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The Austrian oil company OMV (ISIN: AT0000743059) is a dominant integrated oil and gas group in Central Europe and is one of the most important players in Europe. The share price has trended sideways over the last ten years, with repeated major price corrections and recoveries.
The company is known for its high and relatively reliable dividends. Over the years, they have led to a solid total return. The decision to pay out special dividends now makes the share more attractive to investors. In the last two years, additional funds from the boom years have been returned to shareholders. With the new dividend policy and due to the extremely solid financial situation, the level could remain high in the future. Analysts expect an annual total dividend yield of over 9 percent.
In addition, OMV is attractively valued compared to the rest of the industry. A clearly single-digit P/E ratio could indicate a genuine value stock. However, the company is also facing major challenges: Uncertainties due to fluctuating oil prices are weighing on the valuation, as is climate change. The necessary green restructuring of the business model requires high investments. However, it is crucial in order to remain sustainable and competitive in the long term. In this context, it is positive that OMV, unlike its competitors, has recognized the need for change and is already taking important steps for its future business.
Against this backdrop, the OMV share could offer an appropriate risk/reward ratio. The following OMV share analysis should provide more information on whether the OMV share could be a buy.
The most important facts in brief
OMV (Österreichische Mineralölverwaltung) is an integrated oil, gas and chemicals company that focuses on three main business areas:
Source: OMV Annual Report 2023
The Chemicals & Materials division focuses on the production and sale of petrochemical products and plastics. This includes the production of basic chemicals such as ethylene, propylene and butadiene, which are used as raw materials for plastics production. OMV also produces polyolefins such as polyethylene and polypropylene, which are used in various applications such as packaging, automotive parts and consumer goods. The company also develops highly specialized chemical products and materials for various industrial applications.
This area accounted for 21% of sales in the 2023 financial year. Compared to the previous year, turnover in this area fell by 32%. The chemicals business even slipped into the red in the 2023 financial year with an operating result of 120 million euros. In the previous year, an operating result of 2 billion euros was reported.
The Fuels & Feedstock business segment comprises the production and distribution of fuels as well as the provision of raw materials for the petrochemical industry. OMV operates refineries to process crude oil into various fuels such as gasoline, diesel, kerosene and heating oil. These fuels are distributed through a network of filling stations and wholesalers. In addition, OMV provides raw materials such as naphtha and other precursors for the production of chemicals and plastics.
Source: OMV Annual Report 2023
The Fuels & Feedstock segment generated revenue of just under EUR 18 billion in the 2023 financial year, which corresponds to a good 44% of revenue with third parties. It is therefore by far the Group's largest segment. Compared to the previous year, there was a double-digit decline in revenue of just under 11%. With an operating result of 1.7 billion euros, it was recently the second strongest earnings contributor.
In the Energy division, OMV focuses on the exploration, production and marketing of crude oil and natural gas as well as the development of renewable energies and other sustainable energy sources. The company explores for and produces crude oil and natural gas reserves worldwide and is active in the transportation, storage and distribution of natural gas, including LNG (liquefied natural gas). OMV also invests in projects to generate energy from renewable sources such as wind, solar and hydrogen. OMV's strategy in this area aims at diversification and decarbonization to reduce dependence on fossil fuels and make energy supply more sustainable.
Source: OMV Annual Report 2023
At 13.3 billion euros, revenue with third parties in this area fell by more than 55% in the 2023 financial year. Measured against total revenue with third parties of EUR 39.5 billion, this area accounts for around one third of revenue. Despite the decline in turnover, this area made the largest contribution to the operating result at EUR 3.7 billion.
The decline in OMV's revenue and earnings in 2023 tends to be due to a combination of falling commodity prices, economic uncertainties, higher operating costs as well as investments in sustainable energy and regulatory challenges.
With a market capitalization of around 13 billion euros, OMV appears to be a major corporation worth billions. However, compared to global competitors such as Chevron or Exxon Mobil with a market capitalization of 288 and 503 billion US dollars respectively, it is an insignificant lightweight. But size is not always the most important thing. Regional networking in particular represents a deep moat. Here, the Central European region with Austria, Romania and Germany has emerged as a clear regional focus. OMV's high share of production in politically secure regions is also a decisive anchor of stability for energy policy in Europe.
At first glance, the first quarter of 2024 looks sobering. It continues to show a strong downward trend compared to the previous year. Revenue fell by 25 percent to 8.2 billion euros. However, the operating result only fell by 7% to 1.2 billion euros. A significant increase of 20 percent was achieved in net profit for the year, which amounted to 468 million euros. At second glance, however, a positive dynamic can be seen. A decline in sales of over 36 percent was reported for the full year 2023.
The first quarter of 2024 was characterized by low gas prices, which also affected the Austrian oil company. The mild winter in Europe in particular led to lower demand and high gas storage levels. The Fuels and Feedstocks division also recorded a significant decline in its operating result. This was due to lower refinery margins, which had been exceptionally high in the previous year. In addition, lower capacity utilization had a negative impact on earnings.
In the Chemicals & Materials division, on the other hand, a higher result of operating activities was achieved. This was due to positive effects from inventory valuation and higher prices compared to the previous year.
The outlook for the full year 2024 does not provide any specific sales or order figures. However, OMV expects continued high organic investments of around EUR 3.8 billion in 2024. The average price for Brent crude is expected to remain stable at around USD 85 per barrel, slightly above the previous forecast of USD 80. The situation is different for the price of natural gas. At EUR 20 to 25 per megawatt hour, the realized natural gas price is expected to be slightly lower than the previous forecast of EUR 25. It is also well below the price forecast of THE (Trading Hub Europe), which sees the gas price at just under EUR 30. Furthermore, the refinery reference margin in Europe is expected to remain stable at around USD 8 per barrel and capacity utilization at European refineries is expected to remain at 95%. Steam cracker capacity utilization in Europe is also expected to remain stable at around 85%.
Looking at the analysts' estimates, it is not surprising that revenue is expected to fall to EUR 37 billion for the full year 2024. However, the previous years 2022 and 2023 were positively distorted by exceptionally high fossil energy prices.
However, the 6.4% decline in sales expected by analysts represents a significant slowdown in the normalizing sales trend. The situation is different for earnings per share (EPS). Here, analysts are expecting a significant jump of 38.2% to EUR 6.26. This figure is also likely to remain high in the medium term, although a figure of just EUR 6.08 is expected for 2027. This means that the P/E ratio is likely to remain in single digits in the coming years, unless the share price rises significantly.
OMV's Vision 2030 strives for financial strength and responsible transformation, with a clean Carbon Capture and Storage (CCS) operating profit of more than EUR 6.5 bn and a cash flow of over EUR 7.5 bn. Annual investments of EUR 3.8 billion focus 40-50 percent on sustainable projects. The goal of being climate-neutral by 2050 is therefore a high priority. The company is expanding in chemicals, renewable fuels and geothermal energy. OMV sees itself as a leader in the energy transition in Southeast Europe.
The OMV share impresses in the dividend analysis with a score of 14 points. It thus almost achieves the maximum possible score of 15 points. There were only deductions in the category “Continuity 10 years”. Only two points were awarded for the eight years in which the company did not reduce the dividend. The full score of three points would only have been awarded for a value of ten years.
However, only one dividend cut in 2015 was responsible for the deduction of points. This was due to an exceptionally high loss for the financial year. A negative operating result of two billion euros weighed on the 2015 financial year. This was accompanied by a sharp drop in the oil price from over 100 euros at the end of 2014 to below 30 US dollars for Brent Crude at the beginning of 2016. The oil market was considered difficult at the time. The USA in particular was pushing into the market with its revolutionary shale oil production. OPEC also kept production levels high so as not to lose market share and make it more difficult for the new fracking competition to rise. Weak demand from the economy did the rest.
It is also striking that from 2022, special dividends will be paid in addition to the regular dividends. There is a system to this: a new progressive dividend policy is intended to make surplus reserves available to investors. Specifically, with a leverage ratio of less than 30 percent, 20 to 30 percent of the OMV Group's operating cash flow is to be distributed annually as a special dividend - provided sufficient funds are available. If the leverage ratio is above 30 percent, only the regular dividend will be distributed.
As the company has benefited greatly from the oil and gas crisis in Europe in the recent past, the high special dividends of the last two years are easy to understand. However, a look into the future reveals uncertainty.
Analysts expect a decline in total dividend payments (regular and special dividends) until 2027. However, at an estimated EUR 3.80 in 2027, a high level is still being maintained. Based on the current share price of around EUR 40, this corresponds to a potential dividend yield of over 9%.
Overall, with a bit of luck, regular dividends could continue to rise and special dividends could continue to be paid successively, albeit at a slightly lower level. This means good things for the dividend score. The only thing that remains to be seen is whether the double-digit level of dividend growth can be maintained.
With an expected P/E ratio of 8.5, the valuation of the OMV share can generally be classified as favorable. The price-to-book ratio of 0.8 is also attractive. A significant discount to the company's substance is being traded here. Due to the expected profit increases, the P/E ratio should even fall to the extremely low level of 6.5 in the short term.
However, the favorable valuation also includes a risk premium for the uncertainties in the cyclical oil and gas market. The focus is primarily on the development of the oil price, which is a key measure of the Group's profitability. This is expected to remain at a high level for 2024 as a whole, which should be positive for OMV.
However, a more serious problem is likely to be the core business itself. This is because the company produces and markets fossil fuels. They are a major cause of the current climate crisis and have no long-term future. OMV's business model must also change here, which requires high investments and at the same time represents uncertainty.
Even if it is a mammoth project, oil and gas production is to be reduced to below 400 kboe/d by 2030. In addition, higher-value refinery products as well as low-emission premium fuels and base materials for the chemical industry are to be produced. The business with bio-based fuels and green gas is to be significantly expanded and the production of renewable energies increased to 10 TWh. The focus here will be on geothermal energy, solar energy and wind power in particular. More than 13 billion euros are to be invested. Awards show that the company is much more active in this area than its competitors. In 2023, for example, OMV received an outstanding CDP climate protection rating of A-(Leadership) for the eighth time in a row.
The assessment situation is somewhat different for the free cash flow multiple. Measured against the enterprise value of around 24 billion euros, the factor is 17.4, which is anything but favorable. There is no question that high investments are part of the business of an asset-intensive integrated oil and gas group like OMV. However, the transformation of the business model requires additional investment and could put pressure on the return on capital. It is important to keep an eye on this alongside changes in the oil price.
In view of the current market conditions and OMV's strategic orientation, however, the share could be an interesting investment. The company offers a solid basis for investors thanks to its strong strategic market position and attractive cash flows. In particular, its focus on Central Europe positions the company as a politically stable energy supplier for democratic Europe.
Despite the challenges posed by volatile oil prices and the need to invest heavily in the green transformation, OMV is committed to sustainability and future growth. However, the transformation will initially cost money, which could raise questions about the future dividend payout. Analysts tend to be optimistic that the dividend, including special distributions, can be maintained at a high level. If this is the case, annual dividend yields in the high single-digit range would be possible - and even more if the price of fossil fuels remains high. In such a scenario, the share price should also have upside potential.
Looking at analysts' opinions on the share price, it already has a potential of around 19 percent from today's perspective. However, the majority of analysts (44 percent) only see the share as a hold. Around 31% of analysts recommend buying the share.
Those who are prepared to bear the risk of market uncertainties and investment costs could therefore benefit from the long-term opportunities and the currently attractive valuation of the OMV share. However, due to the possible higher price fluctuations, a good nerve is required.