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 Martínez, CFO of the company. A brief introduction will be conducted by Mr. Ángel Bautista, Director of Investor Relations. Mr. Ángel, please go ahead.
Good day, ladies and gentlemen. This is Ángel 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 third quarter results. This presentation will be conducted by Mr. Miguel Martínez, 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 on the slide. I now hand the conference over to Miguel.
Thanks, Ángel, good day, ladies and gentlemen. In today's conference call, we will cover two topics. First, 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 three 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 million, 22% lower year-on-year, and a CCS adjusted operating income of EUR 840 million, 33% lower than in the same quarter last year. In the first nine months of the year, CCS adjusted net income amounted to EUR 1.6 billion, 9% higher year-on-year, and a CCS adjusted operating income of EUR 3.1 billion, 4% lower than in the first months of 2012.
In Upstream, the adjusted operating income during the third quarter of 2013 was EUR 400 million, 37% lower than in the same quarter last year, mainly due to the disruptions in Libya. Repsol 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 price effects had a positive impact of EUR 47 million. We suffered a negative effect of EUR 118 million 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 if compared to the same period last year. Higher DD&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 up, 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 EUR 140 million. Other minor items, such as the exchange rate, explain the remaining differences. Moving on to LNG, adjusted operating income in the third quarter of 2013 was EUR 129 million versus EUR 189 million posted during the same quarter last year because of the increase in the number of cargos sold to Manzanillo, which are linked to Henry Hub prices. In the Downstream business, adjusted CCS operating income in the second quarter of 2013 was EUR 143 million, 53% down year-on-year.
In the refining business, we were able to run our conversion units at full capacity, even though we continue suffering weak margins in Europe. The decrease in margins year-on-year was mainly due to narrower international products spreads versus Brent, partially offset by the wider light heavy crude spread. The CCS refining margin in the quarter reached $3.3 per barrel. The decrease in refining margins caused a negative impact of EUR 163 million. In the chemicals division, a better environment in prices and higher raw volumes had a positive impact of EUR 20 million.
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 EUR 20 million. In Gas Natural Fenosa, adjusted operating income during the third quarter was EUR 223 million, in line with the same period of last year. The effective corporate tax rate in the third quarter 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 will 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 first nine 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 solved without major long-term impact so far. During the third quarter, the production of hydrocarbons reached an average of 344,000 barrels of oil equivalent per day, a 1% increase compared to the third quarter 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 Zawiya export terminal. The effect of the disruptions in the quarter was that production fell by 20,000 barrels of oil per day. We maintain committed and confident to achieve our expected 7% compound annual production growth rate between 2012 and 2016.
In Peru, we are in the process of closing the commercial contracts needed to replace the gas reserves from Block 88 in Camisea as a guarantee for the Peru LNG export facility with those from Kinteroni in Block 57. In Bolivia, the second phase of the Margarita Huacaya project came on stream on budget and one 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 Huacaya 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 million 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 Sapinhoá 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 four wells instead of the initial estimate of five 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 submersible buoy system. We expect to connect the next well to the FPSO in Sapinhoá in February and at least two more wells during the first half of 2014. This delay will have only a minor impact, taking into consideration that we expect to connect the second and third well in October and November respectively. The second FPSO, [inaudible]Fidelis Yaba Dela, is expected to arrive on time in the second half of 2014. 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 2016. This platform will have a processing capacity of up to 100,000 barrels of oil per day and 5 million cubic meters per day of natural gas. In BM-C-33, the Ocean Mylos rig arrived to the drilling location and will be prepared to split the first well in the coming days. This rig has been contracted for a three-year period and can be extended by one or two additional years if needed. It will start drilling in Seat, where we see potential upset in the addition of contingent resources and will continue in Pão de Açúcar, which is the first target for development being the biggest structure in the block.
In Trinidad and Tobago, the government has announced a proposal of fiscal improvements, including carryforward of unused tax credits and increased capital allowances for exploration and development CapEx that will be applied from January 2014 on. If it is 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 infield drilling and exploratory wells starting next month. Let us now cover our 2013 exploratory activity. During the first 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 Murzuq Basin.
On the higher risk portion of our portfolio, we are currently drilling in offshore Eastern Canada, the Margaree well, and in Nicaragua, the Paraíso well. On the lower risk portion, we are currently drilling the second appraisal of our discovery in Buckskin 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, Tiwi-1. During the fourth quarter, we also start exploratory activities in the following prospects. The operated León prospect in Gulf of Mexico. In Alaska, we will conduct our third winter campaign with 2 appraisal wells, Qugruk 5 and 7, and another exploratory well called Tuttu. 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-13 in Gabon, where the formal award is still pending. Turning now to M&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 timetable for completion. Finally, in Peru, and regarding the potential divestment 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 question you may wish to put forward.
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Good morning. The Q&A session starts now. If you wish to ask a question, please press 01 on your telephone keypad. Thank you.
Well, our first question will come from Oswald Clint from Sanford Bernstein. Hello, Oswald. Please go ahead with your questions.
Hello. Yeah, thank you very much. Maybe just on Sapinhoá, could you remind us or tell us at which point would you make that decision not to drill and hook up the fifth well required for that FPSO, and what would be the net CapEx save for Repsol under that decision? Secondly, I'd like to ask about the downstream. Your comments about utilization levels remaining healthy. I know that you'll export surplus products into South America, Africa. I wonder, are you seeing any competition from U.S. exports of products of gasoline and diesel? Then thirdly, just finally quickly asking about Russia, and you have some production there that 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.
Oswald, please could you repeat the first question about Sapinhoá because we haven't understood it.
Yes. Sorry. I was asking about your comments about the fifth well that you may, if the wells keep producing at 30,000 barrels per day, you may only need four wells rather than the planned five. At what point would you make that decision only to go ahead with four wells and not use five?
Okay. Thanks, Oswald, for your questions. First, in relation with the fifth well, the decision will be taken by the whole group, and it's going to depend much on how all the three wells behave. If they follow the same path as the one we have drilled, which is producing 30,000 barrels, we will cover the whole capacity of the FPSO simply with four. It's still pending, I would say, on how the next wells will behave. In relation with the third one, Russia production is not falling. It's quite steady and slightly growing. Tax talking is flat as far as I know. If we have any extra data, we will talk. I think that the tax advantage goes to the unconventional ones. I will double-check with my fiscal team, and I will turn back to you if my answer was not the correct one.
In relation with the exports and the refining, our perception is that we are not suffering a lot the pressure from the U.S. We believe that most of their export are aiming to the Caribbean. We have not suffered yet in our export. 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?
Yes.
Oswald, did I answer?
Yes. Thank you very much.
Thank you, Oswald. Let's move to Flora Trindade from BPI. 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 estimate for the growth in full year 2013 production? You have a 10% target, which considering the nine months is clearly very challenging. Can you give us just your best estimate for the full year? My second question is on Kinteroni. Do you still expect to enter into operation before year end? The last one, I assume someone will ask about Gas Nat, I will just ask regarding one of your shareholders. Sacyr has a breakeven price, which is very close to the current market price.
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 it 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.
Approach or no?
In relation with the first one, it is quite difficult to assess a final figure. When we had the second quarter results presentation, I was quite confident that the 10% increase was reachable. After the disruptions in Libya, it is difficult to say because basically Libya represents 12% of our production. A shutdown for the whole quarter in Libya, to say something, will imply, let us say, a 3% fall annually talking. If things develop normally, I would say that a 7% would be my estimate today. Basically, in line with the long-term production growth. In relation with Kinteroni, the situation is complex in Kinteroni. The whole facility is ready, and it was ready on budget and on time. The government of Peru wants the Block 88, which was the backup of the LNG facility, their production would be sent to the internal market.
The Block 57, which is the one in which Kinteroni is located, is going to be the one that will back up the LNG facility. In order to start production, we have to reach a commercial agreement in which we have the six partners of Camisea involved. We also have the four partners of the LNG processing plant involved. We have the lenders of the LNG facility also involved. On top of that, in Block 57, where Kinteroni is located, our partner Petrobras is selling right now is a stake. We also have to take the entrance of the new partner in agreement. On top of that, we have the government of Peru. It is 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 Kinteroni will be more or less at the same time that the closing of the LNG sale. The last one refers to the breakeven point in Sacyr. Yes, I think that they have our shares at 19-point-something. 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, still for them time to think, but it should be Sacyr the one that answer your question.
Okay, thank you.
Okay, thank you very much, Flora. Let's move on to Jason Kenney from Santander. Hi, Jason. Please go ahead with your questions.
Okay, thank you very much. I was just looking at the 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? Secondly, on Gas Nat. I know there's been a lot of press speculation about this. Are you able to say whether Temasek or Sinopec have indeed expressed an interest in your Gas Nat stake? Potential timing for divestment of Gas Nat, 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. I will double-check and through our IR team, we will give you the answer. In relation with Gas Nat, 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. 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, fades, 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. 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 will keep the stake because it's a very good company, and we have a positive carry of more than 470 basis points. That's all I can tell you, Jason.
Okay, thanks.
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. I will double-check and I will send you the exact figures. Okay, Jason?
Perfect. Thanks.
Did we cover your questions?
Yes. Thanks very much.
Thank you, Jason. Okay, let's move on to Filipe Rosa from Espírito Santo. Filipe, [Foreign language]. Please go ahead with your questions.
Hi. Good morning, everyone. Three questions, if I may. The first one on CapEx. The accumulated CapEx in Q3 seems to be running well below the run rate for you to reach your target for the full year, namely excluding Gas Natural. I believe that downstream 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 Gas Nat. 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 worse working capital position versus Q2? My final question relates to your relationship with Pemex. We talked about Gas Natural, we talked about Sapinhoá. 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 stance that you have adopted so far with other companies that have signed partnerships with YPF? Thank you very much.
Filipe. In relation with the first one, I expect CapEx to be around EUR 3.3 billion by the year-end, EUR 3.2, EUR 3.3 ex Gas Nat. Normally, fourth quarter it's more loaded than the third one. In relation with working capital, we have been going up and down. We have a good reduction by the year-end and in the second quarter, 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 EUR 300 million, so to end up in between what we had at the beginning of the year and what we had presented in the last quarter.
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. 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 Repsol 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.
[Foreign language] Obrigado. Thank you, Filipe. Let's move on to Theepan. Theepan from Nomura. Please, Theepan, go ahead with your questions.
Thanks, Ángel. Good afternoon, Miguel. Three quick questions, please. Firstly, 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 at where the tax rate was, given lower production from Libya. I was wanting to know where you think guidance should be for the full year. Should we see a lowering in the tax rate there? Then thirdly, subsequent to the cash in or proceeds from the LNG deal, could you talk about use of cash and potential for selective M&A? Thank you.
Luis.
Thanks, Theepan. In relation with Libya, we stopped production 10 days ago. Right now, the production is zero. A group of two RX blocked the pipelines, and we expect the situation to be solved quickly. Today, production is zero. Entering into the second question, the reason why tax rate has been 43% this quarter is true that Libya and the upstream were not in. 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. We have a compensation between the lower results in the higher rate countries with lower results also in the, I would say, better fiscal term countries.
In relation with what are we going to do with the cash with the LNG, it simply reinforce our balance. The sale of the LNG is somehow or it will be devoted to reestablish our financial ratio, which is something totally necessary to maintain our investment grade.
Okay. Just coming back to the tax rate, a base case for the full year, what would be the best assumption?
Yeah, 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, Theepan.
Okay, great. Thank you.
Thank you, Theepan. Please, when you ask your questions, could you please speak slowly so we can understand everything? Now let's move on to Hootan Yazhari from Bank of America Merrill Lynch. Hello, Hootan. 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. The second question I had was really regarding the marketing outlook in Spain. You've alluded to volume 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 marketing business. You've often highlighted that as a potential source of significant upside. Thank you.
In relation with the first one, the needed to desulfur the diesel and gasoline productions in Peru, at least the initial estimate is approximately EUR 750 million. We have a stake of EUR 51 million. Basically, it's half of it would be on our side. We are talking about EUR 375 million for a three-year period. It's not that big to say something. In relation with the second one, it's not only that we are seeing a better improvement. For example, in October, the sales were flat in comparison with last year. 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. 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. 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, Hootan.
Thank you.
Thank you, Hootan. 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 Gas Natural and the decision that you still have to make. Obviously, part of that is to do with what you would do with the proceeds, what sort of assets you buy. Let's say you get EUR 4 billion after capital gains tax from the entire stake. When you look at those EUR 4 billion, undoubtedly, you won't be spending all on acquisitions. 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. The second question will 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, the whole thing will work the other way around. First, we have to find an investment that fits in our portfolio, that provide us with new capabilities, will somehow spread our portfolio better than the one we have today, then we will go for the sale of Gas Nat. Basically, we are not thinking in providing any extra dividend in relation with the supposed sale of the Gas Nat stake. In relation with the growth for 2014, we keep attached to our long-term estimates, which is 7% annual growth. We are right now finishing the budget, I cannot provide you more color than saying that it's going to be online with the 7% annual growth till 2016. It would be aligned with that figure. Okay?
Just going back to the first one, obviously, I mean.
Thank you, Thomas.
Okay.
Now, we're over. We're finished with our Q&A session. Thank you very much, all of you, for attending this conference call on our third quarter results. 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.