Hello, and welcome to the Repsol second 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 now like to hand the call over to Mr. Bautista. Sir, you may begin.
Good afternoon, ladies and gentlemen, and welcome to Repsol second 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 a 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. In today's conference call, we'll cover three topics. First, the closing of the agreement for the amicable settlement and compromise of expropriation with the Republic of Argentina in relation to the expropriation and the completion of the disposal of our assets there. Second, the operational activity and the main highlights of the quarter. Third, the quarterly results. On May the 8th, the Republic of Argentina and Repsol completed the agreement for the amicable settlement and compromise of expropriation in relation to the expropriation of the controlling stake of Repsol Group in YPF S.A. and YPF Gas. In accordance with the terms of the agreement, the Republic of Argentina delivered a portfolio of Argentine sovereign bonds with a total nominal value of $5.3 billion.
In view of the favorable perception of the risk of these bonds in the financial markets, Repsol decided to sell all the Argentine sovereign bonds to the JP Morgan in three separate transactions. Repsol obtained almost $5 billion in compensation for the expropriation as a result of the sale of the entire holding of Argentine bonds, close to the maximum amount that Repsol could cash in accordance with the agreement. Previously, on the 7th of May, we sold an 11.86% stake of YPF to Morgan Stanley. On the 12th of May, we sold an additional 0.48%. These two transactions amounted to $1.3 billion and generated a capital gain of €287 million after tax. As of today, Repsol has no exposure to Argentina.
After the monetization of our Argentinian assets, the board of directors agreed to distribute an extraordinary dividend of EUR 1 per share, returning a significant part of the cash to our shareholders and substantially improving our shareholders' remuneration for this year. Moreover, the credit rating agencies recognized the improvement in Repsol's financial position. Fitch and Moody's upgraded our long-term rating, and Standard & Poor's revised its outlook from stable to positive. Now let's move to the operational activity. Starting with the upstream business, in exploration during the Q2 2014, six wells have been concluded. Two wells with a positive result in Alaska and three wells with a negative outcome, Mauritania, Kurdistan, and Namibia. One well is currently held under evaluation in Alaska. In Alaska, the two positive wells were of group 5 and 7 in the North Slope.
We are currently in the visualization phase of a development for our discoveries in the area. Moreover, during the period, we have also received positive news from our exploration and appraisal activities in BM-C-33 block in Brazil, and our Karabashsky venture in Russia. In Brazil, the Seat-2 well in Block BM-C-33 found around 300 meters of a continuous column of good quality hydrocarbons-bearing reservoir. The well reached total depth under current formation evaluation operations. A future test will add resources to the block and support the development scenarios being evaluated. In Russia, the winter campaign has allowed to increase the volume of resources in the Karabashsky blocks in West Siberia. As announced in our recent press release, the volumes added are in the range of 240 million barrels of oil equivalent, as certified by the Federal Agency for State Reserves.
We have also successfully tested production with two horizontal wells of over 1 kilometer in length, significantly de-risking the way towards a future development. Currently, we continue to carry our intense drilling activity in the following areas. In the U.S., we are drilling our operated exploration well, Leon, and the non-operated second appraisal well in Bakken. In Angola, the Ombobo-1 well operated by Eni, reached target depth and is currently under evaluation. Our Rowan Renaissance rig is now on location in Block 22, where we just spud our first operated exploration well in Angola, called Locosso. In Liberia and Colombia, we are currently drilling one offshore well in each country. Moving to production and development activity, during the quarter, we reached an average of 338,000 barrels of oil equivalent per day, excluding the effect of the stoppage in Libya, where we could not produce during the quarter.
Production could have been 17,000 barrels of oil equivalent per day higher year-on-year. The full year operation and ramp-up of our key projects, Sapinhoá in Brazil, Midcontinent in the U.S., SK in Russia, Margarita in Bolivia, and Kinteroni in Peru, increased our production by more than 30,000 barrels of oil equivalent of average production per day, year-on-year. This increase was partially offset by stoppages in Trinidad and Tobago due to the drilling work in the Savonette field and maintenance work on train 3 of the Atlantic LNG plant. In Libya, we have been able to resume production on the eighth of July, where we could not operate during the whole quarter. With regards to the progress of our development project in Brazil, the fourth producing well in Sapinhoá started production on the seventh of July.
We already have four wells connected, which together are producing above 120,000 barrels of oil per day in gross terms, reaching full capacity of the first FPSO. The second FPSO, with a capacity of 150,000 barrels of oil per day, is already in Brazil, and we are expecting to have first oil before the end of 2014, and reaching peak production during the first semester of 2015. In Lapa, formerly Carioca, the development plan has been presented in June 2014 to the ANP. According with our plans, we expect to have first oil before the end of 2016. In the U.S., we continue with the development of the fields and associated production ramp-up in the Mississippian Lime.
This quarter, in line with the company's policy of financial prudence, Repsol adjusted the book value of Midcontinent with an impairment of EUR 142 million after tax, due to the lower activity planned in the extension area. In Venezuela, Cardón IV continues its development as planned, and we are expecting to be on stream at the turn of the year. Finally, in Algeria, the consortium of Reggane has recently awarded the EPC contract for processing facilities and pipelines, which is the controlling path for the first gas, which is expected during the first half of 2017. Moving to the downstream division and starting with refining, although margins continued weak in Europe, our margin indicator was EUR 3.1 per barrel during the quarter, higher than the EUR 2.6 per barrel reached during the second quarter of 2013.
We have been slightly above breakeven during the first half of the year, thanks to the good behavior of the spreads between light and heavy crude oils, compensating the weaker behavior of the spread between middle distillates and Brent. The distillation utilization rate was 83.5% during the quarter, and the conversion capacity reached 106% of utilization. In petrochemicals, the improvements implemented on cracker turbines in order to enhance efficiency in our sites, as well as the programs executed in order to focus our production on more valuable products, has enabled us to reach positive results after several challenging quarters. Our commercial businesses maintain a healthy level of profitability quarter-on-quarter and year-on-year. I will now explain our second quarter earnings performance.
We had a positive variation in net income, which was EUR 520 million, 90% higher than in the second quarter of 2013, due mainly to the capital gains of the YPF share sales. Adjusted net income stood at EUR 390 million, in line with the second quarter of 2013. On a business-by-business basis, starting from the upstream, the adjusted net income was EUR 145 million, 49% lower than in the second quarter of 2013. The basic difference arise mainly from the absence of production in Libya and higher exploration costs. In Libya, production was interrupted during the whole quarter, which resulted in a reduction at the operating and at the net income level of EUR 261 and EUR 88 million respectively. Moving to the rest of the activities, we increased production year-on-year in Brazil, the U.S., Russia, Bolivia, and Peru.
Offsetting the lower volumes in Trinidad and Tobago, which resulted in a positive impact on operating income of EUR 73 million. Higher crude and gas realization prices had a positive impact on operating income of EUR 71 million. Higher depreciation charges due to the increase of production in the U.S., Russia, Bolivia, and Peru had a negative impact of EUR 13 million. Higher exploration costs led to a decrease in operating income of EUR 167 million, mainly due to high amortization of bonds and wells. In Q2 2014, we conclude three exploration wells with a negative outcome: Namibia, Mauritania, and Kurdistan. Additionally, two more wells have been reclassified as negative: Anchois in Morocco, due to the lack of economic feasibility, and Kachemak, one in Alaska, previously under evaluation. Lower taxes had a negative impact of EUR 5 million, mainly due to the better tax rate mix.
The depreciation of the dollar against the euro lowered the operating result by EUR 12 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 EUR 162 million, 32% higher than in Q2 of 2013. The breakdown by business is in refining, our margin indicator was $3.1 per barrel, better than the $2.6 per barrel achieved during Q2 of 2013, having a positive impact at the operating level of EUR 44 million. The premium margin due to the upgrades reached $2.20 per barrel. In the petrochemical businesses, better prices in final products, together with the efficiency programs implemented in our sites, were able to offset higher naphtha price during the quarter, having a positive impact of EUR 20 million.
Turning to the commercial businesses, we released a good set of results, having a positive impact at the operating level of EUR 62 million. Moving to gas and power, operating income was a net loss of EUR 37 million, EUR 62 million less year-on-year. In 2013, our results in North America had been positively impacted by compensations received from supplier from the deviation of cargos to other destinations. Results in trading and other activities explain the remaining difference. In Gas Natural, the EUR 152 million adjusted net income in Q2 of 2014 was 24% higher year-on-year. Better results in the gas commercialization business and the sale of the telecommunication business offset lower income from power generation and distribution activities in Spain and Latin America.
Turning now to our financial situation, the group's net financial debt at the end of Q2 of 2014 amounted EUR 2.4 billion, approximately EUR 3 billion lower than at the end of 2013, thanks to the monetization of the Argentinian assets. Our liquidity position remains healthy at more than EUR 11 billion, even after paying a EUR 1.3 billion extraordinary dividend and the regular interim dividend to our shareholders. In conclusion, operationally speaking, in upstream, we have been able to add more than 30,000 barrels of oil equivalent per day from our key growth projects. Sapinhoá has completed the first phase successfully, and we have the second phase on schedule to our more production in the following months.
In downstream, the quality of our assets again show the capacity of Repsol to weather the current adverse situation, and the efficiency and product redesign programs have proven to be successful by turning around our chemical business results. Our focus is on the development of the 10 key growth projects to reach the 7% compound average production growth rate, together with keeping our exploratory pace to ensure future reserve replacement. At the corporate level, we have completed the agreement for the amicable settlement compromise of expropriation in relation to the expropriation of the controlling stake of Repsol Group and the monetization of the bonds received as compensation, together with the rest of our assets in Argentina. Before we start the Q&A session, as you already may know, yesterday, we reported that we are studying a number of different transactions in the area of exploration and production.
No decision has yet been taken in this regard, and as you may understand, we are unable to make further comments on our M&A activity. Thank you very much for your attention.
Thank you very much. Let's move into the Q&A session. We have 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 these questions at the end. Thank you.
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Well, let's start with the Q&A session. First, we have the questions from Irene Himona from Société Générale. Hi, Irene, how are you?
Hi, Ángel. Fine, thank you. I want to ask firstly a question on Libya. In the first half, Libya produced for about 40 days, I believe, so 22% capacity utilization. What do you assume in your budget for the second half of the year, please? My second question is on cash flow. In the first half you show quite a large negative working capital outflow. I was just wondering if you think that might reverse over the rest of the year. Finally, BM-C-33, which you mentioned. Can you just remind us what resources you have found to date, and when would you expect first oil? Thank you.
Thanks, Irene. Well, in relation with Libya, it's quite difficult to assess an answer. This quarter, we didn't have a single day of production. We started production, as mentioned before, at the beginning of July. I think it was the 8th or the 7th. We were able to ramp it up to the 340,000 barrels we can produce there. Right now, there is a logistic problem, we are only producing 150,000 barrels per day due to logistics issues. Quite difficult to assess. Talking, I would expect a better second half. I think that basically during the first half of the year we have been half of the production. First quarter was okay, second quarter was a total disaster. Difficult to assess, Irene. You probably can put a figure as good as I can, though I am somehow optimistic.
The data we have today is that there are a lot of problems in Tripoli with basically a complex situation in Tripoli. In the Sahara, our people is working well. No problems there. Difficult to assess. I can only tell you that I expect a better part in the second half of the year, better results, more than 50%, if you want, of the production. Moving into the working capital, I think it's partially a one-off and partially it's an increase. It's EUR 500 what we are over. There are basically two reasons. We have a stoppage in the hydrocrackers in Cartagena during June, that implies that a lot of middle products increase the inventory there. Also, this is, I would say, a one-off. We have a part which is the trading activity, which is increasing.
At the end of June, there was a cargo of Russian fuel that also increased the working capital. Basically, I would say it's unusual, and probably we will be able to reduce approximately EUR 300 million in the next quarter. The final one, talking about resources, we are estimating in BM-C-33. We are still estimating those. For sure will be well above EUR 1 billion, but still way too early. We don't have a figure about BM-C-33 yet. We have very good results in Seat, but it's still a long way to go because think that is not only Seat. It's Seat plus Gávea plus the main field Pão de Açúcar. It's difficult to assess, though if once we have the assessments, we will let you know. Is that okay, Irene?
Thank you very much, Miguel. Thank you.
Thank you, Irene. Let's move to Lydia Rainforth from Barclays. Hello, Lydia. How are you? Please go ahead with your questions.
Thanks, Ángel. Hi, everybody. Two questions, if I could. Miguel, in terms of the use of cash, you have previously looked at this EUR 500 million share repurchase plan. Can I just ask what your current thoughts are around that? Secondly, I know there's a limited amount you want to talk about the M&A side, but in the past you have said that you want oil biased, OECD-biased assets that offer you cash flow and good value moving forward. I'm just wondering, are there any of those things that you would be prepared to compromise on if you're not finding the sort of assets that you want? Would you look at returning that cash to shareholders at some point?
Lydia, it touches somehow the M&A issue. I would rather refer, in one hand, to the press release we had yesterday. What we'll look at the end of the road is really to give our shareholders the better return. As mentioned in the prior call we had three months ago, we are looking for something that we really believe could generate more value for our shareholders. At the end of the road, if we don't find this asset, this company, whatever, we'll have to return the cash to the shareholders. That's for sure. I think we deserve some room, let's say one year, 18 months, to really find out if there's a better solution than to return the cash to the shareholders. Is that okay, Lydia?
Yeah, that's perfect. Thank you. Just a separate question, if I could. Just around what are you seeing in terms of operating costs at the moment across the industry, and just what sort of trends you're seeing there. Thank you.
We don't have really an insight there about the general cost because most of it refers to FPSOs, at least in our case. We have contracts for four or five years. I don't have a perceived feeling about the operating cost across the whole industry. What I can tell you is that probably in Brazil, taking out the issue of the FPSOs, probably we have some increases in cost above 5%-6%. Other than that, I have not perceived anything that took my attention.
That's perfect. Thank you very much, Miguel.
Thank you, Lydia. The questions from Haitham Al-Ghais from Morgan Stanley. Hi, Haitham. How are you?
Hi. Thank you very much, Ángel. Good afternoon, gentlemen. Two questions from my side, please. Firstly, both on the development assets. Firstly, on Venezuela and Perla, perhaps if you wouldn't mind giving a more detailed update on the status of that project. In particular, as we approach year-end, and the expected start-up, how confident you're feeling about start-up on schedule, what the critical path items now between now and first oil. Are there any other non-operational issues like contractual or other sort of issues that might act as a sticking point for start-up? The second question I have is around the Mississippi Lime and the impairments you took on the assets. If you could just provide a bit of detail. You mentioned a new development plan forecast.
If you could provide a bit of detail of what that is and what does it mean, particularly for 2015 production and the growth that we're expecting from the U.S. production side of things. Thank you.
Okay. In relation with Venezuela, the status is the one we mentioned time ago. We expect really to end the project by the end of this year. This would be the first phase with 150 million standard cubic feet per day. Next step probably would be reached in May 2015, doubling that production. First and fourth phases probably would be 2017 and 2020, but it's way too early to assess that. 150 by December this year, and doubling that, having 300 extra million standard cubic feet per day by mid-2015. In relation with the Mississippi Lime and the impairment, I have to say that when we acquired the asset, we split the bonus we paid between two areas, the core one and the secondary.
After the reduction we have made in CapEx, along with the production, we have decided to focus the future CapEx in the primary area. That implies that the secondary area, once you delay future production, shows an impairment. That's the reason why we accrue the figure I mentioned before. In relation with production, we are now producing something around 9,000 barrels of oil per day, and we expect to increase year on year 3,000, 4,000 barrels per annum. Did I answer you, Haitham?
Yes. That's very clear. Thanks very much, Miguel.
You're welcome.
Thank you, Haitham. Now let's move to Oswald Clint from Bernstein. Hi, Oswald. How are you? Please go ahead with your questions.
Good, thank you. Yeah, sorry, I just managed to get on. I just wanted to ask a bit more about the impairment on the Mississippi Lime, but really how that makes you think about North American shale, in terms of the kind of growth potential from each of these. Is it the case that your order of preference of the shales has changed? Do you feel you need a certain number of shale plays in the portfolio so that one of them works versus your expectations? Just kind of using the results from the Mississippi Lime. Then the second question, operationally, just curious about the Kinteroni ramp-up
how that's going in the second quarter, and if the kind of 20,000 up to 40,000 barrels per day volume aspirations are still pretty good. Thank you.
Well, in relation with our opinion about shale, I don't know if it probably has changed or not, but one thing is clear. Initially, our partner was really a type of business which is somehow different from the one we are used to. So geology was not there. It was simply drilling, and drilling. Being the most efficient one, the one that really gained the game. I think that the combined efforts we are doing with our partner there, it's improving somehow the results we are obtaining, and it's the way we intend to go there. Which basically is put more geology in the process. To know why one area is a good one and to know why an area is not. Not simply obtain this result by drilling. I think it's working probably with lower production figures, but for us it's not the issue here.
The issue is the value added, and we think we can generate more value added. In relation to the rest of the shale, I don't have a single opinion. I think it's really dependent on the area on which you are, and within the area, in the part in which you are. Touching in Kinteroni, the agreement we have reached implies that we will be delivering 10,000 barrels of oil equivalent per day till the end of 2015. Then we will increase that up to 20,000, doubling the production in 2016. It's okay, Oswald, for sure net of us. I'm talking net figures, okay?
That's net. Excellent. Thank you.
You're welcome.
Thank you very much. Oswald. Now let's move to Flora Trinidad from BPI. Hola, Flora. Go ahead with your questions.
Yes. Hi, good morning. Thank you. My first question is just a confirmation. I think you mentioned it, but just to confirm, you are maintaining your target for production growth excluding Libya for 2014 at 70%? My second question is basically on some guidance you have given on downstream excluding LNG. I think you had mentioned an EBITDA of EUR 1.5 billion for this year. Considering the good results as of first half, are you maintaining this, and what's your view for the second half of the year? Thank you.
Well, in relation with the target, yes. If we had Libya at plateau, in normal conditions, we keep attached to our 7% annual growth till 2016, from 2012 till 2016. In relation with the EBITDA at the downstream level, we ended up the semester with almost EUR 8 billion.
I hope, and I think that if I exclude the gas and power from this figure, I would be around a little less than 700, something like 680 or something like that. I'm talking just on my mind about the figures. 680. This quarter really wasn't that good in refining. If the second part of the year comes a little better, just a little better, we would be there, around the EUR 1 billion of EBITDA without the gas and power. Is that okay, Flora?
Yes. Okay. I would just to follow up on the production. In the last quarter presentation, you mentioned 7% excluding Libya. For production target excluding Libya, what's your view for the full year?
I mentioned excluding Libya in both years, so in a like-for-like basis. Either I include it or exclude it, up to you. If Libya is in normal condition as it was in 2012, the 7% production increase would be reached. The 7% was a five-year guidance. It was not a yearly guidance. Okay?
Okay, sorry. If excluding, because I had the idea you had a target for this year of 7% excluding it. You are maintaining it. No?
No. What I'm maintaining is the 7% continuous-
Okay
annual growth from 2012 to 2016.
Perfect.
Okay?
Thank you. I appreciate it.
In both cases, in a like-for-like basis. If you want Libya in, it's okay. If you want it out, it's okay. Put it in similar conditions in 2012 and 2016. Okay?
Okay. Thank you.
You're welcome.
Thank you. Let's move to the questions of Thomas Adolff from Credit Suisse. Hi, Thomas. How are you? Please go ahead with your questions.
Hey, Miguel. Thanks for taking my question. I wanted to ask you about Talisman's portfolio. Obviously, I can't. I'm struggling to see any attraction there, but I guess the industry likes to window shop and the market likes to speculate. Anyways, just a question back to Libya. You said there are some logistical issues. I just wanted to ask you whether you can clarify it. Is it related to the need to do maintenance? Is it related to infrastructure itself? In other words, if the above ground issues were normal, how long will you be restricted at 150 KBD? The second question is on refining. I look at indicator margins and I see quarterly improvements. Your quarterly refining margin has deteriorated, so I just wanted to have a better understanding what's driving that in your case. The final question is on exploration, I guess on Seat-2.
You talked about a decent column there. I wondered whether you can give a bit more color on the net growth ratio. Thank you.
In relation with Libya, the logistic problems is simply sales. We have flogged all the terminals, and it's a matter of them selling more. They have been quite slow on selling the product. The whole pipelines are totally blocked. Okay? We will see. In relation with the refining, I think that the main difference with probably others is that the spread between heavy and lights is what we are taking as a great advantage during the quarter, and probably is the difference you have there. Sorry. With others. At the end of the road is to have a first quartile system in which you can't feed the whole system with really heavy stuff. Final, in relation with Seat, we are waiting for the tests. Though initial impressions lead us to think that around 200 would be the net one. Okay?
Okay. Thank you very much. Just can I go back to refining again? The light heavy crude spreads were wider in the second quarter than in the first quarter. That's why any indicator margin in the second quarter was higher than the first quarter. Yet your realized refining margin in the first quarter was lower than the second quarter. Your explanation doesn't quite tie in with the evolution in your refining margin. I just wanted to ask you again, what's been the driver for the sequential decline?
I'll double-check that figure and turn back to you, Thomas.
Okay. Thank you.
What I have is the difference between the same quarters. I didn't analyze first versus second, but I will do it and turn back to you, okay?
Okay. Thank you.
Thank you, Thomas Adolff. Now let's move to Felipe Rosa from Banco Espírito Santo. Hola, Felipe. Please go ahead with your question.
Hi. Hello, Miguel. Three questions, if I may. The first one, just a clarification on the buyback of EUR 500 million that you said that you were going to do. Just to clarify whether now this is subject to whether you make an acquisition or not, or you think that following the payment of the special dividend, it no longer makes sense to make this buyback, which I believe was announced to offset dilutive impact from the scrip dividend. My second question relates to Angola. You said that you have just spudded your operated well at Block 22. Could you provide us some pre-drill estimates for this well? How long could it take for us to have some news from this well? Finally, in Brazil, you have reached the full capacity at your first FPSO.
I believe now that you should have a pretty good idea what is the CapEx per barrel and the OpEx per barrel that an FPSO like the one at Sapinhoá can deliver at cruising speed. Could you give us some updated numbers for that? Please on the OpEx, if you could say if it includes or excludes the special participation tax, that would also be very useful. Thank you very much.
In relation with the buyback, what we have is an authorization to go up to buy back EUR 500 million. This is something that for sure will be dependent first on the financial situation we have throughout the year. Right now we are waiting to see how the M&A activity develops, how the financials move, then we'll take a decision. Basically, what we have is the possibility to do it, still no decision has been taken. In Angola, we expect the Renaissance to be there for three, four months, then it will move to the Canary Island if we obtain the permits to explore in the Canary Island. Three, four months to go. In relation with the CapEx and OpEx in Sapinhoá, we are around USD 20 per barrel of OpEx. A little below USD 20.
I think that the variability there is much dependent on the field. For sure in Carioca it would be a different one and probably would be around the 30s. Precisely we are in around EUR 20 in CapEx per barrel in Sapinhoá.
Sorry, CapEx or OpEx? Sorry, just to clarify.
Sorry. OpEx.
Okay. In terms of CapEx for the well? For the first project.
30, 32, including CapEx and OpEx.
Okay. Miguel, sorry, just to come back, because one of the questions I made regarding Angola was whether you could provide some guidance in terms of pre-drill estimates for this important prospect for Repsol.
Can you repeat the question, Felipe?
The pre-drill resource estimates for this well, because it's an important well for you guys, I think, and you are now starting to drill it.
No, we never provide that information. Sorry about that, Felipe.
Okay. Thank you.
Thank you, Felipe. Now let's move to Jason Kenney from Santander. Hi, Jason, how are you? Please go ahead with your questions.
Yes, thanks for taking the question. Can you just give us some guidance on the upstream tax charge? Obviously, it was low in the second quarter. I'm wondering where that moves to in the third quarter, and then maybe further out what a normal rate could be just to confirm that. Is there any chance to get some indication of the split of operating profit upstream by region? I know you split out the EBITDA and the net income by region, but just looking at operating even percentage terms. Finally, in the downstream business, the commercial business is +EUR 62 million year-over-year. I'm assuming that's mostly LPG. And I was wondering how robust you thought that was going forward. Thanks.
Well, in relation with the first one, it's somehow a complex explanation, but I will try my best. Well, the first issue is the mix of income. Being Libya out of the equation and having increased results in Bolivia, with lower tax rate is one of the reasons. The other one refers to Brazil. In Q2 2013, there was a strong devaluation of the real, and that implies a loss in taxes due to the fiscal assets we have there. This year, it happens just the opposite. I mean, the real reevaluates, and we have a gain there when you translate that to EUR due to the increase in the value of the fiscal assets we have in Brazil. To give you an idea, this account for more than EUR 40 million, which is the other reason why it looks so low this quarter.
If you want to have an indication for the whole year, I would say that talking about net results, our estimates would be that we would be around 40% for the whole company. If we talk about the net adjusted result, it would be around 44% for the whole company. That in relation with taxes. The second question refers to the upstream operating profit by region. I think that Ángel will call you afterwards and provide you the detail, if you don't mind. In relation with the EUR 62 million we have as improvement in the marketing area, there are several factors there. One is the one you mentioned, which is the LPG, in which we have been able to catch up. As you know, it's a regulated sector, so we have been able to catch up prices that should have been taken before from our company.
It's a delay in the way in which the cost of the material goes into the formula. Part is that. We also have better results in Portugal. We have better results in our service station network, better results in direct sales, and better results in chemicals. Small figures in all of them, but significant when you add them all. This is what leads you to the EUR 62 million. Okay, Jason?
Yeah. I was just going to follow up on how robust those commercial businesses are then going forward.
I would say that the catch up in the LPG, it's going to be much dependent on the evolution of prices. I will not count that as a permanent one. The others, I would say, are more or less replicable in following years, so in the following months. We will see. I couldn't assess more. It's basically gaining margins in all the areas. Hopefully, I will expect that at least part of this EUR 62, let's say half of it, remains as a permanent advantage. Okay?
Thanks very much. Thanks.
Thank you, Jason. Thank you for your questions. Now we move to Peter Hutton from Royal Bank of Canada. Hi, how are you, Peter? Go ahead with your question.
Hi, Ángel. Hi, Miguel. Thank you very much indeed. You provide the bridge on operating income in both the upstream and the downstream, which I find very useful. Of course, one thing, when you add up all the various elements, the start and the finish, there's a difference still to be explained, and I think in exploration it's quite large and implies that there was some deterioration in trading perhaps, or increases in underlying costs. I wonder whether you can make any comment on that. In the downstream, similarly, you say that the remaining difference is from trading and other activities. Mathematically, that's best part of EUR 50 million. Was there a particularly weak trading environment in the downstream? If there's any comment. The last element on trading is on the CO2 emissions, which is explained as the difference for that EUR 30 million in the corporate result.
That, particularly on CO2, that's a very material number and implies a high degree of volatility. Is that something that we expect some risk around this number? Is that something which we could see quite easily going the other direction in subsequent quarters? If you can just comment on those which may be linked to trading results in each of the divisions.
Well, let me start with the last one, which perhaps the most material one. If you have a pencil by hand, prices of the CO2 ton at the end of March were EUR 4.7 per ton. We ended up in June with EUR 5.86 per ton. It's more than EUR 1.1 per ton. As we have 16 million tons, this year implies that we have made a comparison to the market with a gain of EUR 19 million. In 2013, the situation was just the opposite. In March, the price was 4.8, while in June 2013 was 4.2. This fall of EUR 0.60 per ton implies a negative result last year of almost EUR 11 million. When you add up both minus 11 in 2013, plus 19 this year, you ended up with the figure.
Talking about others, basically it's trading, which is losing EUR 19 million in comparison with last year. Reason for that has been, I would say, basically the Russian contract of the fuel, which in the first months we were unable for differences in quality to really make a reasonable result. The whole thing has been solved and probably going on, this will disappear. Also, all the fleets we have, especially middle average ships, the prices have gone down dramatically in the Atlantic basin. That's also the other reason why we have been below last quarter in trading. Having said so, trading normally is a very volatile activity. It's not easy to assess from here on how it will be. Is that okay, Peter?
It is. That's on the downstream. Is there anything in terms of the delta between the elements that you provide also in the upstream where there's also appears to be something of a shortfall? Is that underlying costs, or is some of that trading result in the upstream as well?
Sorry, I don't understand the question, Peter. Can you repeat it?
Yes. You talk about the trading results. How does that split between upstream and downstream?
The whole trading activity is in the downstream division. All the activity of trading is in the downstream division. There is no trading in the upstream division.
The difference that we see in the bridge between the elements that you provide and last year's results and this year's results, there's still a fairly material difference on that. Does that suggest that there was increases in underlying costs that we saw in the upstream?
I think that probably the difference is that we are somehow taking apart Libya as a whole. Excluding in the comparison all the impacts of Libya in prices, volumes, cost and exploration, and type of change. That's the reason why probably you are not able to tie in. Ángel will give you a call and will help you with the tie. The main difference, I would say, is that Libya is somehow distorting the rest of the differences.
Perfect. Can I just ask one thing on Libya at that point? I know you've provided an update in terms of the production of the field and logistics, but does logistics also relate to the evacuation of staff as well, which is also reported last week?
Not in our case. As far as I know, we have all our people in the field working, and what we don't have is anyone in Tripoli. We only have evacuate our people in Tripoli, which doesn't have much to do with the evacuation or with the logistic problems. No, it's simply that the process of selling on the Libyan authorization to sell is quite slow, and the whole logistic facilities are loaded with crude, there's no possibility to send more crude to the ports. Okay?
Perfect. Thanks, Miguel. Appreciate it.
The other way around, Peter. Thank you.
Thank you, Peter. Let's move to Jon Rigby from UBS. Hi, Jon. How are you? Please go ahead with your questions.
Thanks, Ángel. Hello, Miguel. Can I just ask, given that you've sold, the LNG business is now gone, I guess we can agree that the cash flow generation from the downstream is moving probably at a slightly disappointing rate given your previous projections, and that's sort of environmental. Do you think that the current capacity of the company to generate cash is of a level that can sustain your current projections of CapEx and the dividend commitment that you've made? I guess there's a sort of part two around that is, there's a sort of bleak reference to the conditions around any M&A that you would do. In general, just as a standalone business, do you think the current cash flow generation, cash in, cash out are balanced as you see them?
Thanks for the question, Jon. As I mentioned before, I think we are going to be short of cash generation in 2014, probably around EUR 1 billion. Less than that, approximately EUR 600 million next year. This is my estimate, taking into account Libya working, let's say, at 75%. As of today, at the end of the 30th of June, we were short in cash. Taking out all the extraordinary items, the extraordinary dividends. Taking the regular or the current company, we were short in EUR 600 million without Libya in the second quarter. I think that my estimate of EUR 1 billion short this year and approximately EUR 600 million-EUR 700 million next year, that's it. Other than that, I think that Brazil, I would expect a very important impact on cash generation there.
I think that other than that, we are going to be short 2014, 2015, but other than that, the cash generation is good enough to sustain the CapEx program. At least those are my numbers.
Do you think the trajectory as you see it means that you get back to something like a balanced position as and when Brazil sort of reaches its full capacity?
Yes. Once Sapinhoá reach the 270,000 barrels per day and taking into account, I would say Libya in normal conditions, yes.
Sorry, and the last just point of clarification.
I-
I was just going to say as a point of clarification, that assumes a cash dividend payout similar to that you've been paying out recently in the dividend, i.e., for the proportion of cash versus scrip.
Yeah, taking into account the scrip for sure. By the way, in the last one, it was 75%, almost 76% of acceptance. Yes, taking into account the scrip.
Sure. Okay. Thank you.
You're welcome.
Thank you, Jon. Now let's move to Michele Della Vigna from GS. Hello, Michele. How are you? Go ahead with your question.
Thank you, Ángel. Thank you, Miguel. I just had two quick questions, if I may. The first one relates to your interest expense, which was quite low this quarter. I was wondering if you could give us a guidance in terms of what we should expect in the coming quarters. My second question is on Sapinhoá. The first FPSO has taken about 18 months to ramp up. I think you assume a much faster ramp up for the next FPSO. Could you give us the key reasons why you have higher confidence on that quicker ramp up? Thank you.
Thanks, Michele. Well, you have to think that it's not only that we have reduced somehow the most. It's part of the liability management. Really the interests have gone down. We didn't renew the bond that was due on March. We probably will not renew the one that is due on October. In the other hand, we have put also our money to work. In comparison with last year, though, there are several factors that probably it's important for you to know. First one, if you remember last year in this quarter, we make a gain that was included in the financial line due to when we canceled the preference shares. Okay? The preference shares, we were paying four point something, and we canceled those, and we took a net gain of EUR 75 million.
This year, also working in that line, we have canceled at the end of the 1st of July. In the first day of the second quarter, we have canceled the bond we issued to substitute the preference shares. We have account already, I think it's EUR 71 million of losses in the quarter in the financial area due to the cancellation of this bond. In the other hand, I have EUR 8 billion at hand, and part of it, as I mentioned before, was in euros. The difference between years, in one hand, I have losses from EUR 150 million due to the gain last year with the prefs and with the loss this year with the prefs that we have canceled of EUR 150 million. I've made a gain on the U.S. dollars of $150 million.
At the end, this goes one with the other, basically we have a lower gross debt and a lower interest rates on average. I will take what we have today, in this quarter as a guidance because the effects that are one-offs offset one to the other. I mean, the exchange rates with the situation of the preference shares. Okay, Michele?
Clear.
In relation with the FPSO, think that the second FPSO, it's in the docks in Brazil since November 2014. We don't see any major problem to have it, in the dates I provide you. We expect by the end of this year to have it in place and connecting the first well. Okay?
Thank you.
Thank you very much, Michele. Michele, now let's move to Anish Kapadia from TPH. Hi, Anish. How are you? Please go ahead with your questions.
Hi, good afternoon. I just wanted to clarify the answer to the last question, because I think the question was, why did it take only six months to ramp up rather than the 18 months that the first FPSO took to ramp up?
The main difference, Anish, is that the wells are already drilled. While in the first one, we were drilling while connecting them. Probably this is the main difference in timing between the first and the second one.
Okay. Thank you. Yeah, I have a couple of questions. I was just wondering what your thoughts are around deep water exploration over the next year or so. A number of the other integrators, a number of the ANP companies have pulled back from deep water exploration. It's got a lot more expensive, it seems, to drill some of the wells. I think some of the wells in Angola are costing a couple of hundred million EUR to drill. Also the developments have got a lot more expensive. The economics of deep water exploration seems to have got worse. Are you looking to change your plan, shift your exploration expenditure in any way as a result of that?
My second question was, looking at North America, if you were to get into either a shale play, so an unconventional shale play in the U.S. or an oil sands play in Canada, do you feel that you've got the capability at present to operate, or would you only look at that on a non-operated basis? Thank you.
In relation with the first question, the answer, it's no. We have already in perspective in Angola, the one we are operating, and a second well probably coming by the beginning of next year with, I think it's Conoco. We have Colombia, in which we are drilling with the Petrobras, and we will keep drilling Campos 33. We are not going to modify our way. We feel quite comfortable with the results we have been obtaining there. Talking about capabilities to operate, whether in shale or oil sands, those are capabilities that are not today in the company. This doesn't mean that operation will not be there, or it will be there. We will have to see. Right now there's nothing on the table. What I can tell you is that, those capabilities are not in our company.
Is that okay, Anish?
Yep. That's great. Thank you.
Thank you very much, Anish. Let's move to Matt Lofting from Nomura. Hi, Matt. How are you? Nice to speak with you.
Hi, Ángel, Miguel. Thanks. Just one remaining question, please. If you could talk a little bit about current thoughts in Alaska and the economic viability of the discoveries there over the last couple of years, I guess having worked through some of the data from the drilling program at the start of this year, and then also I think having sort of written down one of the prospects from 2012. Thanks.
Basically, our people is working now in how to develop the project. It's way too early to give you any guidance. What we know is that we are in the phase of visualization and conceptualization of the development. I cannot add more than To what you know. I don't know, probably being optimistic, 2019, the end of could be a year in which we can start first oil. This is a long shot on my side. I will answer that once our people finish their visualization works. Is that okay, Matt?
Yeah. Fair enough. Thanks very much.
You're welcome.
Thank you very much, Matt. We have Richard Griffith from Canaccord. How are you, Richard? Go ahead with the question.
Very well. Thank you. Good afternoon. I just wanted to ask you a question about Canaport and an update really on where Spectra are in terms of reversing some of their pipelines from north to south, to south to north. In that context, where would Canaport fit in your strategic thinking vis North America and obviously the news flow that we saw yesterday?
I think that is way too early to think of it. I don't see easy to really obtain this reversing of the pipelines. On top of that, there are more questions like license to export LNG. At the end, you will end it up with a huge question mark in the table, whether or not the U.S. is going to allow massive LNG exports or not. Right now there's nothing there, and we are not thinking in reversing pipelines. Is that okay, Richard?
Yeah. It was really about the strategic fit. Yeah, that's great. Thank you.
You're welcome.
Now we have Bertrand Hodée from Raymond James. Hi, Bertrand. How are you? Go ahead with your question.
Hello, Ángel. Hello, Miguel. I have a follow-up question on the BM-C-33. In the best-case scenario, when do you think you will be able to take a final investment decision? I know it is early stage, but I would say, is 2015 can be a target for final investment decision, or you think it will be more after that, probably 2016 at the earliest? Thank you.
Bertrand, I think it's way too early because basically what we have is a massive project there. We are talking probably something between EUR 15 billion-EUR 25 billion. It's way too early. Though the result of Seat, the important thing is that being liquids, what have shown us is that probably it would be most profitable to start the whole development by Seat, which contains a lot of liquids, and it would be easier to start with Seat and then moving to Pão de Açúcar and Gávea. As mentioned before, it's way too early. Is that okay, Bertrand?
Yes. If I make another follow-up, when you're talking about developing Seat first and then Gávea and Pão de Açúcar afterwards, do you think this project can hold not one or two FPSO, or do you see that as one FPSO and then different wells and tiebacks?
I think that for the first phase would be one, but probably then a second one will be totally necessary, minimum.
Okay, perfect. Thank you.
We have finally a couple of questions from fixed income analysts regarding how we see regarding our rating, how much we can spend about in order to protect our rating or not. We'll answer that immediately.
In relation with the rating, I think that we have proven the last two years our commitment to really keep the investment grade. After the expropriation of YPF, really all our ratios fall well below, and we took a lot of financial measures to keep the investment grade, which we did, and we even improved it. We are totally committed to maintain our investment grade. For us, it's a must. I think that's my answer.
Okay. Thank you very much. With this last question regarding our commitment with investment grade, we finish this second quarter results. Thank you very much. You know that any further queries you may have, the IR team is entirely at your service. Thank you very much. Have a nice day. Cheers.
That will now conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.