OMV Aktiengesellschaft (OTCPK:OMVJF) Q3 2022 Results Conference Call October 28, 2022 5:30 AM ET
Company Participants
Florian Greger – SVP, IR
Alfred Stern – CEO
Reinhard Florey – CFO
Conference Call Participants
Joshua Stone – Barclays
Mehdi Ennebati – Bank of America
Henri Patricot – UBS
Raphael Dubois – Societe Generale
Henry Tarr – Berenberg
Matthew Lofting – JP Morgan
Kate O’Sullivan – Citigroup
Operator
Welcome to the OMV Group’s Conference Call. [Operator Instructions] You should have received a presentation by email. However, if you do not have a copy of the presentation, the slides and the speech can be downloaded at www.omv.com. Simultaneously to this conference call, a live audio webcast is available on OMV’s website.
At this time, I would like to refer you to the disclaimer, which includes our position on forward-looking statements. These forward-looking statements are based on beliefs, estimates and assumptions currently held by and information currently available to OMV. By their nature, forward-looking statements are subject to risks and uncertainties that will or may occur in the future and are outside of the control of OMV. Therefore, recipients are cautioned not to place undue reliance on these forward-looking statements.
OMV disclaims any obligation and does not intend to update these forward-looking statements to reflect actual results, revised assumptions and expectations, and future developments and events. This presentation does not contain any recommendation or invitation to buy or sell securities in OMV.
I would now like to hand the conference over to Mr. Florian Greger, Head of Investor Relations. Please go ahead, Mr. Greger.
Florian Greger
Thank you, Sergei. Good morning, ladies and gentlemen, welcome to OMV’s Earnings Call for the Third Quarter 2022. With me on the call are our CEO, Alfred Stern; and Reinhard Florey, our Chief Financial Officer.
As always, Alfred Stern will walk you through the highlights of the quarter and discuss OMV’s financial performance. Following his presentation, both gentlemen are available for your questions.
And with that, I’ll hand it over to Alfred.
Alfred Stern
Thank you, Florian. Can you hear me?
Florian Greger
Yes, we can.
Alfred Stern
Excellent. Thank you very much. Ladies and gentlemen, good morning and thank you for joining us. The market in the third quarter of 2022 continued to experience a strong macro environment. While oil prices and refining margins softened compared to the high levels seen in the second quarter on the back of recession fears, and chemical margins shifted downward, European gas prices doubled compared with the already historical high level seen in the second quarter.
On the chart, you see the developments of the market indicators, but for the interest of time, I will go directly to the key messages of the quarter. The third quarter of 2022 proved to be another exceptional one for OMV, marking an increase in terms of operating result and cash flows, and showcasing the value of a balanced portfolio along the value chain.
Our clean CCS operating result rose sharply to EUR3.5 billion and the cash flow from operating activities excluding net working capital effects soared to around EUR2.9 billion. Looking at operations, polyolefin and fuel sales volumes decreased year-on-year impacted mainly by the incident at the Schwechat refinery and fears of an economic slowdown.
The utilization rate of our European crackers and refineries declined due to planned turnarounds and the Schwechat refinery incident. Oil and gas production was lower compared to the prior-year quarter, primarily due to the exclusion of Russia following a change in the consolidation method. Compared to the previous quarter, the production increased. Despite the challenges posed by the war in Ukraine, one thing has not changed, our long-term vision. We are working toward advancing the execution of our strategy with a strong focus on sustainability. And we were very active in this regard in the third quarter.
In July, together with VERBUND, we commissioned the expansion of the ground-mounted photovoltaic plant in Austria. The plant now has a total capacity of 15 megawatt peak and is used for OMV’s own electricity requirements. In Romania, we recently announced that OMV Petrom together with CE Oltenia aim to build four photovoltaic parks with a total capacity of around 450 megawatt peak, which will supply electricity to the Romanian national energy system starting 2024.
Another measure in achieving our ambitious sustainability goals is to increase the production of Sustainable Aviation Fuels to 700,000 tons by 2030. To support this, in September we signed two major MoUs with leading airlines to supply Sustainable Aviation Fuels over the next eight years. One with Ryanair to supply up to 160,000 tons in Austria, Germany, and Romania, and a second one with the Lufthansa Group to supply more than 800,000 tons in various locations. We have already been supplying volumes of SAF to Austrian Airlines at Vienna airport since March 2022.
We have also started working toward our target of increasing the production of low-carbon geothermal energy. In Austria, we are conducting a production test to analyze the geothermal potential in the Vienna basin. Water contained in the rock’s pores is extracted from a depth of about 2,800 meters and then fed back into the ground. In Germany, we have a 50% interest in a geothermal exploration project. The geothermal energy potential is currently assessed by gravity and magnetic measurements taken by a small airplane over an area of around 5,000 square kilometers.
In circular economy, we are in the FEED phase for the construction of an advanced commercial-scale mechanical recycling plant in Austria with a capacity of over 60,000 tons per year. Borealis plans to take a final investment decision in the second half of next year and first production is expected in 2025.
Last but not least, I am delighted to talk about the launch of our breakthrough polypropylene technology, the Borstar Nextension. For consumer packaging, the outstanding performance properties of this technology enable the use of only one material instead of many in multilayer applications, making sorting and recycling easier. For mobility, it will enable purity levels beyond today’s automotive industry requirements with reduced odor and volatiles in interior and exterior applications. The Nextension catalysts are manufactured at our plant in Porvoo.
Let’s now turn to our financial performance in the third quarter of this year. Our clean CCS operating result rose sharply to EUR3.5 billion almost double compared to the third quarter of 2021. The clean CCS tax rate increased to 54%, which was 13 percentage points higher than in the same quarter last year, due to a significantly larger earnings contribution from Exploration and Production. The reported current tax expenses amounted to almost EUR2 billion in the third quarter. Clean CCS net income attributable to stockholders rose by 55% to EUR1.2 billion compared to the prior-year quarter. Clean CCS earnings per share surged to EUR3.69.
Let’s now discuss the performance of our business segments. The clean operating result of Chemicals and Materials dropped by 66% to EUR214 million. The result was impacted by significantly lower base chemicals production and weaker polyolefin margins compared to the third quarter of 2021, when the market experienced a tight supply demand balance due to worldwide logistics constraints.
In addition, we recorded a strong negative inventory effect in the base chemicals and polyolefin businesses, while in the third quarter of 2021 this effect was positive. The performance of OMV’s operated base chemicals business turned negative this quarter.
The effect of higher olefin margins was more than offset by reduced production and higher costs. Due to the Schwechat refinery incident in June, the cracker was running at a very low utilization rate, while the Burghausen cracker was shut down for the entire quarter due to a planned turnaround. This eliminated the cost advantage coming from the high degree of integration between the two sites and increased our feedstock costs, as we had to purchase externally. During the Burghausen turnaround, we also expanded our petchem capacity by around 50,000 tons per year.
The contribution of Borealis, excluding the Joint Ventures, declined by EUR290 million. The result was impacted by significantly lower inventory effects in the base chemicals and polyolefin businesses of almost EUR200 million compared with the prior-year quarter and a decrease in polyolefin sales volumes and margins. This was partially offset by a higher contribution from the Nitro business.
In Borealis’ base chemicals business, strong increases in olefin indicator margins and higher produced volumes were outweighed by negative inventory valuation effects and a lower light feedstock cost advantage. The contribution from the polyolefin business saw a significant decline, impacted by substantial negative inventory effects and a drop in margins and sales volumes for standard products.
The total polyolefin sales volumes excluding JVs were down 17%, affected by significantly lower demand in Europe, the wait-and-see approach of customers, and the reduced feedstock availability in Schwechat. The decline was seen mainly in the Consumer Products and Infrastructure sectors.
Volumes in Mobility improved slightly compared to the lower demand in the third quarter of 2021, which was impacted by semiconductor shortages and widespread production shutdowns at customers. The contribution from the Nitro business rose sharply compared to the third quarter of 2021, mostly due to positive inventory effects.
The contribution of the JVs decreased by 34% to EUR90 million driven by a lower performance of Baystar and a lower Borouge result, primarily due to a decrease in Borouge shareholding following the successful listing of 10% of the company in June. This was partially offset by a stronger dollar. Sales volumes of Borouge were higher, benefiting strongly from the full ramp-up of the PP5 unit, while prices declined due to a softer market. Baystar also experienced a weaker market environment due to rising ethane prices. Sales volumes increased slightly, following the ramp-up of the steam cracker since July.
The performance of the Chemicals and Materials segment saw a significant decline, as explained, driven by a weaker base chemicals business, substantial negative inventory effects and a drop in margins and sales volumes of standard polyolefin products. While the standard polyolefins business showed a similar development as the market indicator margins, you can see that our specialty business kept actually steady and provided a stable earnings base.
We produce specialty grades for various industries such as energy, automotive, health care and consumer products. In energy, we sell polymers for the insulation of high voltage cables, and we supply mega projects such as the German energy corridor. In automotive, we are one of the leading suppliers to global OEMs and Tier 1 producers. We are also a leader in polyolefins with recycled content, supported by our proprietary Borstar technology.
The pricing of our specialty polymers is based on performance, driven by innovation and technology. Over the cycle, these specialty grades account for approximately 40% of the volumes and 60% of the total clean margin in polyolefins, which means specialty grades deliver unit margins more than twice as high as standard polyolefins.
The chart shows the development of the total polyolefin clean sales margin in euros, split into standard and specialty products, since the first quarter of 2020. As you can see the clean sales margin of our standard polymers follows by and large the market indicator margin development, while the clean margin for the specialty business has been very resilient.
While over the cycle the majority of the total sales margin is generated by the specialty business, there might be market situations such as in the second quarter of last year when the market was extremely tight, that the standard polymers business provides more than half of the total sales margin. In the third quarter of this year, the specialty business accounted for some 80% of the total sales margin. A slight volume decline was offset by increased margins per ton.
Despite reduced production in the western refineries, the clean CCS operating result in Refining and Marketing increased by EUR257 million year-on-year to EUR600 million. This was driven by an exceptionally strong result in Gas and Power Eastern Europe and a significantly higher contribution from ADNOC Refining and Trading.
We were able to benefit to a limited extent from the strong refining margins. While the Petrobrazi refinery ran at full utilization, Burghausen was in a planned turnaround and Schwechat was only running at around 20% capacity due to the incident in June.
Total sales volumes were down 21%, mainly as a consequence of lower supply availability in Schwechat and the divestment of the German retail business. This was partly offset by higher jet fuel sales volumes. The retail business performance declined, impacted by the missing contribution from Germany, lower fuel sales, and voluntary discounts to pump prices in Romania.
The commercial business showed a slightly lower contribution due to weaker fuel sales volumes and slightly lower margins impacted by price caps on gasoline and diesel in Hungary. The contribution from ADNOC Refining and Trading increased significantly by EUR98 million, driven by higher refining margins and the strong performance of ADNOC trading. The result of the Gas and Power East rose substantially by EUR241 million.
The excellent gas result was generated mainly by transactions outside Romania. In addition, during the quarter we benefitted from gas volumes acquired in the previous period at lower prices. In the power business, the very good result was supported by the higher production and the favorable market conditions, partially offset by the power over taxation regulation in Romania in the amount of EUR120 million.
The clean operating result of Exploration and Production more than tripled compared to the third quarter of 2021, reaching EUR2.7 billion. The driving factors were significantly higher realized oil and natural gas prices and a stronger dollar with a total positive effect of around EUR2.1 billion. This was partly offset by a negative result in the gas business, lower sales volumes and over taxation in Romania amounting to around EUR110 million.
Compared with the third quarter of 2021, OMV’s realized oil price increased by 42%, and thus more than Brent, also supported by the change in the transfer price from Urals to Brent at OMV Petrom. The realized gas price rose fourfold compared with the prior-year quarter, driven primarily by the increase in gas prices in Europe.
Production volumes decreased by 89,000 to 381,000 boe per day, primarily due to the change in the consolidation method of Russian operations. Increased production in the United Arab Emirates after a revision of OPEC restrictions compensated for decreased production in all other countries, primarily in Romania. Production cost rose to $8.2 per barrel, impacted by the exclusion of the low-cost Russian gas volumes.
Sales volumes were lower as a result of the decline in production. The gas marketing business in Western Europe recorded a loss of EUR162 million, primarily due to supply curtailments from Gazprom. As we explained in the previous quarter, the Russian volumes we receive are sold month-ahead and are, to a certain extent, hedged to minimize the risks.
If the supplied volumes are less than the hedged ones, we need to buy the missing volumes on the spot market, leading to higher costs. Despite our efforts to adjust our hedged volumes, we experienced negative effects in the third quarter. While in the second quarter, we were impacted only in June, in the third quarter we saw these impacts throughout the entire quarter. However, I think it is important to point out that if we look at the entire gas marketing and power business, both West and East, we generated a profit of around EUR100 million.
Turning to cash flow. Our third quarter operating cash flow excluding net working capital effects amounted to EUR2.9 billion, an increase of 44% compared with the previous year’s quarter, primarily driven by much higher commodity prices. We received dividends from ADNOC Refining and Trading of EUR155 million. We also received dividends from Borouge of around 120 million euros, but because they were paid at the beginning of October, they will be included in the cash flow of the fourth quarter.
While in the second quarter the net working capital effects generated a tremendously high cash outflow, in the third quarter these effects generated a positive cash inflow of EUR288 million. The cash outflow due to the gas storage injection was more than offset by the release of margin calls related to gas trading and positive net working capital effects in the chemicals business, driven by lower prices.
As a result, cash flow from operating activities for the quarter increased to around EUR3.2 billion. The organic cash flow from investing activities generated an outflow of around EUR700 million. This included the PDH plant in Belgium, the ReOil demo plant and the co-processing unit in Schwechat, the turnaround in Burghausen, including the expansion of the steam cracker capacity, and the repair works at the Schwechat refinery.
As a result, the organic free cash flow before dividends for the third quarter came in at around EUR2.5 billion. Looking at the nine month picture, cash flow from operating activities, excluding net working capital effects, amounted to EUR8.6 billion, up by around EUR3.2 billion compared to the first nine months of 2021.
Despite a sizeable cash outflow for the net working capital effects, cash flow from operating activities in the nine months rose by 49% to EUR6.3 billion. After payment of EUR1.4 billion for dividends to shareholders and minorities, the organic free cash flow amounted to EUR2.9 billion, almost double the figure from the same period of last year.
Moving on to the balance sheet, following an exceptional cash flow in the third quarter, we were able to reduce net debt by around EUR2 billion since the end of June this year to EUR2.7 billion. As a result, our leverage ratio decreased by 6 percentage points to 9%.
At the end of September 2022, OMV had a cash position of EUR7.7 billion and EUR4.2 billion in undrawn committed credit facilities. Ladies and gentlemen, as announced yesterday the Executive Board has decided that a special dividend in the amount of EUR2.25 per share will be proposed to the Annual General Meeting 2023.
This special dividend will be distributed in addition to and at the same time as the ordinary dividend which will be determined in 2023 in accordance with OMV’s progressive dividend policy. The distribution of dividends is subject to the necessary resolutions by the corporate bodies after the end of the 2022 financial year, in particular the adoption of the annual financial statements and the passing of resolutions by the shareholders of OMV at the 2023 Annual General Meeting.
In addition, the Executive Board, following an alignment with the Supervisory Board intends to review the existing dividend policy so that special dividends can also be considered for future financial years as a means for shareholders to participate in extraordinarily positive business and financial performance of OMV, always taking into account the need for sufficient liquidity and sustainable balance sheet profits as well as a leverage ratio significantly below 30%.
Let me conclude with an update of our outlook for this year. As usual, we will present our outlook for next year with our fourth quarter earnings in February. Based on the developments we have seen in recent months, we are increasing our expectation for the average realized gas price — from around EUR45 to between EUR55 to EUR60 per megawatt hour for the full year.
In chemicals and materials, the guidance for the ethylene propylene European indicator margins for the full-year is unchanged. We see both margins above the previous year’s level. However, compared to the third quarter, we expect a decline in European olefin margins, as end consumer markets are weakening due to increasing production costs and low demand.
For polyolefins, we have seen in October a recovery in margins, based on stronger demand after the summer break and reduced imports as European netbacks have realigned with other markets. At full-year level, our guidance remains unchanged. We see the European polyethylene indicator margin at around EUR400 per ton and the one for polypropylene at around EUR500 per ton.
Looking at operations, the utilization rate of our steam crackers is anticipated to increase from 63% to more than 90% in the fourth quarter, following the restart of the Schwechat refinery in October and the return to operations of the Burghausen cracker at the beginning of September.
As a result, we expect polyolefin sales volumes excluding JVs to increase in the fourth quarter. However, based on the developments of the last nine months, the volumes for full year are now projected to be below the 2021 level.
Construction of the Baystar polyethylene plant in the US has been completed and commissioning is ongoing. Production start is expected in the first quarter of next year. The ethane cracker is undergoing further fine-tuning and the utilization rate is expected to increase.
Overall progress at PDH Kallo in Belgium is around 80%. Following the termination of the agreement with the main contractor IREM as of August 2022, the associated contracts needed to be retendered. In September, Borealis carried out the re-tendering process for the majority of the mechanical and piping works and construction re-started at the beginning of October. The plant is now expected to start operations in the second half of 2024.
Due to the re-tendering of a major part of the remaining work, we expect the total investments of the project to be above the original budget. How big the increase will be can only be estimated once the re-tendering is complete. However, please note that about three quarters of the original CapEx budget has been already spent.
In the fourth quarter, we expect full utilization rate of our European refineries compared with 44% in the previous quarter. We maintain our guidance for the refining indicator margin of around $15 per barrel for full-year, with quarter-to-date margins supported by tightness in the distillate market.
Total fuel sales volumes and margins guidance remain unchanged. Insurance compensation for the business interruption at the Schwechat refinery, covering both fuels and petrochemicals is expected to be booked in the fourth quarter earnings. Cash payments are forecast to be received in 2023.
In E&P, our average production guidance remains unchanged at around 390,000 barrels per day in 2022. In the fourth quarter, we expect production to be slightly higher than in the previous quarter, as additional Maui gas wells are coming on stream in New Zealand.
The organic CapEx outlook for the full-year is unchanged at EUR3.7 billion, including non-cash effective CapEx of around EUR600 million. The clean tax rate for the full year is expected to be around 50%.
Thank you for your attention. Reinhard and I will now be happy to take your questions.
Question-and-Answer Session
A – Florian Greger
Thank you, Alfred. Let’s now come to your question. I’d ask you to limit your questions to only two at a time so that we can take as many questions as possible. You can, of course, always rejoin the queue for a follow-up question. The first question today comes from Josh Stone, Barclays.
Joshua Stone
Thanks, Florian, and good morning. Yeah, two questions, please. Firstly, looking at your special dividend policy. Just talk about how you expect to define the new framework there. Are you thinking of a certain percentage of cash flows or earnings or free cash flow? Just any thoughts about what you’re thinking there? And will there be an annual policy or something more frequent than that? And then secondly, just given the current macro environment with the rising rates and just general recessionary risks here. What’s your appetite to do large transactions today? Thank you.
Alfred Stern
Okay, maybe I start with your second question, Josh, and then maybe Reinhard can explain how we will proceed with the special dividend. So on the recession, indeed, as we can see from our business performance, we are benefiting today significantly from the higher energy prices, in particular oil and gas. And we are at the same time seeing that maybe valuations in some business areas are trending to the lower side, as we have announced in our strategy, we have said, if we find opportunities where we can accelerate the transformation of the company, we will also consider portfolio measures and M&A. And we also said that these needs to be able to accelerate the strategy, but they need to also be value accretive in our journey. In that sense, we are, of course, always considering different measures, but they need to satisfy our value accretiveness, the potential for synergies and also our return expectations.
Reinhard Florey
Yeah. Josh, good afternoon. To your question regarding the dividend policy and its development further, I think, it’s important that we have demonstrated now that the possibility of a special dividend is exactly what we are able to use. And while in the past I have been always using the phrase, I’m not excluding things, we have now made it happen. And I think this is an important signal that we want to give to the market, that the dividend yield, the overall reward for our shareholders is competitive and that we are also striving to keep that competitive.
So in terms of what we said that we intend to review the existing dividend policy, it is meant to aim at that special dividends can be considered for future financial years as a means for shareholders to also participate in that. And we named already that the extraordinary positive business, business environment is one of the criteria that we would see. We would, of course, also see financial performance. We would see the leverage of the company.
But keep in mind that, of course, this will be first aligned also with our supervisory board. So we will come up later with a revised policy as such. It is now important that the shareholders can see that we are willing to apply this and this is something, while still being special, could be part of our policy going forward. And I think this is the signal that we wanted to take here with a strong approach and a relatively high number.
Joshua Stone
Okay. Thank you.
Florian Greger
Thanks Josh. We now come to Mehdi Ennebati, Bank of America.
Mehdi Ennebati
Hi. Good afternoon, all, and congratulations for the strong results and that very constructive dividend policy, dividend announcement. So I will ask two questions, please. First one, regarding the chemical business. So you highlighted that the results was pretty weak this quarter and you provided us some one-off effects which are about to disappear from Q4, such as scheduled and non-scheduled maintenance. But can you maybe tell us what kind let’s say what are — what is the current chemical margin trend relative to Q3 for the non-specialty business? Do you see the polymer margin going up? And if that’s the case, how would you explain it? Is it because the demand is picking up or is it for any other reason?
And the other question is related to that one, you might have benefited from the fact in your chemical business, from the fact that you are using essentially naphtha or let’s say non-gas as a feedstock. Now that gas price is going down quite significantly. Don’t you expect, you know, your competitors in the chemical business to start increasing their production and then competing with you for the non-specialty business? Thank you.
Alfred Stern
Yeah, thank you for the questions, Mehdi. I will try and answer both of them. Maybe if Reinhard had something to add would always be welcome. So the chemicals result, as you pointed out, in the third quarter we saw a reduction in performance in that business. And I really see three big things that are impacting this, which are changing in the fourth quarter. The first one is the turnarounds in Burghausen and the incident in Schwechat were basically in the third quarter. We didn’t produce and with this we lost a lot of the integration effects that we normally have in those refineries, polymer plants, crackers in order to take the full advantage. So this is Burghausen back on stream. Schwechat is fully back on stream for the fourth quarter. So that will bring a significant improvement.
Secondly, we have seen here in the third quarter because of the of the lowering prices, a very significant gap in inventory effects versus the same quarter last year, amounting of almost of around EUR200 million negative effect. It’s a revaluation effect of the inventory rather than a cash effect.
And the third part was what we observed in the third quarter is after the summer period also we suspected a bit of a wait and see attitudes of people. We saw imports coming in stronger and we believe with the adjusted price level here and coming out of the summer like reduced inventories and things, we see that situation improved going forward. Now, specifically, when you look at the polyethylene indicator margins, right, then the — they have rebound now versus the third quarter average by about EUR70 per ton and in the polypropylene effects by about EUR50 per ton. So we have seen a turnaround from the August-September level to come and recover from there. And that’s why we say we are leaving our guidance now. The same here that we had before below 400 and for polyethylene and 500 for polypropylene, because we think the fourth quarter, we’ll see how it works out. But at least it started stronger. I do want to also just point out we have the craft, so I won’t explain that again.
But we, of course, see this path from our specialty business in particular at times that we have now. And the indicator margins, as I explained before, they are for the standard polymer. So we are buffering with our 40% specialty volume significantly better. Then on your question around gas prices versus naphtha, as you probably remember, we have two naphtha crackers in one in Schwechat and one in Burghausen that is integrated with the refinery and really benefiting from that refinery integration and then chemical integration on the other side. So we have a good advantage that we can take care of there in particular also in the strong middle distillate environment that we have now.
And then our other crackers, Sweden, Finland, Belgium, they have this feedstock flexibility where we can flex and use depending on margin optimization, what are the product prices and what are the feedstock costs we can flex in order to make sure we optimize those and we can use that advantage also on the way forward.
Mehdi Ennebati
Perfect. Thank you very much, Alfred.
Alfred Stern
Yeah, you’re welcome.
Florian Greger
Thanks, Mehdi. The next questions come from Henri Patricot, UBS.
Henri Patricot
Yes. Hi, everyone. Thank you for the presentation. I have two questions, please. First one is following up on questions of deals. I’ve seen a headline about the stake of Mubadala in Borealis could change ownership. I was wondering if you could give us some details on your thinking around this and whether we should expect anything to happen in the near future. And then secondly, regarding the recent change in the Executive Board, I was hoping you can give us a bit more of a rationale for bringing marketing and trading back with refining. Thank you.
Alfred Stern
Okay. Henri, thank you for the question. Can I just clarify? Did you ask the Mubadala stake?
Henri Patricot
The Mubadala stake, yes. I’ve seen the 25% stake in Borealis. That could change ownership.
Alfred Stern
Yeah. Okay. Good. I understood it. Now I understood it. So the Mubadala has agreed with ADNOC that ADNOC will buy that 25% share. The closing of the transaction has not happened yet, and because of that, Mubadala is still the shareholder. I don’t want to speculate on when this will close, but I would think it’s been quite some time now. So a lot more to say about this. Other than that, we are quite excited about this because obviously ADNOC is also the key shareholder in Borouge and this is a big commitment to ensure that we continue to have a very strong partnership and alignment and view into the future, not just on Borouge, but in this total business, Borealis, Borouge for a clear future with also a big investment project with Borouge over there.
Your second question on the Executive Board was around, what’s the rationale of putting the one Executive Board member on refining and marketing and marketing and trading. The way we looked at this was that we did a target operating model review based on our strategy, and we basically identified three, if you want business areas, one around chemical and material, the other one around fuels and feedstocks, and the third one around energy. And we thought and as you can see all three of these will then have their entire supply chain basically from production to the customer with full integration and responsibility for the P&L. And this is also the background here of letting Martijn giving Martijn the responsibility for both the refining and the marketing and trading.
Henri Patricot
Okay. Thank you.
Alfred Stern
You’re welcome.
Florian Greger
Thanks, Henri. Next is Raphael Dubois, Societe Generale.
Raphael Dubois
Hello. Thank you very much for taking my questions and congratulations on this strong set of results. My first question is about the special dividend. Could you please tell us what could be the implication for how progressive will be the regular dividend? Should we expect that maybe you keep your regular dividend more stable and still related to the special dividend. Should we see a link with the risk of adding windfall taxation in European countries? It is maybe a way to also please your Austrian government shareholder.
And my second question, we have seen on Bloomberg on Reuters that your finance minister, the Austrian finance minister was going to travel to the UAE. There is maybe some misunderstanding with the announcement of yesterday. Is there anything you can tell us about how the strategy might change in light of those trips to the UAE? It would be great if you could reiterate the involvement of the Austrian government and Mubadala in the decision to carry a specific strategy at OMV level? Thank you.
Alfred Stern
Thank you, Raphael. I will give my best shot at your second question and then for the special dividend and the implication. I’m sure Reinhard can help me out. So, yes, indeed, actually, I’m in Abu Dhabi myself on this call because we did sign yesterday an MoU for energy or gas supply from ADNOC, which included a minimum or we agreed on a minimum of one cargo for the winter season 2023, 2024, but also with potential to explore if we can make this cooperation product. So that was really the meaning of this visit. And at the same time, there was a — there was also a government. So that was what I did as OMV to sign such agreement with ADNOC. There was also for the Austrian government, they had government to government talks about various issues that are also not relating to OMV. And they also signed to reinforce the long-term partnership between UAE and Austria government to government kind of memorandum of understanding for the renewal of the long-term partnership there.
Now as your question was also the involvement of the strategy. Just to make sure you also understand. So I was part of that delegation and also Edith Hlawati who is the CEO of OBAG. She was part of the delegation as well. And Mrs. Hlawati is also a Board Member in the Supervisory Board of OMV. And we keep this quite well separated here. It is the Executive Board of OMV that developed the strategy for OMV that approved the strategy for submission to the Supervisory Board. And in December last year, the Supervisory Board of OMV approved the strategy, and this is what we then also announced in March during the Capital Markets Day and this is the strategy that we are executing at this moment.
Reinhard Florey
Raphael, let me take your first question on the special dividend. The implications on the regular dividend are actually, I would say, marginal because we have on our regular dividend still our progressive dividend policy. So given the environment that we see, we are also expecting that we will apply this progressive dividend to the best of our abilities, which means I’m optimistic that there will be a decision that will also be able to increase the dividend again. So it is not an implication to say while we are looking at a special dividend. We abandon the progressiveness part of our annual dividend. Special dividend is special. Annual dividend follows our progressive dividend policy. And your idea about linking that with the risk of windfall taxation, I don’t see that at all. We see that regarding windfall taxation, there has not been a concrete outcome of negotiations and discussions yet with Austrian government and their interpretation of how the EU regulation can and will be implemented in Austria.
However, I would like to say that it’s a fact that the main beneficiary of the economic success of OMV among our shareholders is the Republic of Austria with a representative OBAG. So we have taken the 31.5% share to a large dividend that we distributed in ’22 for ’21, and they will receive their fair share of the special dividend and they will receive their fair share of the ordinary dividend in 2023. So I think this is more than an act of goodwill. This is a fact that the success of OMV will benefit to all shareholders of which Austria is the biggest one.
Raphael Dubois
Right. Thank you.
Florian Greger
Thanks, Raphael. We now come to Henry Tarr, Berenberg.
Henry Tarr
Hi, there, and thanks for taking my questions. I have two. One was just on the loss on the Russian gas volumes received versus the hedges. Is this now a sort of permanent fixture of the results or is there anything you can do medium term to sort of try and reduce this risk further or down to zero? I don’t know whether you can adjust sales contracts lower to exclude or Russian volumes or other bits there. And then so far, whether there’s a comment as to how sort of October has looked on that gas volumes versus the hedges would be great. And then just secondly, the refining indicator margin and how that sort of shaped up through October. We’d also be great. Thank you.
Alfred Stern
Reinhard, do you want to try the gas question?
Reinhard Florey
Sure. We have been very transparent on what the negative implications of the gas curtailments of Gazprom deliveries to OMV is. So let’s put it like that. Normally, you can avoid any kind of losses in that respect. If you are spot on with the level that you hedge compared to the level that you receive. Now, if the curtailments are not stable and fluctuating, there’s always a risk that you are not spot on. And this is exactly where these losses are coming from.
Now, to be very frank with you, those losses could have been much higher, if not, our gas task force would have done a fantastic job. So we started that immediately. When curtailments started, we could limit this loss to around 50 million in June and more or less that has continued throughout the third quarter. Don’t forget that in this third quarter we have seen these attacks on Nord Stream 1 and 2. So suddenly there was a situation where more or less the zero delivery through Nord Stream 1 was a permanent zero. And all that had to be digested. And then we are seeing that, of course, the gas that we received through the pipeline, through Ukraine in Austria, is also not on a stable level.
Now, this has not changed, but of course, we are getting more and more, I would say, smart and experienced how to deal with that. So I assume that the volatility we have seen in October will not massively deviate from what we have seen throughout the third quarter. So third quarter was 160 million loss in total. But this is only our gas waste business. Don’t forget that our tremendous good results in gas these, we have an overall positive result of 100 million in our gas business in the group.
Alfred Stern
The second question around the refining indicator margin. I will try to answer, Henry. We had in the third quarter, we had a refining indicator margin of 14.4. So that’s a reduction versus the 20.5 that we had in the second quarter. But what we saw through the quarter is that from July, August to September, the refining indicator margin kept strengthening. And this we saw again in October, we saw October another pick up from September. So that we are quite confident that we will end up around the 15 that we have given in our outlook for the full year.
Henry Tarr
Thank you very much. Thank you.
Alfred Stern
You’re welcome.
Florian Greger
Thanks, Henry. We now come to Matt Lofting, JP Morgan.
Matthew Lofting
Hi. Thanks, gents for taking the questions and congratulations on today’s update. Two if I could, I mean, first coming back to the cash return and special dividend. Could you expand on how investors should interpret the special dividend announcement from the perspective of the medium term cash return policy? I think you referenced earlier that the special dividends can be considered in future years, dependent in part on exceptional macro conditions. I wanted to understand better our future special dividend limited to exceptional macro conditions, or alternatively, should we be sort of seeing this as a more sustained top up portion of the total cash return mechanism? And if so, is there a calibration tool, for example, an appropriate distribution of operating cash flow that we should be thinking about from that perspective?
And then second question, just coming back to your earlier comments around windfall taxation based on the sort of the preliminary EU framework and proposal. Do you have an estimate of OMV’s potential payable there for 2022? And linked to that, I believe there was some over-taxation balances in the Petrom side of the 3Q numbers reported this morning. Just expand on the framework there in the extent to which there’s future further outflows that are reliable in Romania through Petrom. Thank you.
Alfred Stern
Thank you very much, Matt. Reinhard, may I ask you to take this question, please?
Reinhard Florey
Sure, Matt. I will try to reiterate what I said before regarding the cash return in medium term. So a special dividend from our point of view is something that has to do with extraordinary circumstances. And those circumstances could come from different areas. It could be excellent business environment, it could be special situations that the government that the company is in. Whenever we feel that the situation regarding our leverage is one that allows us still to execute on our strategic target speed, organic as well as inorganic. And there is something that we still can contribute to the shareholder return. This is what we will do and what we have in mind. We will put that in a policy with a little bit more, I would say, color to it.
But from what we have done today, I think, it is very much possible to interpret what we have in mind, that we see an excellent Q3 that has more or less confirmed our strong performance throughout the year and that enables us really to be also really more than competitive in our shareholder return to our customers and that we really value the shareholders engagement here. So this means about sustaining that. This may not be something that’s there always and ever, but it is a tool that should be at our fingertips whenever we have the possibility to do so.
Regarding the windfall taxation, again, I will not speculate on that. And, to be honest, it’s really hard to speculate on any number, if any, because we have already, both in Austria as well as in Romania already instruments from governments in place that take away part of the profit. It is sort of a royalty scheme that we have in Austria, which takes away not a linear, but really a progressive share of our returns when we produce fossil products in Austria. And in Petrom, there are multiple levers already in place that curb the gas prices, that curb the fuel prices and the fuel stations and things like that. So there is already quite a contribution that this group puts to the states. Therefore, this is not so easy to pre-empt and therefore we have to wait until the negotiations and discussions are being finalized.
Matthew Lofting
Very good. Thanks very much.
Florian Greger
Thank you, Matt. We now come to Kate O’Sullivan, Citi.
Kate O’Sullivan
Hello. Thanks for taking my questions and congrats on the results. So firstly, you mentioned the Schwechat insurance compensation will be booked in 4Q. Could you remind us what the magnitude of that and any expectations on timing for the cash payments in 2023? And secondly a follow up on the inorganic part of your capital allocation priorities, I mean, the increase in Borealis was a sizable transaction at almost 5 billion. Should we think about that as a ceiling for the scale of any transaction you’re screening and any inorganic acceleration being bolt-on in size or if you had any color there, that would be really helpful? Thank you.
Reinhard Florey
Kate, could you please repeat the first part of your question or your first question? We couldn’t fully understand that.
Kate O’Sullivan
Sure. Of course. You mentioned in your opening address about the insurance compensation, which will be booked for the Schwechat refinery in the fourth quarter. If you could just remind us of the magnitude of the size of that insurance compensation that’s coming through. And if you have any expectations for the timing of the cash payments you will receive in 2023 related to that.
Reinhard Florey
Okay, great. Thanks. Now we got the question.
Kate O’Sullivan
Perfect.
Alfred Stern
Thank you. Thank you, Kate, for the question. I will start off with your inorganic growth question and I will ask if Reinhard can answer the insurance question, please. So let me start on the acquisition we did, in our strategy announcement, we did say that acquisitions, we will consider acquisitions to accelerate our transformation. We did also in our capital allocation framework, specify what we are expecting coming out from those acquisitions that they need to be producing synergies that they need to be value accretive, that they need to fit strategically into our direction of sustainable fuels, chemicals and materials and that they need to positively contribute to the return of capital employed KPIs that we have. We have not made any limitations or specifications on the that we would consider. But, as you can see, right, we have a strong balance sheet and have also the possibilities from that to consider a broader range of possible things. I think more important to find the right target that may satisfy those requirements.
Reinhard Florey
Yeah, Kate, on your question regarding insurance and the cash in that we would receive from insurance payment. First of all, to reiterate, we have two kinds of insurances on the Schwechat refinery. One is the business interruption insurance, the other is insurance regarding repairs in case of technical accidents. Starting with the latter one. This starts at a cap of EUR40 million. So everything above 40 million will be reimbursed. We are in the ballpark of around this 40 million of additional CapEx that we have. So we are not seeing that this will be any big amount that needs to be reimbursed by insurance regarding the repair. Fortunately, the team has worked very efficiently. Secondly, regarding the business interruption insurance. This is kicking in after 60 days. So this means that two months would be at the full exposure of OMV. And after that, with a certain cap, this will be reimbursed from the insurance side. If we have assumed that the total damage that we assume net of insurance is in the ballpark of some EUR200 million and the month of June and July are the ones that we have to carry, we have said in June it’s about 100 million of loss from that. You can imagine that we are probably looking at insurance payment in the ballpark between 100 million and 200 million, probably not the full of the upper limit. And this will come also in instalment. So this is not usual that the insurance pays everything at the first instance. So there might be a payment in Q4 and there might be a payment in Q1.
Kate O’Sullivan
Thank you, guys.
Florian Greger
Thank you, Kate. I chip in comment and question that was emailed by Bertrand Hodee from Kepler Cheuvreux. Congrats for the strong results and outstanding cash flow. Western Gas business suffered a loss of in Q3 of 162 million whereas Gas and Power, Eastern Gas was again very strong. So net-net positive. But can you provide us, if you can give an high gas price volatility with an outlook on both divisions either for Q4 or for 2023 and the main moving parts affecting those two businesses and how lower Russia supply deliveries may affect Western Gas business?
Alfred Stern
Reinhard, can you provide some information to this?
Reinhard Florey
Of course, if we look at the moving parts of that business, regarding the Western business, we have on the one hand side a certain, however, small margin on trading and supply business in gas. So this is not in the context of gas being produced, but this is really gas traded and sold to our customers. There’s a small margin of that. So the moving part is the volume in here. If we have a good contract and more volumes then we earn some more money. But the magnitude of volatility there is relatively small. The bigger volatilities in the western part of — on the negative side when it comes to the curtailments, and if we have steady curtailments and steady hedging opportunities, there are no further losses, but this is currently not the case. So therefore, we have, at least for the fourth quarter, to expect that there is a uphill battle for us to keep the losses at a minimum.
Nevertheless, to your question, what happens if there is no gas flowing from Russia, then we are back to what Alfred explained about the alternative supply sources that we have secured for the group to satisfy the demands of our customers. So this business then will go on, and we expect, of course, that also to be positive. If not big, but still a positive business. On the Eastern Gas business, this is two parts. This is on the one hand side, the gas business. Very much domestically produced gas business that we also supply and trade in Romania and the other is the power plant. And for the power plant, it depends both on the electricity margins as well as the utilization because it’s not fully in our discretion to what utilization this power plant can run, this is very much due to the regulator also in Romania. And also the electricity prices are partly in the hands of the regulator. So far, this has been an exceptionally good year. We’re expecting in Q4, a smaller result there because regulation has been tightened. And for 2023, it’s too early to give you an indication of that.
Florian Greger
Good. We have a follow-up question from Raphael Dubois, Societe Generale.
Raphael Dubois
Great. Thank you very much for taking my question. In fact, I have two. The first one is on Nitro. The Nitro business. I understand its earnings — it’s earning better than in the past. But can you maybe give us a bit more color on the absolute level of EBIT contribution of that business? That would be my first question.
And the second one is on the increase in chemical exposure that you are looking at by maybe making an acquisition. It was announced at the CMD. So before the energy crisis, we are currently in Europe, have you changed your view about a production asset base in Europe? We have seen one of your chemical competitor talking about decreasing its exposure to Europe. Is this also something that you might consider in light of what looks like a structural issue for Europe? Thank you.
Alfred Stern
Yes. Maybe I start with the chemical exposure in Europe. And since you wanted absolute EBIT levels for Nitro, maybe Reinhard can help me out then, what the exact numbers are, but I can say something more on the business. The chemical exposure in Europe, if you remember, Raphael, in our Capital Markets Day, what we said about our chemicals businesses that our growth path basically had a couple of different pillars. And the first pillar was due to use — the strong core of the polyolefin business grow and improve the results in this.
The second one was around geographic expansion, where we said we wanted to increase our footprint. North America was one target. Asia was the other target. And then third was around more — going more into sustainability, in particular, circular and creating about 2 million tons of sustainable chemical products by 2030. So — and then the fourth was acquisitions. And what we said at that time is if an acquisition can help us to meet other of the targets, that would, of course, be good and appreciated. So in this idea was already that we should consider also other growth options. And when you look at the big — other growth options outside of Europe and when you look at some of our biggest growth projects. Borouge, Porvoo in Abu Dhabi is a big growth project. The Baystar, which will come 2025, and is today in the FEED phase. And sorry is today in the execution phase, we have made FID. And then Baystar is in North America and in Texas, where we have basically completed the polyolefin plant, the cracker and anticipating that Q1 it will start up. One big investment project that we have is the PDH in Europe, and that’s in Antwerp.
And the reason why we believe this would be a strong location because we believe the propylene market will be short. We still have indications that, that continues despite the different changes. And that propane is a global liquid commodity, which means — and the location in the Antwerp Harbor has access and to the global market price propane feedstock. So this is a little bit how we set up our growth story. And indeed, the crisis here has created some thoughts on some modifications, adjustments. Maybe Neptun project we had in our strategy already as an important project in the Black Sea.
But, as you can imagine, that has even moved up higher in the priority at this point. Then on Nitro, as you know, this business, we have actually signed an agreement with AGROFERT that they would buy the fertilizer business from Borealis. And currently they are working on the regulatory submissions and approvals to make that happen. At the moment, it looks more like closing would probably be more likely in Q1 next year. And indeed, it has been such that the business had strong earnings in particular in the first half of the year. If you look back a little bit further into the Q4 of 2021, maybe you still remember the increase in gas prices put a lot of pressure on that business.
And then with the beginning of the year 2022, it was possible to pass on some of these higher gas prices to the customers. In this case, the supply imbalances reduction of imports into Europe has led to increase in prices. We have seen some increasing pressure on this in the last few months coming, but still a supply demand imbalance, but pushed by high gas prices, of course. Reinhard, do you have on the annual?
Reinhard Florey
Yes, Raphael, we are not disclosing specifically the Nitro results. However, of course, I can give you a little bit of a bridge to that. If you look at the clean operating result of the Chemicals and Materials sector and if you take out the Borealis JV, respectively, the Baystar and Borouge results, you have for the nine months a result of EUR990 million. So the major part of that, of course, comes from the polyolefin side. And if you take the result then only in third quarter, that’s around EUR110 million. And then you can see that the contribution from Nitro business is not the biggest.
However, please take into account that the Nitro business is a cyclical business on a seasonal level. So the first half year in Nitro always is more attractive than the second half year because it’s the season for agriculture to have the most activity, and all the fertilizer business is then booming. So we had clearly a higher contribution in the first half than we had in the third quarter.
Raphael Dubois
Excellent. Thank you.
Florian Greger
Thanks, Raphael. This now brings us to the end of our conference call today and we would like to thank you for joining us. Should you have any further questions, please contact the Investor Relations team. We are happy to help. Goodbye and have a nice day.
Alfred Stern
Thank you. Goodbye.
Operator
That concludes today’s conference call. A replay of the call will be available for one week. The number is printed on the teleconference invitation or alternatively please contact OMV’s Investor Relations Department directly to obtain the replay numbers.
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