28 – Risk management

Capital risk

OMV’s financial steering framework is built upon the principles of operational efficiency, capital efficiency, financing efficiency and sustainable portfolio management. With the focus on strengthening OMV’s balance sheet, delivering a positive free cash flow and growing its profitability, the financial steering framework represents sustainable, risk-monitored and future-oriented value creation for OMV and its stakeholders.

OMV manages its capital structure to safeguard its capital base in order to preserve investor, creditor and market confidence, as well as to provide a sustainable financial foundation for the future operational development of the Group. OMV’s financing strategy focuses on cash flow and financial stability. Principal targets are a positive free cash flow after dividends and a strong investment grade credit rating on the basis of a healthy balance sheet and a long-term , excluding leases, of below 30%.

Capital Management – key performance measures

In EUR mn (unless otherwise stated)

 

 

 

2020

2019

Bonds

8,869

5,802

Other interest-bearing debts 1

2,130

769

Debt excluding leases

10,999

6,570

Cash and cash equivalents 2

2,869

2,938

Net Debt excluding leases

8,130

3,632

Equity

19,899

16,863

Gearing Ratio excluding leases in %

41

22

1

Including other interest-bearing debts that were reclassified to liabilities associated with assets held for sale

2

Including cash and cash equivalents that were reclassified to assets held for sale

Liquidity risk

For the purpose of assessing liquidity risk, yearly budgeted operating and financial cash flows of the Group are monitored and analyzed on a monthly basis. Thus, every month the Group generates a forecasted net change in liquidity which is then compared to the total month end balances of money market deposits and loans as well as maturities of the current portfolio and the available liquidity reserves of the same month. This analysis provides the basis for financing decisions and capital commitments.

To ensure that OMV Group remains solvent at all times and retains the necessary financial flexibility, liquidity reserves in the form of committed credit lines and short term uncommitted money market lines are maintained. As of December 31, 2020, the average weighted maturity of the Group’s debt portfolio (excluding lease liabilities) has been 5.3 years (as of December 31, 2019: 5.2 years).

OMV Group’s operational liquidity management is done centrally via a cash pooling system, which enables optimum use of existing cash and liquidity reserves to the benefit of every individual member of cash pooling system and therefore the Group as a whole.

Details of OMV Group’s financial liabilities are shown in Note 24 – Liabilities.

Political Risk

OMV operates and has financial investments in countries that are subject to political uncertainties in particular Libya, Kazakhstan, Yemen, Russia, Brazil and Tunisia. Possible political changes may lead to disruptions and limitations in production as well as an increased tax burden, restrictions on foreign ownership or even nationalization of property. However, OMV has extensive experience in dealing with the political environment in emerging economies. Political developments in all markets where OMV operates are observed continually. Country-specific risks are assessed before entering new countries.

OMV evaluates the risk of potential US or sanctions and their impact on planned or existing operations.The aim is to stay in full compliance with all applicable sanctions. In particular risks due to political and regulatory developments both inside and outside of Europe having the potential of unfavorable effects on the Nord Stream 2 project and on OMV’s activities in Russia are regularly assessed and monitored.

Climate change risks

OMV consistently evaluates the Group’s exposure to risks related to climate change in addition to the market price risk from European Emission Allowances. Such risks comprise the potential impact of acute or chronic events like more frequent extreme weather events or systemic changes to our business model due to a changing legal framework or substitution of OMV’s products due to changing consumer behavior. OMV recognizes climate change as a key global challenge. OMV thus integrates the related risks and opportunities into the development of the Company’s business strategy. Changes in the pace of energy transition compared to OMV’s expectations and thus changes in the future development of supply and demand could have a negative impact on the valuation of OMV’s oil and gas assets.

Market risk

Derivative and non-derivative instruments are used to manage market price risks resulting from changes in commodity prices, foreign exchange rates and interest rates, which could have a negative effect on assets, liabilities or expected future cash flows.

Hedges are generally placed in the legal entities where the underlying exposure exists. When certain conditions are met, the Group may elect to apply  9 hedge accounting principles in order to recognize the offsetting effects on profit or loss of changes in the fair value of the hedging instruments at the same time as the hedged items.

Derivatives are only used for economic hedging purposes and not as speculative investments. However, where derivatives are not designated as hedging instruments (i.e. hedge accounting is not applied), they are valued through profit or loss for accounting purposes.

The tables hereafter show the fair values of derivative financial instruments together with their notional amounts. The notional amount, recorded gross, is the amount of a derivative’s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of the transactions outstanding at the year-end and are not indicative of either the market risk or the credit risk.

Nominal and fair value of derivative financial instruments

In EUR mn

 

 

 

 

 

 

 

2020

2019

 

Nominal

Fair value assets

Fair value liabilities

Nominal

Fair value assets

Fair value liabilities

Commodity price risk

 

 

 

 

 

 

 

 

 

 

 

 

 

Downstream, Oil incl. oil products

515

30

(71)

7,102

284

(237)

Downstream, Gas

31

3

(7)

Downstream, Power

213

24

(14)

Downstream (cash-flow hedges) 1

759

57

(93)

7,102

284

(237)

 

 

 

 

 

 

 

Upstream, Gas

150

1

(11)

56

10

(4)

Upstream

150

1

(11)

56

10

(4)

 

 

 

 

 

 

 

Downstream, Oil incl. oil products

6,305

445

(386)

11,496

318

(339)

Downstream, Gas

20,156

1,931

(1,985)

15,103

2,013

(1,885)

Downstream, Power

209

5

(6)

216

15

(6)

Downstream, Other

334

98

(29)

23

0

(0)

Downstream

27,003

2,478

(2,406)

26,839

2,347

(2,231)

 

 

 

 

 

 

 

Foreign currency risk

 

 

 

 

 

 

 

 

 

 

 

 

 

USD (net investment hedge)

168

9

(1)

SEK (cash-flow hedges)

143

6

Foreign currency hedges (designated in hedge relationships) 1

311

14

(1)

 

 

 

 

 

 

 

USD

793

17

(1)

684

15

(3)

NOK

272

4

(0)

501

10

RUB

288

8

NZD

69

1

(0)

153

0

(1)

RON

5

0

(0)

35

0

(0)

SEK

44

(0)

Other

108

1

(0)

118

1

(1)

Foreign currency hedges

1,290

22

(1)

1,778

35

(6)

 

 

 

 

 

 

 

Interest rate risk

 

 

 

 

 

 

Interest rate hedges

113

0

(4)

1

Including inefficient part of hedges designated in a hedging relationship

The Group’s hedging portfolio disclosed in the Consolidated Statement of Changes in Equity relates to the following hedging instruments:

Cash flow hedging – Impact of hedge accounting

In EUR mn

 

 

 

 

 

 

 

 

Forecast purchases

Forecast sales

Foreign currency, firm commitments

Foreign currency, other

Interest rate

Total

thereof cost of hedging reserve

 

Commodity price risk

Foreign currency risk

Interest rate risk

 

 

 

 

 

 

 

 

 

 

 

2020

Cash flow hedge reserve as of January 1 (net of tax)

5

39

44

Gains/(losses) of the period recognized in OCI

(7)

364

(62)

10

0

305

16

Amounts reclassified to the income statement

(6)

(353)

n.a.

(0)

0

(359)

n.a.

Amounts reclassified to the income statement because the hedged future cash flows no longer expected to occur

3

(24)

(21)

n.a.

Amounts reclassified to balance sheet

40

62

(0)

102

(16)

Tax effects

(8)

5

(2)

(0)

(6)

Cash flow hedge reserve as of December 31 (net of tax)

26

31

8

0

65

thereof discontinued hedges

57

57

n.a.

 

 

 

 

 

 

 

 

Hedge ineffectiveness recognized in profit or loss

(2)

2

0

 

 

 

 

 

 

 

 

 

2019

Cash flow hedge reserve as of January 1 (net of tax)

(33)

73

(1)

39

(1)

Gains/(losses) of the period recognized in OCI

53

(11)

41

84

(1)

Amounts reclassified to the income statement

n.a.

(34)

n.a.

(34)

n.a.

Amounts transferred to cost of non-financial item

(4)

(40)

(44)

2

Tax effects

(12)

11

(1)

Cash flow hedge reserve as of December 31 (net of tax)

5

39

44

 

 

 

 

 

 

 

 

Hedge ineffectiveness recognized in profit or loss

(14)

(0)

(14)

Reserve for unrealized exchange gains/losses for net investment hedge 1

In EUR mn

 

 

 

Foreign currency risk

 

2020

2019

Reserve as of January 1 (net of tax)

Valuation of the USD loans

10

Tax effects

(2)

Reserve as of December 31 (net of tax)

7

1

Included in currency translation differences within other comprehensive income

At 31 December 2020 and 31 December 2019, the Group held the following cash flow and net investment hedging relationships. The table shows the profile of the timing (maturity) of the nominal amount of the hedging instruments.

Impact of hedge accounting on the statement of financial positions

In EUR mn

 

 

 

 

 

 

 

Forecast purchases

Forecast sales

Net investment hedge

Foreign currency, other

Interest hedges

Total

 

Commodity price risk

Foreign currency risk

Interest rate risk

 

 

 

 

 

 

 

 

 

2020

Nominal Value

541

218

176

311

113

1,358

Below one year

415

196

311

921

More than one year

126

22

176

113

437

Fair value – assets

52

5

n.a.

14

0

71

Fair value – liabilities

60

33

n.a.

1

4

98

 

 

 

 

 

 

 

 

2019

Nominal Value

66

7,036

7,102

Below one year

41

5,415

5,455

More than one year

25

1,621

1,647

Fair value – assets

6

279

284

Fair value – liabilities

0

237

237

Above shown Fair value assets and liabilities are presented in Line item Other financial assets and Other financial liabilities in OMV’s Consolidated statement of financial position.

Commodity price risk

Upstream

In order to protect the Group’s result and cash flow from the potential negative impact of falling oil and gas prices as well as to ensure sufficient liquidity headroom in order to enable the Group’s growth strategy, OMV uses financial derivatives to secure favorable oil and gas prices from time to time. When doing so, OMV enters into derivative positions selling forward parts of its future production, thereby locking in future oil and gas prices and reducing exposure to market prices in the periods for which the hedges are concluded. OMV Group adopts a flexible approach to monetize hedges prior to their maturity with the aim to generate a positive contribution to the results.

In 2020, oil and gas derivative contracts were concluded, resulting in a total negative Operating result impact of (37) (oil: EUR (30) mn, gas: EUR (7) mn).

In 2019, swaps for gas volumes were entered into, resulting in a total positive Operating result impact of EUR 2 mn.

For these derivative instruments no hedge accounting was applied.

Downstream

Commodity price risk management in Downstream refers to analysis, assessment, reporting and hedging of market price risk exposure arising from non-trading and trading activities, covering refining (refinery margin, petrochemical margin, inventories up to a defined threshold, market price risk from European Emission Allowances) as well as oil and gas marketing activities (marketing margin, inventories up to a defined threshold) and producing power (spark spreads) in addition to proprietary trading positions.

Limited proprietary trading activities are performed for the purpose of creating market access within the oil, power and gas markets. In Downstream Gas, OTC swaps, options, futures and forwards are used to hedge purchase and sales price risks. The aim is to hedge the price risk on inventory fluctuations and the differences in terms and conditions of purchases and sales.

In Downstream Oil, derivative instruments are used for both hedging selected product sales and reducing exposure to price risks on inventory fluctuations. Crude oil and product swaps are used to hedge the refining margin (crack spread), which is the difference between crude oil prices and bulk product prices.

For the petrochemical production, some of the forecasted cracker feedstock purchases and finished product sales are hedged through refined oil products swaps. Cash flow hedge accounting is applied to those derivatives, except for the derivatives that are used to limit the price risk on the inventory held for immediate consumption. Contracts not designated as cash flow hedges are classified as fair value through profit or loss and stated at fair value.

Furthermore, exchange-traded oil futures as well as OTC contracts (contracts for difference and swaps) are used to hedge short-term purchase and sales market price risks.

Swaps do not involve an investment at the time the contracts are concluded; settlement normally takes place at the end of the quarter or month. The premiums on options are payable when the contract is concluded; where options are exercised, payment of the difference between strike price and average market price for the period takes place at contract expiration.

European Emission Allowances purchases are always executed in due time to fulfill all legal requirements and are carefully managed by considering the related price risk.

Cash flow hedges in Downstream

In the Downstream Oil Business, OMV is especially exposed to volatile refining margins, inventory risks and emission price risk. In order to mitigate those risks corresponding hedging activities are taken, which include margin hedges and stock hedges. Additionally, cash flow hedge accounting is applied to forecast electricity purchases and forecast natural gas purchases. Also a part of the hedges done for future sales and purchases of the crackers has been designated as cash flow hedge.

The risk management strategy is to harmonize the pricing of product sales and purchases in order to remain within an approved range of priced stocks at all times, by means of undertaking stock hedges so as to mitigate the price exposure. The range is a defined maximum deviation from the target stock level, as defined in the Annual Plan for hedging activities.

Furthermore, in respect of refinery margin hedges, crude oil and products are hedged separately, with the aim to protect future margins. Endorsed mandates are documented and defined within the Annual plan for hedging activities.

In case of refinery margin hedges only the product crack spread is designated as the hedged item, buying Brent Crude Oil on a fixed basis and selling the product on a fixed basis. The crack spread for different products is a separately identifiable component and can therefore represent the specific risk component designated as hedged item. There are limits set for the volume of planned hedged sales to avoid over hedging.

In 2020 the risk management objective for the refinery margin hedges changed and therefore most of the hedging relationships were discontinued.The accumulated gains and losses remain in the cash flow hedging reserve upon realization of the hedged item. In addition hedge accounting related to forecast sales of specific products has been terminated because cash flows have no longer been expected to occur due to the impacts of the COVID-19 pandemic. The accumulated gains and losses were immediately reclassified to profit or loss.

Stock hedges are used to mitigate price exposure whenever actual priced stock levels deviate from target levels. Forecast sales and purchase transactions for crude oil and oil products are designated as the hedged item. Historically, Brent crude oil has formed the largest risk component of the stock price, however in some cases also oil products are used for stock hedges. In such cases, Platts/Argus product price is used as the risk component. Other components like product crack spreads and other local market cost components are not hedged.

The hedging relationships are established with a hedge ratio of 1:1 as the underlying risk of the commodity derivatives are identical to the hedged risk components. Hedge ineffectiveness can arise from timing differential between derivative and hedged item delivery and pricing differentials (derivatives are valued on the future monthly average price (or other periods) and sales/purchases on the pricing at the date of transaction/delivery).

For ‘Forecast purchases’ the hedge ineffectiveness is included in line item ‘Purchases (net of inventory variation)’ in OMV’s Consolidated income statement. The hedge ineffectiveness and recycling of ‘Forecast sales’ for hedges where a risk component of the non-financial item is designated as the hedged item in the hedging relationship is shown in line item in OMV’s Consolidated income statement.

Foreign exchange risk management

OMV operates in many countries and currencies, therefore industry-specific activities and the corresponding foreign exchange rate risks need to be analyzed precisely. The represents OMV’s biggest risk exposure, in the form of movement of the USD against the EUR and also against other main OMV currencies (, , , and SEK). Movements of these currencies against the EUR are also important sources of risk. Other currencies have only a limited impact on cash flow and Operating result. The transaction risk on foreign currency cash flows is monitored on an ongoing basis. The Group’s net position is reviewed at least on a semiannual basis and the sensitivity is calculated. This analysis provides the basis for management of transaction risks on currencies. Since OMV produces commodities that are mainly traded in USD, OMV Group has an economic USD long position.

options, forwards and swaps are mainly used to hedge foreign exchange rate risks on outstanding receivables and payables. The market value of these instruments will move in the opposite direction to the value of the underlying receivable or liability if the relevant foreign exchange rate changes. When certain conditions are met, the Group may elect to apply IFRS 9 hedge accounting principles in order to recognize the offsetting effects on profit or loss of changes in the fair value of the hedging instruments at the same time as and the hedged items. Certain hedges which refer to a forecasted currency position are therefore classified as cash flow hedges and stated at fair value through comprehensive income.

Translation risk is also monitored on an ongoing basis at Group level, and the risk position is evaluated. Translation risk arises on the consolidation of subsidiaries with functional currencies different from . The largest exposures result from changes in RON, USD, RUB, NOK, and SEK denominated assets against the EUR.

A foreign currency exposure arises from the Group’s long-term net investment in its subsidiaries, associated companies and joint ventures in foreign currencies. Foreign exchange translation differences relating to these net investments are recognized in other comprehensive income. Borealis has hedged part of its investment in an associated company which has USD as its functional currency, by designating certain external loans in as hedges of the Group’s investments in its foreign operations. The hedged risk in the net investment hedge is the risk of a weakening USD against the EUR that will result in a reduction in the carrying amount of the Group’s net investment in the associated company in USD. The EUR/USD impact on the measurement of the loan is recognized in other comprehensive income.

To assess hedge effectiveness, the Group determines the economic relationship between the hedging instrument and the hedged item by comparing changes in the carrying amount of the debt that is attributable to a change in the spot rate with changes in the investment in the foreign operation due to movements in the spot rate (the dollar-offset method). The Group’s policy is to hedge the net investment only to the extent of the debt principal.

There is an economic relationship between the hedged item and the hedging instrument as the net investment creates a translation risk that will match the foreign exchange risk on the USD borrowing. The Group has established a hedge ratio of 1:1 as the underlying risk of the hedging instrument is identical to the hedged risk component. Hedge ineffectiveness will arise when the amount of the investment in the foreign associated company becomes lower than the amount of the borrowing.

Interest rate management

To facilitate management of interest rate risk, OMV’s liabilities are analyzed in terms of fixed and floating rate borrowings, currencies and maturities. Appropriate ratios for the various categories are established, and where necessary, derivative instruments are used to hedge fluctuations outside predetermined ranges.

OMV is exposed to uncertainties resulting from the interest rate benchmark reform in respect of its hedges of (6 month) EURIBOR and (3 month) USD LIBOR interest risk, related to the existence of two outstanding USD interest rate swaps with a nominal amount of USD 110 mn in total, and one outstanding interest rate swap with a nominal amount of EUR 23 mn. Their hedging period reaches beyond 2021 when uncertainties about existence of the USD LIBOR rates arise. OMV expects that the hedging instrument and the hedged risk of the hedged item will not change as a result of the reform; however, any hedge ineffectiveness would be accounted for in profit or loss. OMV applies the amendments to IFRS 9 issued in September 2019 to those hedging relationships directly affected by IBOR reform (see Note 2 – Accounting policies, judgements and estimates).

Interest rate swaps can be used to convert fixed rate debt into floating rate debt, and vice versa. In the year 2020 the impact of interest rate swaps has not been material. (2019: no open position).

The hedge ineffectiveness and recycling of ‘Interest rate swaps’ are both shown in line item ‘interest expenses’ in OMV’s Consolidated income statement.

Sensitivity analysis

For open hedging contracts sensitivity analysis is performed to determine the effect of market price fluctuations (+/–10%) on market value. The sensitivity of OMV Group’s overall earnings differs from the sensitivity shown below, since the contracts concluded are used to hedge operational exposures.

The effect of market price fluctuations on earnings or equity depends on the type of derivative used and on whether hedge accounting is applied. Market price sensitivity for derivatives to which cash flow hedge accounting is applied is shown in the sensitivity table for equity. Sensitivity to market price fluctuations for all other open derivatives is shown in the sensitivity tables for profit before tax.

Sensitivity analysis for open commodity derivatives affecting profit before tax

In EUR mn

 

 

 

 

 

2020

2019

 

Market price
+10%

Market price
(10)%

Market price
+10%

Market price
(10)%

Upstream, Gas

(6)

5

(2)

2

Upstream

(6)

5

(2)

2

Downstream, Oil incl. oil products

(14)

14

(18)

18

Downstream, Gas

(1)

0

(25)

25

Downstream, Power

(20)

20

(13)

13

Downstream, other

23

(23)

2

(2)

Downstream

(12)

11

(54)

54

Sensitivity analysis for open commodity derivatives affecting other comprehensive income

In EUR mn

 

 

 

 

 

2020

2019

 

Market price
+10%

Market price
(10)%

Market price
+10%

Market price
(10)%

Downstream, Oil incl. oil products

(32)

32

(80)

80

Downstream, Gas

(2)

2

Downstream, Power

24

(24)

Downstream

(10)

10

(80)

80

For financial instruments, sensitivity analysis is performed for changes in foreign exchange rates. On Group level, the EUR-RON sensitivity not only includes the net RON exposure versus the EUR but also the net RON exposure versus the USD, since the USD-RON exposure can be split into a EUR- and EUR-USD exposure. The same is true for the EUR-NOK, EUR-SEK and EUR-NZD exposure.

Sensitivity analysis for financial instruments affecting profit before tax 1

In EUR mn

 

 

 

 

 

2020

2019

 

10% appreciation of the EUR

10% depreciation of the EUR

10% appreciation of the EUR

10% depreciation of the EUR

EUR-RON

(11)

11

(20)

20

EUR-USD

(27)

27

(22)

22

EUR-NZD

(4)

4

(15)

15

EUR-NOK

(8)

8

(6)

6

EUR-RUB

(0)

0

(30)

30

1

Refers only to financial instruments and is not the same as the Group’s overall foreign exchange rate sensitivity in terms of operating result

Sensitivity analysis for financial instruments affecting other comprehensive income 1

In EUR mn

 

 

 

 

 

2020

2019

 

10% appreciation of the EUR

10% depreciation of the EUR

10% appreciation of the EUR

10% depreciation of the EUR

EUR-USD

33

(33)

EUR-SEK

(15)

15

1

Including sensitivity of the net investment hedge

OMV Group holds financial assets whose market value would be affected by changes in interest rates. The effect of an interest rate increase of 0.5 percentage points on the financial assets measured as of December 31, 2020, would have been a EUR (9) mn reduction in the market value of these financial assets (2019: EUR (12) mn). A 0.5 percentage points fall in the interest rate as of December 31, 2020 would have led to an increase in market value of EUR 9 mn (2019: EUR 12 mn).

OMV regularly analyzes the impact of interest rate changes on interest income and expense from floating rate deposits and borrowings. Currently the effects of changes in interest rate are not considered to be a material risk.

Credit risk management

The main counterparty credit risks are assessed and monitored at Group level and Segment level using predetermined criteria and limits for all counterparties, banks and security providers. On the basis of a risk assessment, counterparties, banks and security providers are assigned a credit limit, an internal risk class and a specific limit validity. The risk assessments are reviewed at least annually or on an ad-hoc basis. The credit risk processes are governed by guidelines at OMV Group level stipulating the group-wide minimum requirements. The main counterparties with contracts involving derivative financial instruments have investment grade credit ratings. OMV uses commercial trade insurance for parts of its receivables in some business areas to mitigate risk. Based on the high economic uncertainty resulting from the COVID-19 pandemic, special attention is paid to early warning signals like changes in payment behavior.

Credit risk is the risk that OMV Group’s counterparties will not meet their obligation under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk arising from credit exposures with customer accounts receivables (see Note 18 – Financial assets), from its operating activities as well as from its financial activities such as financial investments, including deposits with banks and financial institutions (see Note 26 – Statement of cash flows), foreign exchange transactions and other financial instruments (see Note 18 – Financial assets).

gearing ratio
Net debt divided by equity, expressed as a percentage
EU
European Union
IFRSs
International Financial Reporting Standards
EUR
Euro
mn
Million
sales revenues
Sales excluding petroleum excise tax
USD
US dollar
RON
New Romanian leu
RUB
Russian ruble
NOK
Norwegian krone
NZD
New Zealand dollar
FX
Foreign exchange
EUR
Euro
USD
US dollar
RON
New Romanian leu
FVTPL
Fair value through the statement of profit or loss