Hello, and welcome to the Repsol third quarter 2014 preliminary results conference call. Today's conference will be conducted by Mr. Miguel Martínez, CFO. A brief introduction will be given by Mr. Ángel Bautista, Head of Investor Relations. I would like now to turn the call over to Mr. Bautista. Sir, you may begin.
Thank you. Good afternoon, ladies and gentlemen, and welcome to Repsol third quarter results conference call. I am Ángel Bautista, Director of Investor Relations. This presentation will be conducted by Mr. Miguel Martínez, CFO. Other members of the executive committee are 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. Actual results may differ materially depending on the number of factors as indicated on the slide. I now hand the conference over to Mr. Martínez.
Thank you, Ángel. Good afternoon, ladies and gentlemen. Today, I would like to discuss something which I think is very material, if somewhat unusual. The material event was the death of Christophe de Margerie in Moscow. It was a great loss for Total, the energy industry, and those people everywhere trying to find solutions in a complicated world. Christophe was not just the CEO of a major oil company. He was more than an executive. He was a leader. He challenged the industry with an enormous personality, a sense of humor, and a genuine desire to work together in goodwill to improve things. For those of you who met Christophe, you will appreciate my feelings of affection and admiration. To my colleagues at Total, I express a deep sense of loss.
I'm also grateful that people of Christophe de Margerie's enthusiasm, gift for life, and common sense do rise to the top of this industry. I repeat, his loss was a material event for all of us. Now let's start with Repsol's third quarter results conference call. Today, we will cover two topics. First, the market environment for the quarter, together with the operational activity and the main highlights, and second, the quarterly results. Starting with the macroeconomic environment, during the third quarter of the year, we started to receive news that has impacted the commodity and financial markets, and that is still having a strong influence on them. China and the Eurozone demand show some signals of weakness, and therefore have reduced the market forecast of future crude and oil products demand. Volatility in the financial markets has increased.
Oil supply has increased more than expected due to the fast growth in the U.S. and increased production in Libya. As a consequence, during the quarter, we saw declining crude prices, but the quarter finished with a much stronger dollar. Being a euro-denominated company, these effects hedge each other. With regard to the refining environment, we saw a recovery of the refining margin indicators throughout Europe, thanks to the weaker oil prices and a strong maintenance season in the U.S., from which we benefit. In the last few weeks, the downward trend in Brent crude prices has continued, reaching their lowest level since November 2010. Sustained improved refining margins are protecting us in the short term from this situation. All Repsol actual production is profitable at current price. Moreover, the current environment does not affect our strategic projects and neither our development CapEx program.
Every strategic project still to come on stream has a break-even price below $80. Repsol faces the current environment from a very solid and low gearing financial position. Let's move now to the operational activity. Starting with the upstream business. In exploration, since the publication of the second quarter results, eight wells have been concluded. Five wells with a positive result in U.S. and Russia, of which three were appraisals, and three wells with a negative outcome in Libya and Liberia. Two additional wells are pending evaluation, Colombia and Angola. In the Gulf of Mexico, we had good news from two wells. León, our operated ultra-deepwater well, where we have found good quality oil sands with a net pay above 150 meters. We are currently evaluating the discovery. Additionally, we have also completed appraisal work at the Buckskin and expect to move into front-end engineering and design in 2015.
In Brazil, in Campos 33, SEAP II is programmed to run a test following the drilling of Pão de Açúcar, which we are respudding now after encountering a healthy oil column. A test was performed in the Sagitário well in Block 50 of Santos, confirming that this feature is a significant discovery. In Colombia, the offshore well Orca-1, located in the Tayrona block in the Caribbean Sea, is currently preparing to run a test in the target formation. In Angola, we cannot disclose information for the time being from our first operated well in the pre-salt segment of the Kwanza Basin, named Locosso-1. The results of the well are under evaluation. In Russia, we have three positive wells, 31P and 32P in the Karabashsky second block, and K-3 well in the Karabashsky third block in West Siberia. We carry out production tests this year that confirm last year positive results.
In Alaska, we are finalizing the definition of two to three paths for the first development. We'll have additional definition and potential confirm from next winter drilling campaign. Currently, we continue to carry out drilling activity in the following areas. In Brazil, the Arapuca well is being drilled, targeting the pre-salt of the Albacora Leste producing block. Facilities are already there. Therefore, a discovery would be very easy to monetize. In the U.S., two non-operated wells are active, Buckskin North and the Marathon-operated well in the Key Largo prospect. Our activities continues in Romania and in Norway. Before year-end, we expect to spot additional wells in Spain, Norway, Angola, Algeria, Canada, and Peru. Finally, during the quarter, we obtained one new block in Algeria and dilute our stake in the Tayrona and Guajira offshore blocks in Colombia.
Turning to production activity, during the quarter, we reached an average of 366,000 barrels of oil equivalent per day. The production was 6% higher year-over-year, and 8% if Libya is stripped out from both years. In Libya, we resumed production on the 7th of July, and were able to produce at 50% of our full capacity during the remaining part of the quarter. In Brazil, we have reached production of 100,000 barrels per day in gross terms with the first FPSO, and we are expecting to have first oil from the second FPSO this month. This second FPSO is already on location. Sapinhoá field will reach plateau for both FPSOs in the second half of 2015. Moving to the downstream division, starting with refining, our margin indicator was EUR 3.9 per barrel during the quarter, higher than the EUR 2.6 per barrel reached during the third quarter of 2013.
The increase was due to the good behavior of the spread between products, except the middle distillates and Brent, that offset the weaker behavior of the spread between light and heavy crude oil. Distillation utilization rate was 84.8% during the quarter, and the conversion capacity reached 106% of utilization. In petrochemicals, the improvement of the market environment as well as the adjustments undertaken by the business during 2013 allowed us to maintain the positive results achieved in previous quarters. Volumes in the marketing business remain stable year-over-year. Finally, I would like to briefly explain the recent acquisition of the Chilean company, Compañía General de Electricidad, CGE, by Gas Natural Fenosa.
This acquisition reinforces the leadership of Gas Natural Fenosa in gas distribution in Latin America with the entrance in a stable and growing economy where Gas Natural Fenosa did not have a presence, providing a platform for the consolidation for power distribution in LATAM and further growth in power generation in Chile. This transaction is consistent with Gas Natural Fenosa strategic priorities, which aim to increase its international diversification. From a financial point of view, it does not change the solid financial position of Gas Natural, having a low impact on the gearing ratio of the company. Gas Natural Fenosa has reaffirmed its intention to maintain the actual payout policy and therefore, considering the accretive nature of this acquisition, even increase the level of dividends paid to shareholders. I will now explain our third quarter earning performance.
Adjusted net income stood at €415 million, 41% higher than in the third quarter of 2013. The accumulated adjusted net income for the first nine months of the year is €1.3 billion, 10% higher than in 2013. On a business-by-business basis, starting from the upstream business, adjusted net income was €185 million, in line with the third quarter of 2013. The basic differences are mainly due to increased production year-over-year in Brazil, the U.S., Peru, Bolivia, and Russia, which resulted in a positive impact on operating income of €63 million. Lower crude and gas realization prices, which had a negative impact on operating income of €56 million. Higher depreciation charges due to higher production had a negative impact on operating income of €42 million. Lower exploration costs lead to an increase in operating income of €38 million, mainly due to lower amortization of bonds and wells.
In 3Q14, we accounted for five exploration wells with a negative outcome. Aroco-1 and Timbo-1 in Liberia, and a group in Libya. Additionally, two wells have been reclassified as negative. Jupiter-1 in Sierra Leone and Magadi-1 in Brazil, previously under evaluation. Higher taxes had a negative impact of €17 million. Other items, such as the minority interest and equity affiliates and other costs explain the remaining differences. Turning to our downstream division, adjusted net income was €190 million, 77% higher than in the third quarter of 2013. In refining, the margin improvement had a positive impact at the operating level of €137 million. In the petrochemical business, better margins and volumes allow us to improve the operating income by €38 million. The commercial business had results in line with the same year ago period. The gas and power business operating income was €47 million lower year-over-year.
The results of the North American operations were affected by the warm season and the negative results from the hedging positions. In 2013, our results in North America were positively impacted by compensations received from suppliers for the deviation of cargoes to other destinations. Results and trading and other activities explain the remaining difference. In Gas Natural Fenosa, the €92 million adjusted net income in the third quarter of 2014 was 13% lower year-over-year. These lower results are mainly explained by the lower results in the gas commercialization business due to the new regulation approved this year in Spain and the sale of the telecom business carried out during the second quarter of 2014. Turning now to our financial situation, the group net financial debt at the end of the third quarter amounted to €2 billion, approximately €3.4 billion lower than at the end of 2013.
Net debt over capital employed ratio stands at only 6.6%. Our liquidity position, cash, and outstanding credit lines is €10.5 billion, sufficient to cover short-term maturities 3.6 times. In conclusion, operationally speaking, we continue to deliver the production growth target established in our strategic plan. During the quarter, we received some good news from our exploratory activity which will create further opportunities to our future growth. In downstream, we were able to capture the improved market momentum. Additionally, I would like to take this opportunity to underline the resilience of our earnings to this weaker crude oil price environment. Since Repsol production is still 60% gassy, the quality and relative size of our downstream assets protects us, along with the better performance of the spread of those products not indexed to crude oil prices. The negative correlation between oil prices and the dollar-euro exchange rate also provides a hedge, and the solid and stable results from Gas Natural Fenosa are not affected by Brent price.
Finally, we continue analyzing the market in order to pursue a possible inorganic transaction. Probably, as a result of the new macroeconomic scenario, better opportunities could arise. Now we will be pleased to answer any questions you may have. Thank you very much for your attention.
Thank you very much. Now, we'll move into the Q&A session. We've also enabled a chat in the webcast in order to pose questions. Please use it only in the event there are connection problems on the call. You can identify it by a tab called Ask a Question. We will address, if any, these questions at the end.
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Let's move into the Q&A session. We'll start with Haitham Al-Ghais from Morgan Stanley. Hi, Haitham. How are you? Please, go ahead.
Thanks, Ángel. Good afternoon. Thank you, Miguel, for the presentation as well. I actually would love to pick up on the last point that you made around the inorganic sort of opportunities you're pursuing, just with regards to the current environment. Clearly, as you say, a lower oil price may allow you to acquire something at a more attractive price. I just wanted to understand how you're finding the evolution of bid-ask spreads effectively with sellers. Are you finding that sellers are willing to discuss valuations at lower oil prices, or is that actually potentially providing some challenge with regards to executing on a transaction? My second question just relates to Libya and really with regards to the more sort of medium-term ability to carry out maintenance.
Daily production has been sort of better than in previous months, one of the issues remains obviously access into and out of the country and perhaps If you could say something about your ability to actually maintain production and carry out necessary workover activity, et cetera, on the fields there, and whether that might pose a challenge for you, that would be helpful. Thank you.
Thanks, Haitham. I think that your point is right. In the short term, sellers and buyers' expectations are somehow far apart. I think that at least two or three months with this level of prices will probably close this gap into a more feasible way to close a transaction. I agree with you. If you look at many of the companies have fallen between 20% and 50% of their market cap. Spot price and expectations are far apart today. Having said so, if prices remain at this level, I think that better opportunities would arise, especially if we compared with the situation we had three months ago. In relation with Libya, there's no issue with maintenance. No major problems there. The incident we had yesterday was based in less than 20 people robbing some cars.
There were some shootings, by safety reasons, we decide to take our people out. I expect it to be a minor incident, and that we can recover production short-term. Did I answer you, Haitham?
Yeah. That's very helpful. Thank you, Miguel.
Thank you very much, Haitham. Now let's move to Filipe Rosa from Banco Espírito Santo de Investimento. Hola, Filipe, please go ahead with the questions.
Hi. Good morning, everyone. Just two questions from me. The first one relates to your exploration and appraisal campaign in the Gulf of Mexico. You have this discovery at León and the positive results from Buckskin. Could you just give us a little bit more information on what could be the potential of, firstly, the León discovery? In the case of Buckskin, what do you mean by positive? Do you think that it allowed you to support your expectations in terms of resources? Did it imply an upward revision of the resources that you estimate for this area? My second question relates to what is your outlook in terms of oil prices? What is your perception? Is that affecting the way you are looking at your CapEx plan? You probably need to revise it soon.
Do you see any potential investments at risk with the new backdrop of oil prices? Coming back to your intention to make an acquisition, are you revising downwards your long-term assumption for oil prices? Do you think that you now will be able to make an acquisition at the previous valuations you were expecting because the sellers will adjust their prices to your new level or to your valuation? Thank you very much.
Thanks, Filipe. Well, I don't know if I can put more light in the Gulf of Mexico results. Basically, in Buckskin, we found a net pay of more than 150 meters, but it's way too early, Sorry, in León, to make any assessment about the potential of the discovery. We will run an appraisal well once we have rig availability, probably we will have more light. In relation with Buckskin, as mentioned, we keep drilling now in the north part to really establish the front-end engineering and design of the future development. Think that also the distance between León and Buckskin is lower than 30 miles. We have to think about it, and all this area is going to have development closest. It's time to think. I cannot give you more light on that.
In relation with the outlook for oil prices, I'm sure that they will fluctuate, as a first comment. In relation with the CapEx, I would say I will not touch, and we will not modify our plan for exploration. If we start exploring today, probably first oil would arrive in eight years. We have to look more as an exploration as buying an option. Buying an option is something that has proved. We have achieved good results through our model, which basically implies putting at risk and penalizing short-term our P&L of EUR 7 per barrel produced, and we will keep attached to that. In relation to the development, and the CapEx of the developments, I would say that for sure, for future developments, we are taking into account the assets scenarios.
Up to date, all the projects that are ongoing do not present any problems. For the future, we'll have to see. Finally, in the acquisition, for sure we are revisiting long-term oil prices and really having a wide band, I would say between EUR 70 and EUR 100, to analyze any possible acquisition. Did I answer you, Filipe?
Yes. Thank you very much. Thank you.
Gracias, Filipe. Now, we're moving to Credit Suisse, Thomas Adolff. Hello, Thomas. Please go ahead with your question.
Hi. Thank you. Buenos días. Miguel, you sounded quite excited about the acquisition of CGE. You even gave it a slide in the presentation. I just wanted to come back to the point you just made on exploration that you said you do not plan to modify it. If we think about lease expiries aside, perhaps it is actually better and cheaper to buy undeveloped resources than your finding cost per barrel, if anything. We are not talking about big corporate deals or big asset deals that the others are referring to, but simplistically, an opportunistic approach to buy undeveloped resources versus exploration. That is one question, if you can talk around that. Staying with exploration, perhaps, can you quantify the resource addition so far in 2014 from your exploration campaign? The final question I had was on Buckskin again.
You did sound quite excited about the appraisal results, but I wondered whether your base case, which I think is a standalone joint development, I think with Moccasin or another field, whether that is still the base case or whether we should actually be thinking about, as some of the industry press talked about, a tieback instead. Thank you.
Thanks, Thomas. In relation with the acquisition or the M&A activity, I think that is not only the M&A of the corporation, the one that is working in the process. Also, the business is totally involved in it. We are analyzing also undeveloped resources, but in my perception, they are still not cheap. In that sense, I would say, let us see how they evolve. Normally, within two months, people do not change their mind, and I think the mindset, and sellers are still thinking a world of EUR 110. Not much possibilities there. Okay?
Okay.
In resources addition in 2014, we do not disclose that. Though I am sure that we are doing okay.
Are you on track to deliver on your annual targets so far, the run rate?
Yes. Even if nothing happen from now till the year-end, we are okay. In relation with Buckskin, really, I cannot put more light than the one I gave you. There are several possibilities there. The one, as you mentioned, is Moccasin, there are also other developments nearby, we'll have to see. Let the people do his job. Let's take the results from the north flank in Buckskin, then we'll be able to provide you more light. It's way too early.
Okay.
Sorry about that.
Thank you. Thanks.
Well, thank you, Thomas. Now moving to Sanford Bernstein, Oswald Clint, how are you? Please go ahead with your questions.
Good. Thank you very much. Maybe I think you made a comment that all of your production was economic at these prices. Could you just talk about your Midcontinent volumes? Is that also true for that portion of your upstream, in the third quarter, and what happens here at these oil prices going forward, and how should we think about that volume growth into 2015? Then just a smaller question, just want to make sure the Russian discoveries you have are normal developments that are outside the scope of any of the sanctions. Thank you.
Sorry, did you hear me? Because I had the microphone off.
No, I didn't actually. Sorry.
Oh, sorry about that. Well, sorry about that. My microphone was off. In Midcontinent, I was telling that we reached 11,000 barrels per day last month, which is a little above our target, and the production there is profitable at $80. Think also that we have finished the carry of our partner, of SandRidge, this October. Growth for the future, I would expect to reach 15,000 barrels, no more than that, in Midcontinent for next year. In relation with Russian discoveries, I would say first, we are not affected by sanctions. We are out of the three reasons why you have to move out there. We are not in any of these circumstances. The development is still way too early to make any comment. We still have to work on the appraisal phase for a while. Sorry about the microphone issue, Oswald. Did I answer you?
That's okay. Yes, absolutely. Thank you.
You're welcome.
Thanks very much, Oswald. Now we're moving to Anish Kapadia from Tudor, Pickering, Holt. Hi, Anish, how are you? Please go ahead with your question.
Hi. Good afternoon. I had three questions, actually. Firstly, it seems like bid-ask spreads are quite wide at the moment, as you mentioned. There is a number of companies that when you look at their share prices, they are looking distressed and like you said, they will not accept the offers that you are thinking. Would you look to potentially go hostile for any corporates? Are you looking more at asset deals or corporate deals? The second question is relating to Angola. We have seen, just generally in the industry, quite a few unsuccessful wells in the pre-salt in Angola. It seems like on your two wells in Angola, the commerciality is highly questionable. Just wondering how you think about your Angola pre-salt exploration strategy going forward. Just the last one, going back to SandRidge. You mentioned that it is profitable at $80.
If you look at realizations in the U.S., they seem like they are significantly below that at the moment. What makes you cut back on your investment in SandRidge or change anything over there? Thank you.
Thanks for your question, Anish. In relation with the first question, we are looking at both assets and corporates. We are trying to look anything that moves. For sure it would be friendly. We do not believe in hostile activity. The possibility of failure there, it is enormous. If it is a friendly transaction, we will be there. If not, we will have to go away and look for other possibility. In relation with Angola, I could agree with your comments, think that we have just drilled two wells there, so it is way too early. Remember that in Brazil, same situation happened, at the end it appears. It is a matter of keep playing, and we will see. Finally, in relation with Midcontinent, we will keep our 30 rigs there working.
If you ask me where would be the moment or the limit in which we will have to stop production, I do not have the figure in my mind, for sure it is lower than the prices we are seeing today. Basically I would say no hostile. We are looking asset and corporates. Angola needs more time. We have only just drilled two wells, we will have to keep trying. Finally, in Midcontinent, we will not cut back as of today prices. Okay, Anish?
Thanks, Miguel. Very clear.
Well, thank you very much. Now, let's move to Flora Trindade. Flora from BPI. Flora, [Foreign language] Go ahead with your questions, please.
[Foreign language]. [Foreign language] Three questions, if I may. The first one a bit more generic. Considering the current prices, it seems increasingly likely that Sacyr will have to sell a part of the stake. Just wondering if you are working together with them on this. The timeline for the refinancing is January, so it is approaching. Just wanted to see if you have any specific view here. More specifically, you mentioned in the press release a new plant in Cartagena with SK. Can you give us just a sense of how much could be the contribution to the EBIT of this plant? More specific on the net debt evolution table you provide in your release in page 13. You have an income tax of EUR 287 million in the quarter alone.
Does this increase, if you compare with the rest of the quarters, excluding the adjustments, is basically related with just the real that you mentioned in the previous quarter? Because it seems a pretty wide change considering the FX change of the real. Just wondering if this has to do also with Libya or with other issues, if you could explain the drivers, please. Thank you.
Thanks, Flora. In relation with the first one, we are not working with them. We know that the loan matures in January 2015, but I think that the main differences we have today with what we had three years ago was that the situation has changed in many senses. First one, we are not talking about the 20% of the company, but about a 9%. Second, the relation with Sacyr is totally different from the one we had in the past. Third, also the financial situation is different. The banks will probably react somehow differently. I cannot provide you more color than that. We are not working with them. They have shown several times in public their interest on keeping their stake here. Let's see how it evolves.
In relation with Cartagena, it's difficult to analyze the EBIT by refinery because we work with the whole refineries as a whole. It's difficult to really assess the EBIT of a single refinery. If you ask for SK and SK EBIT, we expect it to be, in annual basis, around EUR 22 million, which implies an internal rate of return of above 30%. Finally, in the income tax, you are right. In Brazil, due to the devaluation, we have to account a fiscal loss due to the deferred taxes. Also the impact of Libya coming into production make the fiscal terms tougher this quarter, reaching the 48% you have seen. For the whole year, I expected it to end up at 44%. Did I answer you, Flora?
Yes. Perfect. Thank you.
You're welcome.
Obrigado, Flora. Now let's move to Irene Himona from Société Générale. Hi, Irene. How are you? Please, go ahead with your questions.
Thank you, Ángel. Good afternoon, Miguel. I had two questions, please. First on the cash flow. As you mentioned in Q3, your cash flow did cover CapEx and dividends. I wonder if you can clarify the picture for the fourth quarter. I understand there's been a recent change to dividend tax for retail Spanish investors, and some companies are paying the dividend early as a result. Are you likely to pay the dividend in December rather than in 2015 to help them with that? In other words, are we looking at three dividend payments this year and one next year? My second question on the downstream. Obviously, a key strength this quarter. Can you talk a little bit about the trends you're seeing in Spanish and European oil products demand? Are things getting a little bit better? Thank you.
Thanks, Irene. For sure, the dividend policy is a board decision. My opinion is that we are not going to modify the schedule we have had in the past, so I expect dividends to be paid in January 2015. Okay? In relation with the fiscal terms about the dividend, they basically favor solutions like the scrip. Answering to your question, I don't expect changes, and I don't expect the board to modify the regular payment of dividends in January. Related to products, I agree with you. We have seen a better demand in Spain, though quite tiny, but better.
In relation with Europe, despite the good results of all the companies this quarter and the margins we have seen in October, which are even better than what we have seen in the third quarter, I'm very conservative with my approach to the refining industry in Europe, because we are still long in distillation capacity, so we will see. Better margins, though I'm prudent in my estimates for the fourth quarter. Taking this into account, what do I expect for the fourth quarter? I would say that depending on Libya, with Libya in a like-for-like basis, I think we should do a little better than we have done in this quarter. Refining margins are a little better. Cold weather helps. Gas oils will have to increase margins. We'll have the fullest speed Sapinhoá. Gas and power would do better in the U.S.
I'm a little optimistic in comparison with the third quarter. Okay, Irene?
Thank you. Thank you, Miguel.
Thank you very much, Irene. Now we move to Hamish Clegg from Bank of America Merrill Lynch. Hi, Hamish, how are you? Please go ahead with your question.
Good afternoon, guys. Must be good to be Repsol, one of the only companies to benefit from or at least be less impacted by lower oil prices, given your mix. One of the questions asked on many of the other calls has been, what's the sort of rough rule of thumb leverage to oil prices for you, which is something that oil companies have been answering us. Second question is just on your drilling and M&A. One of the things you mentioned is the lead time on having a successful drilling campaign, finding oil, and it coming into the portfolio. How much would you consider using your successful drilling operations as a means to generating cash flow? It might not be organic, but by selling stakes in some of your discoveries, that could definitely help bolster your cash position in terms of cash coming into the business.
You also said, if I remember rightly, earlier in the year, if you didn't do a deal by year-end, you would look to be returning the excess capital on your balance sheet to shareholders. In the current environment, is this something you would stick to?
Thanks for your question, Hamish. In relation with oil price sensitivity, I'll give you something more than the oil price sensitivity. Basically, after tax, a dollar fall affect us approximately in EUR 18 million at after-tax results. A 10% increase in the dollar increases our EPS by 12%. Normally, oil price and dollar moves in the opposite direction. We have somehow a coverage there. This is the sensitivity we have, is not much. If you think that roughly, if you want to make the account by yourself, you can do it mentally. From the 58 million barrels we may produce in oil, take out eight million barrels to make the calculations easier, taking into account that we have fixed price in Ecuador and some PSC, EUR 50 million impact at EBIT level.
Once you discount taxes and royalties there, which is 60%, you will reach the EUR 18 million that I mentioned. Okay?
Yeah.
In relation to return cash to shareholders, I asked for a period of 18 up to two years, last quarter. We have covered only five months by the year-end. I still have some room.
You've got some time
with my shareholders allowed.
Yeah.
Okay? I think that we have had good time till now, not moving quickly. In relation with selling assets, we have done some farm-outs, like in Colombia, but it is not the goal today. The farm-outs we did in Colombia were based on a portfolio management issue, especially because it was exploration there. We have plenty of cash. This is also one of our advantages today. One of our problems, because financially talking is not very efficient to have EUR 7 billion in cash as we have today. I would say no, it's not in our idea to keep selling assets or to sell assets or part of it, not at this moment. Okay?
You said you'd never consider hostile M&A. Can you maybe elaborate a little bit more on why you wouldn't, given that you could get the support of shareholders?
If you analyze the percentages of failure in hostile transaction, you would realize that it's quite big. Also, it's not in our genes. We are Pacific people, and we do prefer to go hand by hand with the management and with the board of the company. If we can't really reach an agreement, we will go for it. If not, there are so many companies out there that if it doesn't fit, we will look for another one. The risk of failure, it's enormous in a hostile situation.
Okay. Thank you.
Thank you, Hamish.
Thank you very much, Hamish. I'll say hello to Alastair Syme from Citibank. Hello, Alastair. How are you?
Hello. Very well. Thank you. On your refining network, do you see much change in crude feedstock, given all the changing differentials going on in global crude markets? Do you have much flexibility to take advantage? Can I also ask what projects you're looking to FID as we head into 2015 or the first half of 2015? Finally, I'd love to know how much the León well costs, if you'd be prepared to share that. Thank you.
Sorry. In relation with the flexibility, no major changes. We are always active managing oil supply basket. The flexibility, I would say, is more on our refining system, and we take the advantage of that, and we permanently look at every type of crudes that are available. In relation with your second question, projects that would have FID in the first half of 2015. Let me think. I think that Alaska would be basically the main one that really is important. We have to take into account also the campaign of this winter, next winter. Alaska would have a FID next year, and probably also the 3rd stage in Margarita. I would say those are the two main. In relation with León, the whole cost, 100% of the well was $280 million. 280.
Okay. Thank you.
It's okay, Alastair?
On the crude feedstock question, I guess my point was, you're seeing an increasing availability of lighter crudes as things get backed out of the U.S. market. Can you take advantage of that in the system?
I would say that an increase in light crudes will not help us much as a basic rule. Part of our advantage is between the spread of heavy and light. If there's more light crude in the market, the spread between heavy and light would be lower. We are handling today, our diet include 45% of heavy stuff. Basically, would like to have a wider spread. If the increase of light crude comes in, logically, it will not help us.
Yep.
It's okay, Alastair?
Absolutely. Perfect. Thank you very much.
Thank you very much, Alastair. Now, let's move to Jon Rigby from UBS. Hi, Jon. It's always good to speak with you. Go ahead.
Hi, guys. Can I just ask two questions on cash, then just one on the downstream. On cash, as you're running at the moment, you're running a cash deficit for the first nine months of the year if you X out the working capital. I was thinking, are you conscious of the sort of wasting asset in terms of your balance sheet strength, i.e., is there a sort of backstop date by which you consider you need to have done a deal as opposed to when you would want to? Just related to that, on Brazil, which is now sort of held off balance sheet to some degree, I noticed that the CapEx continues to be quite heavy, obviously, because you've got a lot of work to do.
Will that require more funding at any stage, or will that effectively pay out or be able to complete the CapEx spending from its own internal funding and the Chinese funding that went in there? Then just on the downstream, I noticed the 106.6% utilization rate of your conversion units, and a relatively high rate of utilization for the integrated system as a whole. Given the refining margins that existed in the third quarter, is that a good representation of a system that's running pretty much flat out? Thanks.
Thanks, Jon, good afternoon. First, I'm totally conscious about cash. Being the financial director, the CFO of the company, and having EUR 7 billion at hand, let me tell you, everyone pretend to grab it. Yes, I'm conscious. We have a deficit, taking out all the non-current or extraordinary items, of EUR 400 million at the end of September. We already have paid the whole dividend for the year. Basically, with the better expectation, I hope for this quarter, we will end up with a shortage of cash, taking into account that probably around EUR 200 million in a like for like basis for the working capital.
The non-present
it's not that big.
Yeah.
Okay. We follow that really cautiously. In relation with cash in Brazil is more than funding. Our data shows that, in a regular scenario, $90 will have a permanent cash availability between $4 billion and $5 billion permanently. It's fully funded with the capital increase we did with the Sinopec. In the third one, you are right. I think it's a good rate. It's where we should stand because, basically, we module the distillation capacity in order to maximize the conversion, which is where we really make the money. I would say yes. Current utilization rates, I think it's a good one.
Just to follow up on that Brazil comment you just made, are there plans at some stage to bring that cash, sort of repatriate that cash, or will it always sit in Brazil for the foreseeable future?
Well, actually, what we have, it's both partners have the money already in their hands.
Because the loan process.
Yeah.
Yeah.
Yeah. We are comfortable at the present time with this situation.
Okay. Cool. That clarifies it. Thank you.
Okay, Jon.
Thanks.
You're welcome.
Thank you very much, Jon. Now, Joshua Stone from Barclays. Hi, Joshua. How are you? Go ahead with your question.
Hi. Good afternoon. Very well, thanks. Given the fall in the oil price, I just wanted to clarify on your acquisition priorities. You previously talked about a need for liquids and wanting to get more liquids in the portfolio, but also mentioned the advantage of having gas in a falling oil price environment. Are those priorities unchanged, or are you perhaps willing to maybe settle for a little bit more gas if the opportunity presents itself? Then in the gas and power part of the downstream division, is slightly surprised by the weakness there. Can you talk a little bit about how much you expect that to be one-off, and perhaps reverse over 4Q? Thanks.
Thanks for your questions, Joshua. In relation with the first one, I would say liquids or gas is not precisely the most critical factor in the acquisition. We look more for really value and possibilities to generate value, and also in stable scenarios. Meaning that by that portfolio talking, we need to be more in stable countries. If you want my opinion, I think that there's more downside today in liquids than in gas, but it's just an opinion. In relation with gas and power, it's quite difficult to make an assessment. I think that Algonquin last year, which is the reference price at a given moment, reached 80. It's very much dependent on how the weather will affect the East Coast during the fourth quarter. Difficult, really difficult to assess how the weather is going to be in the East Coast of the U.S. Sorry about that.
It's okay. Thanks.
Well, thank you very much, Joshua. Now with Joshua, we've finished our Q&A session and this conference call. You know that any further doubts or queries you may have, the IR service or the IR area of Repsol is entirely at your service, and thank you very much.