Bloomberg News

RWE Will Sell Oil, Gas Production Unit to Cut Capital Spending

March 05, 2013

RWE AG (RWE), Germany’s second-largest utility, will sell its Dea oil and gas unit to cut capital spending after scrapping a target for asset disposals.

The divestment will “take considerable pressure off future capital expenditure and therefore make an essential contribution to improving RWE’s financial headroom,” the company said today in a statement. The unit, which runs RWE’s exploration and production business, is valued at about 4.5 billion euros ($5.9 billion) by Frankfurt-based B. Metzler Seel Sohn & Co. KGaA.

The sale of Dea, which pumps oil and gas in the U.K., Germany, Norway and Egypt, will enable RWE to bolster cash at a time when profit margins are being squeezed by slowing energy demand in Europe and the phaseout of nuclear power at home. RWE, joining larger competitor EON SE in cutting costs, has abandoned a previous target for disposals after prices fell short.

“We do not want to divest at just any price,” Chief Executive Officer Peter Terium said today at a press conference. While RWE “gives up existing profitability” by selling Dea, expanding the unit is “extremely capital-intensive,” he said.

The utility has completed 2.1 billion euros of its disposal program, originally targeted to reach 7 billion euros by the end of this year, Terium said. He declined to give a new target or schedule, saying only that RWE will concentrate this year on selling its Net4Gas unit, the operator of the Czech gas grid. “If we manage to do more, so much the better,” he said.

Oil, Gas

The company’s oil and gas production was 30.8 million barrels of oil equivalent in 2012, or 84,300 barrels a day. Production is targeted at more than 40 million barrels in 2014, or more than 100,000 barrels a day, according to the Essen-based utility’s annual report published today.

RWE rose 1.1 percent to close at 29 euros in Frankfurt trading today, the highest in more than six weeks.

“RWE needs money” and the sale of Dea enables the company to reduce its debt while giving up “relatively little” profit, Sven Diermeier, an analyst at Independent Research GmbH, said by phone from Frankfurt.

RWE intends to cut the ratio of net debt to earnings before interest, taxes, depreciation and amortization to below 3 in the “medium term” from 3.5. Starting in 2015, it will no longer spend more on investments and dividends than it gets in cash flow from operations, Terium said. Capital spending may fall as low as 3 billion euros by then, from 5.54 billion euros in 2012.

Profit Slips

RWE also reported a 0.8 percent decline in 2012 earnings. Recurrent net income dropped to 2.46 billion euros, missing the 2.51 billion-euro average estimate of 25 analysts surveyed by Bloomberg. Recurrent net, which is adjusted for exceptional items, is used to calculate the company’s dividend, which it kept unchanged at 2 euros a share.

Net income fell 28 percent to 1.31 billion euros, while sales advanced 2.9 percent to 53.2 billion euros. RWE forecast 2013 operating results of 5.9 billion euros and recurrent net of 2.4 billion euros, with Ebitda reaching about 9 billion euros.

It “will hardly be possible to maintain that result” after 2013, Terium said. “In the longer term, earnings capacity in conventional electricity generation will be markedly below what we have seen in recent years.”

Germany is gradually shutting down nuclear plants after Chancellor Angela Merkel ordered an end to atomic power generation by 2022. The country is seeking to fill the production gap by adding renewable-energy projects and efficient fossil-fuel-fired stations.

In January, EON reported a 72 percent jump in 2012 adjusted net income to 4.3 billion euros after exceeding a target for asset sales and renegotiating gas contracts. It forecast earnings on that basis of 2.2 billion to 2.6 billion euros this year.

To contact the reporter on this story: Tino Andresen in Dusseldorf at tandresen1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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