Wednesday 7 December 2016

Share Watch: Austrians' retrenchment is the route to happiness

John Lynch

Published 31/08/2015 | 02:30

International stock markets are never easy to call, and last week proved it. In the climate of Mario Draghi's quantitative easing, even enlightenment does not appear to be enough, faced with the Chinese downturn and devaluation. The tall poppies have long ago been harvested and that sinister creature, the contrarian, is coming into his or her own.

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Beaten-up sectors are again attracting notice, one of which is the neglected oil business. This column has seen the portents and has noted international oil services firms that in time could buck the trend, like Technip and Repsol.

This morning we look at another, the largest oil and gas outfit in Central and Eastern Europe, the Austrian concern OMV, which is going through some awkward times at the moment but has opted to take the same medicine that the 'oil majors' are inflicting on themselves.

OMV accounts for one tenth of the Vienna stock exchange and it has its headquarters in that beautiful city. Indeed there is an OMV refinery close to the Austrian capital, a sure sign that it was once a prized state company. First listed in 1987, the government still retains a 31pc stake in the enterprise, held by holding company Oel, which also holds the state shareholding in Telecom Austria and Austria Post Office. The same man once chaired all three companies, but following a rumpus over OMV strategy, its CEO was ousted. Government officials were unhappy and the Chancellor described the situation as "chaotic".

The problem was solved with an 'Austrian solution for an Austrian problem.' Oel has been downsized, its board scrapped, there are new capital expenditure constraints, and it is now reporting to the Finance Minister. These unhappy management manoeuvres cannot have impressed OMV's other significant shareholder, the International Petroleum Investment Company controlled by Abu Dubai sheiks.

OMV is an integrated oil and gas company with 25,000 employees and a market value of €7.2bn. It explores and produces oil and gas, processes it in the groups' three refineries and markets its product through the subsidiary OMV Supply and Trading. Following its floatation it went on an expansion spree, and it snapped up oil and gas assets in Romania and Turkey. But the corner-stone of OMV strategy is its exploration and production activities and the strong likelihood that most of future investments will be in this area.

Last year was challenging for OMV with major interruptions in its oil production in the unstable regions of Libya and Yemen. As a result, the company's future strategic pillars will centre on the less volatile areas of Norway, UK and Romania. The group has refineries in Austria, southern Germany and Romania, with sales of €28bn last year, incurring a loss of €240m.

It also has 4,000 services stations in 11 central and European countries with strong brands like Petram Petro Ofisi and Avanti and Viva.

Last year, as everyone now realises, was a dreadful one for global oil companies and OMV was no exception. Sales declined 15pc to €35bn and profit plunged 60pc to €1bn. The OMV share price is bobbing along in the low €20s, a long way from its high of €60, notched up six years ago. The slump in oil prices and rising production costs saw OMV sell its 45pc interest in a German refinery and a port terminal in Turkey.

Like most of the oil majors, the company believes that a period of lower prices is inevitable. As a result, it is following the example of the 'big boys' by cutting costs, shedding staff, seeking savings from its contractors and deferring costly projects.

As an investor, if asked to choose between OMV and Repsol, I would tend to plump for the latter.

Repsol doesn't have the management problems of OMV; it obtains most of its product from stable developed countries, is generating profits in refining and is free from political pressures. However, OMV is the market leader in Central and Eastern Europe and the contrarian investor could be tempted.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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