average in the period 2017 to 2019, while having spent only around €0.5 billion for investments.

Borealis' organic CapEx is expected to be higher in the next two years compared to the 2019 level, as the company is finalizing two main growth projects, the PDH plant in Belgium, as well as the ethane cracker and polyethylene plant in Texas, U.S. After 2020, while their cash generation ability will increase as a result of the start-up of growth project, organic CapEx will go back to historical levels of around €0.5 billion.

If we look at the combined picture, capital discipline remains a priority for the OMV Group. The combined capital spending for next year is estimated to be between €2.5 billion and €3 billion.

We are funding the growth of the Borealis projects, balancing our capital spending with Upstream and our innovative Downstream projects. If the macro environment remains challenging next year, our spending will be adjusted towards the lower end of this range.

Our near-term focus will be on net debt reduction to strengthen the balance sheet and maintain our investment credit grade, while at the same time delivering on our progressive dividend policy. Thank you for your attention.

Before we come to your questions, I hand over to Reinhard for some additional remarks on the Borealis transaction.

Thank you, Rainer. Ladies and gentlemen, good morning from my side as well.

It has been emphasized already the closing of Borealis acquisition is a true game-changer for OMV, not only repositioning OMV from a strategic perspective, but also changing our financials, as we will fully consolidate Borealis in our books starting today. Therefore, before coming to your questions, I would like to use the opportunity to run you through the financial implications of this important deal.

Starting with the closing, Borealis will be now fully consolidated in our figures. Borealis is holding major participations in joint ventures, most notably the 40% stakes in Borouge in Abu Dhabi, and the 50% stake in Baystar in the U.S.

These participations will now be reflected at equity in our operating result. A bigger OMV also means a bigger balance sheet.

The overall assets of Borealis amount to around €14.4 billion on a 100% basis. If we deduct the previous 36% participation which was reflected in our books with €2.3 billion, the remaining amounts to around €12 billion, deducting the purchase price, which means our balance sheet will expand by around €8 billion.

Let me elaborate a bit on the changes in our balance sheet on the equity and liability side. Of course, this is still a preliminary view as of today's perspective until full finalization of our purchase price allocation.

So, OMV's equity base will increase because of two incremental effects. Firstly, the step-up in the valuation of our 36% share; secondly, some tax synergies that raised OMV's equity position via deferred tax assets.

In total, we are currently expecting that these two effects will lead to a gain of around €1.6 billion on a preliminary accounting view, which will be booked as a special item in our fourth quarter results. In addition, based on the purchase price, we will book a non-controlling interest for Mubadala's remaining minority stake in Borealis of around €2.5 billion.

This will be shown as non-controlling interest among the equity positions. On the debt side, OMV's net debt will increase in the fourth quarter, reflecting the cash out of €3.8 billion and the Borealis debt consolidation.

As of end September, the Borealis debt stood at around €2 billion including leases and at around €1.8 billion excluding leases. Based on these effects and the payment of the OMV dividends in the fourth quarter, we are currently expecting to end the year with a gearing ratio, defined as net debt excluding leases to equity of around 45% or slightly below.

That's however, only the year-end snapshot as the focus shifts to debt reduction now. We expect to deleverage the company fast.

We will see the impact from the major divestments announced already in the first half of next year and we won't stop there. We will inform you about further divestments in the beginning of next year.

Thank you for your attention. Now, Rainer and I are happy to take your questions.

Yes. Thank you, both.

Let's now come to your questions. [Operator Instructions] The first question comes from Alwyn Thomas of Exane BNP Paribas.

Hi. Good morning.

I hope you can hear me okay. A couple of questions from me.

Firstly, I just wanted to get what -- are you able to describe what you think are the right level of Borealis dividend expectations for 2021 or 2021 plus? I appreciate next year is quite a big CapEx year.

Just to help us there. And secondly, I appreciate the gearing target by year-end.

That's helpful. Wondering if you could possibly give us a rough estimate of where you'd like it to be by the end of next year, given all the asset disposals as well and some of the earnings expectations from Borealis, just so that we can get to what we think will be a rough clean number for the group at the end of next year.

Thank you.

Thanks for your question. The Borealis dividend level of course is one that we will decide on the course of next year's performance.

So there's nothing to announce at the moment. This is something where we, of course, have a clear flexibility to adjust according to the economic situations that we see in the market, so we cannot anticipate that today.

Your other question was around the gearing level at -- of OMV by the end of next year, if I understood you right. Now, of course, we are on the path of clearly deleveraging and the aim has to be that we will be somehow in the mid-30s of gearing excluding leases, because this gives us clearly the perspective that we are close to the target level that we anticipate for the group and on the other hand also see, of course, that the economic environment is hopefully slightly improving.

And on the other hand, we'll also see a certain challenge in next year.

Okay. Perhaps and could I maybe just ask what you anticipate for Borealis' earnings or cash flow performance for next year as well?

I appreciate the outlook is not particularly certain, but perhaps within a range.

No, there's nothing that we currently can give as an outlook. So this is too early, as we are today, in the first day of full consolidation anyway.

Okay. No worries.

Thanks.

Thanks, Alwyn. We now come to Thomas Adolff, Crédit Suisse.

Good afternoon. Just two questions.

Firstly, on the payments to Mubadala and doing it all-in-one, I mean, you did say you have the liquidity, but you had the option to kind of spread it a little bit. So, I mean, should I be reading something between the lines as a sign of confidence on the disposals, or is it just simply, let's get it done with and move on?

And then, secondly, just on Libya. I think you mentioned, Libya is now producing about 16 kbd and, of course, the market felt -- the ramp-up is a lot faster than expected.

What do you see on the ground? I mean, when do you expect your operations to reach plateau production?

Can it happen within weeks or months, or what is the situation on the ground please? Thank you.

Thomas, to your first question. Of course, this is a sign of confidence.

And I think it is both from a perspective that we do have the liquidity as OMV. And on the other hand, of course, it also has commercial and economic considerations.

You can imagine with very favorable rates that we had been able to refinance. This is certainly a better deal than just paying interest for a deferred payment to our very appreciated partner.

So, therefore, having the liquidity there and Rainer mentioned in his speech that we have cash on hand of more than €7 billion and additional undrawn credit facilities. This certainly displays the strength where it is clearly the economic better decision to pay the full price now.

Thomas, this is Rainer. I would like to give you a comment on Libya.

Well, I was also surprised by the rapid ramp-up in Libya, to be honest. I thought it will move more slowly.

At the moment, it's pretty silent on the ground. But, I think, in a very honest remark, the country remains fragile and we need to see more political progress in the country.

The ceasefire is helping and that's why I think we can calculate with some production in the fourth quarter. This is an upside for OMV and I think we will see also a further ramp up.

I think we will produce more than the 16 kbd. But how much, honestly speaking, I don't know.

It's a bit too early. Coming back to plateau production of 35,000 barrels per day, I think this is not the number we will see in the fourth quarter, but it really depends how quickly, especially, our local staff can ramp up the production further.

Thank you.

We now come to Mehdi Ennebati at Bank of America Merrill Lynch.

Hi. So, good morning all and thanks for taking my question.

So maybe question on Borealis, please. So you provided the Borealis cash flow from operation for the first nine months of the year, that it is €1.1 billion, which look pretty solid.

I was just wondering, what was the share of Borouge on those €1.1 billion. And also could you please tell us, if the Borealis cash flow from operation has been increasing or rather decreasing from the first quarter to the third quarter, just for us to try to understand the dynamic.

And maybe one more question. Do you expect Borealis organic free cash flow to be positive in 2021?

I am asking because you are saying that the CapEx will go up, but we don't know if it will go up very significantly on that. Thank you.

Mehdi, thanks for your questions. So if you take the share of Borouge dividend, if you take Borealis cash flow, I would restraint from giving you an exact number, but the ballpark is that it's slightly below half of the cash flow coming as a dividend from Borouge.

Your other question was, whether the cash flow Q1 versus Q3 had developed positively or negatively? Well, actually this has been, a rather stable development, of course also influenced by the fact that in the face of a crisis, as of the end of Q1, there was also in Borealis, a clear restraint on CapEx and a clear optimization of OpEx.

So therefore, the cash flow was also positively influenced, by countermeasures that the company has been taking.

And maybe regarding 2021, please?

2021, I think Rainer has mentioned, that in 2021, there is also sizable organic, respectively inorganic cash out. So we're expecting free cash flow in that year, not a huge contribution, but starting, as Rainer said, in 2022, having significant contribution, in free cash flows from Borealis.

Okay. But…

Mehdi, I just would like to give you …

Yes. Please.

Mehdi, I just would like to give you one additional, information. And I do repeat, what I have said also in earlier calls, on the share of Borouge, in our cash flow.

The Borouge contribution is strongly depending on the naphtha prices, in Asia. So what I would like to recommend to you is, look into the naphtha prices in each quarter.

And then you get an idea about, the performance of Borouge, on a quarterly basis, because there is very great -- yeah, let's say, Borouge is really falling strongly on the naphtha prices. It's -- as higher than naphtha prices as higher the contribution from Borouge.

All right. Thank you very much.

Okay. We come now to Henri Patricot of UBS.

Yes. I want to thank you for the update.

A couple of questions please. So the first one around hedging, because you did a little bit of hedging in the third quarter, so I was wondering, if you're doing any of that R&D Downstream, but perhaps more likely on the Upstream side, with a more challenging macro environment?

And then secondly, I was wondering, you mentioned, the CapEx and that could be towards the lower end of the range next year, if the macro is more challenging. I wanted to get a sense of, what gets -- pushed back you from exactly to bring CapEx count, closer to €2.5 billion.

Thank you.

Henri, regarding hedging in Q3, first of all, the precautions that we took in hedging some of our volumes, on the upstream side have ended, with the end of Q3. So, there is no downside from that to be expected in Q4.

The hedging losses have been less than €30 million, so this has not been a huge effect. But nevertheless, I think it was an important step that also helped us in Q2.

And in Q3, it was sort of that protection where you sometimes, also pay price for that. But as said, this is not a huge impact.

And we will not see any of that in Q4, to be repeating. In Downstream, of course the hedges are extremely helpful.

And they are part of our operative business. And this is something that Rainer has mentioned it, also will recur with mid-double-digit number, in Q4.

Well Henri, talking about CapEx, I think it strongly depends, whether or not. And when we are going to see an economic recovery in 2021, determining what is really the CapEx budget we will approve in our Board.

Right now, as a gut feeling, I think that also the first half of 2021, we will see a COVID type year, so that, at least the first half of the year, we will discuss our CapEx budget to be pushed back to the lower end. And I think I said it also in the earlier call, we are more very conservative.

And we would like to demonstrate a high performance on CapEx -- capital discipline. So you should prepare anyhow, that the range between €2.5 billion and €3 billion OMV will not pick the other end.

I would be surprised, if I would see that after my comments.

Okay. Got it.

The next question is coming from Michele Della Vigna, Goldman Sachs.

Thank you very much for the presentation and for taking my question. It's really one.

And it's a strategic question on, decarbonization. When I look at the strategy of your peers, they are mainly focused on renewable power.

And yes there is an alternative route to decarbonization through the circular economy. And it seems to me like, you're really taking this route with the Borealis acquisition and with some of the other projects you're investing in.

It's about recycling. It's about capture and use of CO2, bioproducts, biochemicals.

I was wondering, if you could lay out your strategy for decarbonization, with a focus on the circular economy. Thank you.

Yeah. I am delighted to do so, Michele.

First of all we have made an announcement in our last call, that we have a long-term target -- CO2 reduction target to become carbon neutral in our operations, until 2050. That's an ambition.

But we also published, that we are increasing our Scope 1 and 2 targets, being now a 30% reduction, instead of a 19% reduction until 2025, in our operations. This is mainly coming -- this is coming from both business segments, Upstream as well as from -- and Downstream.

We, in addition also increased our short-term target for Scope 3 reduction from 4% reduction to 6% reduction. All the comments of the reductions are based on, the comparison to the emissions, we have published for the year 2010.

So this is just OMV being engaged in, also reducing their CO2 footprint. We also published a firm number, of at least 1 million ton CO2 reduction, until the year 2025.

So this is all, the story about CO2. OMV is also investing into some renewable power.

You might have seen that, we are building together with VERBUND, the largest power company of Austria, the biggest photovoltaic plant, here in the country. But all these activities are focusing on, our equity power demand.

So OMV is more striving towards, renewable power for the equity demand. A good reason why we are not investing into renewables is that we don't have a really convincing business model for you.

If I cannot present to you a double-digit rate of return of my investments, which I can't calculate in renewable power projects, I think I will disappoint you on our ROCE targets. And secondly, I think we can contribute very much with our strategy that we would like to burn less oil but upgrade it into chemicals, which means we are going to reduce our fuels output in favor of higher petrochemicals production.

And on top of that, I think we are now taking care about the captive market behind our petrochemical business with the Borealis acquisition and then investing into circular economy. We are now in the hot phases to discuss the FID for a bigger brand for the ReOil technology here in Austria.

So the next scale up we have in mind is the 20,000 tonnes per annum capacity. We will meet our commercial threshold with 200,000 tonnes per annum capacity.

So it's just economy of scale, which is in our mind until 2025. So I think we are not talking about only an ambition in the year 2050, we are talking about definite 2025 targets what we would like to invest for and reduce for a better CO2 footprint in the next five years.

Thank you.

Thanks Michele. And we now come to Peter Low, Redburn.

Hi, thanks for taking my questions. The first one was just a clarifying question on the various moving pieces with the Borealis acquisition and its impact on net debt and gearing.

I think you said that gearing would end the year at 45% pre-leases. If I just take the 3Q net debt number and add the €3.8 billion cash out and then also factor in I think you said a €1.6 billion increase in equity that you'll book as an exceptional in 4Q, I would calculate the pro forma gearing would be just 32%.

So I'm obviously missing a couple of moving parts there. Any help with that would be appreciated.

And then the second was just, how do you view the relationship between de-gearing and distribution growth? Should we assume that gearing has to fall below that 30% threshold before we see any movement on the dividend?

Thanks.

Peter there is one part that you are missing in your equation, which is the debt of Borealis, which we'll also fully consolidate yeah, and that is the number of as I said €1.8 billion excluding leases and €2 billion including leases. So that will bring you then to the number that I have displayed here.

Regarding the gearing, of course, it is our target to reach the target level of 30%. And the precision of whether you move slightly up or slightly down this -- before you have the ability to grow your dividend, this is something that depends very much on the outlook of the economy that we'll ultimately see.

But with the promise that we have given to divest parts of our portfolio, which we see as noncore in the magnitude of €2 billion, I would see that this will contribute very strongly to reaching this kind of level. And this is some level where I said by the end of 2021, we expect to be already in the range of mid-30s and deleverage with the execution of further divestments, further down and this is very much in line with both staying with our dividend policy that we have given, and also the strategic development of the company with the opportunities that we also have with Borealis on board now.

Okay, thank you. Very clear.

Good. Next is Matt Lofting, JPMorgan.

Yeah. Hi, gents.

Thanks for the presentation. Two questions if I could please.

First, given the completion of the Borealis deal, could you just talk a bit more holistically or strategically around capital allocation priorities 2021 and beyond into the medium-term? I understand that you need to prioritize de-gearing from the perspective of let's say the next sort of six to 12 months.

But behind that and when we look beyond that particularly with the additional growth CapEx being put into Borealis combined with additional disposals that you appear to be signaling this morning, how should we expect the business mix to evolve? And as that happens and the nature and perhaps the stability of the cash flow evolve how does that affect the appropriate parameters around dividends and cash return medium-term?

Then secondly and a shorter one, could you just talk about looking into 4Q and perhaps early next year the latest data points and views that you have around demand trends through the lens of your marketing and petchems businesses? Thank you.

Matt regarding the capital allocation priorities, of course, there's a short-term perspective and there is a mid and long-term perspective. On the short-term I think digesting this transaction is a priority to make sure that the traditionally very strong financial position of OMV is displayed for a very, very long time.

So that means that deleveraging and also of course dividends stay a priority in the capital allocation over any other inorganic growth at the moment. However, with now three legs in the mid and long-term, we do have a lot of opportunities not only to expand on business like upstream, downstream or petrochemicals but also push forward the transformation of the company in terms of circular economy, in terms of recycling, in terms of biogenic replacement of fossil fuels and all that.

So you will see that there will be sizable investments in the transformation of the company in low-carbon future and of course also in the area where we have now set a milestone with Borealis, which is the petrochemical and chemical area.

All right, Matt, just one comment because you asked about gearing and dividend. What I realize in these days is that OMV really differentiated from their peers that, we keep our dividend policy, and that the dividend has a certain weight and priority in our discussion, especially when we also talk about the capital allocation next year.

I would like now to answer your question about the fourth quarter and moving into 2021 what are the major trends I do see? I think the oil market, especially and the refining, the oil and refining market is now coming with a major uncertainty on the demand side.

Everybody is now talking about what is the effect of the potential lockdowns we are going to see over here in Europe. So I think that, the oil price and also the refining is very much demand-driven given the – I don't know, how should I call it light lockdown of Germany and what kind – they try to take care about the economic impact.

But one thing is for sure, jet demand will be further weakened into Q4, and jet is driving the show and making the pressure on the refining margins in Europe. We do see now a good $2 per barrel in the market.

I think, there is no upside in refining margins for Q4. When we talk about natural gas, I will give you a positive indication.

If you look into today's quote in the European gas prices, you will see it's a first quarter with the quoted prices above the previous year quarter. The average gas price in European gas in the fourth quarter 2019 was €13 per megawatt hour, whereas you see now a quotation of above €14.

So natural gas is not so much impacted by the COVID effects, I have mentioned in refining and oil. I think the gas consumption and the price curve will be more driven by the temperatures, weighting us in the next weeks to come.

When we talk about petchem and polymers, we are expecting to see a stable business also in the fourth quarter. It's really depending whether or not we're going to see heavier lockdown effects like in April, when Germany decided to shut down the automotive production – the production in the automotive industry, which was a heavy impact also for the polymers, we are supplying into this chain.

So all in all, I would say, stable also fourth quarter. We are talking about petchem polymers refining natural gas, a challenging quarter for Upstream a little bit less challenging for OMV, because Libya is coming back, but a challenging quarter for refining as well.

Great. Appreciate it.

Thanks guys.

Next question is from Bertrand Hodee, Kepler Cheuvreux.

Yes. Good morning, gentlemen.

I have a question around slide 14 on the CapEx, especially around Borealis and to understand whether the Baystar JV in the U.S., which is equity funding of, it is included in those numbers. And I wanted to refer to two things in fact.

First, there were some organic – inorganic CapEx with Borealis having increasing its stake in Novealis, the Baystar JV. So can you disclose that number?

And I wanted also to double check is for 2021 in your Borealis guidance, was there any related CapEx associated with the ethane cracker in the U.S.? Thank you.

Yes, Bertrand. Of course in Borealis, there have been inorganic CapEx this year, both for the acquisition of another 25% in the Baystar project, which was concluded earlier this year, as well as a small acquisition also in Korea a company called DYM.

So there has been a part of the CapEx in Borealis also of inorganic nature. And in 2021, there will be partly still some equity injections into the U.S.

business, but specifically also CapEx regarding the organic investment, which is currently being done in Kallo in Belgium which is a sizable project. And therefore, there will be also, I would say, other than normal CapEx it's not an organic in that sense, but other than the normal level in 2021.

But can you disclose what was the inorganic CapEx of Borealis in 2020? And more specifically is the, I would say, equity funding of the JV in the U.S.

is included in your CapEx guidance, organic CapEx guidance for 2021?

No. It's an organic part, so that is not included in the organic guidance, yes.

And regarding the magnitude as far as has been disclosed with Borealis it is known and as far as is not disclosed, I cannot comment at the moment.

There is a follow-up question from Thomas Adolff, Credit Suisse.

Hi, guys. And thanks for taking my follow-up question.

Just going back to your comment on the leverage ratio net debt to equity. Just correct me if I'm wrong, by end of 2021, you said you expect it to be around the middle of mid-30s.

And if memory serves me well, wasn't your target previously 30% or less? Has anything changed there please?

Yes, there has changed something not in our target, but in the economic situation. So we have a crisis at the moment, and we clearly see that we cannot overstretch our expectations here.

However, what we said is that after the closing of the transaction of Borealis, we have to take 12 to 18 months to return to the levels of our target and the anticipated step from where we will end up at the end of this year to a level of mid-30s next year, I think is already a sizable improvement that we are seeing with a clear target to reach to 30% very soon.

And if I may follow-up, versus the 30% and the prior target versus now the mid-30%, what exactly has changed in your assumption? Is it the oil price, or is it actually anything else refining chemicals?

So what has changed there please?

What has changed is the target price of the oil with $50, which has been already announced in first quarter this year. And this is the expectation for 2021 that we see oil price of $50, which previously has been above $60.

Okay. Thank you very much.

Very clear.

And we now come to Sasikanth Chilukuru, Morgan Stanley.

Hi. Good morning.

I had two questions please. The first one, you talked about non-core assets.

I was just wondering if there were any businesses within the Borealis that you would consider non-core and potentially disposal candidates? And the second one is just a follow-up on the Borouge dividend.

I was just wondering you mentioned the contribution of Borouge. Was that an annual payment dividend payment, or is the Borouge dividend essentially paid on a half yearly basis?

I just wanted to understand the magnitude of that dividend as well. And slightly related to that was there any dividend contribution now from Baystar?

And what is the level of dividend coming in from Baystar? Thanks.

I'll take your second question first here. So, regarding the Borouge dividend normally this is an annual payment that we see here.

But, of course, it is subject to the agreements between the shareholders and in Borouge that is 40% Borealis and 60% ADNOC. So this has been the payment and as said it has been less than half of the cash flow that we have displayed here.

Regarding the dividends from Baystar, no, there is no dividend today, because this is a business which is currently ramping up. So we are, of course, expecting dividend payments also from Baystar in the coming years, but as it is ramping up, we are not expecting that for next year.

I'll take your questions on the portfolio whether or not they are non-core assets. We first would like to start now a dialogue with the Borealis management and give me some time to answer your question.

At the end of the year, we will make an announcement, because I can read between the lines what you would like to get as a message, what is the next divestment package. And this is something we are going to publish end of this year or beginning of next year.

Thank you.

Good. So this concludes now our conference call.

We would like to thank you for joining us. If you have any follow-up questions, please reach out to the Investor Relations team.

Many thanks and have a good day.