Hello, welcome to the Repsol fourth quarter 2014 and full year 2014 results conference call. Today's conference will be conducted by Mr. Josu Jon Imaz and Ángel Bautista. A brief introduction will be given by Mr. Ángel Bautista, Head of Investor Relations. I would now like to hand the call over to Mr. Bautista. Sir, you may begin.
Good day, ladies and gentlemen. This is Ángel Bautista, Director of Investor Relations. On behalf of our company, I would like to thank you for taking the time to attend this conference on Repsol's fourth quarter and full year results. This presentation will be conducted by Mr. Josu Jon Imaz, our Chief Executive Officer. Other members of the executive committee will be joining us as well. Before we start, I invite you to read our disclaimer note. We may make forward-looking statements which are identified by the use of words such as will, expect, and similar phrases. Present results may differ materially depending on a number of factors as indicated on the slide. I now hand the conference over to Mr. Josu Jon Imaz.
Thank you, Ángel. Thank you, everyone, for attending this conference where we will address three main topics. First, the main events of 2014. Secondly, the quarterly and full-year results. Finally, third, an update on the acquisition of Talisman Energy together with the outlook for 2015. Let us start with the main events of 2014. We end 2013 and began 2014 with the closing, as you could remember, of the disposal of our LNG assets to Shell as planned. During the first week of 2014, we were able to close the settlement with the Argentinian government in relation to the controlling stake of the Repsol Group in YPF and YPF Gas. That agreement, which was ratified by Repsol's annual general meeting in March with a 99.7% acceptance, included the recognition by the Republic of Argentina of a debt to Repsol amounting to $5 billion.
In May, the Republic of Argentina delivered a portfolio of Argentinian sovereign bonds, which Repsol decided to sell, obtaining almost $5 billion, very close to the maximum amount that Repsol could cash in according that agreement. Additionally, we sold our remaining 12.3% stake in YPF for $1.3 billion. In total, we closed the Argentinian solution to the expropriation, cashing in $6.3 billion. After that monetization of our Argentinian assets, the board of directors of Repsol, of course, agreed to pay an extraordinary dividend of €1 per share, substantially improving our shareholders' remuneration for this year, as committed, to compensate the support, let me say, the full support of our shareholders during the expropriation period. We end the year with the announcement to acquire Talisman Energy in agreement with its board of directors.
Taking advantage of our sound financial position and in order to consolidate our strategic objective of growing in our upstream division while improving the risk profile of our portfolio, we decided to enter into a transformational transaction. Let me say that the acquisition of Talisman fits all the strategic requirements we were looking for. First, OECD or OECD-like countries-based portfolio. Secondly, growth platforms to prepare Repsol for future value creation and sustainability, incorporating new capabilities to improve the competitiveness of the company. Finally, value creation for our shareholders. Now let's move to the fourth quarter and full year 2014 results. Fourth quarter 2014, CCS adjusted net income was EUR 370 million and CCS adjusted operating income was EUR 626 million. These results were 201% and 197% higher, respectively, compared with the same period of last year, thanks mainly to the good results obtained in the downstream business.
2014, CCS adjusted net income was EUR 1.7 billion, and CCS adjusted operating income was EUR 2.4 billion at 27% and 12% higher, respectively, compared with the same period of last year. Starting with the upstream business, you could say now, adjusted net income for the fourth quarter was EUR 4 million, 98% lower than in the fourth quarter of 2013. Let me explain the main differences that are due to, first of all, a higher production. We increased production year-on-year in Sapinhoa in Brazil, in our Kinteroni project in Peru, in Venezuela, the U.S., Bolivia, Trinidad and Tobago, and Russia. This increase resulted in a positive impact on the operating income of EUR 124 million. Production reached 371,000 barrels of oil equivalent per day during the fourth quarter, a 16% increase year-on-year.
When we look at the full year, we reached an average 355,000 barrels of oil equivalent per day, a 2% growth compared with 2013, despite lower output coming from Libya. If we compare, let me compare both years. Without Libya, production growth would have reached 8%. Second factor, lower crude and gas realization prices that had a negative impact at the operating level of EUR 232 million. I have to add higher depreciation charges, some higher depreciation charges due to higher production that had a negative impact of EUR 106 million. Also, lower exploration costs that led to an increase in the operating income of EUR 77 million, mainly due to lower amortization of wells and lower G&A and G&G. We also have higher taxes with a negative impact of EUR 19 million, basically in Venezuela and Brazil, due to the depreciation of the local currencies against the dollar.
Finally, other items such as the minority interest and equity affiliates and other costs explain the remaining differences. Our full-year net adjusted result in upstream was EUR 589 million, a 40% decline due to lower production in Libya, for security reasons, as you know, and lower prices. Discussing about our upstream division performance, I like to end with our reserve replacement ratio, that was 118% for 2014. We finished the year, the year 2014, I mean, with a total of 1.54 billion barrels of oil equivalent of net proven reserves. Rolling average over the last five years has been 198%. Turning to our downstream division, adjusted net income in the quarter was EUR 370 million, which compares with the EUR 21 million of the fourth quarter of 2013. Full-year net adjusted income stood at more than EUR 1 billion, a 111% increase compared to 2013.
Drilling down, even being in downstream business, let me hit drilling down into the quarterly results. In refining, we saw a year-on-year increase in margin from $4.1 to $5.5 per barrel, due mainly to lower energy costs, wider spreads between the products, mainly gasoline and middle distillates and Brent. Higher margins had a positive impact at the operating level of EUR 251 million. The utilization rate of our distillation capacity has been 80.1% during the quarter, in line with the full-year utilization rate, and we run the conversion capacity at full speed, reaching 105% of utilization rate. In the petrochemicals business, wider margins and higher volumes allowed us to improve the operating income by EUR 126 million. This improvement is due to the competitiveness programs implemented during the year together with a better market environment.
In the commercial businesses, it was the LPG division, the main driver of the EUR 45 million increase in the operating income. Notably, it's worth mentioning that in the fourth quarter of 2014, as well as in the full year, sales in our marketing division in the Iberian Peninsula and the market in general continued the growth trends seen in previous quarters. I presume that due to the economic growth we are experiencing in the countries where we operate our commercial businesses. Moving to gas and power, operating income in the quarter was EUR 102 million higher year-on-year in North America. Results in trading and other activities explain the remaining difference. In Gas Natural Fenosa, the EUR 67 million-adjusted net income in the fourth quarter of 2014 was 32% lower year-on-year.
These lower results are mainly explained by the provision for impairment that Gas Natural Fenosa did of the Egyptian LNG plant of Damietta. Finally, we have seen a decrease in the financial charges year-on-year, thanks to a higher result of the U.S. dollar-euro exchange rate positions, lower debt, and the reduction of its average cost. To sum up this quarter, we have delivered a fair set of results with improved performance of our downstream business offsetting the lower results of the upstream division due to the current environment of lower crude oil prices. We've been able to generate positive free cash flow before divestments during the year and even in a low crude oil scenario, the integrated model we have designed allow us to remain resilient. The different investment cycles and cash generation of the upstream and downstream businesses contribute to a greater stability of our results.
Let me say that additionally, the increased U.S. dollar strength and the significant portion of our gas production not linked to oil prices provide further steadiness. On top of that, we have the likelihood of the dividend flow and results of our affiliate, Gas Natural Fenosa, a stake that provides further optionality to protect the company in any possible scenario. Let me now give you an update on the acquisition of Talisman Energy and the outlook for 2015. As you may already know, the shareholders of Talisman approved last week, I think on February 18th, the sale of the company to Repsol in the special shareholder meeting that took place in Calgary. We are working together with Talisman management, always within the scope, of course, of the arrangement agreement to achieve a smooth integration. We are already identifying value addition initiatives arising from the combination of both companies.
This is a transformative opportunity. We will challenge all that we do and draw on the best of both companies, fully integrating Talisman to emerge with one single culture. We are now in the process of obtaining all necessary approvals, a process that is evolving as expected. Closings should take place before the end of June 2015. Let me now speak about what we should expect for 2015. Pending closing, we can't speak at present of the figures of the future merged company, but we'll have the opportunity to do it in coming weeks. On a stand-alone basis within Repsol, we are revisiting or reviewing our investment program, including our exploration budget in light of the current environment, together with implementation of efficiency and cost-cutting measures. In the upstream business, we'll invest EUR 2.7 billion, which compare to the EUR 3.8 billion invested last year.
We are reducing our exploration CapEx, including in this case G&G and G&A, to EUR 1.2 billion, a 35% decrease with respect to 2014. Our investment in the upstream division is going to be focused on the development of our projects, mainly in Brazil, the United States, Algeria, and the Caribbean and Andean areas. Our downstream business investment will be applied basically to maintenance and to our programs to reduce CO2 emissions, increasing profit through energy consumption reduction at our industrial plants, and giving more steps of the new specifications project in our refinery in Peru. During the year, we will review all of our supply chain and the relationship with our suppliers and service providers in order to reduce costs. We have already started, and we are seeing price reductions arising from them.
Finally, the integration with Talisman Energy will allow us to optimize even further our CapEx program from 2016 and beyond. I like to confirm that after the Talisman acquisition, we envisage that we will maintain our competitive shareholder remuneration at current levels with the script option till 2016-2019. We can advance some strategic lines of the current and future Repsol that of course, we are going to develop them in the future strategic plan. We have obtained, through the acquisition of Talisman, the right balance between our upstream and downstream divisions for the short and medium term. Therefore, our upstream business won't have the mandate to grow. The mandate for our upstream business is to focus on efficiency and value creation through portfolio management at the right moment. Downstream will remain a strong, efficient, free cash flow generator with the right size.
Niche international developments could arise, leveraging, of course, our wider geographical presence, mainly the lubricants, chemical or trading businesses. From the combined portfolio of Repsol and Talisman, we will be able to optimize CapEx and costs. Without the need to grow, exploration intensity can be reduced when needed. Let me add that we will remain fully committed to our financial discipline, maintaining a strong balance sheet and competitive shareholder remuneration. With a much broader portfolio and no need to grow in the midterm, I like also to stress the fact that portfolio management will become a strong driver of value creation, as it has been in the past, once the macro scenario favors this activity. Sustainability, safety, governance, good governance, and environmental management at the highest standards will remain at the core of our operations.
To conclude, 2014 will remain in our memory as a transformational year for Repsol. A year in which Repsol was able to exit Argentina, deploying the money obtained from the compensation in increasing the scale and quality of our upstream division. With this acquisition, we complete the achievement and surpass the targets that we established in the strategic plan 2012-2016, released some weeks after the expropriation of YPF. We will now focus on integration of Talisman and thereafter on establishing the new strategy of Repsol outlined in this speech. Thank you very much for your attention. We will now be pleased to answer any questions you may wish to ask. Thank you.
Thank you. If you would like to ask a question at this time, please press the Star or Asterisk key, followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off. Once again, please press Star one to ask a question.
Thank you very much. This is Ángel Bautista again. We'll move now into the Q&A session. As always, we've enabled a chat in the webcast, just only use it if we have any connection problems during the call. In case that happens, we believe it won't happen, we will address those queries at the end. Well, now let's move into the Q&A session. First we have Felipe Rosa from Banco Espírito Santo. [Foreign language] Please go ahead with your questions.
Hi. Good morning, everyone. Thank you very much for taking my three questions. The first one relates to your output for 2015 in the upstream. If you could provide us some guidance, the Q4 exit rate is much higher than the average for the year. If you could provide us some color on guidance for 2015, taking into account specifically probably some comments on Brazil and Libya, which that could provide some important swing factors. My second question relates to your guidance in terms of CapEx. You guided for upstream. I don't know if you, apart from exploration, are you cutting any projects from your pipeline? Are you delaying any project so that you manage to reduce your CapEx so significantly? If you could provide us a guidance for the overall company for 2015 in terms of CapEx?
Finally on exploration, you are reducing your budget, but 2014 was a record year in terms of investment. Could you just let us know what are the main highlights in terms of wells for terms of exploration for 2015? What are the wells that we should look at? Thank you very much.
[Foreign language] Let me say, regarding our guidance for 2015 in terms of production in our upstream business, our guidance is to increase in a 6%-7% the current production that we have had this year in 2014. That fits in a current way with our strategic plan. Let me say that we are forecasting this production and this increase of production, excluding both years, the possible effect of Libya. Anyway, as you know, the production in Libya in net terms last year was only 13,000 barrels per day as average. Even in the worst situation, we are going to increase our production in 2015. Regarding our upstream in CapEx, our E&P investment decrease is at 27% in dollars with respect to 2014. At 57%, a bit more than the half cut or decrease in the investment corresponds or comes from lower investment in exploration.
I think that there are some reasons behind this reduction. One of them is the intensive exploration campaign of 2014. We are comparing the current figure or the guideline for 2015 with $1.8 billion invest in exploration in 2014. That is a very important figure. The other part of the reduction is also the rationalization of our exploration activity, because, first of all, the new strategic scenario, after the acquisition of Talisman, we are not, in some way, obliged to grow every year. We could put more focus on value creation, on free cash flow generation, and not in growth. Of course, we are also, in general terms, adapting our investment in E&P to the current low price scenario. At 40%-45% of the full reduction in CapEx corresponds to lower development investment through cost reduction.
Of course, we are benefiting from the current market condition, and in some ways, the reduction of running investment, non-critical activities in ongoing projects. In any case, we are slowing down or delaying the critical and strategic development projects in our upstream activity. I think that you also asked me about Brazil. In Brazil, we are going to achieve the plateau of the production in Sapinhoa North, the north part of the project, Sapinhoa, at the end of the year, in the fourth quarter. After achieving this plateau, I think that in gross terms, we'll have a production of 270,000 barrels per day in Sapinhoa. You have to take into account that we have the 60% of the 25%.
That means in net terms, plus our production in Albacora, our production at the end of the year at around 43,000-45,000 barrels per day net terms for Repsol in Brazil. Regarding Libya, first of all, as you know, for security reasons, we shut down our production the first week of November. In the short term, on the ground, we have a strong security concern, and we have not many hopes regarding the short term there. Perhaps in operational terms, let me say that in any scenario where we could have a fair and good security environment on the ground, we will be able to achieve almost the full production in 27 or 96 hours. That means that in technical terms, we will be able to overcome this situation quite quickly. Perhaps let me add another strategic analysis about Libya regarding the medium and long term.
It's evident that Libya is a problem for Repsol. Let me say that Libya is also a problem, of course, for Libyan people and also for Europe, because in the current international scenario, the possibility to have a failed state in the borders of the European Union, it's a main concern for the international community. We are following, and we think that this effort of international community trying to stabilize the country could have a good result in the medium long term. That is a strategic analysis regarding the future. In the short term, the only thing I could say is that we have strong security problems. Regarding the guidance CapEx for the whole company, the EUR 4.8 billion was the full CapEx in 2014, and we are going to reduce to EUR 3.8 billion in 2015.
Okay. Thank you very.
Excuse me. I forgot it because I have here notes about your questions, and I forgot to answer the last one. In the same spirit of the current strategic and oil price situation, we are going to be prudent regarding our exploration campaign. That means that we have more appraisal wells than frontier wells. The appraisal wells that are going to help us to define coming projects are the appraisal in Campos-33 in Brazil, the appraisal well that we are to develop in the Gulf of Mexico to appraise our recent discovery of Leon, and finally, three wells in Alaska, two in the area of Qugruk, one in Alpine, to appraise and to allow us to define, in the first quarter, more or less, of 2016, a development project for Alaska. In total terms, we are going to dry 21 wells this year.
13 are appraisal, and eight are exploration pure wells. Let me say that we are trying to reduce our exploration in frontier wells, in frontier areas. Regarding these kind of areas, we are going to explore two wells in Angola in the Block 22 area, and the third one in Norway.
Okay.
Okay.
Okay. Thank you very much.
Thank you, Felipe, for your questions. Now let's move to Haytham Rashid from Morgan Stanley. Hi, Haytham. How are you today? Please go ahead with your question.
Thank you, Ángel. Good afternoon, gentlemen. A couple of questions from my side, please. Firstly, just on the North American gas business, and the good results you've had there, I just wondered if you could give us a sense of how repeatable that will be in 2015. It seems to be an area where it's delivered over and above expectations reasonably consistently. Is there something you can tell us about how much of that performance is something that we can see continue into 2015, and help you through the weaker oil price environments? Secondly, I have a question on the CapEx guidance that you gave for 2015. Specifically, what you're basing price.
Is the 27%-28% reduction in CapEx a reflection of, does that assume your base price deck that I think you talked about before of $85 2015, $93 2016, or are you looking at a different oil price scenario with that CapEx plan in mind? My final question is really around your new strategy. I appreciate that you probably will come back to us with more detail on that. Perhaps if you could just elaborate a little bit about the idea of more portfolio management and focusing on value creation. Could you tell us a little bit about what that can entail? Is that looking at all assets within your portfolio like Gas Nat? Is it about monetizing more of your upstream discoveries, the exploration successes you've had earlier on? Just a little bit of color around that would be very helpful. Thank you.
First of all, starting for our gas and power business in North America. As I said in my speech, we are the factor of the mark-to-market positions we had in the fourth quarter. Of course, we are going to do our best to repeat these results in the future, but I have to say to you that we depend in a close way from weather, for instance, because you know that we took advantage of the high prices in New England and in the Northeastern American coast. In these scenarios, our Canaport plant and our commercialization business in North America is more profitable. I can't deliver, of course, anything regarding the first quarter of the year, but I could say that is going to depend in a strong way from the weather in North America. Of course, the mark-to-market positions we have.
Regarding the CapEx reduction, first of all, we have a long-term price scenario, price deck. In our opinion the rig count drop in unconventional production, the natural decline of wells, and the long-term slowdown across the sector, will translate into a tightening of the supply-demand balance that will bring prices up. That is our view regarding our price scenario and our deck. Of course, we are not here to forecast the oil price scenario, but to manage the current scenario. My duty is to manage this company in any scenario where the Brent price is $60 per barrel. Regarding this scenario of $60 per barrel, we have to be able, even in this current scenario, to have as Repsol, I'm talking, of course, about the Repsol standalone company.
I can't deliver any figure regarding Talisman, as you know, before the closing, is to have a free cash flow neutral scenario at the current oil prices. To achieve this objective, we are being very present regarding our CapEx in our upstream business. Of course, we are trying to promote efficiency in every business of Repsol. As you know, we have a long track record of managing businesses in tough scenarios. I'm talking, in this case, about refining petrochemicals and some others in the current European scenario. I think that we could be able to do that. Regarding your last question, portfolio management. First of all, we are not in a hurry to divest anything. First of all, we have the cash we need now to pay Talisman transaction.
It's true, we announced to the market that 12 months after the closing, we are going to be able to divest EUR 1 billion assets in the market. That is 2% of the total assets of Repsol. It's not too much, of course, we are going to take account the oil scenario price in this policy. In that case, we will try to divest in assets not directly linked to the oil price. Regarding Gas Natural, you know that Gas Natural is always an alternative, but today's environment reinforces the integrated model, with strong cash generation coming from downstream and Gas Natural Fenosa. Gas Natural Fenosa brings a cash dividend with a much higher yield than the marginal cost of debt after tax. We are not in a hurry to do anything regarding the investment. We'll do it, but in the right moment.
Okay. Thank you very much. Very clear.
Thank you. Thank you very much. Hi, Tim. Now let's move to Bruno Silva from BPI. Hola, Bruno. [Foreign language] Let's go ahead with your questions.
[Foreign language] Thank you very much for taking my questions. The first one, a quick wrap up on the Venezuela context that has been deteriorating. I remember asking you in the last earnings conference call, what was your position? I just wanted to have, if possible, an update from your side. Several other companies, probably more affected by the local currency, have been doing impairments. I didn't quite see any reference to Venezuela amongst impairments and provisions that you have recorded, that you have booked in this last quarter. I just wondered if you could make an update, what criteria are you using in order to do impairments or not, particularly regarding Venezuela? The second question related with recent news with potential investments in Canaport, if you could comment on that.
Related with results from Canaport, can you please quantify what is the contribution from the mark to market of positions in these results? Finally, you commented that you are still keeping the EUR 1 billion divestment target. I would just complement by asking if after these couple of months since the announcement of Talisman deal, if you have evolved in terms of your knowledge of Talisman business and whether or not you are more or less optimistic regarding targets such as the EUR 2 billion of synergies, and if you could provide us what would be, for now, the annual schedule of savings and integration costs, namely for 2015. Thank you very much.
Thank you very much, Bruno. Let's start by Venezuela. Let me say that we are operating in Venezuela in a normal way, and we are developing our projects in Venezuela in a normal way. Let me also say that I know that there are some companies or sectors that could have less or more difficulties in Venezuela. You also have to take into account that the oil and gas sector is very particular in Venezuela because it's a key factor for the economic sustainability of the country. The environment where we operate is different from the environment, in business terms I mean, where some other sectors or companies operate.
Regarding the influence or risk of the valuation in accounts in Venezuela, the last exchange rate for the sector, as you know, contemplates the official exchange of 6.3 bolívars per US dollar, there is not any impact on the oil and gas sector companies. Of course, we did a provision of EUR 74 million in the last quarter. Why? Mainly in terms of prognosis regarding the possible evolution of the year. Let me say, I don't know what is going to happen in the future. Perhaps it's not going to happen, but even in a future scenario of a devaluation of the official exchange rate, taking into account that our operations in that country are strongly dollarized, taking into account that we could have cross effects, we could have a short position in bolívars loan in USD.
In financial terms, we could have positive effects, and in tax terms, we could have negative effects. Our people, our team, with this provision, is comfortable for this year, even taking into account a possible scenario of a devaluation of the official exchange rate. Next point, the mark to market of Canaport in the first quarter has been more or less, in operational terms, $60 million. That is the mark to market position, but of course, this mark to market position in cash term is going to be recovered in January, in February, or at the end of the contract. In the other side, your next question was about.
Canaport.
Potential investment in Canaport, sorry. As you know, Canaport goes outside the perimeter in the sale of our LNG business to Shell. Of course, our goal is now to maximize the value of the plant, analyzing, studying, and trying to implement different alternatives. It's true that in the market, you know that there is a growing interest in exporting LNG from the U.S., from the Eastern and Pacific coasts of Canada. We are trying to take the steps in this direction, in order to know if this option to be open and to be available for Repsol. The idea is to design an attractive price for Repsol and for third parties in order to be able to attract investment. Let me underline that Repsol doesn't contemplate, under any scenario, to make a significant investment in Canaport.
In terms of CapEx for Repsol, it's going to be near zero. Now we are looking for permits, we are analyzing the engineering of the project, and we are going to try, to be able, if we could have the possibility to analyze a different alternative. I think that it's okay. Yeah, okay. Sorry, I forgot it. Yes. Regarding Talisman, let me say that I have to be very prudent, as I said before in my speech and in my answer. At the current day, Talisman is another company, and we could have the opportunity after the closing to manage the company, to know in the correct way where the more strong points, weaknesses are, and of course, to analyze and to deliver the synergies we forecast when we design the takeover operation over Talisman.
Okay. Thank you very much, Bruno. Now let's move to Lydia Rainforth from Barclays. Hi, Lydia. It's always nice to speak with you. Please go ahead with your questions.
Thanks, Angel, and good afternoon. I'll stick to three questions, if I could. Can you just tell us where you are regarding the thinking on the hybrid bond and whether you need to get that done before the deal closes or whether that is done in the second half of the year? Secondly, and partly linked to that, clearly the oil price at the moment is below what I think you considered the acid test when you did the Talisman deal. Is there any implication on that in terms of what you think you might have to do with in terms of the credit rating agencies? Just outline any discussions you might have had with them on that. Just a final question, actually two, if I could.
Third question, just on the cost optimization side, how much are you looking for that being, and this is just for Repsol itself, how much are you looking for that to be self-help and efficiency improvements versus what you are looking for from the suppliers side? Just a very quick clarification question. The conversion capacity utilization of 105%, is that the maximum that you think you can get to, or can that be pushed any higher at all? Thank you.
Thank you, Lydia. First of all, let me say that we are not in a hurry to issue the hybrid bond. We delivered, as you know, in the roadshow and after the announcement of the acquisition of Talisman, that we are going to issue a hybrid bond of a maximum of EUR 5 billion. It's in some way a financial cushion. We are not in a hurry to do it now. We could pay the full Talisman transaction with the cash we have in our pockets. That means that we are going to do that over the year, perhaps in two, in three tranches. We are, of course, to take advantage of any window opportunity to issue this hybrid. We are not in a hurry to do it, and we'll deliver the information about this issue in coming next 12 months.
Regarding the rating, we have enough financial flexibility to give a strong answer regarding the maintenance of our rating grade. We checked with some rating agencies two months ago, the scenario, and we haven't got any news, neither linked to external factors nor to price scenario that have changed over the last two months. Let me underline that we'll do whatever it takes to maintain the current investment grade. Let me say we have many tools to react. We have, of course, the cash we have in our pockets. We have, of course, the hybrid bonds issuing process. We have the portfolio management. We have the reduction of CapEx of further divestments not linked to oil prices assets. Our financial cushion is really wide to ensure that we are going to maintain our rating rate. Second question, cost optimization.
More or less, when I was talking about our reduction of EUR 1.1 billion in CapEx terms in our upstream business, I said that 55%, more or less, I remember the figure, comes from the exploration activity and 45% from our development programs. Let me say that more or less from this last figure, that could be EUR 450 million, 50% could come from, in some way, slowing down some running investments or things like that, and 50% comes from efficiency. That could be EUR 200 million, EUR 250 million in our upstream activity, and that means more or less 6%, 7% of the full CapEx. I'm talking, of course, about CapEx in upstream regarding this efficiency of cost optimization. That more or less fits in a correct way when what is happening and what some other companies of the sector are delivering now.
Of course, you know that we are, and we continue improving the efficiency of our downstream businesses, mainly through the reduction, thanks to our CO2 program, the reduction of our energy cost. You know that in our refineries and in some way, perhaps a bit less, of course, in this last case of the petrochemicals, but in our refineries, 65% of the total cost is energy. Last year, we have been able to reduce in 450,000 tons our emissions of CO2 of the company, mainly in our refining and petrochemical businesses, also a part in the upstream business. Thanks to these CO2 reductions, we have reduced in a huge way our energy cost in refining. We are going to go on through this program over 2015. I note here 105% the conversion utilization rate in refining. I think that could be a quite astonishing figure.
You have to take into account, first of all, that when we use the term utilization, we are comparing with the possibility we have to operate the plant outside the maintenance programs. Second one, you also have to take into account that in some processes, mainly cokers, and we have four cokers in batch. That means that if we are able to reduce the time of the full cycle of the cocker, that means that we are able to increase the conversion utilization rate of our system. Theoretically, we could say that 108%, 110% could be the maximum, but be sure that we are going to do our best to overcome this figure. Thank you, Lydia.
That was really helpful. Thank you very much.
Thank you, Lydia. Now let's move to Jason Kenney from Santander. Hi, Jason. How are you? Please go ahead with your question.
Thanks very much. Maybe building a bit on Lydia's question and asking it in a different way. I'd be interested in your views on the profile for net debt to EBITDA, where it was at the end of 2014 and what kind of progression or profile you see to the end of 2015 once Talisman is acquired. Secondly, I'm just looking at the cash flow in the results announcement. Did you restate the 2013 cash flow number? If so, I was just wondering why that was. Then, maybe finally, I know you've guided Talisman will close in the second quarter. Do you think that's more likely in April or in May? Thanks.
Thank you, Jason. Regarding the first question, let me say that I'm not going to deliver anything of Repsol plus Talisman because I can't do that now. We'll do after the closing. Now I'm going to give you the figure regarding Repsol standalone. At the current $60 per barrel oil price, let me say that our forecast is that we are going to be neutral for the current Repsol in 2015 in terms of free cash flow. After paying, of course, after financial expenses, after CapEx, logically, and after dividend.
Okay.
Could you repeat the second question, please?
I was just looking at the cash flow statement, and it looks like you've restated the 2013 number by around EUR 1.4 billion, I was wondering why that was.
Yes. The answer is yes. We restate the 2013 cash flow number due to the new reporting standard that is called NIIF. The answer is yes. Regarding your question about the closing process of Talisman, let me say that we are to close the process as soon as possible, and our commitment is to do it in the second quarter of the year.
Okay, thanks.
Thank you, Jason, for your questions. Now let's move to Matt Lofting from Nomura. Hi, Matt, how are you? Go ahead with your question.
Hi. Thanks a lot, Ángel. Two questions if I could, please. Firstly, just sort of coming back to CapEx. I think you talked about within the development side of the planned adjustments, sort of roughly 50% being related to slowing down activities versus 50% efficiency gains. On the former, I wonder if you could just give us a sense of specifically what projects have been slowed on a view through 2015 and within that, what the status of the Perla project in Venezuela is at the moment, whether or not that's online yet, and if not, when it's expected. Then, secondly, just if you could comment on the trajectory on a standalone basis, at least of full upstream depreciation for this year. I think you noted in the press release that the depreciation was around EUR 100 million higher year-over-year in the fourth quarter. Thanks.
Regarding your first question, let me say that no strategic project for Repsol, when I'm talking about a strategic project, you know that we are talking about Lapa, we are talking about Cardón, we are talking about Margarita. No project has been slowed. The CapEx reduction has been delivered or done or is going to be done thanks to efficiency and to a slowdown of running investment of current projects, but not the strategic project. Let me only underline the exception of Midcontinent. As you know, the unconventional environment is quite different, so you have the possibility to reduce or to slow down your CapEx to fit to your cash needs and to production monetization. In the current oil price scenario, we are slowing down our investment in Midcontinent.
I'm not going to deliver more about this issue because, I have to respect the operator, SandRidge, that tomorrow is going to deliver the full figures regarding what is happening in Midcontinent. Why do we have higher depreciation in the fourth quarter comparing with last year? That is mainly because the higher production in Brazil and United States.
Okay, great. Thanks a lot.
Thank you.
Okay. Now let's move to Jon Rigby from UBS. Hi, Jon. Good to speak with you again. Go ahead with your questions.
Hello, Angel. Two, three questions, actually, I'll confess up front. The first is, you gave some outlook on the exploration activity and the sort of risk profile that you're taking. You talked about number of wells drilled, split between appraisal, exploration, and then frontier. Can you just give the comps for 2014 as well, just so that I can gauge how the money is being spent year-over-year and maybe get some idea about the likely accounting impact of that cut in exploration if that's possible. The second is just on the hybrid debt, just for some clarification. Is it likely you're able to put that into a jurisdiction where you'll get full tax shield for the interest charges that you get? Obviously net down the cost of any debt that you issue. If you can just maybe make some comments around that.
Then, I think actually Oh, yes. One other thing. Is there any plan at some stage or other as you sort of deepen your position in the U.S. to upgrade your ADR listing to a sort of full listing in the U.S. as opposed to where you are right now? Thanks.
Yes. Thank you, Jon. Regarding your first question, let me say that over this year, we drilled 34 wells, 12 of them were positive, eight are now under evaluation, and the rest, I think that is 12, eight, 14, I think, they were negative, the rest. Regarding the positive, let me stress León in the Gulf of Mexico, Seat II in Brazil, Buckskin-2, and of course, the successes we have in Alaska and in Russia in West Siberia. Regarding the tax share of the interest charges, there is not limits to tax deduction of interest charges. I mean that we could make the deduction of everything regarding this issue. Regarding the last question, could you repeat it, please?
I was just wondering whether, I guess as you deepen in the OECD, and build your upstream business, whether you will also upgrade your U.S. listing to a full ADR sort of in comparison or comparable with your peers.
Yeah. Sorry, Jon. I didn't know the last one. Yes, it's a possibility that we are analyzing now, and we are going to make a decision after the closing of Talisman.
Okay. Lovely. Thank you.
Jon.
Thank you, Jon, for your questions. We move to Hamish Clegg from Bank of America Merrill Lynch. Hi, Hamish. Please go ahead with your questions.
Hi, guys. Thanks for taking my question. I had two quick ones for you. Firstly, just in the refining business, I noticed a fantastic quarter demonstrating how well the refinery's performing. One of the things you started off the call was saying the performance was due to two things. One is obviously your improvements, and two is the better environment. Do you think you could maybe give us a bit of a guide in terms of how much of the better performance is from the environment versus the improvement? My second question is, I note that Talisman is seeking tenders for a, or putting out a tender for FPSOs on a Ca Rong Do project in Vietnam, which has sort of gone out there.
I was wondering if you could tell us about how your working relationship was with Talisman prior to this deal closing and your influence over development of various regions. While Vietnam's a pretty profitable region for Talisman, can we assume you won't allow the company, or maybe this is impossible, to commit more CapEx in less profitable regions like North America and the North Sea?
Thank you, Hamish. First of all, let me say that as you said, the fourth quarter was sound for our refining business. I know that I'm going to have problems with our IR people after saying that. Let me add that taking into account growth we have experienced in January and February, the first quarter of this year is going to be even better. I don't know how long it's going to take, this situation, but that is the current situation. You could even clearly know what part comes from the environment and what part comes from the efficiency. If you take the margin index, I think that we have delivered the figure of the margin index, this improvement is due to prices. The differential between our result we delivered in our downstream, operational result, and the margin index is due to a higher efficiency.
I think that more or less, we have been able to earn EUR 1.5 per barrel over our refining index over the last quarter. Taking into account that we are distilling more or less 20 million barrels per month, 60 million barrels. In operational terms, we could think that EUR 90 million more or less came from the efficiency difference. Regarding the new projects, Cartagena and the upgrading of Petronor, from the full of the total refining index, EUR 3.6 per barrel comes from the upgrading of both projects.
Okay.
Rob, sorry. Regarding the second question, it would be fantastic to have the opportunity to answer you about this question, you have to understand that I can't. Take into account that nowadays Talisman is a different company, we have to respect the legal issues regarding our relationship now with Talisman. Before the closing, I'm not able to answer anything regarding this question.
No problem.
Anyway, that is nothing to do with the relationship between both companies. Let me say that I had the opportunity to know in a direct way because I visited Southeast Asia with Mr. Suárez de Lezo, with the person managing our upstream businesses, two weeks ago. I had the opportunity to know on the ground that the relationship of Talisman, in this area is really good and okay.
Brilliant. Thank you.
Thank you.
Okay. Thank you very much, Hamish. Now, let's move to Srinjoy Banerjee from Barclays. Srinjoy, I believe you're a fixed income analyst, so please go ahead with your questions.
Hi. Thank you for taking my question. Just a couple on Talisman. After the Talisman acquisition, would Repsol guarantee Talisman's outstanding debt? What are your thoughts on Talisman debt going forward? Would you refinance from the Repsol level as it matures? Thank you.
I am sorry to repeat that this is a decision that we are going to have in any case after the closing of the taking over process with Talisman. I am sorry, in legal terms, I couldn't deliver anything more regarding this issue. Thank you.
Okay. Thank you very much.
Thank you. Let's move to Irene Himona. Hi, Irene. How are you? Always nice to speak with you. Go ahead with your question.
Good afternoon. Thank you. Just one actually, going back to the downstream, if I may. Looking at downstream, excluding the North American gas business, so if you like, the genuine downstream. You had a fantastic year. For the full year, it was the highest EBIT since the peak in the cycle back in 2007, 2008. I wonder what, in giving us sort of guidance for Repsol standalone being, let's say, cash neutral in a world of $60 with a reduced CapEx, what are you budgeting? What is your expectation, your assumption for that genuine downstream division? You mentioned already that Q1 is even better than Q4, but what is embedded in your guidance? Thank you.
Thank you, Irene. Let me remind you that, well, you know the figures, let me remind that the EBITDA of the full upstream businesses, in CCS terms in 2014, has been EUR 2.2 billion. It's going to depend, of course, on external factors like the refining margin that you know that is not in our hands. My best approach now to the EBITDA at CCS for our downstream businesses, for Repsol standalone, that is obvious because Talisman has no downstream businesses. For Repsol, it could be at around EUR 2.5 billion, EUR 2.6 billion for 2015. Fortunately for us, downstream, I think that is going to be a real cash cow for this coming year.
Thank you.
Thank you, Irene.
Just to go back and clarify one thing, if I may. Can you just repeat for us what your budgeted CapEx is for the downstream in 2015? Thank you.
Yes. I think I am going to repeat it because I think that I don't deliver the figure. It's going to be EUR 970 million, and that's more or less due to the, I mean, EUR 700, EUR 750 million is our running business investment every year in our downstream businesses, including the efficiency investment, plus what we are going to invest in the upgrading of our Pampilla Refinery that you know, that we launched that project in 2012.
Okay. Thank you very much. Very clear. Thank you.
Thank you, Irene, as always. Let's move to David Gamboa from Tudor, Pickering, Holt. Hi, David. Go ahead with your questions.
Hi, Ángel. Thanks for getting my questions. I just have two, if I may, on the exploration side of things. I'm just trying to get a sense on where you guys are going to focus your exploration activities going forward. You mentioned Angola, where we've got a couple of results last year, but not clearly commercial. You mentioned you're going to drill two wells in Angola this year. You said Block 22. Have you dropped the well that you're going to drill in Block 37, or are you still going ahead with that? Do you have any update on the Locosso well that's being evaluated? On the same side of things, you mentioned the Alaskan appraisal program this year, and I think you mentioned that you were thinking about a development project in Q1 2016.
Can I just confirm that date, and how do you see the Alaskan? Do you need the well results in order to progress with an FID over there, or how should we think in the Alaskan timing over there? Thank you.
Yes. Thank you, David. Let me say that regarding the Block B-22, I mean, the Locoso well, that was the first one, I mean, is now under evaluation. This well is going to go in the same directions. Regarding the other wells where we are not operators, I'm talking about the B-37 and the B-35 blocks. In the last one is Eni, the operator. We have no news about the drilling now. Regarding Alaska, I can't confirm because you know that we are going to drive three wells this year to appraise as an appraisal of our discoveries in the area. In order to know in an exact way, I mean, the resources we have in the area and the feasibility of the development plan, we have to wait for the conclusion of these three wells.
Now, these days, we are starting the first one, but I think that we are going to be able, after drilling these three appraisal wells, to prepare and to deliver with a high probability a development plan, sorry, that we will deliver, and we launch the FID, probably in the first quarter of next year, in 2016.
Thank you. Thank you very much.
Thank you, David.
Okay, thank you. Now, let's move to Brendan Warn from Bank of Montreal. Hi, Brendan, go ahead with your questions.
Yeah, thank you, gentlemen. It's Brendan Warn from BMO Capital Markets. Just two questions. Just the first one on, obviously, we're in a EUR 60 oil price environment. Can you just make a comment on expected sales increases or marketing benefits in Spain? We're noting that year-on-year fourth quarter grew by 4%. Then just second question relating to, call it a EUR 60 oil price environment, if you can make any further comments related to the Talisman acquisition again, if possible. Just your statements about the IRR of the acquisition being above WACC, and also what your expectations for EPS are once the deal has closed. You said it would be neutral for 2016. Are you able to restate that, or will you be restating those estimates?
Yeah. Regarding our marketing businesses, and marketing sales in Spain, let me say that the growth year-on-year in 2014 has been at around 2%, more or less the full sales of our marketing business, in 2014. Sorry, I have to check this figure. Excuse me. Yeah. No, sorry. I haven't got the figure now with me, but I think that the full figure regarding the sales of our full marketing business has been a growth of 2% this year. Regarding 2015, we have to think that the framework of the economic picture in Spain and Portugal, where we have a main part of our downstream sales, is improving, and we expect to have a small growth at around 1%, more or less, in the sales of our four downstream businesses in Spain and marketing businesses, and more or less, keep growing our margins in this business.
Regarding Talisman, let me say that we said in December that this transaction, in terms of earnings per share, was accretive for 2016 and 2017, depending, of course, of the price deck. You remember that we said at that time that in our own price deck, it would be accretive in 2016, in an analyst price deck, the accretivity will come in 2017, we maintain what we said in December in terms of profitability of the acquisition of Talisman, we maintain what we said in December. Thank you.
Yeah, thank you.
Okay. Thank you very much, Brendan Warn. Let's move to Biraj Borkhataria from Royal Bank of Canada. Hi, Biraj. How are you? Go ahead with your questions.
I'm good, thanks. Thanks for taking my question. I just had a quick one on the U.S. onshore. In the Midcontinent, could you just remind us of your current activity, how many rigs you're running, and directionally, where you expect that to go in 2015, and also your CapEx budget for the region? Thanks.
As I said before, we are reducing the number of rigs in Midcontinent. The evolution is going to depend, of course, on the oil price in America, in West Texas, and the world of course, but in local terms, the oil price in the area. Let me say that I have to respect the operator, and tomorrow, SandRidge is going to deliver the forecast of investment for coming months, and I have to respect the opinion, and I have to respect the press conference with analysts that SandRidge is going to deliver tomorrow. I know, of course, the figures, I have to respect their timetable. Thank you.
Sure. Thank you.
Okay. Thank you, Biraj. Now, Neill Morton from Investec. Hi, Neill, how are you? Go ahead with your questions.
Thank you very much. Good afternoon, everybody. Just two quick questions, hopefully. Firstly, going back to the free cash flow neutrality for standalone Repsol in 2015. You talked about that being after dividends. Are you assuming a scrip dividend within that statement? If so, what proportion of take-up are you assuming? Then just secondly, a quick question on the cash flow statement. In FY 2014, there was a big increase in other financial assets. Just wondered what that was, whether it was simply you sort of parking liquidity into other short-term liquid investments. Thank you.
Regarding your first question, the answer is yes. In this, yes, I'm assuming more or less a 60% of acceptance. Excuse me, could you repeat, Neill, your second question?
Yes, it was just with regards to the cash flow statement on page 32 of the release. There's a EUR 1.6 billion investment in other financial assets during the course of 2014. I just wondered what that was.
Yes. Are full liquid short-term deposits.
Okay, great. Thank you.
Thank you.
Hi, Neill. Thank you. Thank you for your questions. With Neill Morton, we have finished this Q&A session. You know that in the IR area, we are at your entire service for further queries you may have or any clarification you may need. Thank you very much. Thank you. Cheers.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.