OREANDA-NEWS. August 31, 2015. Fitch Ratings has affirmed OMV AG's Long-term foreign currency Issuer Default Rating (IDR) at 'A-' with a Stable Outlook. A full list of rating actions is at the end of this release.

OMV is an Austria-based medium-size integrated oil and gas company that mainly operates mature oilfields in Romania and Austria, and has stakes in a number of upstream assets in the North Sea, North Africa and the Middle East. Its 2014 upstream output OMV was 309 thousand barrels of oil equivalent per day (kboepd) and at end-2014 it had 1.1bn barrels of oil equivalent (boe) in proven reserves. In this oil price environment we do not expect OMV to increase its hydrocarbon production as it had previously planned.

We forecast that in 2015-2018 OMV's credit metrics will remain commensurate with the 'A' rating category, ie, funds from operations (FFO) adjusted net leverage of under 2x (end-2014 - 2.1x) and FFO fixed charge cover of around 9x (end-2014 - 10.1x). We expect that in 2015 OMV's FFO adjusted net leverage will peak at around 2.2x and revert to 2x by end-2016.

KEY RATING DRIVERS
Flat Upstream, Targets Revised
In 1H15, OMV posted a 0.3% increase in total hydrocarbon output yoy to 305kboepd, most of which was achieved in 2Q15. We view this as a positive result as additional production volumes from Norway's Gudrun platform launched in 2014 (OMV's share - 24%) and New Zealand's Maari field offset shut-ins in Libya and Yemen. During 1H15, OMV Petrom, the group's 51% subsidiary in Romania, accounted for all of the group's upstream clean EBIT, on production of 182kboepd or 60% of the group's total.

OMV's upstream operating costs per barrel of oil equivalent fell 19% yoy in 1H15 to USD13.8/bbl reflecting the stronger US dollar and cost-cutting measures that OMV is currently implementing to combat the oil price decline. We view this achievement as positive given that OMV operates in relatively high-cost areas such as the North Sea and Central and Eastern Europe.

While OMV continues spending on upstream exploration and development, it has abandoned its upstream production target of 400kboepd by 2016 given the currently adverse oil prices. We conservatively forecast OMV will achieve oil and gas production of no more than 315kboedpd in 2018 on lower contribution from the North Sea than those per management expectations and lower production in Libya and Yemen due to the uncertain political situation.

Downstream Saves Performance
While in 1H15 OMV reported a 13% fall yoy in clean EBITD (excluding one-off items and inventory holding gains/losses) to EUR1.9bn, mainly due to sharply lower sales revenues (down 40% yoy) on lower oil prices, downstream accounted for 46% of clean EBITD, compared with 22% in 1H14. This was mainly the result of favourable refining margins that averaged USD7.6 per barrel (bbl) in 1H15, compared with USD1.8/bbl in 1H14, and 92% refinery utilisation for 1H15, up from 87% in 1H14.

OMV attributed significantly better refining margins to lower costs for own crude consumption, better product spreads and improved yields in Petrobrazi following the completion of refinery upgrades. OMV's three refineries in Austria, Southern Germany and Romania have capacity of 17.8mt p.a. In 1H15, OMV refining input volumes were down 1.4m tons or 14% yoy to 8.7m tons. With refinery portfolio optimisation and EUR1bn downstream disposals completed by end-2014, OMV has significantly reduced its exposure to downstream.

In our forecasts, we expect OMV's downstream (refining and marketing) margins to return to USD5/bbl - USD6/bbl levels in 2016-2018 as Europe has persistent refining overcapacity. These margins incorporate the improved refining assets mix as OMV has retained in its portfolio better performing or recently upgraded assets eg, modernised Petrobrazi in Romania.

Weakening Cash Flows, Further Cuts Needed
OMV's cash flows from operations in 1H15 were down EUR322m or 20% yoy to EUR1.3bn, which was partially offset by a reduction in capex of EUR409m or 23% yoy to EUR1.4bn. Most capex cuts were in downstream - EUR268m or by 59% yoy, while upstream capex was down only by EUR135m or 10% yoy. OMV continues to invest in fields in the development stage, eg, Norway's Gullfaks, Aasta Hansteen, Edvard Grieg and Gudrun, Romania's field redevelopments, as well as Tunisia's Nawara and the UK's Schiehallion.

OMV expects to spend between EUR7.5bn to EUR9.0bn on capex in total over 2015-2017, of which roughly 80% or EUR6.0bn to EUR7.2bn is to be allocated to upstream. We believe that in order to offset weak oil prices OMV may have to cut upstream capex further in 2015-2018. As we expect oil prices to recover to USD65/bbl in 2016 and USD75/bbl in 2017, we view this upstream capex reduction as a temporary cash saving measure. However, if this trend persists, it may change our view on the company's future upstream profile, as OMV's current upstream production is commensurate with the 'BBB' rating category.

Fitch's key assumptions within our rating case for the issuer include:
- Fitch's latest Brent price deck of USD55/bbl in 2015, USD65/bbl in 2016, USD75/bbl in 2017 and USD80/bbl in 2018
- Upstream production of between 300kboepd and 315kboepd in 2015-2018
- Capex of EUR2.7bn in 2015 and between EUR2.5bn-EUR3.0bn in 2016-2018
- Dividend payout ratio of 30% in 2015-2018
- Planned hybrid bond qualifying for a 50% equity credit

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage above 2x and FFO fixed charge cover below 10x on a sustained basis.
- Failure to meet oil and gas production targets, higher than expected expenditure or delays in delivering upstream projects in the North Sea or significant adverse changes in taxation, licensing and regulatory regimes in OMV's main markets.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action is unlikely given OMV's limited business profile and smaller size relative to its larger and more diversified 'A' category rated European peers.

LIQUIDITY
At 30 June 15, OMV had EUR558m in cash and cash equivalents versus EUR1.5bn in short-term debt. In 1H15, OMV's free cash flow (FCF) after dividends and disposals were down EUR522m yoy to negative EUR962m. For 2015, we expect that the company will post slightly negative FCF after nearly EUR3.3bn in capex and dividends.

Historically, OMV has enjoyed good access to capital markets. We expect that the company will be able to tap capital markets to refinance upcoming maturities. Furthermore, at end-June 2015, OMV had undrawn committed credit lines of EUR3.6bn.

FULL LIST OF RATING ACTIONS

OMV AG
Long-term foreign currency IDR: affirmed at 'A-', Outlook Stable
Senior unsecured rating: affirmed at 'A-'
EUR750m perpetual subordinated fixed to floating rate notes: affirmed at 'BBB'

OMV Finance Limited
Senior unsecured debt rating: affirmed at 'A-'