Net income for the first half of 2006 amounted to NOK 11,263 million (NOK 9.00 per share), compared with NOK 7,270 million (NOK 5.80 per share) for the first half of 2005.
Operating income for the second quarter of 2006 amounted to NOK 14,640 million, compared with NOK 11,255 million in the second quarter of 2005. The improved earnings were mainly driven by higher oil and gas prices together with higher aluminium prices. Operating income amounted to NOK 32,507 million for the first half of 2006, compared with NOK 23,009 million the first half of 2005, an increase of 41 percent.
Net cash provided by operating activities was NOK 23,142 milllion for the six months ended 30 June 2006, compared with NOK 11,752 million for the first half of 2005. Approximately NOK 6,500 million of the increase related to increased tax accruals which will be paid during the second half of 2006.
"Strong second quarter"
"Hydro reports strong second quarter earnings, reflecting continued high oil and gas prices as well as good cost control in an environment with significant cost pressure in most areas. However, the results were negatively affected by lower-than-expected oil and gas production," says Eivind Reiten, President and Chief Executive Officer.
"In our aluminium business we have another strong result upstream, with high production volumes and a robust market. The performance in Extrusion is good, with a notable increase in volumes at improved margin levels," says Reiten. "However, the results for Rolled Products and Automotive are not satisfactory, and further restructuring measures will be taken to secure cash generation and improved profitability."
Oil & Energy
Operating income for Oil & Energy amounted to NOK 13,168 million for the quarter. Hydro realized an average oil price of US dollar 67.9 per barrel in the second quarter of 2006, an increase of 36 percent compared with the second quarter of 2005, and an increase of 12 percent compared with the first quarter of 2006. Realized gas prices increased 37 percent to NOK 1.79 per standard cubic meter (Sm3) in the second quarter of 2006, compared with the second quarter of 2005, but decreased 17 percent compared with the first quarter of 2006 mainly due to lower spot prices.
Oil and gas production averaged 537,000 barrels of oil equivalents (boe) per day during the second quarter of 2006, approximately the same level as in the second quarter of 2005, but down 73,000 boe per day from the first quarter of 2006. For the first half of the year, average oil and gas production increased to 573,000 boe per day, compared with 561,000 boe per day in the first half of 2005.
At the end of June, the Ormen Lange/Langeled project was 75 percent complete, in line with the schedule and budget. As planned, activity levels relating to offshore and onshore work will reach peak levels during this summer and fall season. Exploration activity proceeded at a high level during the second quarter of 2006. Hydro participated in a total of eight new discoveries in the Gulf of Mexico (GoM), on the Norwegian Continental Shelf (NCS) and in Libya.
Operating income for Hydro's total aluminium activities amounted to NOK 1,871 million for the second quarter of 2006, compared with NOK 1,338 million in the second quarter of 2005. The improved result primarily reflected higher aluminium prices.
During the first quarter of 2006, Hydro's Aluminium business area was divided into two separate business areas to ensure dedicated management focus on the challenges in each area. Implementation of the new organization was completed during the second quarter of 2006.
Operating income for Aluminium Metal amounted to NOK 1,620 million in the quarter, compared with NOK 1,166 million in the second quarter of 2005. Increased aluminium prices continued to have a positive impact on operating results. Hydro's realized aluminium price amounted to US dollar 2,368 per metric ton (mt) in the second quarter of 2006, an increase of 29 percent compared with the second quarter of 2005 and 10 percent higher than the first quarter of 2006. Measured in Norwegian kroner, the realized aluminium price increased by 24 percent, compared with the second quarter of 2005.
Hydro's primary aluminium production amounted to 451,000 mt in the second quarter, relatively unchanged compared with the second quarter of 2005. Production losses due to the plant closures in Norway and Germany were mostly offset by increased production relating to the Alouette expansion in Canada and incremental improvements to existing capacity. Costs related to the closure of the primary metal plants amounted to NOK 309 million for the second quarter of 2006 primarily relating to the closure of the plant in Stade, Germany.
Aluminium Products operating income amounted to NOK 301 million for the quarter, compared with operating income of NOK 210 million in the second quarter of 2005. The improved results were positively influenced by higher volumes. However, overall margin developments were still negative, despite positive developments in the Extrusion sector. Results in the second quarter of 2006 were impacted by positive metal effects within Rolled Products of NOK 149 million. Costs relating to plant closures and write-downs amounted to NOK 185 million for the quarter.
In May 2006, Hydro decided to close its magnesium casthouse operations in Porsgrunn, Norway as a result of increasing low priced exports from Chinese producers into the European markets. Operations ceased at the plant in the second quarter of 2006.
Income tax expense for the first half of 2006 amounted to NOK 23,571 million, compared with NOK 14,713 million for the first half of 2005. This represents 68 percent and 66 percent of income before tax, respectively.
Investments amounted to NOK 4.8 billion for the quarter. Roughly 85 percent of the amount invested related to oil and gas operations.
Outlook – Oil & Energy
Oil and gas prices are expected to remain high in 2006. Hydro has revised its oil and gas production target for 2006 from 615,000 to 585,000 boe per day. The reduction of 30,000 boe per day is divided equally between Hydro's Norwegian and international portfolios and is mainly due to unexpected developments in Norway, Canada and GoM and somewhat lower gas export from Norway than planned. The reduction excludes effects of the recently ended oil services strike on the NCS. The action, which began 21 June, had a limited effect on production on the NCS, but affected production drilling and well activities for the industry as a whole.
Exploration activity is expected to remain high throughout 2006. In the second quarter of 2006, Hydro signed a contract with Transocean Inc. for deepwater drilling capacity in the GoM for the period from 2007 to 2013. The agreement will secure capacity in the medium and long-term for Hydro's exploration program in the GoM.
Outlook – Aluminium
The general economic outlook for the second half of 2006 remains positive, but growth in the US may slow toward the end of the year. Global consumption and production of primary aluminium are each expected to increase in 2006 by approximately 5-6 percent. The market for primary metal is expected to remain fairly balanced with the main uncertainties relating to developments in China and in alumina and energy prices.
Market volume developments are expected to remain positive within the rolled products and extrusion sectors influenced by growth in overall industrial production and restocking of customer inventories.
During 2006 the global magnesium market has continued to weaken from an already poor level in 2005. Competition from Chinese magnesium producers has resulted in an oversupply of magnesium on the world market, driving prices down. Hydro sees limited potential for an improvement in this market and will take further measures to reduce its exposure in this area.