Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Repsol's Third Quarter 2013 Preliminary Results. This conference call will be led by Mr. Miguel Martinez, CFO of the company. A brief introduction will be conducted by Mr.
Angel Bautista, Director of Investor Relations. Mr. Angel, please go ahead.
Good day, ladies and gentlemen. This is Angel Bautista, Director of Investor Relations in Repsol. On behalf of our company, I would like to thank you for taking the time to attend this conference on Repsol's 3rd quarter results. This presentation will be conducted by Mr. Miguel Martinez, CFO.
Other members of the Executive Committee will be joining us as well. Before we start, I invite you to read our disclaimer note. We may make forward looking statements, which are identified by the use of words such as will, expect and similar phrases. Present results may differ materially depending on a number of factors, as indicated conference over to Miguel. Thanks, Angel,
and good day, ladies and gentlemen. In today's conference call, we will cover 2 topics. 1st, the quarterly results and second, the operational activity during the quarter. Starting with the results. In this quarter, the results were affected by a tough environment due to 3 factors: disruptions in Libya, weak international refining margins and the dollar depreciation.
As a consequence, we obtained a CCS adjusted net income of EUR 387,000,000 22% lower year on year and a CCS adjusted operating income of €840,000,000 33% lower than in the same quarter last year. In the 1st 9 months of the year, CCS adjusted net income amounted to EUR 1,600,000,000 higher year on year and a CCS adjusted operating income of €3,100,000,000 4% lower than in the 1st months of 2012. In Upstream, the adjusted operating income during the Q3 of 2013 was €400,000,000 37% lower than in the same quarter last year, mainly due to the disruptions in Libya. Repsol's crude realization prices had a better performance than Brent year on year due to higher volumes in Brazil and in the U. S.
Gas realization prices increased year on year due to the sales volume mix, positively impacted by the increase of the Henry Hub and Brent. These two prices these two price effects had a positive impact of €47,000,000 We suffered a negative effect of €118,000,000 in operating income compared to the same period last year as a result of the sales volume reduction in Libya. Exploration costs were in line this quarter compared to the same period last year. Higher G and A and geology costs were compensated by lower costs of the dry wells. The increase in depreciation charges and in operating costs of the new projects as these are still ramping together with increased maintenance costs and the absence of the revenue that we booked last year for the lease of the Scarabeo 9 rig had a total negative impact of €140,000,000 Other minor items such as the exchange rate explain the remaining differences.
Moving on to LNG. Adjusted operating income in the Q3 of 2013 was €129,000,000 versus €189,000,000 €129,000,000 versus €189,000,000 posted during the same quarter last year. Because of the increase in the number of cargoes sold to Manzan EU, which are linked to Henry Hub prices. In the Downstream business, adjusted CCS operating income in the Q2 of 2013 was €143,000,000 53% down year on year. In the refining business, we were able to run our conversion units at full capacity even though we continue products spreads versus Brent, partially offset by the wider light heavy crude spread.
The CCS refining margin in the quarter reached 3 point $3 per barrel. The decrease in refining margins caused a negative impact of €163,000,000 In the Chemicals division, a better environment in prices and higher volumes had a positive impact of €20,000,000 Turning now to the commercial businesses, we would like to highlight that we are seeing a change in the trend in the marketing division as overall sales volumes in Spain increased by nearly 4% compared to the same period of last year, due to a 21% increase in wholesale volumes together with a 3% decrease in the service stations sales. This increase in volumes could not completely offset the lower margins in both the marketing and LPG businesses with a total negative effect of €20,000,000 In Gas Naturalfenosa, adjusted operating income during the 3rd quarter was EUR 223,000,000 in line with the same period of last year. The effective corporate tax rate in the Q3 of 2013 was 43%. In relation with YPF, more than 18 months since the illegal expropriation of our controlling interest in such company, we have not been compensated.
Despite the publicly stated willingness of the company to find a negotiating path with the Argentinian government in order to negotiate a fair solution to our dispute and the efforts that we have devoted with this purpose, there is no particular progress to report on this front. We will continue with these efforts, but meanwhile, we'll keep on pursuing all available legal options to protect Repsol and our shareholders' interest. Let us continue with the operational activity through our main businesses. In the upstream division, in the 1st 9 months of the year, production increased more than 8%. With Libya at normal levels, our net production would have increased by 10% compared with the same period of last year, in line with our previous estimate.
Let us remind that even though we are having some temporary production disruptions in Libya, incidents are being sold with a major long term impact so far. During the Q3, the production of hydrocarbons reached an average of 344,000 barrels of oil equivalent per day, a 1% increase compared to the Q3 of 2012. Throughout the quarter, we suffered disruptions of our production in Libya due to the shutdown by activist groups of the pipeline that transport the crude oil to the Sauea export terminal. The effect of the disruptions in the quarter was that production fell by 1,000 barrels of oil per day. We maintain committed and confident to achieve our expected 7% compound annual production growth rate between 2012 2016.
In Peru, we are in the process of closing the commercial contracts needed to replace the cash reserves from Block 88 in Camicea as a guarantee for the Peru LNG export facility with those from Quinteroni in Block 57. In Bolivia, the second phase of the Margarita Huacalla project came on stream on budget and 1 month ahead of schedule. The project will add 5,000 barrels of oil equivalent per day to our production. The potential of the Margarita and Huacalla field is huge and we are starting to consider a third phase that could be executed in a short time frame to deliver up to 18,000,000 cubic meters per day by 2016, provided that the additional commercialization volumes can be secured. In Brazil, current production from the first well of the Zapinhua field is above the initial expectations at around 30,000 barrels of oil equivalent per day.
If the productivity of the wells follows this pattern, we will only need 4 wells instead of the initial estimate of 5 in order to fulfill the total capacity of the first FPSO of 120,000 barrels of oil equivalent per day. Due to the adverse weather conditions, we had a delay in installing the Sumeritable VOI system. We expect to connect the next well to the FPSO in Sao Paulo in February and at least 2 more wells during the first half of twenty fourteen. This delay will have only a minor impact taking into consideration that we expect to connect the 2nd and third well in October November, respectively. The second FPSO, Fudal de Abadella, is expected to arrive on time in the second half of twenty fourteen.
Moving on to Carioca, a new well has proven the prospectivity of the Southwest Flank. Furthermore, last week, a letter of intent to charter an FPSO for a period of 20 years was signed, expected to start producing in the second half of twenty sixteen. This platform will have a processing capacity of up to 100,000 barrels of oil per day and 5,000,000 cubic meters per day of natural gas. In Campos 33, the Ocean Millers rig arrived to the drilling location and will be prepared to spud the first well in the coming days. This rig has been contracted for a 3 year period and can be extended by 1 or 2 additional years if needed.
It will start drilling in Zett, where we see potential upset in the addition of contingent resources and will continue in Pal de Acucar, which is the first target for the development being the biggest structure in the block. In Trinidad and Tobago, the government has announced a proposal of fiscal improvements, including carry forward of unused tax credits and increased capital allowances for exploration and development CapEx that will be applied from January 2014 on. If it's approved by the parliament, these and previous measures taken by the government are promoting investment in mature fields thus Repsol is bringing 2 jackups to the TSP oil field for infill drilling and exploratory wells starting next month. Let us now cover our 2013 exploratory activity. During the 1st 9 months of the year, 10 out of the 20 exploratory wells found hydrocarbons.
These good results allow us to achieve the resources addition target that we had in our strategic plan. We announced recently our latest discovery, which corresponds to a high quality oil well in Libya, very close to our producing assets in the Mursug Basin. On the higher risk portion of our portfolio, we are currently drilling in offshore Eastern Canada, the Margheri well and in Nicaragua, the Paraiso well. On the lower risk portion, we are currently drilling the 2nd appraisal of our discovery in Bakzin in Gulf of Mexico. We are drilling another well in the block NC 115 in Libya and we just started drilling our first well in Kurdistan, 3 week 1.
During the Q4, we also start exploratory activities in the following prospects. The operated Lyon prospect in Gulf, Mexico. In Alaska, we will conduct our 3rd winter campaign with 2 appraisal wells, a group 57 and another exploratory well called Tutu. In relation to the exploration acreage, during 2013, we have been acquiring further acreage to secure a substantial future growth. We have strengthened our portfolio this year by acquiring more acreage in OECD countries like Canada, U.
S. And Norway, extending our exposure to carbonates following the PERLA play in Aruba, Colombia and Nicaragua and increasing our exposure in West Africa, where we were the highest bidders of the offshore block E-thirteen in Gabon, where the formal approval where the formal award is still pending. Turning now to M and A. In the LNG business, we would like to mention that the sale process to Shell continues progressing as expected, in line with the estimated time table for completion. Finally, in Peru and regarding the potential development of our downstream assets, the final binding offers have not fulfilled our expectations.
So we have ended the sale process. In summary, the tough environment affected the quarterly results mainly due to three factors: the disruptions in Libya, the weak international refining margins and the dollar depreciation. Notwithstanding these factors in the quarter, we were able to release a resilient set of results on accumulated basis with a 9% increase in our CCS adjusted net income. I will now be pleased to answer any questions you may wish to put forward.
We have enabled a chat in the webcast in order to post questions in the event there are connection problems on the call. You may identify it by a tab called Ask a Question. We will address these questions at the end.
Good morning. The Q and A session starts now.
Well, our first question will come from Oswald Clint from Sandfort Bernstein. Hello, Oswald. Please go ahead with your questions.
Hello. Thank you very much. And maybe just on Sapanoa, could you remind us or tell us at which point would you make that decision not to drill and hook up the 5th well required for that FPSO? And what would be the net CapEx for Repsol under that decision? Secondly, I'd like to ask about the downstream.
I your comments about utilization levels remaining healthy. I know that you'll export surplus products into sort of South America, Africa. But I wonder, are you seeing any competition from U. S. Exports of products of gasoline and diesel?
And then thirdly, just finally quickly asking about Russia. You have some production there. It is set to grow. There have been some decreases in mineral extraction tax in that area. Is any of that applicable to your Russian production assets?
Thank you. Yes. Assets? Thank you.
Oswald, please could you repeat the first question about Sapingo because we haven't understood it?
Yes. Sorry, I was asking about your comments about the 5th well that you may if the wells keep producing at 30,000 barrels per day, you may only need 4 wells rather than the planned 5. At what point would you make that decision only to go ahead with 4 wells and not use 5?
1st, in relation with the field well and the decision will be taken by the whole group and it's going to depend much on we will cover the whole capacity of the FPSOs, We will cover the whole capacity of the FPSO simply with 4. So it's still pending, I'll say, on the on how the next wells will behave. In relation with the third one, Russia production is not falling. I mean, it's quite steady and slightly growing. And tax stocking is flat as far as I know.
But if we have any extra data, we will talk. I think that the tax advantage goes to the unconventional ones. But I'll double check with my fiscal team and I will turn back to you if my answer was not the correct one. And in relation with the exports and the refining, our perception is that we are still we are not suffering a lot the pressure from the U. S.
We believe that most of their export are aiming to the Caribbean And also impartially to I mean, we have not suffered yet in our export. And I said yet because it's going to depend much on the spread between West Texas and Brent to see how the whole thing evolves. Did I answer you, Oswald? Oswald, did I ask?
Yes. Thank you very much.
Thank you, Oswald. Now let's move to Flora Trinidad from BPA. Hola, Flora, please go ahead with your questions.
Hola, thank you for taking my questions. The first one is on production. Can you update us on your best estimates for the growth in full year 2013 production? So you have a 10% target, which considering the 9 months is clearly very challenging. So can you give us just your best estimate for the full year?
And then my second question is on Quinteroni. Do you still expect to enter into operation before year end? And the last one, and I assume someone will ask about CASNA. So I will just ask regarding one of your shareholders. So Safir has a breakeven price, which is very close to the current market price.
So, I was just wondering if you have been approached or if you are aware that they could be somehow interested in disposing part of the stake and if has happened in the past, you would be willing to support them and potentially find some buyers? Is there any feedback on this? Thank you.
In relation with the first one, it's quite difficult to assess a final figure. I mean, when we had the 2nd quarter results presentation, I was quite confident that the 10% increase was reachable. After the disruptions in Libya, it's difficult to say, because basically Libya represents 12% of our production. So a shutdown for the whole quarter in Libya to say something will imply a 3% fall annually talking. Having said so, if things develop normally, I would say that a 7% would be the my estimate today, basically in line with the long term production growth.
In relation with Quinta Roni, the situation is complex in Quinta Roni. I mean, the whole facility is ready and it was ready on budget and on time. But the government of Peru, once the Block 88, which was the backup of the LNG facility, will be send it to the and their production would be send it to the internal market. So the Block 57, which is the one in which Quinteroni is located, is going to be the one that will back up the LNG facility. So in order to reach to start production, we have to reach agreement, commercials agreement in which we have the 6 partners of Camicea involved.
We also have the 4 partners of the LNG processing plant involved. We have the lenders of the LNG facility also involved. And on top of that, in Block 57, where Kinteroni is located, our partner Petrobras is selling right now its stake. So we also have to take this the entrance of the new partner in agreement. And on top of that, we have the government of Peru.
So it's quite difficult to assess a date for when Kinteroni will start because as you can see, we have more than 15 parts involved in the negotiation. Having said so, I think that things are moving slowly, but moving and probably the closing and the startup of Quinta Roni will be more or less at the same time that the closing of the LNG sale. And the last one refers to the breakeven point in Zafir. Yes, I think that they have our shares at 19 point something. So we are close, but I don't think that they are going to sell.
You should ask them. But my perception is that they are quite comfortable right now with their stake. The loan matures by January 2015. So still for them time to think, but it should be, Satir, the one that answered your question.
Okay. Thank
you.
Realizations in U. S. A. Brazil or North America Brazil slightly weaker than expected particularly quarter on quarter. Can you just give me a bit of color around that please?
And then secondly on Gas NAT, I know there's been a lot of press speculation about this. I mean, are you able to say whether Temasek or Sinopec have indeed expressed an interest in your Gasnat stake and potential timing for divestment of Gasnat presumably after the LNG sale?
Thanks for the question, Jason. I will double check the realization prices in Brazil and in the U. S. Because I don't have the same perception that you have about lowering those prices. But I'll double check and through our INR team will give you the answer.
And in relation with the gas net, I think that I would say that right now we are starting to study which counterparts or which companies would be interested in the stake, but it's way too early to provide you any color. We are I mean, Gas Natural is a great company. We are quite comfortable in our stake. It's true that the rationale behind the operational activity once we sell the LNG business faint. And in that sense, we have to study all possible alternatives in relation with our portfolio and Gas Natural is part of it.
We are not in a hurry and we are starting to study which transaction could improve our, I would say, global portfolio distribution. And only when we analyze which is the right move to do, we will do it because other than that, if we don't find an alternative for Gas Natural, we'll keep the stake because I mean, it's a very good company and we have a positive carry on of more than 4 70 basis points. That's all I can tell you, Jason.
Okay. Thanks.
[SPEAKER JOSE RAFAEL FERNANDEZ:] Yes, I have in relation with the U. S, perhaps the difference and I will have, as mentioned before, to double check it, will come because of the increase in the mix due to the SandRidge production. But I will double check and I will send you the exact figures. Okay, Jason? [SPEAKER JOSE HUMBERTO
ACOSTA MARTIN:] Perfect. Thanks.
Did we cover your questions?
Yes. Thanks very much.
Thank you, Jason. Okay, let's move on to Felipe Rosa from Spiritus Santo. Felipe, Rola, please go ahead with your questions.
Hi, good morning, everyone. Three accumulated CapEx in Q3 seems to be running well below the run rate for you to reach your target for the full year and namely excluding Gazotrel. I believe that down stream is the division where the CapEx is running below. I don't know if you could update your target for the full year for the CapEx ex Gazzmat. Second question relates to the substantial working capital outflow that you have had in Q3.
Could you give us some guidance whether you expect to reverse that in Q4? And what were the main drivers for the working capital position versus Q2? And my final question relates to your relationship with Pemex, okay? We talked about Gazotrel, we talked about some of these. I don't know.
Could you give us your view on how do you see this potential interest of Pemex in setting up a partnership with YPF? And would you adopt the same margin stance that you have adopted so far with other companies that have signed partnerships with YPF? Thank you very much. [SPEAKER JOSE MARIA
ALVAREZ PALLETE:]
Lippe, in relation with the first one, I expect CapEx to be around $3,300,000,000 by the year end, dollars 3,200,000,000 3,300,000,000 ex cash net. Normally, 4th quarter, it's more loaded than the 3rd one. In relation with working capital, we have been going up and down. I mean, we have a good reduction by the year end and in the Q2. And it worked the other way around in the first quarter and in this third one.
My estimate is that probably by the year end, we will be able to reduce by $300,000,000 so to end up in between what we had at the beginning of the year and what we had presented in the last quarter. And finally, in relation with Pemex and their interest in YPF, well, what I can tell you is that Pemex presented, as it was mentioned before an offer that was not accepted unanimously by the board meeting. Other than that, you should check with them their interest in YPF. And if you speak in relation with the statements that the General Manager of Pemex did, I think it's a very peculiar statement given that Pemex has never expressed his discrepancy with the Board of Directors. Pemex has direct knowledge of the efforts made by RESL to reach a negotiated solution and the reasons that lead the Board of Directors to unanimously reject the proposal made by YPF through Pemex as it was gravely detrimental to Repsol's interest.
Thank you very much, Miguel.
Thank you, Felipe. Now let's move on to Tipan from Nomura. Please, Tipan, go ahead with your questions.
Thanks, Angel. Good afternoon, Miguel. Three quick questions, please. Firstly, just could you elaborate on the exact situation in Libya today in terms of production? What's on and what's off?
Secondly, with that, I was somewhat surprised where the tax rate was given lower production from Libya. So I was just wanting to know what where you think guidance should be for the full year? Should we see a lowering in the tax rate there? And then thirdly, just subsequent to the cash in or proceeds from the LNG deal, could you just talk about use of cash and sort of potential for selective M and A? Thank you.
Thanks, Stephen. In relation with Libya, we stopped production 10 days ago. And right now, the production is 0. A group of 2 Rx blocked the pipelines and we expect the situation to be solved quickly. But today, production is 0.
The reason entering into the second question, the reason why tax rate has been 43% this year this quarter, sorry, is true that Libya and the Apsi were not I mean, they have been somehow the supposedly improvement due to the lower results in upstream has been in the other side compensated because downstream, especially refining, which is the lower tax rate we have throughout the group, the results were not there. So we have a compensation between the lower results in the higher rate countries with lower reserves also in the, I would say, better fiscal term countries. And in relation with whatever we're going to do with the cash with the LNG, it simply reinforce our balance. I mean, we should the sale of the LNG is somehow or was somehow or it will be devoted to reestablish our financial ratio, which is something totally necessary to maintain our investment grade.
[SPEAKER JOSE RAFAEL FERNANDEZ:] Okay. And just coming back to the tax rate, a base case for the full year, what would be the best assumption?
[SPEAKER JOSE RAFAEL FERNANDEZ:] Yes. Sorry, I forgot that one. Our estimate today, it's 44% for the whole year. But it's going to be also dependent on where the results come from in the final quarter of 2013. Thanks, Thipan.
Okay. Great. Thank you.
Thank you, Thipan. Please, when you ask your questions, could you please speak slowly so we can understand everything? And now let's move on to Houtan Jazari from Bank of America Merrill Lynch. Hello, Houtan. Please go ahead.
Hi there, gentlemen. A couple of questions please relating to the downstream. You mentioned that you've ended the sales process on the Peruvian downstream assets. I just want to understand what your thinking is now with those assets given that you might have to incur some significant upgrading capital expenditure, which you were keen to avoid and that being one of the main rationale for wanting to sell it in the first place? And the second question I had was really regarding the marketing outlook in Spain.
You've alluded to volumes stabilizing in the country and showing some signs of life there. I just wanted to see what scope was for beginning to introduce margin increments in the You've often highlighted that as a potential source of significant upside. Thank you.
[SPEAKER JOSE RAFAEL FERNANDEZ:] In relation with the first one, the needed to desulphur the diesel and gasoline productions in Peru, at least the initial estimates is approximately 7 $50,000,000 We have a stake of $51,000,000 So basically it's half of it would be on our side. So we are talking about $375,000,000 for a 3 year period. So it's not that big to say something. And in relation with the second one, it's not only that we have we are seeing a better improvement. For example, in October, the sales were flat in comparison with last year.
So and this is the first time in the last probably 30 months that we have seen a stabilization in the sales compared with the prior year. But one thing is the sales and the other one is margin. Margin, I would say that somehow we are in the comfort zone, which is the one that allowed us to maintain our market quota. So perhaps a little increase, but I would say that the good news is that it looks as the whole demand is being recovered. Thank you, Houten.
[SPEAKER JOSE RAFAEL FERNANDEZ:] Thank you.
Thank you, Houten. And now let's now move to Thomas Adolff from Credit Suisse. Hi, Thomas. How are you? Please go ahead with your questions.
Hi. Thank you very much. Two questions, please. Going back to Castell Naturale and the decision that you still have to make. Obviously, part of that is to do with what you would do as it proceeds, what sort of assets you buy.
But let's say you get €4,000,000,000 after capital gains tax from the entire stake. And when you look at those €4,000,000,000 undoubtedly, you won't be spending all on acquisitions. So my question really is about how you would split it in terms of asset acquisition, further balance sheet de gearing, maybe some buybacks or special dividend? And the second question would be on production growth in 2014. What should we expect?
And what sort of contingencies are you assuming or you carry for the Libyan volumes? Thank you.
In relation with the first one, I mean, the whole thing will work the other way around. I mean, first, we have to find an investment that fits in our portfolio that provide us with new capabilities with somehow spread our portfolio better than the one we have today. And then we will go for the sale of Gas Nabs. But basically, we are not thinking in providing any extra dividend in relation with the sale of supposed sale of the Gas Nuts stake. In relation with the growth for 2014, we keep attached to our long term estimate, which is 7% annual growth.
We are right now finishing the budget. So I cannot provide you more color than saying that it's going to be online with the 7% annual growth till 2016. So it would be aligned with that figure. Okay? Okay.
Thanks. But just going back to the first one, obviously, I mean
Thank you, Thomas. So now we're over. We finished with our Q and A session. Thank you very much, all of you for attending this conference call on our Q3 results. And every further queries or doubts that you may have, please contact the IR team and we'll be more than glad to answer any further clarifications or questions.
Thank you.