Morningstar DBRS Assigns Issuer Rating of A (low) With Stable Trend to OMV AG

DBRS Ratings GmbH (Morningstar DBRS) assigned an Issuer Rating of A (low) with Stable trend to OMV AG (OMV or the Company).

KEY CREDIT RATING CONSIDERATIONS
The A (low) credit rating reflects OMV's diversified nature of business with strong integration in the downstream segment, strong financial risk profile with conservative financial policy, and strong market position in the chemicals and materials segment. The company is one of the largest gas suppliers in Austria with a market share of around 40%. The credit rating also considers Morningstar DBRS' implicit support assumption from the Austrian government (rated AAA by Morningstar DBRS) as 31.5% of the company is owned by the Austrian state holding company Osterreichische Beteiligungs AG (OBAG). In addition, the operations of OMV are of high systemic importance to the government as OMV has an industry-leading position in the country.

CREDIT RATING DRIVERS
The Stable trend reflects Morningstar DBRS' expectations that the financial metrics of the company will continue to support the current credit ratings for at least next 12 months. Morningstar DBRS may consider a negative credit rating action if the financial metrics of the company deteriorate such that Morningstar DBRS adjusted debt-to-cash flow ratio trends above 2 times (x) on a sustained basis. A negative credit rating action may also be considered if the Company were to face material disruption in its natural gas supply from Russia before finding suitable alternatives as a result of the ongoing Russia-Ukraine conflict resulting in a material impact on cash flow generation.

A positive credit rating action, although unlikely in near term, is possible if the company were to improve its business risk profile in terms of its size and diversification parameters while maintaining its financial risk profile.

EARNINGS OUTLOOK
Based on its base-case crude oil and natural gas price assumptions, Morningstar DBRS expects the Energy segment of the company to continue to generate material cash flow surplus for the company. The margins in refining and chemical segment are expected to remain subdued for the remainder of 2024 as a result of higher input costs, before gradually increasing next year onwards as per Morningstar DBRS' base-case assumptions. However, the volatility in earnings is expected to be mitigated to an extent as a result of anticipated higher capacity utilization by the company in 2024.

FINANCIAL OUTLOOK
Morningstar DBRS expects operating cash flow in 2024 to be in line with 2023 results based on its base-case commodity price assumptions. OMV's capital expenditure guidance of EUR 3.8 billion for 2024 and dividend outlay are expected to be funded from operating cash flow. The company is expected to continue to follow conservative financial policy and direct its cash flows towards debt reduction in line with OMV's target to maintain its leverage below 30%. The financial risk profile of the company is expected to continue to support the current rating levels over the medium term.

CREDIT RATING RATIONALE
The product mix of the company is well-balanced with 53% liquid production and 47% natural gas production, with majority of its assets in European countries. OMV operates three refineries in Europe, which provide essential feedstock for its chemicals and materials (C&M) segment. Through their joint ventures, OMV also operates petrochemical facilities in UAE (through its subsidiary Borouge, in a joint venture (JV) with ADNOC) and in the United States (through its subsidiary Baystar, in a JV with TotalEnergies). OMV, thus, has a highly vertically integrated operations in its downstream segment.

As a result of continued strong commodity price environment over the last couple of years, the Energy segment of the company has contributed to the improvement of the overall financial risk profile of the company. Also, the C&M segment, despite weak margins, has had positive operating results through the cycle. As of YE2023, the company reported debt-to-cash flow of 1.5x, debt-to-capital of 22%, and EBIT-to-interest of 11.3x. The company also maintains a conservative financial policy and has set its leverage target below 30%.

OMV is the largest natural gas player in Austria and supplies close to 40% of natural gas requirement in the country. OMV is partially owned (31.5%) by the Austrian government's investment holding company OBAG. OMV is critical to the energy security of the country, and therefore a potential default could have a cascading effect on key industries related to the Energy sector. Morningstar DBRS thus makes an implicit support assumption, which uplifts OMV AG's final rating outcome.

The scale of operations of the company remains relatively small compared with rated peers in the similar rating category. The company had a total proven reserve size of 1,114 mboe for the YE2023 and a total production of 364 kboe/d. However, the risk is somewhat alleviated by the fact that it has a strong market position in some EU countries like Austria, Germany, and Romania.

OMV has a long-term supply contract with Gazprom, which extends until 2040. As of Q12024, the company received an average of 5.3 MMcmd of gas supply from Russia. The company is facing pressure from the Austrian government to end its contract with Gazprom and look for suitable alternatives to meet the natural gas demand. However, as of date, there has not been any material development. OMV is exploring alternatives like LNG imports, laying capital expenditure on Neptun Deep project in Black Sea, which is likely to be operational from 2027 (production estimation from Neptun Deep project is over 100kboe/d).

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
Morningstar DBRS considered carbon and greenhouse gas costs as a relevant environmental factor. This factor is relevant because compliance with ever-increasing environmental regulations and standards limits the growth potential and adds costs for all oil and gas companies, including OMV.

There were no Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of OMV, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of OMV, the FRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of OMV, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (15 April 2024)
https://dbrs.morningstar.com/research/431177

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (15 April 2024)
https://dbrs.morningstar.com/research/431186

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for this credit rating include Annual Report, Investor Presentation, Earnings Call, Quarterly Reports. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly rated issuer. This is the first Morningstar DBRS credit rating on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/436166.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Amaury Baudouin , Senior Vice President, Sector Lead,
Rating Committee Chair: Anke Rindermann , Managing Director ,
Initial Rating Date: July 15, 2024
Last Rating Date: [Not applicable as there is no last rating date.]

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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