Wintershall Dea braces for possible service company forces majeures in Norway

London — The head of Germany's Wintershall Dea pointed Wednesday to the possibility of a future impact on its operations in Norway if service companies declared contractual force majeure due to the coronavirus outbreak.

CEO Mario Mehren, speaking at a webcast press conference, said Wintershall Dea was also slashing its spending budget for 2020 given the impact of both coronavirus and the oil price crash, and cast doubt over the timing of the company's planned initial public offering.

"There is no doubt 2020 will be an extremely challenging year for the industry," Mehren said following the release of the company's 2019 results.

Mehren said the company's operations globally were as yet unaffected by the coronavirus outbreak, but warned its work in Norway could be affected in the future.

"In Norway, our projects -- those that are operated by us like Dvalin and Nova -- are so far running according to schedule," he said.

"We have to see if there is any impact from force majeure declarations from some of our service companies in the future, but it's too early to tell so far," Mehren said.

Dvalin -- which is expected to have peak output of some 8 million cu m/d -- is set to come online in the fourth quarter and is one of the key projects seen offsetting falling gas output elsewhere on the Norwegian Continental Shelf.

The company's Nova oil and gas field offshore Norway is expected to start production in 2021.

Capital spending

Upstream companies across the globe have been slashing capital expenditure plans for 2020 in response to the virus and the oil price slump, and Wintershall Dea -- which began operating as a separate entity in May 2019 following the merger of the BASF-owned Wintershall and Russian-owned DEA -- is no exception.

"In response to what we expect to be a sustained period of challenging commodity prices, we are taking a number of decisive measures," Mehren said.

First, the company has decided to lower its development capex to be in the range of Eur1.2 billion-Eur1.5 billion ($1.3 billion-$1.7 billion), a 20% reduction on its original plans for this year and comparable to its 2019 development capex of Eur1.5 billion.

"We will also be reducing our exploration budget to Eur150 million-Eur250 million compared to Eur340 million in 2019," Mehren said.

The company's production last year averaged 642,000 b/d of oil equivalent, up by 9% on the combined output of Wintershall and DEA in 2018.

For 2020, the company expects to produce at 600,000-630,000 boe/d -- excluding volumes from its onshore Libyan operations that are currently suspended.

Wintershall Dea had planned to launch an initial public offering in the second half of 2020, but the exact timing of the IPO remains uncertain given current market conditions and low prices.

"From a company perspective, nothing has changed. We will be IPO-ready by mid-2020," Mehren said.

"It is no secret that our shareholders want to take us public, but it's also no secret that you need the right market conditions. So the shareholders will give the start signal for the IPO and they will decide what the right timing for the IPO is," he said.

Price war

Mehren said the world was in a state of great flux. "In our industry this is a time of change," he added, pointing to the recent sharp oil price fall.

"While the price war that Saudi Arabia has triggered affects the entire global economy, it is the oil and gas producers who will naturally feel it first. And we are hit by it too," Mehren said.

He said the company also assumed that the negative effects of the coronavirus would have a significant global impact especially in Q1 and Q2, and oil and gas prices would remain "significantly" below last year's prices.

Wintershall Dea needs an average oil price in 2020 of $35-$40/b and an average gas price of $4/Mcf to be able to have positive free cash flow and fully fund its development capex and exploration, he said.

Mehren said, however, that the company was "well positioned even in the face of crisis" given its low production costs.

"In 2019, our average production costs were $4.30/boe, almost half the industry average of around $8/boe," he said.

The low costs across its portfolio -- centered on northern Europe, Russia, Latin America and the MENA region -- were part of its "compass for navigating through this storm."

Mehren also pointed to its midstream segments -- comprising its stake in the 55 Bcm/year Nord Stream gas pipeline and onshore gas lines in Germany -- as being a "stable source of cashflow."

"This pays off especially given the current volatility of oil and gas prices," he said.

Mehren would not be drawn on the fate of the planned 55 Bcm/year Nord Stream 2 pipeline -- which it has helped to finance -- referring to the comments made earlier this year by Russian President Vladimir Putin that the project would likely come online in Q1 2021.