Hydro reported strong results for the first quarter 2007, supported by high aluminium prices and solid operational performance within both energy and aluminium. Divestment gains also contributed positively, while declining oil and gas prices weighed on quarterly earnings.
Earnings before financial items and tax (EBIT) amounted to NOK 14,823 million in the first quarter, up from NOK 8,144 million in the fourth quarter of 2006 and down from NOK 16,870 million in the first quarter of 2006.
Net income rose to NOK 5,594 million from NOK 3,361 million in the previous quarter and NOK 4,783 million in the same quarter last year. Net income from the quarter was positively affected by significantly lower tax rates than in previous quarters, reflecting strong earnings from the lower-taxed aluminium and international oil and gas businesses.
Aluminium Metal, Hydro's upstream aluminium business, reported its best-ever quarterly result. Downstream operations, Aluminium Products, delivered better earnings following significant rationalization and improvement efforts. Results for the first quarter included divestment gains of about NOK 700 million. Favorable market conditions in Europe also contributed to the results.
"I'm pleased that we are reporting improved earnings in both our main aluminium areas, providing a solid basis for further growth as a global aluminium company following the planned merger of our oil and gas activities with Statoil," said Hydro President and Chief Executive Officer Eivind Reiten.
"We have maintained focus on day-to-day operations and excellent project execution while completing the demerger of our oil and gas activities, planning the integration with Statoil and preparing for the launch of a ‘new’ Hydro. ‘New' Hydro will start trading as an aluminium and power share from 1 October," Reiten said.
Overall oil and gas production rose to 610,000 barrels of oil equivalents (boe) per day in the first quarter, boosted by record output from Hydro's international operations. First-quarter production was 15,000 boe per day higher than in the fourth quarter last year and at the same level as the first quarter a year ago. Following revised output forecasts for partner-operated fields on the Norwegian Continental Shelf, Hydro has reduced its 2007 oil and gas production target by 3.3 percent to 585,000 boe per day.
Net cash provided by operating activities was NOK 14.8 billion for the first quarter of 2007, compared with NOK 15.5 billion for first quarter of 2006.
Hydro announced on May 21 an agreement to sell its polymers activities to the UK-based chemicals company INEOS for approximately NOK 5.5 billion. Hydro expects an after-tax gain of about NOK 400 million when the transaction is completed, expected in the third quarter of 2007. The sale is subject to approval by EU competition authorities and other regulatory bodies.
"The agreement with INEOS represents a good long-term industrial solution for the polymers business and is in line with our strategy to divest non-core activities and concentrate on developing our aluminium and power activities," Reiten said.
Investments amounted to NOK 3.8 billion for the first quarter, of which 79 percent related to oil and gas operations. The provision for current and deferred taxes amounted to NOK 9,982 million for the first quarter of 2007, about 64 percent of income before tax.
Oil & Energy
EBIT for Oil & Energy amounted to NOK 11,166 million for the quarter compared with NOK 9,109 million in the fourth quarter of 2006 and NOK 14,140 million in the first quarter of 2006. Results for the fourth quarter of 2006 included an impairment write-down of Hydro's Gulf of Mexico (GOM) portfolio of NOK 3,436 million.
Crude oil prices fell considerably at the beginning of 2007, correcting upwards somewhat from mid-January but remaining lower during the quarter compared with both the fourth and first quarters of 2006. Hydro realized an average oil price of USD 55.9 per barrel in the first quarter of 2007, a decline compared with both the fourth and first quarters of 2006.
Oil and gas production reached 610,000 barrels of oil equivalents (boe) per day during the first quarter of 2007, up 15,000 boe per day from the fourth quarter of 2006, and at the same level as the first quarter of 2006. Production from Hydro's international portfolio was record high in the first quarter of 2007, mainly due to positive contributions from the Dalia field in Angola and the Terra Nova field in Canada. However, Hydro reduced its oil and gas production target for 2007 to 585,000 boe per day from 605,000 boe per day due to revised production forecasts for several partner-operated fields on the Norwegian Continental Shelf (NCS).
Hydro participated in the completion of nine wells resulting in four discoveries in the first quarter of 2007. Exploration costs of NOK 786 million were charged to the results for the first quarter of 2007, compared to NOK 1,407 million in the first quarter of 2006, which included costs relating to the acquisition of seismic data amounting to NOK 470 million.
The Ormen Lange/Langeled project is proceeding according to plan. At the end of March, the total project was 94 percent finished and is expected to be completed on time and within budget.
EBIT for Aluminium Metal amounted to NOK 2,534 million for the quarter, compared with NOK 899 million in the fourth quarter of 2006 and NOK 1,706 million in the first quarter of 2006. Results for the quarter were positively influenced by continued high aluminium prices. However, increased raw material prices partly offset the effect.
Realized aluminium prices measured in Norwegian kroner rose by 4 percent in the first quarter of 2007 compared with the fourth quarter of 2006, and by 12 percent compared with the first quarter of 2006. Hydro's primary aluminium production, including its share of production from partly owned companies, fell to 433,000 mt in the first quarter of 2007, down 4 percent compared with both the fourth quarter and first quarter of 2006. The decline from the fourth quarter of 2006 was due to the closure of the Stade smelter in Germany and fewer production days during the quarter.
Unrealized gains and losses on operational hedge programs amounted to a positive effect of NOK 290 million in the first quarter of 2007, compared to a negative effect of NOK 341 million in the fourth quarter of 2006.
Aluminium Metal's share of profit (loss) in equity accounted investments (non-consolidated investees) increased to NOK 236 million in the first quarter, compared with losses of NOK 12 million in the fourth quarter of 2006 and was relatively unchanged compared with the first quarter of 2006.
The Qatalum aluminium project in Qatar, which is 50 percent owned by Hydro and a major element in its growth strategy, is on track with a final decision by the partners to proceed with the project expected around mid-summer 2007. A third expansion of the Alunorte alumina refinery in Brazil, in which Hydro has a 34 percent share, started in 2006 and is targeting an increased total annual production capacity of approximately 6.5 million mt in 2009.
EBIT for Aluminium Products amounted to NOK 1,315 million in the first quarter of 2007, an increase of roughly NOK 1.8 billion, compared with the fourth quarter of 2006.
Results for the first quarter included a gain on the divestment of Hydro's automotive castings business of NOK 667 million and positive metal effects of NOK 149 million, while the fourth quarter of 2006 included costs related to plant closures, rationalization and fixed-asset impairments of about NOK 700 million, as well as negative metal effects of NOK 164 million. Compared with the first quarter of 2006, EBIT increased by about NOK 830 million as a result of the divestment gain, partly offset by lower positive metal effects of NOK 211 million. EBIT for the first quarter of 2006 included charges related to pension plan contributions in the UK of NOK 379 million.
Good underlying operating results for the first quarter of 2007 reflected continued positive market developments in Europe, while developments in the North American market remained weak, with a significant decline in the US general extrusion market estimated at 20 percent compared to the first quarter of 2006.
During the first quarter of 2007 Hydro completed the divestment of its automotive casting operations, and its interest in Meridian Technologies Inc, important steps in the restructuring of its aluminium products business portfolio. In March 2007, Hydro finalized the closure of its magnesium plant in Becancour, Canada, and is working towards divesting its magnesium remelting operations in Germany and China.
Hydro is also currently evaluating alternative opportunities relating to the divestment of its automotive structures business. Hydro plans to continue to rationalize and improve the financial performance of its aluminium products business, and expects additional charges relating to plant rationalization costs in 2007.
Outlook - Oil & Energy
Oil prices are expected to remain high, while downward pressure on gas prices is expected to continue during 2007. Planned production shutdowns on the NCS are expected to have a negative impact on production in the coming months. Exploration activity is expected to remain high throughout 2007, with approximately 60 wells planned to be spudded.
The Ormen Lange/Langeled project is expected to come on stream as planned and contribute substantially to Hydro's production capacity.
Preparations for the planned merger of Hydro's oil and gas activities with Statoil are proceeding according to plan, with expected completion on 1 October 2007. The merger plan is up for approval by shareholders in Hydro and Statoil at extraordinary general meetings on 5 July 2007.
Outlook - Aluminium Metal
With the exception of China, key economic indicators continue to signal a somewhat slower growth in the remaining part of 2007 compared with 2006 in all the major regions, particularly the US. European industrial growth is expected to moderate during the second half of 2007. China stands out, with an even stronger economic development in 2007 than in 2006 and continues to drive aluminium industry fundamentals.
A combination of high LME prices and relatively stable short-term alumina prices are apparently leading to high smelter capacity utilization in China and production there is expected to grow by more than 30 percent for 2007 compared with 2006. Global production growth excluding China is estimated at about 5.5 percent in 2007 compared with 2006.
China's consumption of primary aluminium is also growing. Global consumption growth in 2007 is estimated at about 9 percent, dominated by China, which is expected to contribute about 80 percent of the increase. Primary aluminium consumption, excluding China, is expected to grow by about 2.5 percent in 2007 compared with 2006. Consumption growth in Europe is expected to slow to about 3 percent, while the US consumption is expected to decline by about 1.5 percent.
European demand for casthouse products is expected to remain strong during the second quarter but may weaken during the second half of 2007. The market in the US may improve somewhat during the second half of the year but is expected to remain relatively weak. The weakening US dollar is expected to strengthen US exports and therefore have a negative impact for European aluminium producers, although higher aluminium prices in US dollars may compensate to some extent.
The behavior of financial investors will continue to be an important factor affecting the development of primary aluminium prices on the LME.
Outlook - Aluminium Products
European markets for extruded and rolled products were relatively strong at the start of 2007. Margins are expected to remain stable for both product groups. Although shipment growth in 2007, especially for extruded products, is expected to be lower than in 2006, the outlook is positive for the second quarter.
In the US, orders for extruded aluminium products have declined significantly during the first quarter compared to the first quarter of 2006. The US economy shows signs of weakening and industrial production is expected to show lower growth rates in 2007 than in 2006, with possibly a flat or negative development.
The global light-vehicle market is expected to continue growing in 2007, driven by emerging markets. The Western European market is expected to be slightly down, while the US market is expected to continue the negative developments seen in 2006. Margins are expected to remain under pressure.
Results for our aluminium products operations in the second quarter 2007 are expected to be influenced by continued favorable market conditions in Europe as well as further progress on plant rationalization programs. However, additional rationalization expenses are also anticipated.
Certain statements contained in this announcement constitute “forward-looking information” within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended. In order to utilize the “safe harbors” within these provisions, Hydro is providing the following cautionary statement.
Certain statements included within this announcement contain (and oral communications made by or on behalf of Hydro may contain) forward-looking information, including, without limitation, those relating to (a) forecasts, projections and estimates, (b) statements of management’s plans, objectives and strategies for Hydro, such as planned expansions, investments, drilling activity or other projects, (c) targeted production volumes and costs, capacities or rates, start-up costs, cost reductions and profit objectives, (d) various expectations about future developments in Hydro’s markets, particularly prices, supply and demand and competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk management, as well as (i) statements preceded by “expected”, “scheduled”, “targeted”, “planned”, “proposed”, “intended” or similar statements.
Although Hydro believes that the expectations reflected in such forward-looking statements are reasonable, these forward-looking statements are based on a number of assumptions and forecasts that, by their nature, involve risk and uncertainty. Various factors could cause Hydro’s actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. Factors that could cause these differences include, but are not limited to, world economic growth and other economic indicators, including rates of inflation and industrial production, trends in Hydro’s key markets, and global oil and gas and aluminium supply and demand conditions. For a detailed description of factors that could cause Hydro’s results to differ materially from those expressed or implied by such statements, please refer to the risk factors specified under “Risk review – Risk factors” on page 134 of Hydro’s Annual Report 2006 (including Form 20-F) and subsequent filings on Form 6-K with the US Securities and Exchange Commission.
No assurance can be given that such expectations will prove to have been correct. Hydro disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.