OMV AG

Good morning, ladies and gentlemen, and welcome to OMV's earnings call for the first quarter of 2021. With me on the call are Rainer Seele, OMV's Chairman and CEO; and Reinhard Florey, our CFO.

As always, Rainer Seele will walk you through the highlights of the quarter and discuss OMV's financial performance. After his presentation, both gentlemen will be available to answer your questions.

And with this, I hand it over to Rainer.

Yes, thank you, Florian. A very warm good morning, ladies and gentlemen, and thank you for joining us.

The first quarter of 2021 provided some positive news for our industry with a materially better quarter-on-quarter macro environment in the Exploration & Production and Chemicals & Materials segments. However, the environmental refining marketing remained challenging due to the pandemic.

Let me start by providing a brief review of the economic environment. Oil prices recovered in the first quarter of 2020 -- 2021, reaching $69 per barrel in March, a similar level last seen in January 2020.

At $61 per barrel, Brent was 38% higher quarter-on-quarter and 22% higher year-on-year. The upward momentum was driven by the rollout of the COVID-19 vaccine which has improved global demand expectations.

At the same time, supply and power outages due to the extreme weather conditions in the U. S.

impacted U.S. liquid supply.

OPEC Plus continued to demonstrate strong discipline which, together with Saudi Arabia's voluntary cuts of an additional 1 million barrel led to a more balanced market. European gas prices increased substantially.

A slight above €18 per megawatt hour, Central European gas prices were 70% higher than in the same quarter of 2020 and 31% up compared to the previous quarter. Stronger demand in Asia, shipping constraints and some LNG production restrictions pulled LNG imports away from Europe.

At the same time, cold weather throughout Europe triggered strong demand growth for heating and power. At $1.7 per barrel, the refining indicator margin in Europe remained at a low level 66% below the first quarter of last year.

Substantially lower middle distillate spreads and a sharp increase of crude prices were only minimally offset by higher naphtha and gasoline cracks. Compared to the fourth quarter of last year, the indicator margin was flat.

Ethylene and propylene indicator margins Europe were slightly above the previous quarter but down 21% and 11%, respectively, year-on-year. Both indicator margins were impacted by rising naphtha prices.

European margins for polyethylene and polypropylene rose substantially and reached the highest level ever in the first quarter of this year. The polyethylene indicator margin Europe more than doubled and the polypropylene indicator margin grew by 54% year-on-year.

This was mainly attributable to a tight market in Europe, driven by strong demand and supply constraints. On a global level, polyolefin demand also showed strong growth in the first quarter, twice as much as in the same period last year, leading to a favorable margin environment.

At €870 million, our clean CCS operating result was 24% above the same quarter of last year and 66% higher than in the fourth quarter of 2020. This was mainly attributable to a substantially improved exploration production business, and the very strong performance of chemicals and materials.

The contribution of the new segment, chemicals and materials represented about half of our earnings, reflecting the growing importance of -- and weight of this business in our portfolio. We were able to deliver an outstanding quarterly cash flow from operating activities, excluding net working capital effects of €1.7 billion.

I have to read it again, it's such a nice number, €1.7 billion, which is more than double compared to the first quarter of 2020. This demonstrates the strength of our integrated portfolio and the value of the expansion into chemicals.

Our Clean CCS earnings per share increased by 34% year-on-year. Looking at the operations, our E&P production was 5% higher year-on-year, primarily due to increased production in Libya, Malaysia and Tunisia.

The production cost remained below $7 per barrel. Our refineries in Europe showed an average utilization of 81%.

While demand in Austria and Germany was still considerably impacted by lockdowns, the refinery in Romania had a high utilization rate of 95%, mainly due to good demand for middle distillates in the region. In Chemicals & Materials, Borealis showed an excellent performance, driven by higher polyolefin sales volumes in Europe and Asia, as well as by a very strong margin environment.

We also made further progress with our strategy, focusing mainly on chemicals and sustainability. In January, we took the FID for the expansion and modernization of our steam cracker in Germany.

The new units will add 50,000 tonnes capacity and expect it to come onstream in the third quarter of 2022. In January, we also announced the operational start of the demo plant for advanced mechanical recycling in Germany, a joint project with our partners, TOMRA, a Norwegian collection and sorting machine manufacturer, and Zimmermann, a German waste management company.

This plant is one of the world's most advanced mechanical recycling plants. It represents the first step towards developing highly demanding applications for various industries, such as automotive and consumer products.

We currently run four mechanical recycling plants in Austria and Germany with a capacity of around 100,000 tonnes per annum. In February, we made further progress with our efforts in the era of hydrogen.We decided to invest in green hydrogen plant at our site in [Schwechat] with a production capacity of up to 1,500 tonnes of green hydrogen.

The new electrolysis plant will be Austria's largest. The green hydrogen is planned for use in the refinery to hydrogenate biobased and fossil fuels, substituting grey hydrogen as well as for the decarbonization of the transport sector.

In this context, we signed a memorandum of understanding with the Austrian post for the use of green hydrogen in its logistics fleet. We see huge potential for hydrogen in areas of heavy traffic and in public transportation, as these are areas where electrification can be difficult or even impossible.

In March, we announced another investment in biofuels. We will build a pilot plant in Schwechat, where second-generation biofuels will be produced using a patented process developed in-house.

Start-up is planned for 2023. This innovative process converts the glycerine into bio alcohol, which is added to gasoline, thus reducing the carbon footprint.

Glycerin is a waste product from biodiesel production and the manufacture of detergents and soaps and is considered an advanced feedstock under the European Renewable Energy Directive. We also took the FID for the Jerun gas field in Malaysia in March.

When it comes on stream in 2024, the project is expected to add around 30,000 barrels per day to OMV production. Gas produced from the field will be sold to the Petronas Bintulu LNG Complex.

Last but not least, we are very proud that Borealis broke its own record in filing patent applications in 2020, continuing its reputation as Austria's patent Kaiser. The growing number of patents underscores the Company's position as a leading industry innovator, and it is a testimony to our dedication to creating value through innovation.

Let's now turn to our financial performance in the first quarter of '21. Our Clean CCS operating result increased to €171 million compared to the first quarter of 2020 which was only partially affected by the pandemic.

This increase was mainly driven by a substantially better performance of the Exploration and Production and Chemicals & Materials segments, and it was partially offset by a significant decline in refining and marketing. Driven by a proportionately higher contribution of Chemicals & Materials, the Clean CCS tax rate decreased to 27% which was five percentage points lower than the same quarter last year.

Clean CCS net income attributable to stockholders rose by 34% to €424 million. Clean CCS earnings per share was €1.30.

Let me now discuss the performance of our business segments, which are reporting for the first time under the new structure. The clean operating result of Exploration and Production increased considerably by €361 million.

The main driver were higher realized oil prices and improved sales volumes, primarily driven by the return to full operations in Libya. OMV's realized oil price increased by 18%, which was slightly less than the Brent price increase due to hedging effects.

As guided, we have hedged 1/4 of our oil production for the first half of '21 at a price of around $55 per barrel. While the Austrian gas hub prices were 70% higher than the first quarter of 2020, our overall realized gas price declined by 6%.

This was mainly due to lower gas prices in Romania and Malaysia, as well as a 2-month lag for half of these sales volumes in Russia. Together, these volumes represent around half of our total gas sales volumes.

Our production rose by 23,000 barrels per day to 495 due to a higher contribution from Libya, Malaysia and Tunisia, a development that was partially offset by a natural decline in Romania and lower volumes in Norway. In Russia, production was slightly lower than in the first quarter of 2020 due to lower pipeline pressure.

A booster compressor installation will enable increased production starting with the third quarter of this year. Total sales volumes increased by 11,000 barrels per day, hence, somewhat less production -- less than production due to fewer liftings in Norway and in the United Arab Emirates.

Depreciation decreased slightly compared to the first quarter of 2020 due to the reserve revisions and a lower asset base resulting from impairments taken in the third quarter of last year. The Clean CCS Operating Result of Refining & Marketing decreased significantly year-on-year to €108 million, driven by lower demand caused by travel restrictions related to COVID-19.

Product sales were 17% below the first quarter of 2020, mainly caused by continued subdued jet fuel demand on the back of slower-than-expected COVID-19 vaccine rollout. Sales volumes in retail were 7% lower than the third -- the same quarter of last year.

Unit margins in both retail and commercial were lower, burdened by the rapid increase of crude comprises. The contribution from ADNOC Refining & Trading came in at minus €25 million due to significantly lower refining margins.

ADNOC Global Trading started its operations in December, and contributed positively to the result. The contribution from the gas business fell from the very high level of 2020 to €70 million.

The results were impacted by the weaker performance of the storage business and supply results. Gas sales volumes rose by 23% on account of higher sales in Germany and the Netherlands, slightly offset by lower sales in Romania.

The clean operating result of Chemicals & Materials more than tripled to €442 million year-on-year. This sharp increase is attributable to two factors.

First and foremost was a strong improvement of polyolefin margins and higher sales volumes. Secondly, the consolidation of Borealis and the JVs into our results supported the overall performance.

Let's now have a look at the different businesses. The contribution of OMV's base chemicals declined compared with the very strong prior year quarter due to lower olefin indicator margins as higher feedstock costs could not yet be fully passed on to the market.

Borealis showed an excellent performance. Excluding the joint ventures, earnings grew from €54 million to €270 million.

This was driven by better performance of both businesses, base chemicals and polyolefins, which was partially offset by a lower fertilizer result. The Borealis base chemicals business improved following positive inventory valuation effects, which more than compensated for lower margins.

Earnings of the polyolefin business rose sharply primarily driven by significantly higher margins and increased volumes. Positive inventory valuation effects supported the result.

We were able to expand polyolefin sales volumes in Europe by 6%, in particular in consumer products, health care and energy. The contribution from the fertilizer business was lower compared to the first quarter of 2020.

The business could not benefit from the favorable market environment due to a backlog of sales orders following operational issues in the second half of 2020. In addition, the margins were negatively impacted by higher natural gas prices.

At €124 million, Borealis joint ventures, Borouge and Baystar, delivered a strong result, representing about 1/3 of the segment earnings. This was driven by improvements in the operational performance of Borouge, strong recovery of the Asian markets, leading to higher polyolefin prices and sales volumes and higher contribution due to the full consolidation of Borealis.

Polyolefin sales volumes from the JVs grew by 16%, driven by higher sales at Borouge. The sales volumes at Baystar fell slightly below the negative impact of the taxes freeze in February.

Turning to cash flow, our operating cash flow, excluding net working capital effects, more than doubled to €1.7 billion with around 1/3 coming from Chemicals & Materials. As demonstrated in 2020, Borealis is a company that generates very strong cash flows, and the first quarter has proved this once again.

We have seen a significant year-on-year increase from Chemicals & Materials in the quarterly operating cash flow, excluding net working capital effects, of more than €400 million. With the consolidation of Borealis, we have reached a new record of cash flow generation.

Compared with the first quarter of 2020, we saw a significant swing in net working capital while net working capital had a positive impact in the prior year quarter, leading to an inflow of €283 million, we recorded substantial negative net working capital effects in the amount of €646 million in the first quarter of this year. This was mainly attributable to a significant increase in receivables and inventories due to higher sales volumes and higher oil and gas polyolefin prices.

As a consequence, the cash flow from operating activities for the first quarter of 2021 was 5% lower than in the prior year quarter. The organic cash flow from investing activities amounted to €533 million, almost flat compared to the prior year quarter despite the additional investments in Chemicals & Materials.

As a result, the organic free cash flow before dividends decreased by 11% to €532 million. The cash flow -- the cash outflow for inorganic investments was €118 million and included a capital contribution to Baystar.

Net debt, excluding leases, decreased by €261 billion to €7.9 billion. Consequently, our gearing ratio, excluding leases, defined as net debt, excluding leases to equity, decreased by four percentage points in only three months to 37% from its peak level at the end of last year, when we have concluded the Borealis acquisition.

We consider the divestments already signed, totaling a net debt reduction of more than €1 billion. Our gearing ratio, excluding leases, would be around 32% this quarter.

We are fully committed for deleveraging quickly and are well on track to reach a gearing ratio, excluding leases, of around 30% by the end of this year. At the end of March 2021, OMV had a cash position of €3.5 billion and €4.2 billion in undrawn committed credit facilities.

Let me now give you an update on our divestment program. We are well on track and are confident that we will deliver the envisaged €2 billion by end of this year.

We have signed agreements so far resulting in a deleveraging effect of more than €1 billion. In the second quarter, we expect closing of three divestment projects, our 51% stake in Gas Connect Austria, our E&P operations in Kazakhstan and presumably the Maari oil field in New Zealand.

This was reduced -- this will reduce our net debt by around €700 million. The closing of the sales agreement for the retail stations in Germany is expected in the second half of this year.

The sales process for the Borealis nitro business, including fertilizers and melamine, is progressing well. The pre-marketing phase started in the second quarter, and we see that the fertilizer market conditions are highly supportive of this transaction.

We have received the first nonbinding offers for the sale of our Slovenian marketing business, and we expect to open the data room to selected potential buyers soon. Let me conclude with an update of our outlook for this year.

Based on the developments we have seen so far, we have updated our oil price assumption for 2021. And now we expect an average Brent price in the low 60s.

We have also revised our expectation for the average realized gas price to above €11 per megawatt hour. We reconfirm the full year production guidance of around 480,000 barrels per day in 2021, provided that Libya contributes around 35,000 barrels a day.

In the second quarter, we expect production to be below that of the first quarter, as the maintenance activities in Russia will be in the second quarter rather than the third quarter. In addition, we expect the closing of the divestment of Kazakhstan.

However, sales will be above the level of the first quarter due to the catch-up effect of the oil underliftings we recorded in the first quarter. In Refining & Marketing, we reconfirm our previous estimates with the exception of commercial margins.

We now expect them to be below the 2020 level. In Chemicals & Materials, we keep our estimates of the European olefin margins projected to be at the prior year level.

The polyolefin market has continued to rise in the second quarter, but prices are expected to come down as the maintenance season ends and the shipping market normalizes. However, with supply chains in need of restocking and underlying demand remaining healthy, we expect full year margins substantially above 2020 levels.

The polyolefin volumes of Borealis, excluding JVs are expected to be slightly higher than in 2020. The clean tax rate for the full year is expected to be in the low 30s.

Thank you for your attention. Now Reinhard and I are more than happy to take your questions, and back to Florian.

Yes, thank you, Rainer. We now come to your questions and start with Josh Stone, Barclays.

Two questions, please. Firstly, to you, Rainer, there was some news that you're not going to extend your term beyond 2022 for one more year.

I was wondering if you have to say why not as there were some headlines that you were looking to look for five more years. And then second question, if you just update us, there was on disposals, talk about a third package to be announced this year.

Is that still the case?

Okay. Josh, I'll take the first question, which is the easier one, and the second goes to Reinhard.

Why not additional five years, I don't get it approved from my wife. That's a clear answer, yes?

It's a tough application. And my family has asked me to spend more time with the family.

You must understand, I am now more than 15 years CEO of different companies, and I was always living in airplane. Now I also would like to spend some time with my family in the garden, enjoying a good glass of red wine.

Josh, to your second question. First of all, of course, we are concentrating on the first and the second wave of our disposals.

For the first wave, and those are the three divestments that Rainer has spoken about that have been signed already in 2020 and will now close in 2021, bringing proceeds of around €1.1 billion. The second round that we have announced are well on the way in the preparation.

We cannot talk about more details there, but it is the divestments of the fertilizer business of Borealis, as well as Slovenian filling station business. Now when it comes to third package, this will be decided then according to our needs for further increasing headroom for possible new steps that we'll decide on later in this year.

There are no acquisitions planned for 2021. And also, this is a perspective that we keep with very high discipline.

There will be continued [indiscernible] in our portfolio. And that will also keep ongoing.

And that is what is the third package around that we will announce later in the second half of this year.

Thanks, Josh. We now come to Sasi Chilukuru, Morgan Stanley.

I had 3, please. The first one regarding the -- your guidance for the polyolefin margins.

I was just wondering if you could contextualize your guidance for these margins with respect to the margins you've seen in the first quarter, what would substantially higher than 2020 levels translate when you were to compare it with 1Q '21 levels and with regards to that, what margin levels are you currently seeing in April in -- both in Europe and Asia? The second question I had was regarding the cash distribution policy or dividend policy for Borouge.

If you could remind us what that was. Is it fair to assume a pickup in Borouge net income levels to translate to a pickup in the dividends received from that JV?

Or are there any other considerations that I should be aware of in terms of the cash contribution of that JV. And finally, just a quick one.If you could provide us an update on the current situation in Libya.

What is the current production rate there right now?

Sasi, as we speak about the Chemicals & Materials business, I can confirm that we continue to see good polymer margins in Europe and in Asia. The margins in Europe are a bit higher than in Asia.

As the prices, if you look into the prices, the prices in Europe are higher at the moment than in Asia. Maybe the U.S.

impact is a bit stronger in Europe than in Asia. I haven't elaborated so much, but that's more or less the situation.

What we see is, right, that the olefin margins are continuing to improve into the second quarter. So we might see a shift from polymers to olefins.

You might see that in the combination, especially also in the future, that we do have a hedge between the monomers and the polymers, not 100%, but there will be a shift between these two business units. Your question on Libya, well, the environment in Libya is pretty stable at the moment.

I would say I don't see any need to correct my outlook that I'm going to see a stable production until year-end in Libya. The environment has improved.

I have discussed with Hans several times, whether or not we are going to send back our expatriates and our experts into the country. We are not there at the moment, but I would say no reason to be -- to have sleepless nights about Libya at the moment.

And Reinhard is now taking the Borouge question.

Yes, sure. Regarding the cash distribution of Borouge, first of all, it's important to understand that there is a cash distribution as dividend every quarter.

So it's not only a first quarter effect, but we'll see every quarter a dividend from Borouge. Regarding the policy itself, of course, there is no specific disclosure to be done.

However, you can definitely count on a rich dividend policy that Borouge is running, which we have been demonstrating over the past quarters. It's also not to be expected that with further investments also in Borouge that dividends would seize.

So there is enough potential for leverage also of the Company so that there is a continued dividend, maybe not at the same level that we see today, but clearly, continued dividend to be expected.

The next questions are coming from Raphaël DuBois, Societe Generale.

First of all, congratulations on the very strong results. Two questions, please.

The first one is on the utilization rate at your refineries. When we look at it, [indiscernible], it was only slightly up compared to the previous quarter despite the turnaround at Schwechat in the last quarter, in 4Q 2020.

You still show a better utilization rate than the European average, but this advantage seems to have been shrinking a bit. Can you maybe explain why that is the case, why you could not keep your two refineries in Germany and Austria run as much as before?

That will be my first question, please.

Raphaël, you can also ask a second question, and then.

Sure, so my second question is also on Borealis. You have strongly benefited from the non specialty part of your production in the first quarter.

Can you tell us if the non -- sorry, if the specialty part of your production will also see an increase in margins, maybe to reflect somewhat the very strong environment we're in going into the rest of the year?

Raphaël, you're absolutely right in your analysis of our refinery utilization. We have a utilization with the 81% compared to Q4.

The reason why we are now meeting the limits is that our flexibility to deal with the high -- with the very low jet demand in the market is now limiting us with the flexibility, shifting more towards petrochemicals. You have seen that we are now expanding the capacities for ethylene and propylene production in Burghausen, but definitely, this is not the case.

As I'm expecting that especially jet demand, or let me say this on my view on refining margins. First of all, we see already a recovery of the refining margin.

We have seen an average 1.7 in the first quarter. We are now something around $2.

5 in April. The refining margins are backed now first half on a high naphtha and gasoline cracks.

The problem we see right now in the markets are the very low cracks of diesel and jet. And diesel is even worser if you look into the cracks than jet.

So we have a big diesel problem in the market. And if I look into April, the picture hasn't changed.

The picture only has changed towards the better in gasoline as we are going to prepare for the driving season. The second half of this year, I'm expecting a further recovery of the refining margins as we are going to see a better situation in the middle distillates market.

So the second half will be supported by the middle distillates, whereas the first half were supported by gasoline. And that's the reason why we are calculating -- or we are expecting to see a higher utilization second half of this year than first half because of the problems we see -- additional problems we see with the diesel in the market.

A long answer, sorry, Raphaël. Next time, I try to make it shorter.

So Reinhard, now it's your turn.

Yes, Raphaël, you asked about the share of nonspecialty or specialty regarding Borealis margins. It is true that the -- with the prices spiking in the polyolefin area, of course, the non specialty business participated and benefited earlier and higher, and we indicated that already in advance that this would be the case.

However, we will see that there is certainly a certain peaking of these prices going on, and that we will see for the non specialty part, maybe even a slight decrease of these prices in the second half. This is not what we would be expecting in the specialty part.

So in the share between specialties and non specialties, we would see rather again a pickup of the share of specialties in Borealis results. Overall, very strong industrial positions.

And be aware that not all the contracts and all the sales are just long-term contracts in the specialty part, but we also have areas where, on a quarterly basis, prices are being renewed. So I'm expecting rather a stronger specialty contribution, specifically in the second quarter now.

Next is Matt Lofting, JPMorgan.

Congrats on a strong performance in Q1. Two questions, if I could, please.

First, on the upstream side, I think the average net gas realization sort of moved higher sequentially to about €10.5 per megawatt hour Q1 average. But as I recall, quite a high proportion of your hub volumes are lagged in terms of the pricing, particularly through Russia and parts of Asia.

So could you talk a bit about the outlook for gas realizations Q2 and beyond factoring in those lags? And then secondly, on deleveraging, just wondering the extent to which strengthened macro conditions, oil above 60, strong performance from Borealis and the framework you gave around disposals is increasing your conviction or confidence [indiscernible] delivering sub 30% net debt-to-equity by year-end?

All right. Matt, I'm more than happy to answer gas question.

As you know, I'm a pipeline -- I grew up as a pipeliner, therefore, I like your gas questions. Concerning the prices, you can see our guidance is that the realized gas price will be above €11 per megawatt hour.

You are right, we have locked in, I think, a €10. 4 per megawatt hour for the first quarter.

So you should see a higher realized gas price for the upcoming quarters. The reason is that we do have time lag effects in several contracts.

I think it's a 2-month time lag for the gas in Russia. For 50% of the gas, we produce that.

So the 50,000 barrels per day gas production, which is indexed to European gas prices is coming with a time lag effect of two months. So the higher gas prices, we have -- or the rising gas prices we have seen then in Q1, we will see them now starting to run into our numbers for Q2 onwards.

So if you have a time delay in the beginning, you have a time -- a positive time lag when the gas prices will go down, of course. So another information is that we also have a time lag effect with our production in Malaysia.

And this is even higher, it is four months time lag we do have in our contracts. So we see now the gas prices from December in our gas production in Malaysia, and that's why a further increase in gas prices will be supported by higher prices in Malaysia.

One last comment on the gas price development, I think we are going to see, especially in the two summer quarters, more a winter price level than the summer price level we are used to. What you can see on the forward price curve in the market is already €20-plus per megawatt hour, which is 4x -- 3x to 4x higher than the gas price we have seen last year in the two summer quarters.

So I would say, especially the gas production should contribute more in the upcoming three quarters. The major question, I don't answer, you might have in your head, Matt, is how much above €11 per megawatt hour, the price will be at the end of the year.

I'll leave it with you, my friend.

Matt, regarding deleveraging. Of course, your comment or question makes me happy because also I feel that it will be a little bit easier for us now with this clearly better economic environment to reach the tough target of 30% gearing that we have announced and that we are fully committed to.

Now why I'm saying that? First of all, we are keeping a clear discipline on our CapEx with the €2.7 billion.

We will not go beyond that. The question why I'm still hesitating to say we are going sub 30% this year is simply that it's not entirely possible to forecast when the cash inflows from the second row of divestments will come, whether with our commitment to sign them still in this year, whether also the closing will be possible, I cannot fully commit today.

So therefore, at least, I would say, the 1. 1 billion of the three divestments of the first round will definitely come in, and for the second ones, we'll see whether one or the other will also close still this year, then it might be possible to go sub 30%.

Otherwise, I still feel comfortable that we can reach the 30% in '21 and still reap the fruits from the divestments in 2022, also from the cash side. Don't forget, 30% is our target level, so I feel already at 30% more comfortable as I was feeling with 41% when we had the Borealis deal done in 2020.

I think we are on a very good trajectory. As I said, some -- around 32%, including the €1.

1 billion already after Q1, and we'll continue this journey.

Thank you, Matt. The next questions come from James Hubbard, Deutsche Bank.

Two questions, please. The first is -- so Borealis result boosted by inventory effects.

Do you -- can you say anything about the scale of what those inventory gains are and are they broken out anywhere? And then secondly, so selling the four oilfields in Malaysia, and obviously, you sold Maari last year, I think.

I'm just wondering, does that -- what is the overall plan for your Asia upstream position? Is it still seen as core or -- and these were just -- this process is just selling the more mature assets?

Or are you thinking about maybe what the future of the Asian Upstream business is for OMV? And does it need an Asian Upstream business at all?

James, regarding inventory effect of Borealis, yes, I think it's important to talk about it because for the other businesses, R&M and E&P, we are showing CCS effects which give you the indication. We don't do that for Chemicals & Materials because in chemical industry, the market does not know CCS logic in that sense.

The inventory effect that we have seen in the first quarter are slightly below €100 million. So this should give you a good indication for the Borealis.

If you would compare quarter-on-quarter, it would be around €130 million difference because there was a negative effect on the side last quarter, whereas we have a quite sizable effect positive in this quarter.

Well, James, I'm more than happy to take your Malaysia question. You're absolutely right, our divestment of the oilfields is just in line with our strategy that we would like to divest mature fields.

We are not an expert in tail end production. That's the reason why we, at a certain point of time, are stepping out.

But we are committed to Malaysia. You can see that we, just this year, took an FID on the Jerun SK48 gas field development, and it will bring in 2023, 2024 additional around 25,000 to 30,000 barrels per day for the gas production.

Your question is do we need some -- even some Asian upstream production. I would say, as we speak about gas, we are talking about a growing market, we are talking about a very healthy market, we are talking about our upstream position in Malaysia, about a very, very low cost, high competitive production we are going to invest for.

We are talking about investment projects with the high rate of return in our calculation. So I have lots of arguments when we talk about upstream production, especially in Asia, and part of our strategy, James, is that OMV moves more and more towards Asia.

I would even be more open to think and to discuss whether or not we need so much upstream production in Europe, as the European market, as we talk about the different continental markets is a market with a totally different low potential in oil and gas consumption, whereas we are talking about real big growth markets in Asia. Thanks, James.

Next questions are coming from Henri Patrica, UBS.

I have two questions, please, on the petrochemicals. The first one, just following up on the previous comments that were made.

Just wondering [ how ] quickly you captured the higher benchmark petchem margins in Borealis. And you mentioned, in some cases, you have quarterly pricing for specialty.

But on the non specialty side, you said that you kind of fully captured the higher benchmark margins in the first quarter, we should expect to see a bit more of that benefit in the second quarter? And then secondly, can you give us an update on Baystar and the new units, the cracker, which I believe was started out in April, whether there's any impact from the Baystar and what you expect in terms of a ramp-up there?

Sure, Henri. Regarding the petchem margins, I think that we can expect still a very strong second quarter for Borealis.

The hike of the margins came continuously over the month. And I don't think that the level that is reached today can be compared to the average of what we have seen in the quarter.

So in general, we are expecting both in the non specialty, as well as in the specialty, a slight increase in the average, but we have to see how the end of this quarter develops towards summer and how these pricing goes. But in general, we are quite, I would say, positive on the development of petchem also for the second quarter.

Henri, on Baystar, I can say that our polymer production is back in the JV, so given this blizzard impact we have seen at the Gulf Coast, we are now back with production of polymers. But the cracker, the execution of our investment project was not negatively impacted so far.

We can keep the time line, and we are expecting that the cracker will come onstream second half -- no, second quarter, sorry, second quarter of this year. Thank you, Henri.

The next question is from Giacomo Romeo, Jefferies.

First of all, I have to join my colleagues in congratulating you for the excellent results. My first question is whether you can provide an update on the evolution of the commercial discussions in Romania with regards to the terms of the Neptun projects.

And just to confirm here, if you are able to reach an FID on this project, does it automatically mean that you will not exercise your option for Achimov four and five? And the second question I have is, you mentioned a few times your efforts on recycling projects.

Can you provide a little bit of an outlook of where you see capacity going in the next few years? And how do you see returns evolving on -- in these applications?

Giacomo, let's talk about Neptun a bit. As I said already this morning, we are highly committed to the Neptun project.

I think we see some progress now in Romania, especially strong signals from the government that they are ready also to start a parliamentarial approval process for the amendment of the offshore ore. I think what I could read in the newspaper is that Romgaz has placed a binding offer for the Exxon shares.

What was very important for us that in case Romgaz successfully will take over the 50% share of Exxon, the operatorship will move to OMV Petrom. From our point of view, it was very important that OMV will get the operatorship given our technical background in executing this project.

I think we would minimize the technical risk, and we have signed it. And well, we prepare for an FID next year.

And then, of course, you are right, then we are going to ask ourselves the question on Achimov 4, 5. I reconfirm what I said in our last call, that we prepare for 500,000 barrels per day max production of [ 440, 500 ] was the range, I think, in 2025.

And that's why we have to discuss next year at latest, whether or not we would like to continue with the acquisition of Achimov 4, 5. Your analysis is absolutely right.

Reinhard, the floor is yours.

Yes, Giacomo, regarding the recycling project, we are talking several initiatives that are currently being started in OMV regarding the circular economy. One is certainly around our chemical recycling regarding ReOil.

And there, the next step that we are planning to still take as an FID this year, is what we call second stage or demonstration plant, where we are leveraging up more or less the pilot plant that we are currently having up and running also on a continuous basis, producing synthetic crude oil that we can input in our refineries that we are taking that up to a production between 50,000 and 20,000 tonnes per annum for the years to come. This is more or less in between step that we see to demonstrate both the technical, but as well also the economic feasibility and also in preparation of the whole feedstock pipeline and feedstock supply chain that we need.

When we have set that up, we would then go into the next step, and we're estimating that this takes place still before 2024, 2025 to a full industrial scale which is in the magnitude of up to 200,000 tonnes per annum. And those plants then would be even scalable or multipliable on different sites, so that there is also not only one site like Schwechat being benefiting from that, but other plants in Scandinavia, but even in Middle East, could be following suit.

The second stage there is mechanical recycling. And I think Rainer has mentioned it in his speech already, Borealis is taking real efforts there to have not only plants but really concrete projects, both in Sweden as well as in Germany.

And there, we are really producing recycled, high density polyethylene, low density polyethylene, but also recycled polypropylene. And those are projects that can deliver directly also in following industries with green products.

All of them are first-stage projects, which means smaller scale but fully suitable production for industrial use. And with those also then yielding profitability, there is expansion in this field also planned for the future.

Thanks, Giacomo. Next is Thomas Adolff, Crédit Suisse.

I do apologize. I missed the chunk of your presentation.

So I do apologize if I do ask a question that's already been answered. Rainer, you chose not to extend your contract next year.

I won't ask what's next for you, but can we expect to get an update on the successor by, say, the end of the year? And secondly, I think on cash flow, I think you've said, over time, you want to be generating more than €5 billion in cash flow from operations.

Presumably, this is a pre working capital figure. Considering you've done 1.7 in the first quarter and assuming kind of the chemical margins that we're seeing in 2Q can be sustained for a little bit longer than 2Q, where should we expect cash flow roughly to finish the year?

And then finally, if I may, just on the fertilizer business that you are looking to sell you said during the pre-marketing space, just kind of want to get a sense for feedback you've had so far, the interest level.

Thomas, you have missed my first answer because Matt was also asking me a question. I have to discuss with my wife, and these are always tough negotiations.

You will get an update at earliest -- early next year, I would say. Your second question, absolutely right analysis.

This is going to be a very cash-rich year for OMV looking down the road. Reinhard will give you a little bit more insight.

When we talk about the fertilizers, pre-marketing the first reaction is, there is a good interest in the market. What helps, Thomas, is that the business environment for fertilizers has improved.

So the appetite -- especially if you are on the sunny side of the street, you're more looking around buying some ice creams. And that's happening now in the market.

So the improving and better market environment in fertilizers is helping us in the process. So the first reaction is a good one, but it's too early to really give you a more precise indication.

Reinhard?

Thomas, just to clarify, our midterm target of more than €5 billion in operating cash flow is a post working capital number. Why is that?

Because if we are planning to the future, we do not plan for the fluctuations of the net working capital. So that is more or less an assumption of a flat delta net working capital that we have in there.

And you're right, if we are taking it pre net working capital this year, the 1.7 is a fabulous number, and it will not go away. However, we cannot expect that we have the same impact in the following quarter because, of course, also the effect that we see in the net profit from the effects of higher prices that have been rising in the first quarter have had an impact.

This is the CCS effect which we are not expecting to replicate in the coming quarters. But even if you take the post working capital number of almost €1.1 billion in this first quarter, this is an excellent number.

And there, we are quite confident that we are keeping this level if economic environment keeps on pushing positively.

Thanks, Thomas. And now Bertrand Hodee, Kepler Cheuvreux.

One follow-up question on the inventory effect disclosure. As you mentioned, cash flow was extremely strong, ex working capital, but you benefited from an inventory effect, quite significant.

And if I understand well, you did not intend to disclose the inventory effect at Borealis going forward, even if you give us the answer during this conference call. But can you confirm that you won't disclose on, I would say, in your excel supplement or in the press release, this inventory effect at Borealis, which could be from one quarter to another quarter, quite a significant, I would say, delta to assess either your operating results performance or your cash flow performance?

Yes, Bertrand, I think it's a fair question. Let me put it like that.

We are reporting this and to giving you this explicit answer because it has been a very extraordinary effect. Of course, we would love to see many more quarters where we have such a strong spike of prices because if we are talking inventory effect, we are talking much less of a volume effect.

It's much more the pricing effect that we see in inventories that more or less came in when they were bought at lower prices, but then, of course, were being sold. We are seeing that the value has increased through this pricing.

So therefore, I don't think that it's necessary to keep that as a permanent number that we disclosed. But whenever there are extraordinary effects, we will not hesitate to give you the numbers also for comparison from quarter-to-quarter.

So if we do not report this as a special topic, then you can confirm that or be confident that the effects are marginal in comparison to the quarters that we compare with.

Thank you, Bertrand. We now come to Mehdi Ennebati, Bank of America Merril Lynch.

Sorry, this morning, I haven't been able to connect quite early. So apologies if my questions have already been answered.

First one regarding the Refining & Marketing. There has been [indiscernible] year compared to the consensus.

I just wanted to know was it more due to the marketing or to the refining? Have you been able to generate relatively strong marketing as usual, or did you see any negative impact here on [indiscernible] products, which might have affected your margin quite significantly?

The other question that I have is more for the analysts in order to help us to [indiscernible]. Would it be possible, please, for you to provide regular every quarter, the inventory valuation change effect at the chemicals division, please?

Just for us to help us to clean the figures if we want to. And if I may, sorry, last question, can you please tell us about your current refining margin level?

Would you say that it is currently improving compared to the first quarter? Or would you say that it remains quite under pressure?

Your first question maybe was whether the effect that is a little bit of a soft result in R&M is coming more from refining or from marketing. What we clearly see is that the refining part has been suffering from lower margins as well as lower utilization.

So the main part is clearly due to the situation that we still have had a quite low demand in specifically the jet fuels, the kerosene, which led to lower utilization levels. We're still also suffering here in Europe from major lockdown situations due to the COVID pandemic, which deprives people from their normal human right to mobility.

So the individual mobility has been drastically reduced. I think this certainly will also improve.

From the marketing side, we are still enjoying very good results from the retail business and also from the gas business. Maybe not in that way, as we have seen in Q4, which was extraordinary high and could balance the situation for quarter four a little bit better than it's possible in quarter 1, but still very strong business there.

Then to your second question, I think I pointed it in my last answer regarding the inventory valuation to the fact that we have answered this question in this quarter was very clearly due to the situation that we have an extraordinary situation, which we not expect to continue or to repeat every quarter. So I understand that you would like to see a little bit what's the equivalent of the CCS that we have for our E&P and R&M situation also for C&M, segment, we will see how appropriate logic that is also in line with the way how the market in general is reporting for chemicals can be applied.

But for the moment, we leave it to say when there are extraordinary effects, we will be transparent about them. If we are not saying anything like that, you can rely that there has not been a major effect that's necessary to mention.

Just a follow-up regarding the refining margin trend so far in April. Would you say that it is roughly in line with Q1, remaining under pressure?

Or would you say that it starts picking up?

Maybe I take your question on the refining margin. We see a recovery of refining margins now in April.

The refining margin on average we have seen in Q1 was $1.7 per barrel, which was the level of Q4 we have seen last year. Refining margin in April so far is something around $2.

5 per barrel. So the margin has now improved, but still, we are talking about a margin level where most of the refiners really have no fund to operate their refineries.

When I look down the road -- let's say why the -- we do see a margin improvement. Looking into the refined products, we see good cracks coming with jet and now very good coming with -- not with jet, coming with naphtha, and with gasoline.

And gasoline cracks even improved in April. So the first half of '21, the recovery of refining margin is supported by now the starting driving season and especially the naphtha and gasoline cracks.

Whereas I think that the refining margin in the second half of this year will be supported by better cracks and middle distillates. The product we have, as a problem at the moment in the market, is diesel.

The lowest crack you see in the refined products market is coming with diesel. It's even worser than jet what we have seen.

So given the fact that transportation will pick up second half of this year, we think it will be backed by recovery of the stronger cracks in middle distillate second half of this year. So we will move into the $3 until year-end.

That's my view on the refining margins.

So this concludes our conference call for today. Thank you very much for joining us.

Should you have any further questions, please contact the IR team. We are happy to help.

Goodbye, and have a nice day.