Hello, and welcome to the Repsol Second Quarter 2014 Preliminary Results Conference Call. Today's conference will be conducted by Mr. Miguel Martinez, CFO. A brief introduction will be given by Mr. Angel Bautista, Head of Investor Relations.
I would now like to hand the call over to Mr. Gautista. Sir, you may begin.
Good afternoon, ladies and gentlemen, and welcome to Repsol's 2nd quarter results conference call. I am Angel Bautista, Director of Investor Relations. This presentation will be conducted by Mr. Miguel Martinez, CFO. Other members of the Executive Committee are joining us as well.
Before we start, I invite you to read our disclaimer notes. 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. Martinez.
Thank you, Angel, and good afternoon, ladies and gentlemen. In today's conference call, we'll cover 3 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. 2nd, the operational activity and the main highlights of the quarter. And third, the quarterly results.
On May 8, 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 YPFSA 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 $5,300,000,000 In view of the favorable perception of the risk of these bonds in the financial markets, Repsol decided to sell all the Argentinean sovereign bonds to the JPMorgan in 3 separate transactions. Repsol obtained almost $5,000,000,000 in compensation for the expropriation as a result of the sale of the entire holding of Argentinian bonds, close to the maximum amount that Repsol could cash in, in according with the agreement. Previously, on the 7th May, we sold an 11.86% stake of YPF to Morgan Stanley. On the 12th May, we sold an additional 0.48 percent and these two transactions amounted to $1,300,000,000 and generated a capital gain of €287,000,000 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 €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 improvement in Repsol's financial position. Rich and Moody upgraded our long term rating and Standard and Poor's revised its outlook from stable to positive. Let's now move to the operational activity.
Starting with the upstream business. In exploration, during the Q2 of 2014, 6 wells have been concluded: 2 wells with a positive result in Alaska and 3 wells with a negative outcome: Mauritania, Kurdistan and Namibia. And one well is currently held under evaluation in Alaska. In Alaska, the 2 positive wells were of Rook 57 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 Campos 33 block in Brazil and our Karavansky venture in Russia. In Brazil, the SEAT-two well in block Campos 33 found around 300 meters of a continuous column of good quality hydrocarbons bearing reservoir. The well reached total depth and the current formation evaluation operations and 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 Karabakhi blocks in West Siberia. As announced in our recent press release, the volumes added are in the range of 240,000,000 barrels of oil equivalent as certified by the Russian Reserve Authority.
We have also successfully tested production with 2 horizontal wells of over 1 kilometer in length, significantly derisking 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 1st operated exploration well in Angola called Locoso. In Liberia and Colombia, we're currently drilling 1 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, Sapinhoa in Brazil, Mid Continent in the U. S, SK in Russia, Margarita in Bolivia and Quintaroni 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 Sabonet field and maintenance work on Train 3 of the Atlantic LNG plant. In Libya, we have been able to resume production on the 8th July, where we could not operate during the whole quarter. With regards to the progress of our development projects in Brazil, the 4th producing well in Chapinhoa started production on the 7th July.
We already have 4 wells connected, which together are producing about 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 1st semester of 2015. In Lapa, formerly Carioca, the development plan has been presented in June 2014 to the EMP. According with our plans, we expect to have first oil before the end of 16.
In the U. S, we continue with the development of the fields and associated production ramp up in the Mississippian line. This quarter, in line with the company's policy of financial prudence, Repsol adjusted the book value of Mid Continent with an impairment of €142,000,000 after tax due to the lower activity planned in the extension area. In Venezuela, Cardon 4 continues its development as planned and we are expecting to be on a stream at the turn of the year. And finally, in Algeria, the consortium of Regan 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 twenty seventeen.
Moving to the Downstream division and starting with refining. Although margins continue weak in Europe, our margin indicator was $3.1 per barrel during the quarter, higher than the $2.6 per barrel reached during the Q2 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 brands. The distillation utilization rate was 83.5% during the quarter and the conversion capacity reached 106% of utilization. In petrochemicals, the improvements implanted in 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 2nd quarter earnings performance. We had a positive variation in net income, which was €520,000,000 90% higher than in the Q2 of 2013, due mainly to the capital gains of the YPF share shells. Adjusted net income stood at €390,000,000 in line with the Q2 of 2013. On a business by business basis, starting from the upstream, the adjusted net income was €145,000,000 49% lower than in the Q2 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 261 €88,000,000 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 income impact on operating income of €73,000,000 Higher crude and gas realization prices had a positive impact on operating income of €71,000,000 Higher depreciation charges due to the increase of production in the United States, Russia, Bolivia and Peru had a negative impact of €13,000,000 Higher exploration costs led to a decrease in operating income of €167,000,000 mainly due to high amortization of bonds and wells.
In Q2 2014, we conclude 3 exploration wells with a negative outcome: Namibia, Mauritania and Kurdistan. Additionally, 2 more wells have been reclassified as negative: Anshua in Morocco due to the lack of economic feasibility and Kachemak, 1 in Alaska, previously under evaluation. Lower taxes had a negative impact of €5,000,000 mainly due to the better tax rate mix. The depreciation of the dollar against the euro lowered the operating result by €12,000,000 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 €162,000,000 32% higher than in the Q2 of 2013. The breakdown by business is in refining. Our margin indicator was $3.1 per barrel better than the 2.6 dollars per barrel achieved during the Q2 of 2013, having a positive impact at the operating level of €44,000,000 The premium margin due to the upgrades reached $2.2 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 €20,000,000 Turning to the commercial businesses. We released a good set of results having a positive impact at the operating level of €62,000,000 Moving to Gas and Power.
Operating income was a net loss of €37,000,000 €62,000,000 less year on year. In 2013, our results in North America had been positively impacted by compensations received from supplier from the deviation of cargoes to other destination. Results in trading and other activities explain the remaining difference. In Gas Nat, the €152,000,000 adjusted net income in the 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 distribution activities in Spain and Latin America. Turning now to our financial situation.
The group's net financial debt at the end of the Q2 of 2014 amounted €2,400,000,000 approximately €3,000,000,000 lower than at the end of 2013, thanks to the monetization of the Argentinian assets. Our liquidity position remains healthy at more than €11,000,000,000 even after paying a €1,300,000,000 extraordinary dividend and the regular interim dividend to our shareholders. In conclusion, operationally speaking, Apsin, we have been able to add more than 30,000 barrels of oil equivalent per day from our key growth projects. Sapingoa has completed the first phase successfully and we have the 2nd phase on schedule to earn more production in the following months. In downstream, the quality of our assets again show the capacity of vessel to weather the current adverse situation and the efficiency and product redesign programs have proven to be successful by turning around our clinical business result.
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 and 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 and A activity.
Thank you very much for your attention.
Thank you very much. Let's move into the Q and A session. We have enabled a chat in the webcast in order to post questions. Please use it only in the vendor or 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.
Well, let's start with the Q and A session. First, we have the questions from Irene Haymona from Societe Generale. Irene, how are you?
Hi, Angel. 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. And then finally, Campos 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, I mean, it's quite difficult to assess an answer. I mean 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 7th.
And we were able to ramp it up up to the 340,000 barrels we can produce there. Right now, there's a logistic problem and we are only producing 150,000 barrels per day due to logistics issues. So quite difficult to assess. But you're 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, 1st quarter was okay, 2nd quarter was a total disaster.
So difficult to assess, Irene. You probably can put a figure as good as I can, though I am somehow optimistic. I mean, the data we have today is that there are a lot of problems in Tripoli with I mean with basically a complex situation in Tripoli. But in the Sahara, our people is working so no problems there. So 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 500 what we are over. And there are basically two reasons.
We have a stoppage in the hydrocrackers in Cartagena during the June And that implies that a lot of middle products increased the inventory there. And also this is I would say a one off. And then we have a part which is the trading activity which is increasing. And at the end of June, there was a cargo of Russian fuel that also increased the network the working capital. So basically, I would say, it's unusual and probably we will be able to reduce approximately $300,000,000 in the next quarter.
And the final one, talking about resources, we are estimated in Campus 33, we are still estimating those. I mean, for sure, it would be well above €1,000,000,000 but still way too early. And we don't have a figure about Campus 33 yet. We have very good results in SERD, but it's still a long way to go because think that is not only SERD. It's SERD plus Gavia plus main powder sugar.
So 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. Now let's move to Lydia Rainforth from Barclays. Hello, Lydia. How are you? Please go ahead with your questions.
Thanks, Egal. Hi, everybody. Two questions, if I could. Miguel, in terms of the use of cash, you have previously looked at the €500,000,000 share repurchase plan. Can I just ask what your current thoughts are around that?
And then secondly, I know there's a limited amount you want to talk about the M and 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? Or would you look at returning that cash to shareholders at some point?
Lydia,
it touches somehow the M and A issue. So I would rather refer to the in one hand to the press release we had yesterday. What we look at the end of the road is really to give our shareholders the better return. So as mentioned in the prior call we had 3 months ago, I mean, 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 found this asset, this company, whatever, we'll have to return the cash to the shareholders.
That's for sure. But I think we deserve some room, let's say, 1 year, 18 months to really find out if there's a better solution that to return the cash to the shareholders. It's okay, Lydia?
Yes, that's perfect. Thank you. And then just a separate question if I could. It's just around what are you seeing in terms of operating costs at the moment across the industry? And just sort of 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. And we have contracts for 4 or 5 years. So 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%. But other than that, I have not perceived anything that took my attention.
That's perfect. Thank you very much, Miguel.
Thank you, Lydia. Now the question is from Haitham Rashid from Morgan Stanley. Hi, Haitham. How are you?
Hi. Thank you very much, Angel. Good afternoon, gentlemen. Two questions from my side, please. Firstly, is it both on sort of development assets?
Firstly, on Venezuela and Perla, perhaps if you wouldn't mind giving a more detailed sort of 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 sort of now and first oil? Are there any sort of other sort of non operational issues like sort of contractual or other sort of issues that might sort of act as a sort of 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 on the sort of 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 sort of 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. I mean, we expect really to end the project by the end of this year. This would be the first phase with 150,000,000 standard cubic feet per day. Next step probably would be reached in May 2015 doubling that production.
And then 3rd and 4th phases probably would be 2017 2020, but it's way too early to assess that. So 150 by December this year and doubling that, adding 300 extra 1000000 standard cubic feet per day by mid-twenty 15. In relation with the Mississippian Lyme 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 and along with it with the production, we have decided to focus the future CapEx in the primary area. And that implies that the secondary area once you delay future production shows an impairment.
And 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 3000, 4000 barrels per annum. Did I answer you, Haytham?
Yes, that's very clear. Thanks very much, Miguel.
You're welcome.
Thank you, Haifeng. Now let's move to Oswald Klin from Bernstein. Hi, Oswald. How are you? Please go ahead with your questions.
Good. Thank you. Yes, sorry, I just managed to get on. I just wanted to ask a bit more about the impairment on the Mississippi Lineman, 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 line. And then second question operationally, just curious about the Quintarone ramp up, how that's going in the 2nd quarter and if the kind of 20,000 up to 40,000 barrel per day volume aspirations are still pretty good? Thank you.
Well, in relation with our opinion about shale, I think that I don't know if probably has changed or not, but one thing is clear. I mean initially our partner was really a type of business, which is somehow different from the one we are used to. And so geology was not there. It was simply drilling, drilling and drilling being the most efficient one, the one that really came 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 pretend to go there, which basically has put more geology in the process.
I mean to know why, to know why one area is a good one and to know why an area is not, not simply obtain this result by drilling. And I think it's working probably with lower production figures, but for us it's not the issue here. To 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.
And touching in Kintaroni, the agreement we have reached implies that we will be delivering 10,000 barrels of oil equivalent per day till the end of 2015. And then we will increase that up to 20,000 doubling the production in 2016. It's okay as well for sure net of us. I mean, I'm talking net figures, okay?
Excellent. Thank you.
You're welcome. Thank you very much. Oswald, now let's move to Flora Trinidad from BEPA. 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 targets for production growth excluding Libya for 2014 at 7%. And then my second question is basically on some guidance you have given on downstream excluding LNG. I think you had mentioned an EBITDA of €1,500,000,000 for this year. Considering the good results as of first half, are you maintaining this? And then what's your view for the second half of the year?
Thank you.
Well, in relation with the target, yes. I mean, if we had Libya at plateau, I mean, in normal conditions, we keep attached to our 7% annual growth till 2016 from 2012 till 2016. And in relation with the EBITDA at the downstream level, we ended up the semester with almost 8,000,000,000
euros
I hope and I think that if I exclude the gas and power from this figure, I would be around $700,000,000 a little less than $700,000,000 something like 680 or something like that. I'm talking just on my mind about the figures. So 680. This quarter really wasn't that good in refining. So if the 2nd part of the year comes a little better, just a little better, we would be there around €1,000,000,000 of EBITDA without the gas and power.
Is that okay, Flora?
Yes. Okay. I would just follow-up on the production. In the last quarter presentation, you mentioned 7% excluding Libya. So full production target excluding Libya, what's your view for the full year?
I mean, I mentioned excluding Libya in both years, so in a like for like basis. So either I included or excluded up to you. But if Libya is in normal condition as it was in 2012, the 7% production increase would be reached. But the 7% was a 5 year guidance. It was not a yearly guidance, okay?
Okay. Sorry. But if excluding because I have the idea you have a target for this year of 7% excluding it. So you are maintaining it. No?
No, no. What I'm maintaining is the 7 continuous annual growth from 2012 to 2016, okay? Perfect.
Thank you, Richard.
And in both cases in a like for like basis. I mean, if you want Libya in, it's okay. If you want it out, it's okay. But I mean put it in similar conditions in 20 12 2016, okay?
Okay. Thank you.
You're welcome. Thank you. Now let's move into the questions of Thomas Al from Credit Suisse. Hi Thomas, how are you? Please go ahead with your questions.
Hey, Miguel and Gael. Thanks for taking my question. I wanted to ask you about Talosmart's portfolio. Obviously, I can't I'm struggling to see any traction there, but I guess the industry likes to window shop and the market likes to speculate. But 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 kilobytes D?
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. And the final question is on exploration, I guess, on SEAT 2.
You talked about a decent column there, but I wondered whether you can give a bit more color on the net to gross ratio. Thank you.
In relation with Libya, the logistic problems is simply sales. I mean, we have flood all the terminals and it's a matter of them selling more. They have been quite slow on selling the product. So the whole pipelines are totally blocked, okay? So we will see.
We will see. In relation with the refining, I think that the main difference with probably others is that the spread between heavy and light is what we are taking as a great advantage during the quarter. And probably is the difference you have there with others. And at the end of the road is to have a 1st quartile system in which you can't feed the whole system with really heavy stuff. And final, in relation with Seth, we still have to we're waiting for the tests.
The initial impressions lead us to think that at least 200,000,000 would be around 200,000,000 would be the net one. Okay.
Thank you very much. Just can I go back to refining again? The light heavy crude spreads were wider in the Q2 than in the Q1. That's why any indicator margin in the Q2 was higher than the Q1. Yet your realized refining margin in the Q1 was lower than the second quarter.
So your explanation doesn't quite tie in with the evolution in your refining margin. So I just wanted to ask you again what's been the driver for the sequential decline?
I'll double check that figure and answer back to you, Thomas. Okay. Thank you. What I have is the difference between the same quarter. So I didn't analyze 1st versus second, but I will do it and turn back to you, okay?
Okay. Thank you.
Thank you so much. And now let's move to Felipe Rosa from Banco Spiritu Santo.
Just a clarification on the buyback of €500,000,000 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 are now you said that you have just spudded your operated well at Block 22.
Could you provide us some pre drill estimates for this well? And how long could it take for us to have some news on from this well? And finally, in Brazil, you have reached the full capacity at your first FPSO. So 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 Sapinhoa can deliver at cruising speed. So could you give us some updated numbers for that?
And please on the OpEx if you could say if it includes or excludes special participation tax that would also be very useful? Thank you very much.
In relation with the buyback, I mean, what we have is an authorization to go up to buyback €500,000,000 But this is I mean something that for sure will be dependent first on the financial situation we have throughout the year. And so right now we are waiting to see how the M and A activity develops, how the financials move and then we'll take a decision. Basically, what we have is the possibility to do it, but still no decision has been taken. In Angola, we expect the Renaissance to be there for 3, 4 months and then it will move to the Canary Island if we obtain the permits to explore in the Canary Island. So 3, 4 months to go.
And in relation with the CapEx in Sapinima, we are around $20 per barrel of OpEx, a little below $20 I think that the variability there is much dependent on the field. I mean for sure in Karyakat would be a different one and probably would be around the 30s. But in and precisely we're in around 20 in CapEx per barrel in Sartanilla.
Sorry, CapEx or OpEx? Sorry, just to clarify. Sorry, OpEx. Okay. And in terms of CapEx per barrel?
For the fixed projects?
30, 32 including CapEx and OpEx.
Okay. Okay. And 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 these important prospects for Repsol?
Can you repeat the question, Felipe?
The pre drill resource estimate 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 question.
Yes. Thanks for taking the question. Can you just give us some guidance on the upstream tax charge? Obviously, it was lower in the Q2. I'm wondering where that moves to in the Q3.
And then maybe further out what a normal rate could be just to confirm that. And then 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. And then finally, in the downstream business, the commercial business is plus €62,000,000 year on 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 revaluates and then we have a gain there in when you translate that to euros 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 €40,000,000 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. And 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 Apsing operating profit by region. And I think that Angel will call you afterwards and provide you the detail if you don't mind. And in relation with the €62,000,000 we have as improvement in the marketing area, there is several factors there. One is the one you mentioned, which is VLPG, 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, I mean take before from our company. So it's a delay in the way in which the cost of the material rose goes into the formula. So part is that, but 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. So they can be small figures in all of them, but significant when you add them all.
And this is what leads you to the €62,000,000 Okay. Jason?
Yes, yes. I was just going to follow-up on how robust those commercial businesses are then going forward. I mean I
would say that the catch up in the LPGs, it's going to be much dependent on the evolution of prices. So I will not count that as a permanent one. And the others, I would say, are more or less replicable in following years, so in the following months. So we will see. There's no I couldn't assess more.
It's basically gaining margins in all the areas. So hopefully, I will expect that at least part of this 62, let's say half of it remains as a permanent advantage. Okay?
Thanks very
much. Thanks.
Thank you. Thank you, Jason. Thank you for your questions. And now we move into Peter Hutton from Royal Bank of Canada. Hi, how are you Peter?
Go ahead with your question.
Hi, Angel. Hi, Emeka and Miguel.
Thank you very much indeed. You provide the bridge on operating income in both the upstream and the downstream, which I find very, very useful. But 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 differences result is from trading and other activities. But mathematically, the best part of €50,000,000 So was there a particularly weak trading environment in the downstream, if there's any comment. And the last element on trading is on the CO2 emissions, which is explained as the difference for about €30,000,000 in the corporate result. Now that particularly on CO2 that's a very material number and implies a high degree of volatility. Is that something that we can we expect some risk around this number?
Is that something which we could see quite easily going the other direction in subsequent quarters? So 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, I mean prices of the CO2 ton at the end of March were €4.7 per ton. We ended up in Yumu with €5.86 per ton. So it's more than €1.1 per ton. As we have 16,000,000 tons, this year implies that we have made a comparison to the market with a gain of €19,000,000 In 2013, the situation was just the opposite.
In March, the price was 4.8, while in June 2013 was 4.2. So this fall of €0.60 per ton implies a negative result last year of almost €11,000,000 So when you add up both minus €11,000,000 in 2013, plus €19,000,000 this year, you ended up with the figure. Talking about others, is basically it's trading, which is losing €19,000,000 in comparison with last year. Reason for that has been, I would say, basically the Russian contract of the fuel, which in the 1st month we were unable for differences in quality to really make the a reasonable result. The whole thing has been solved and probably going on this will disappear.
And also the I mean all the fleets we have especially middle average ships the prices have gone down dramatically in the Atlantic basin. And 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. So 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 sort of delta between the elements that you provide also in the upstream where there also appears to be something of a shortfall? Was that is that underlying costs? Or is there some is some of that trading result in the upstream as well?
Sorry, I don't understand the question, Peter. Can you repeat it?
Yes. On the you talk about the trading results. Some of that how does that split between upstream and downstream?
No. 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.
So 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. So excluding in the comparison all the impacts of Libya in prices, volumes, cost and exploration and type of change. So that's the reason why probably you are not able to tie in. But Angel will give you a call and we'll help you with the tie. The main difference I would say is that Libya is somehow distorting the rest of probably of the differences.
Perfect. Thanks. Can I just ask one thing on Libya at that point? I know you 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, I mean, we have all our people in the field working. And what we don't have is anyone in Tripoli. So we only have evacuate our people in Tripoli, which doesn't have much to do with the evacuation or with the logistic problems. So no, it's simply that the process of selling on the and the leaving authorization to sell is quite slow.
And the whole logistic facilities are loaded with crude. So there's no possibility to send more crude to the ports. Okay?
Perfect. Thanks, Miguel. Appreciate it.
It's the other way around, Peter. Thank you.
Thank you, Peter. Now let's move to John Rigby from UBS. Hi, John. How are you? Please go ahead with your questions.
Thanks, Angel. Hello, Miguel. Can I just ask, given that you've sold the LNG business has now gone and 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. And I guess, there's a sort of part 2 around that is there's a little bleak reference to the conditions around any M and A that you would do.
But in general, just as a stand alone business, do you think the current cash flow generation, cash in cash out are balanced as you see them?
Thanks for the question, John. As I mentioned before, I think we're going to be short of cash generation in 2014, probably around €1,000,000,000 and less than that approximately €600,000,000 next year. This is my estimate taking into account Libya working let's say at 75%. As of today, I mean, at the end of the 30th June, we were shorting cash, taking out all the extraordinary items, the extraordinary dividends. I mean, taking the regular or the current company, we were shorting €600,000,000 with Algibya in the 2nd quarter.
So I think that my estimate of EUR 1,000,000,000 short this year and approximately EUR 600,000,000 EUR 700,000,000 EUR 700,000,000 EUR 700,000,000 EUR 700,000,000 next year that's it. But other than that, I think that the Brazil, I would expect a very important impact on cash generation there. And I think that other than that, I mean, 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 Yes. Once Apinonia reach
the 270,000 barrels per day. And taking into account, I would say Libya in normal conditions, yes. And sorry, and
the last just point of clarification. I was just going to say as a point of clarification, that assumes a cash dividend payout similar to that that you've been paying out recently in the dividend, I. E. For the proportion of cash versus
scrip? Yes. Taking into account the scrip for sure. I mean and by the way in the last one it was 75% of almost 76% of acceptance. So yes taking into account the script.
Okay. Thank you. You're welcome.
Thank you, John. Now let's move to Michele Della Vigna from GS. Hello, Michele. How are you? Go ahead with your question.
Thank you, Achal. 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.
And then my second question is on Saphinha. 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.
[SPEAKER JOSE HUMBERTO
ACOSTA MARTIN:] Thanks, Michele. Well, you have to think that first we reduced the I mean, it's not only that we have reduced somehow the most I mean, it's part of the liability management. Really, the interest have gone down. We didn't renew the bond that was due on March. We'll probably will not renew the one that is due on October.
And 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 the cancel when we canceled the preference shares, okay? The preferred shares we were paying 4 point something and we canceled those and we took a net gain of €75,000,000 This year and also working in that line, we have canceled at the end of the 1st July, I mean, in the 1st day of Q2, we have canceled the bond we issued to substitute the preference shares. So we have account already, I think, dollars 71,000,000 of losses in the quarter in the financial area due to the cancellation of this bond.
In the other hand, I have €8,000,000,000 at hand. And part of it, as I mentioned before, was in dollars. So the difference between years, in one hand, I have losses from $150,000,000 due to the gain last year with the prefs and with the loss this year with the prefs that we have canceled of $150,000,000 but have made a gain on the U. S. Dollars of EUR 150,000,000 So at the end, this goes one with the other.
But basically, we have a lower gross debt and a lower interest rates on average. So 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.
And in relation with the FPSO, I think that second FPSO, it's in the docks in Brazil since November 2014. So we don't see any major problem to have it I mean, in the situation in the dates I provide you. So 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. Now Michele, now let's move to Anish Caballia from TPH. Hi, Anish. How are you? Please go ahead with your questions.
Hi, good afternoon. So I just wanted to clarify the answer to the last question. I think the question was why does it take only 6 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. So probably this is the main difference in timing between the first and the second one.
Okay. Thank you. And then I have a couple of questions. I was just wondering what your thoughts are around deepwater exploration over the next year or so. A number of the other integrators, a number of the E and P companies have pulled back from deepwater exploration.
It's got a lot more expensive, it seems, to drill some of the wells. I think some of the wells in Angola costing a couple of $100,000,000 to drill. And then also the developments have got a lot more expensive. So the economics of deepwater 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?
And then my second question was looking at North America. If you were to get into either a shale play, sort of 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.
Well, in relation with the one with the first question, the answer it's no. I mean, 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. And then we have Colombia in which we are drilling with the Petrobras and we will keep drilling Campos 33. So we are not going to modify our way. We feel quite comfortable with the results we have been obtaining there.
And talking about capabilities to operate whether in shale or oil sands. Really those are capabilities that are not today in the company. And but 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.
So basically, what I can tell you is that those capabilities are not in our company. Is that okay, Anish?
Yes. That's great. Thank you. Thank you very much, Anish. Now let's move to Matt Lofting from Nomura.
Hi, Matt. How are you? Nice to speak with you.
Hi, Miguel and 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. So it's way too early to give you any guidance. But what we know is that we are in the phase of visualization and conceptualization of the development. So I cannot add more than to what you know. But I don't know probably being optimistic 2019.
2020 in the end could be a year in which we can start the first oil. But this is a long shot on my side. So I will answer that once our people finish their visualization works. Is that okay, Matt?
Yes, yes. Fair enough. Thanks very
much. You're welcome. Thank you very much, Matt. Now we have Richard Griffith from Canaccord. How are you Richard?
Go ahead with your question.
Very well. Thank you. Good afternoon. I just wanted to ask you about Canoport because and an update really on where Spectra are in terms of reversing some of their pipelines from north to south to south to north? And 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 it's way too early to think of it. I don't see easy to really obtain this reversing of the pipelines. And on top of that, there are more questions like license to export LNG. At the end, you will end up with a huge question mark in the table whether or not the U. S.
Is going to allow massive LNG exports or not. So right now there's nothing there and we are not thinking in reversing pipelines. Is that okay, Richard?
Yes. It's really about the strategic fit. Yes, that's great. Thank you.
You're welcome. Well, now we have Bertrand Houdic from Raymond James. Hi Bertrand, how are you? Go ahead with your questions.
Yes. Hello, Miguel. I have a follow-up question on the BMC 33. Can you 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 it 15 can be a target for final investment decision or you think it will be more after that probably 2016 at the earliest?
Thank you.
Well, Bertrand, I think it's way too early because basically what we have is a massive projects there. I mean, we are talking probably something between $15,000,000,000 $25,000,000,000 So it's way too early. 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 is contains a lot of liquids and it would be easier to start with Syed and then moving to Pao de Acucarangavia. But as mentioned before, it's way, way too early. Is that okay, Bertrand?
Yes. And if I may, can I have a follow-up? So when you're talking about developing Fiat first and then Gavia and the Paolo de Asoca afterwards, Do you think this project can hold not 1 or 2 FPSO? Or do you see that as one FPSO and then different wells and tiebacks?
I think that for the first phase would be 1, but probably then 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 the rating, how much we can spend about to in order to protect our rating or not? And we'll answer that immediately.
In relation with the rating, I think that we have proven in the last 2 years our commitment to really keep the investment great. I mean, after the expropriation of YPF really all our ratios fall well below and we have to we took a lot of financial measures to keep the investment grade, which we did and we even improved it. So we are totally committed to maintain our investment grade. It's for us, it's a must. And I think that's my answer.
Okay. Thank you very much. With this last question regarding our commitment with investment grade, we finished this 2nd 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.