Good day, ladies and gentlemen. This is Ángel Bautista, Director of Investor Relations at Repsol. On behalf of our company, I would like to thank you for taking the time to attend this conference on Repsol's fourth quarter results and a summary of the year 2012. This presentation will be conducted by Mr. Antonio Brufau, CEO. 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 Mr. Brufau.
Thanks, Ángel, thank you for attending this conference. I will be addressing four topics during the call. First, the main events of the year, marked by the YPF confiscation and the updated strategic plan that followed. Second, an update on the financial situation. Third, the quarter and year results. Fourth, a preview of 2013. 2012 was a year marked by the legal confiscation of YPF by the Argentinian government. On April 16, the Argentine government decided to expropriate 51% of the company, taking the shares exclusively from our stake. After the YPF confiscation, we presented a strategic plan update, which explained how the company's ability to grow was unaffected, and how we would be solving in the short term the challenges to strengthen our balance sheet.
Our decision to make the upstream division the growth engine of the company, supported by the cash generated by our downstream business, remains unchanged. We maintain our mid-term upstream growth focus on 10 projects, which are the support of our production increase and reserve replacement ratio level. Five of these projects are currently producing. Margarita-Huacaya in Bolivia, which started production from the first expansion phase in May 2012. This is a gas field with prices in the range of 10% Brent per million BTU. The second phase is on a schedule to start delivering additional volumes in the fourth quarter this year. The field is expected to deliver a total net production of 17,000 barrels of oil equivalent per day by 2014. Mid-Continent in the U.S. started to deliver production from the Mississippian Lime back in February 2012.
For the time being, the results are in line with the estimates we used at the time of the acquisition. We expect Mississippian Lime to be around 2% of the 2013 production level. We expect to drill around 700 wells during this year. The alliance with Repsol Oil and Gas joint venture in Russia started to book production with the assets incorporated in August from the Samara region oil fields, and later on in November of the Tatarstan region oil fields. We are currently producing around 10,000 barrels net to us and expect to add additional 4,000 more from the SK assets, which have started production last week. Lubina-Montanazo in Spain started production in October. It contributes 6,000 barrels of high margin barrels.
Sapinhoá in BM-S-9 Brazil, which come on a stream in January this year and will add net to Repsol 20,000 barrels by 2014 and 45,000 barrels by 2016. This project will increase not only our oil production, but also the average margin per barrel. The remaining 5.5 projects are progressing as follows. Kinteroni in Peru, wells and facilities are complete. We have a short delay in first gas due to heavy rain season and the completion of final details in the commercial agreements. We expect to start production in a matter of weeks. Cardón IV first stage in Venezuela to produce 300 million cubic feet a day of gas in gross terms, is progressing on a schedule with first gas planned by 2014. Carabobo, again in Venezuela, is in the early stages of conceptualization with engineering, seismic, and stratigraphic wells under execution.
We are pursuing an accelerated production project to be decoupled from the main one, with all oil initially being processed and exported from existing facilities. The first well started production on December 28th, 2012, and we are now drilling additional development wells. Carioca, our second BM-S-9 development project, is progressing as scheduled. We are currently carrying forward engineering studies in order to be able to declare commerciality by year-end. First oil is scheduled for the end of 2016 as planned. Reggane in Algeria, where we expect the front-end engineering and design for subsurface facilities to be completed by June this year. First gas is in line with our previous estimates and is scheduled for the second half of 2016. Operationally, we progressed consistently on several forums in 2012.
Starting with the upstream business, in the development and production areas, we have delivered a reserve replacement ratio of 204%, making 2012 the third year in a row with this ratio higher than our strategic plan's mid-term goal of 120%. The 2012 organic reserve replacement ratio has been 194%. We increased production from a 2011 average of 299,000 barrels to 332,000 barrels per day. The production outcome was mainly increased by Libyan volumes back to normal and Margarita barrels in Bolivia. Trinidad and Tobago, that was affected by maintenance both in the trains and on the field's facilities, had a negative impact. In the exploration side of the business, our team is delivering every year the targeted contingent resources. In 2012, we added nearly 400 million barrels from exploration, plus around 300 million barrels coming from non-organic additions of U.S., Mid-Continent, and Russia.
The year-end resources inventory reached more than 2.1 billion barrels compared to the 1.5 billion barrels as of the end of 2011. The main discoveries behind the added resources are Pão de Açúcar in BM-C-33, ranked as one of the top 10 discoveries in the world in 2012, and Sagari in Peru, along with smaller discoveries in Colombia and Algeria. We maintain the focus in constantly renewing exploration acreage to have a robust portfolio. During 2012, we added more than 68 blocks, 44 of which are in the United States, an area where we are focusing on for future growth, while we still keep on diversifying, adding Angola, Aruba, Australia, Bulgaria, Namibia, and Romania to our current geographical presence. These new areas cope with the stated strategy with regards to continue building a balanced portfolio with more oil concentration and focus on our geological expertise.
In the downstream business, the refining division significantly improved performance, delivering a 2012 refining margin of $5.3 per barrel compared to $1.6 per barrel in 2011. The macro conditions were favored by occasional events, mainly in the third quarter, such as a massive maintenance season in Europe, along with accidents in refineries in Venezuela and Mexico. These events, besides the $1.6 per barrel premium margin contributed by the upgrades, resulted in the margin improvement. Let me remind you that we need a margin of $2 per barrel to break even in our CCS EBITDA and a $3.7 per barrel to break even in our CCS EBIT at an 80% utilization rate. The retail business results have still been resilient, even though demand has been decreasing throughout the year.
The chemical business experienced a very weak period this year, with a drop in volumes and margins that has caused a negative result. At the EBITDA level, we ended the year at break even. We are working in order to increase the competitiveness of our chemical business. That includes, first, rationalization of our industrial assets, focusing on the most competitive ones. Second, moving to higher added value products, and third, focus on energy efficiency projects and reduction of raw materials cost to supply our crackers. Going now to the financial position, Repsol ended 2012 with a net debt ex Gas Natural Fenosa of EUR 4.4 billion, EUR 2 billion lower than the one at the end of 2011 after YPF expropriation effects. The reduction was due to, on the one hand, the EUR 1.4 billion placement of 5% treasury shares back in January 2012.
To a lesser extent, was due to non-core divestments and cash generation of our businesses, higher than investments, dividends, and interest payments. Repsol has been maintaining good access to the capital markets at very competitive terms, securing enough liquidity to pre-finance our business plan for the following years. As of December 2012, Repsol has EUR 4.6 billion in cash, plus EUR 4.4 billion in committed undrawn credit lines. Liquidity available shows a coverage ratio of three times in relation to short-term debt. Our leverage ratio at the end of the period was 21.6%, including preference shares. In our strategic plan, we defined some actions to strengthen the balance sheet. Let me explain the progress made in 2012. First, the implementation of the scrip dividend was very successful, with an acceptance ratio of 64% and 69% for the final dividend of 2011 and the interim of 2012, respectively.
The program contributed cash savings of EUR 900 million. Second, working capital reductions through the optimization of refining inventories and commercial conditions reduced cash requirements by more than EUR 750 million in 2012. Third, selected non-core divestments in Ecuador and Chile amounting to EUR 551 million. Fourth, on the sale of our LNG division, we announced earlier this week that we signed an agreement with Shell to sell all the assets and operations related to our LNG business outside U.S. and Canada for an enterprise value of $6.7 billion. Repsol's reported net debt will decrease by an estimate of EUR 2.2 billion as a consequence of the transaction. Looking at debt with the credit rating agencies' criteria, the reduction is expected to be in the range of EUR 4 billion to EUR 4.9 billion, which would imply a significant improvement in Repsol financial ratios.
All these steps ensure the company maintains a solid financial position, reduces debt, and increases liquidity. As for the preferred and treasury shares, we will be announcing our decision on the alternatives in the short term. Our sound financial and liquidity situation after the LNG sale allows us to accomplish these transactions, avoiding dilution to our shareholders. I will make a parenthesis to talk about the actions taken during the year to get a fair compensation for the YPF confiscation. We are very grateful for the broad support we have been receiving from governments, public and private institutions, and the whole international community that has severely reproved this illegal action. However, we remain open to any potential negotiation to reach a fair agreement that compensates the value of our confiscated assets. Meanwhile, the defense of our stockholders' interests oblige us to strongly pursue all available legal options.
The legal claims we have filed in the U.S., Spanish, and Argentinian courts, and in particular, the International Centre for Settlement of Investment Disputes, are progressing well according to the legal procedures. Let me go now to the quarterly results. Fourth quarter CCS adjusted net income was €517 million, and CCS adjusted operating income was €1,053 million. These results were 115% and 109% higher, respectively, than during the same period last year. The improved results have been driven by a better performance in both the upstream and the downstream divisions. In the upstream business, the adjusted operating income was €492 million, 151% more than what we obtained during the same period of the previous year. In addition to the Libya production returning to normal and the continuous increase in the Margarita ramp-up volumes, we have started production from the Russian, Spanish, and the Mississippian Lime operations.
The other main explanation of the variation was lower exploration expenses, which were €48 million less than during the same period of 2011 due to lower amortization of both bonds and wells. In the LNG division, the adjusted operating income was €110 million, in line with the same period last year. As mentioned in the LNG sale release, we will be booking the LNG business results until the closing of the transaction. In the downstream business, the CCS adjusted operating income was €326 million, 151% higher than the fourth quarter of 2011. The good performance comes mainly from the refining business due to higher distillate volumes and increased utilization rate of our system up to 83% and a margin of $6.3 per barrel. The premium, the margin from the new units, reached $2.45 per barrel during the quarter, and the utilization rate in the conversion units reached 93%.
In our retail businesses, the LPG results partially offset the decrease in margins and volumes in the retail sales. To finish with the quarterly results, in Gas Natural Fenosa, the adjusted operating income of EUR 226 million was 22% higher than during the same period last year. The increase is due to higher margins in the wholesales marketing business and better results in electricity commercialization. Moving to the 2012 cumulative annual results, I only want to mention that the upstream division accounted for more than 50% of the annual CCS adjusted operating income, and also that 2012 CCS net income was higher than the one obtained in 2011, which included YPF. It means, to me, that we have been able to offset the YPF impact in our P&L. Now I would like to cover the forecasted activity for 2013. In the upstream division, we expect to increase production by 10%.
January average was around 360,000 barrels per day. We are currently adding to this figure SK barrels in Russia, and we will be adding shortly Quintanilla barrels that will be on a stream in the coming weeks. As explained in the exploratory day back in January, the exploratory activity in 2013 will include 30 wells and two appraisal ones. 75% of investment will target oil, and 65% of the total budget, above $1 million, will be spent in drilling. We will concentrate our activity offshore in Brazil, Angola, U.S., Norway, and Canada, coupled with recovery onshore activity in Libya, Algeria, and new operations in Russia. On the LNG businesses, we are still obtaining reasonable results regardless of the market challenges we face. Canaport is an efficient terminal, flexible with demand swings and able to handle Q-Max and Q-Flex vessels.
It also has strong synergies with Repsol's North America gas commercialization division. The plant location allows us to benefit from a premium market versus other Henry Hub markets in North America, especially during winter months, as we have proved this January. Nevertheless, we plan to reevaluate the operating and strategic alternatives for these assets. In the downstream division, we expect to maintain a high capacity utilization of our conversion units, obtain a fair evolution of the retail division results, and improve our product differentiation in the chemical business. Finally, we will persist in our efforts to get a fair compensation from the Argentinian government on the confiscated stake of YPF. As I mentioned before, to that end, we will remain open to any negotiation alternative that arises, in the meantime, we will continue with all available legal actions.
This year was one of the most challenging years we have had as a company. We dealt with the confiscation of YPF and the impact of the market events affecting Europe and Spain, having a direct influence on the region risk perception. In this challenging environment, our operational units have maintained the focus on delivering the objectives to comply with their role in our strategy. 2012's operational performance and financial results are a proof of this. We are reshaping a company with a straightforward strategy, with growth denominated by the upstream division, which stands above the industry average, and with a strong financial position which supports current and future projects assured by a dynamic exploratory activity. Now I will be pleased to answer any question you may wish to put to us. Thank you.
Ladies and gentlemen, the Q&A session starts now. If you wish to ask a question, please press 01 on your telephone keypad. Thank you.
Hello again. Please, Thomas Adolff from Credit Suisse, go ahead with your questions.
Good afternoon. Thanks for taking my question, congratulations on the LNG transaction. I guess on the financial strategy, the pref share conversion is the next, as you said, probably into plain vanilla bonds. I'm also wondering whether you will continue to pursue non-core asset sales during 2013, such as Peru Downstream, for example. When one considers the potential improvements to the financial position from this, by the time you complete the LNG sale with Shell by late 2013, early 2014, should we think of Repsol having excess funds over and above your credit rating requirements in 2014 that will allow you to take opportunistic steps, i.e., acquisitions in the upstream again? Just another one on the treasury shares. Is there a preference to cancel these to offset the dilution from the scrip? I guess my final question is on the Downstream.
Structurally, fundamentally, Europe is on the wrong side of the cost curve for chemicals, it's great to hear from you that you're talking about rationalization of industrial assets moving to higher value added products, et cetera. Could you possibly quantify this impact and over what timeline you're trying to implement all of this? Thank you.
President.
Well, thanks Thomas for your congratulations about the LNG. About selling non-core assets, we don't have many left in our balance sheet. Still, we have the Peruvian Downstream business that we are now thinking in divesting. That is not going to be big in terms of quantity of money which is involved in Peru, but it's going to be important in terms of not requiring the CapEx that we need to improve the quality of our units in our refinery there. I would think that other than that, the remaining non-core assets are very few. We do consider Downstream in Spain as a very core asset for us. Therefore, we do not plan to sell Downstream assets in the Iberian Peninsula. Obviously, the LNG transaction, as Shell has mentioned, will need some time in order to get all the approvals. Mainly the antitrust authorizations. That may take some time.
By the end of this second semester, I do think we should be able to go ahead with the deal. The antitrust authorities are not in our hands to decide when. Let's assume that is going to happen 2013, beginning 2014, as Shell has mentioned. If that is the case, obviously we will have a very good financial structure. Maybe I want to emphasize that we have done the LNG deal for two reasons. One was to improve our financial structure. When I say improve, I say improve. I mean that after the deal, we will have a very solid financial structure that is the one that we want. Therefore, no cash in excess. The second reason for the selling of LNG is, as I mentioned in our presentation of the strategic business plan, for Repsol, this is a business very intensive in CapEx.
We do see that our operation was very good, but very limited in terms of growth. If we have to place at Repsol our money, I do prefer to place that at the upstream level than investing in liquefaction trades, et cetera. Therefore, the reasoning for that is changing the possibility of having a non-growth division to a growth story. Having said so, improving our solid financial position, selling an asset that for another company like Shell means more than for us in terms of growth, we remain very oriented, very focused in organic growth. I mean that we cannot think that what we have done very well up to now, which means growing organically, has to change. Obviously, we have to look to everything which is moving around the world in terms of looking for opportunities.
My main priority and the priority of the company is just growing organically, investing a lot in exploration, more than our competitors, placing our operations in areas where we have strength, and thinking 10 years from now. I mean that we have to be solid financially talking. We have to grow internally. We have to look for small opportunities that fit in our portfolio, like the Russian one, like the Mississippian Lime 1, et cetera, but nothing more than that. Therefore, we plan to remain in the way we have done up to now. Our treasury shares is an asset that today, in my opinion, is the best asset we have in our portfolio. Because at EUR 16 per share, the upside possibilities is very high. Do we plan to use those shares for scrip dividend today? My answer is no. We do prefer to have capital increases.
There are no significant dilution. In my opinion, there is no dilution through scrip dividend, because everybody may have the right to go to buy shares or cash. Therefore, the treasury shares we have, it's good to have those, again, to be solid financially talking. Your last point about chemicals. In chemicals, we have three different position. We have first, as important to put the frame. Chemicals account for 3% of the total capital employed. In the worst scenario, that has been 2012, we have breakeven at EBITDA level. That means that we cannot suffer much from this business. 3% capital employed, breakeven at EBITDA level. Having said so, that's not enough for Repsol. We are just working in closing units that are not very efficient. Obviously, we try to close these units in a broad analysis.
I mean that we try to move people from the chemical units to the refining businesses, et cetera, in order not to interfere much in our labor stability. We are very determined, and we have done that in the past, to close non-efficient units. Second, we are just trying to move from low value added to high value added, even though that means loss in sales, et cetera. That means increasing margins. Lastly, we are just investing our money in chemicals in order to be more efficient in terms of energy reduction, energy consumption. This is the game. The cost in terms of closing units, just focusing our efforts in value added products. Lastly, reducing consumption of our own raw materials. Thank you, Thomas.
Thank you.
Okay. Thanks, Thomas. Now, please, Hootan Yazhari from Merrill Lynch, please go ahead with your questions.
Hi there. Just a quick question regarding Canaport. You've mentioned that you're looking at different options available at the moment. Maybe you can expand on what those options are. In particular, would you address the potential to invest in the asset further to reverse flows, and make it an LNG export terminal? Obviously, there is quite a lot of interest given the huge quantities of gas in the region. Is that something that Repsol would look to undertake itself, or that's not of interest and you would prefer someone else to do it? Thank you.
Your last point, I take your last phrase. Let's allow someone else to do that. I don't think today it would be a good idea to invest, let's say EUR 1 billion, converting or having a dual plan in regasification and liquefaction today. If that is a good business, it will be good business for us and for many others. In connection with that, we have to think that in the U.S., as far as I know, and as of today, there is only one liquefaction train that has been allowed to export natural gas. Therefore, I think that if that is going to be the case, it will not be tomorrow. It will take some time. We will have plenty of time to study other alternatives.
Today, what we think, first, we are located in the best place in the U.S., in the border in Canada, but in the area which is more attractive in terms of natural gas commercialization, in terms of high margins. We are not linked to Henry Hub. We always have a margin on top of the Henry Hub because of the market that we are. There is a lot of gas, as you said before, in Canada. Maybe one of our strategies will be to look at the upstream level, trying to improve our positions there in order to maximize the capacity of our pipes there to deliver gas into the U.S. We have a very extensive network and a very good group of people in the U.S. selling and trading natural gas and electricity. That's another area where we are going to put our attention.
What I have to tell you is that Canaport, in my opinion, was the best project that the U.S. had until three or four years ago, before shale gas appeared to be the key player in this business. Still, this is a business for 25 years. Obviously today, this is a business that is creating more problems than opportunities. We know that. We have to manage that. Who of you and us could be sure that in four or five years, Henry Hub prices do not equilibrate with international prices? Who is sure that nobody is going to export natural gas coming from shale gas and therefore pushing prices up? Who is for sure?
Who knows what is going to happen in the LNG chain all over the world in terms of massive quantities of LNG that will be on the sea requiring some place to place the gas? Many things are today question marks. What I'm sure is that what is today a question mark, in 25 years, we will have different situations. For sure, we are at the lowest position in natural gas in the U.S. Five years ago, that was not the case. We would be at the highest. Who knows what's going to happen in five years? My responsibility and Repsol responsibility is to manage that asset thinking long term and trying to break even in the business in two or three years, and let's take that for sure, and building from that in the next years to come. Did I answer?
Yes. I see what you said. Your strategy right now is one of waiting and seeing, there's no real urgency to do anything with this asset for now, just to manage it for break even.
Yes. Remember, Hootan, that we book an impairment value, or we are going to book a provision for those assets in Canada and the U.S. for EUR 1.8 billion gross. The total CapEx that we have employed there including the pipes, is EUR 2.5, EUR 2.3 to be accurate. Therefore, we have left very few room for mistakes. The goal was, let's clarify, let's clean our home, our house in the U.S. in this business line, not to be pushed, not to be pressed to do businesses that do not fit in our strategy. From now on, we have capital employed net very low.
We have a very clear idea of what we have to do near term, which means offsetting damages and building the future and analyzing the future and following the market trends to maximize the value at the time that the economy recovers for the natural gas business or price recovers. Okay?
Thank you very much.
Thank you, Hootan. Please, Filipe Rosa from Banco Espírito Santo, go ahead with your questions.
Hi. Good morning, everyone. Two questions, if I may. The first one on E&P. You gave an outlook for production to grow 10% in 2013. Could you give us some idea how do you expect the profitability per barrel to evolve under current market conditions? My second question goes for refining and marketing. You mentioned that you are trying to cut your costs at the chemicals business. Could you give us an idea what you are doing to try to shore up the profitability in your marketing division? Whether you expect refining and marketing as a division to perform in line below or above 2012? Thank you very much.
Filipe, your second question is about our marketing business in Spain?
Yes.
Okay. I'll start with the second one. Sales decline in Spain in retail business still are very important. In 2012, at our marketing stations, volumes of sales went down by 9%. Obviously, this declining ratio will have to reduce at a given moment, but nobody knows when. Through the year, our operating income in our marketing station was EUR 400 million, which was EUR 100 million lower than the year before, 2011. Obviously, what we have is very specific plans. First, to keep our market share. We kept that in 2012, in 2011. That's first. Second, to keep margins at the level we had last year. We have proven to be very efficient in keeping those margins. With some exceptions, but with some periods that were very difficult.
In general, I think that 2013, we will be able to keep the same margins as we had before. Obviously, the non-oil operations and the non-oil business every day becomes more important. Therefore, what is damaging us, which is the volume in the declining in sales, it's being offset with an increase in non-oil and LPG, which is another business line that is performing quite well. My impression is that through 2013 we will see about the same figure at the operating income in what we could consider the marketing business. LPG doing slightly better, products doing slightly worse, non-oil products doing better, and also being more efficient in terms of cost efficiency. We do have plans to reduce our cost in the marketing stations. Therefore, that's not a problem for Repsol.
That has been there many years, we have proven that even though since 2008 we have lost something like 25% of volumes, our margins and our operating income is higher today than it was four years ago. That proves that our system is very efficient. Your first question that I did not understand very well, that quality? Sorry.
On the profitability per barrel for the upstream division, the outlook for 2013.
Based on the new barrels coming from Brazil, barrels coming from Russia, good gas natural barrels coming from Bolivia, et cetera, it will move our margin per barrel from $5.70 per barrel to $7.50 in 2016. From 2012 to 2016, which is the analysis we have, is from $5.70 net income per barrel to $7.50 per barrel after taxes, after everything, which is the way we analyze our margins per barrel because of our taxes being very different in Libya and Bolivia, in all places. The analysis we do is net income per barrel. 2012 net income per barrel was $5.70. 2016, we don't see many problems in getting that $7.50 per barrel.
Thank you very much.
Did I answer you?
Yes. Thank you very much.
Thank you, Filipe.
Thank you, Filipe. Now it's a turn for Theepan Jothilingam from Nomura. Thanks. Go ahead.
Thanks, Ángel. Good afternoon. A couple of questions, please. Just coming back to the dividend strategy. Could you talk about that going forward? Will we still be looking at a payout ratio, particularly post the LNG sale? Secondly, just a point of clarity. When you come back and think about profitability for the North American gas business for 2013, is it right to assume similar levels of profitability to 2012, or should we see that improve? When is it as a base case that we see that move into positive territory? Thank you.
Well, our dividend strategy will not change. Even though 2012 has a high payout, we do think that as we see our P&L moving forward, we see that our payout will be very similar to the industry. We don't have plans to change that for both. The payout, the yield per share, and the scrip policies that we are using. Therefore, we will continue with the scrip policy. We will move around the 50% payout ratio in the years to come, and we do think that we will be able to pay what we are paying now and more. Our idea is to have a cash out because of the dividends of around EUR 500 million. This is what we think we can accomplish based on the data we have in our strategy.
In terms of LNG, if I understood properly, because in 2013, the figures will be around the same as 2012. We don't see any difference. Well, we have performed fantastically well in January, but because of the special situation that we had in the east part of the United States, and we have performed very well as you will see in the first quarter results. My opinion is that I don't see a big change. Obviously, when you see LNG globally, including the assets sold to Shell, you have to take into account the ramp up of Manzanillo, the Mexican terminal. Some of the gas will go to Mexico at Henry Hub linked prices. Therefore, once Manzanillo is working full at 100%, and as delivering our commitment to Manzanillo 100%, at the operating level, you may see EUR 130 million less than today.
No, sorry Antonio. I was wanting to ask a little bit more about, I think there was an EBITDA loss of sort of $135 million for that North American gas business last year. What I'm trying to understand is do we see an improvement in that number? Is it a lower loss, or when do we start to see that number turn positive?
I think that it's difficult to answer properly. That I would consider the same quantity of losses of last year. Maybe slightly less because of January being very good. To be prudent and to be conservative, let's take the same figure.
Okay. Thank you. That's very helpful.
Okay, thank you, Theepan. Please, Lydia Rainforth from Barclays, go ahead with your questions, Lydia.
Thank you. Good afternoon, everyone. Three questions if I could, mostly clarifications. Can I come back to the preference shares and the treasury shares? To be clear, you don't have to wait for the closing of the LNG sale to actually either convert the preference shares or sell the treasury shares. Is my understanding correct on that? Secondly, on YPF, do you think it's possible to get an agreement with Argentina at some stage during 2013? Finally, to clear up, can you give us an indication of what your CapEx budget is for 2013 in itself? Thank you.
Well, do we have to wait for the preferred shares conversion? No. We now are in the process to work in the final structure. We do think that, if I may so right now, maybe tomorrow it will be slightly different, I think that the ideal transaction would be swapping the preferred shares into a long-term bond, bringing an interest in the bond to compensate with the present value of the subordinate or the preferred shares. I think that we will go for a 10-year bond with prices that account for the discount that we have to place in this instrument. We don't need to wait. We are going to proceed very soon on that. Do I feel confident in reaching an agreement with the Argentinian authorities? Let me tell you, I am ready to reach an agreement. I'm not feeling confident.
I'm ready to sit, I want to sit with the Argentinian authorities to see what we can do that fits in the interest of the stockholders of Repsol, which is what I have to protect. Things, as you know, are not progressing very well in Argentina and in YPF. Now they are seeing that what they did was a totally crazy deal or a crazy decision, in my opinion, on top of being illegal. That company was very well managed. YPF was very well managed in the past, the discovery of Vaca Muerta was a proof of that, now they have to deliver. They have expropriated, or they have taken the asset from us, we have to see what they do. I am sure, what I know today is that they are having a lot of problems in trying to copy us.
Having said so, ready to discuss, ready to sit, that doesn't mean that we are not going to proceed, as I said before, with all the legal actions that we have to do in order to preserve our rights. Last, the CapEx we have, excluding Gas Natural Fenosa, it's going to be around EUR 3.6 billion. If you want the detail of that, E&P is going to be EUR 2.7 billion and downstream around EUR 600 million- EUR 700 million. Obviously, on top of that, you have to add Gas Natural Fenosa to reach a total consolidated level of EUR 4 billion. For us, excluding Gas Natural Fenosa, EUR 3.6 billion.
That's very helpful. Thank you very much.
Thank you, Lydia. Now it's the turn for Irene Himona from Société Générale. Hello, Irene. Please tell us your questions.
Thank you. Good afternoon. I have two questions, please. Firstly, on the LNG sale. Obviously, Shell has a strategy of integrated gas, but clearly they're not acquiring any production associated with your assets. Would you be open to discussion on disposing of reserves at the right price if you could add value, as you did in Brazil, for example? My second question is on marketing, if I can go back to marketing profitability in Q4. As you mentioned, for the full year, the result is about 20% lower than in 2011. However, there appears to have been quite a sharp drop in Q4. Actually, if I annualize the fourth quarter marketing EBIT, I'm running at about 60% below 2011. Was there something unusual in the fourth quarter, because volumes had been declining all along, to cause that weakness? Thank you.
Okay. With your first question, the answer is we do not consider selling upstream assets even though they are linked to the midstream assets in LNG. We have never talked with Shell. We do not plan to sell. Our priority is to grow in this business. Therefore, it is not in our mentality selling assets at this level. Your second question, that's true. In the last quarter of 2012, we suffer, let's say, from the media and political pressure that happened to be in all Europe about prices going too high. Obviously, we negotiate with the authorities, we reach agreements, et cetera, and now we are back to normal. Volumes were declining, but at the same speed than before. I would say that we had two problems in last quarter. One was LPG, and the second one was the margins in the marketing station.
These two problems have been already solved. We have new ways to discuss with the authorities, I don't think that's going to come again. That was quite normal in all Europe. Remember, the last quarter in here was not good at this level. Again, this is the only business that it's linked to the Spanish economy or to the European economy, basically. We shouldn't look that on a monthly basis. That's better to look that on an annual basis or even more than an annual basis. What I was mentioning before, we have had 25% volume reduction from 2008 to 2012, and operating income at this level is higher than that year, and it remains at the level between EUR 400 million and EUR 500 million.
If you take that and you compare that with our capital employed, which is around EUR 1.5 billion, which is not much, that means that we get good money from this business. The reason for that is because we are the dominant player, we have very good network, we are fully integrated at all the downstream business, et cetera.
Again, Miguel is telling me that if you look at the downstream business as a whole during this crisis that is big and deep, in 2012, last year, we got an EBITDA of EUR 1.5 billion. 2011, which was even worse, was EUR 1.7 billion. The same as 2010, EUR 1.7 billion. 2009 was EUR 1.8 billion. During the last four years, we have been able to move on top of EUR 1.5 billion at the moment that the market was very depressed and we had a significant crisis in Spain and in Europe.
The CapEx today, thanks to all our efforts in the past, it's going to be no more than EUR 600 million for the following years. This CapEx will go to improve our operations. Not to increase our operations, to improve our operations and to increase the EBITDA. My impression is that even though we may have, on a monthly basis, some problems, on an annual basis and more than annual, free cash flow and EBITDA considerations will be significantly better in the future. Thank you. Did I answer you, Irene? Yes. Thank you very much.
Thanks, Irene, for your questions. Now, please, Alejandro Demichelis from Exane. Please, Alejandro, go ahead with your questions.
Yes. Good afternoon, gentlemen. A follow-up from the previous question on CapEx. Now that you're talking about boosting your organic upstream growth, how should we be thinking about CapEx going forward, particularly versus what you told us at the last strategic plan? The second question, which is linked to that, is how does that boosting in upstream investment is linked with the rating agency's statement of yesterday talking about all of the profits have to be used for reducing debt?
Well, in terms of CapEx, the average we have in front of us, the total CapEx, excluding Gas Natural Fenosa, is around EUR 3.6, EUR 3.7 billion. That's the CapEx we see in front of us organically. At the upstream level, the CapEx we think we have in front of us is for 2013, as I said before, EUR 2.8 billion, and remaining that level until 2016, which is our strategic business plan. All the CapEx, basically most of the CapEx, will go to upstream and being very efficient in terms of the remaining business units. In terms of our balance sheet, our rating agencies, et cetera, as I said before, the LNG business and the LNG transaction we sell is just to improve our financial structure. The plan is self-financing.
Obviously, talking for two years from now is very difficult, but I have very clear ideas of how to manage this company in terms of being very strict, very rigid in terms of using the money of our stockholders. The rating agencies understand that very well. The priority, organic growth. Obviously, if something happens that fits in our strategy and that we can manage as being organic, we will go for it. That is going to be very minor. That's not going to be relevant. With organic growth, we will go for more than 500,000 barrels a day of production, 2016, and with tremendous potential with the projects we have in front of us today for the years beyond 2016. We are not excited about doing different things that we are doing right now.
We know how to manage this business in the way we do that now. We do not plan, as I said before, to change that direction.
Okay. Just to confirm, you don't expect CapEx to be very different between now and 2016 versus what you guided for 2013, yeah?
No, not at all. For sure.
Okay. That's very clear. Thank you.
Thank you.
Thank you, Alejandro. Now it's the turn for Bruno Silva from BPI. Go ahead, Bruno.
Good morning, everyone. Still have a couple of questions. The first one, I'm sorry for going back to the treasury stock question. I guess you mentioned that the low stock price was the reason for preferring not to amortize the shares against the scrip shares. Under the same rationale, would you prefer or would you be ready to propose to the shareholders meeting a buyback program instead? Or do you think because of the time expected to close the LNG sale and due to credit rating restrictions, that would not be possible at all, at least during the course of this year? The second question on the working capital optimization that you have been talking about. In the results in the fourth quarter alone, you got around EUR 900 million. It seems promising, looking at other benchmarks that they wouldn't drive to this kind of savings.
Can you please give more color on the origin of this success and the potential for further savings in this item for 2013? Final question is a follow-up on previous questions on EBIT upstream for 2013. You already provided the trend in terms of barrels profitability through 2016, but for the current year alone, and aside from the mentioned production growth and the seeming neutral FX and prices for liquids and gas, how much should EBIT for upstream grow? I'm asking it because I guess Mid-Continent could be margin dilutive in 2013. Isn't that correct? Thank you.
Your first question about buybacks, we do not have the buyback concept in our mind. We do think that the treasury shares that we have, as I said before, is a very good asset. We will place that to a financial investor the sooner we do think that the value is there. Therefore, a company like us with the growth story that we have in front of us, I think that should place all the efforts in growing and not in reducing the capital structure. Therefore, the answer very clearly is no, in terms of buyback. In terms of the working capital, I think that we have mentioned 750, not 900. EUR 750 million, and three basic reasons for that. One is optimizing the quantity of barrels that we have to keep in our stock, the barrels of raw material, of oil, and just agreeing with others to reduce that.
The second one is forcing the selling of our refining products in Spain, just trying to keep very low inventory levels at our refining system. Obviously, we have reduced because of the economic situation in Spain, the days to receivable. When we sell our products, mainly chemicals and others, we force people to pay or in advance or in a very short period of time, therefore reducing the quantity of receivables in our balance sheet. Many things like that. I pass to Miguel because he wants to say something to you.
Good afternoon to everyone. Basically, the reduction was obtained 10% due to the refining stock, and the rest, the other 5%, was due in the receivables. For 2013, for sure, it will be dependent on the prices as a first step. It's not the same, the amount of network when you're living in EUR 100 per barrel world or in EUR 130. Having said so, I would expect that reasonably, we would be able to keep around EUR 600 million of the reduction throughout 2013.
Back to me, Bruno, on your last point, we cannot disclose the EBITDA of 2013. I can tell you that production increase will come from Brazil, which is Sapinhoá, very high margin barrels. It will come from Russia, international prices, and the U.S., Mississippi Lime and Shenzi, and others, again, international prices. Brazil, international prices and high margin, U.S., international prices, Russia at the level of EUR 50 per barrel. In gas, it will go to Peru, where we have already a very fixed price and a very good price, and Bolivia, that we are selling gases at 10% Brent. Believe me, the increase in production will go to barrels that will bring a significant margin. Also, do not forget about Spain. In Spain, we have a very, almost 90% margin, and we will produce 6,000 barrels per day more this year than the year before.
Combining all these things, it's not difficult to see the EBITDA will go and will increase in a very significant manner.
Okay.
Okay?
Thank you very much.
Okay. Thanks, Bruno. Haythem Rashed from Morgan Stanley. Haythem, hello. Go ahead with your questions.
Thank you, Ángel. Good afternoon. Thanks for the presentation. Three questions, if I may. Firstly, just wanted to ask a little bit about your 10% growth target for this year. If you could just provide a little bit of color on how we should think about the delivery of that growth throughout the course of 2013. Should we be expecting this growth to be coming through in the first half or more back-end loaded with some of the ramp-ups you have and startups in the latter half of the year? The second question I had was just on the refining margin for Q4, clearly, a very robust number compared to Q3. I just wondered if, aside from obviously the uplift from the upgrades, what is driving a fairly robust margin versus the rest of the European market, which saw a sequential fall in refining margins.
My final question is just around Libya. You mentioned the underlift in cargoes in the fourth quarter. Just wondered if there was anything around that in terms of operationally, are things as normal in the country, and is it business as usual? I guess related to that, the exploration program that you have there for later this year, is that still on track? Thank you.
Well, your first question about growth production. In January, we are at the level of 360,000 barrels already. Where the production is going to come, Spain, Russia, Peru with Kinteroni, which will start very soon, Brazil, the U.S. We do think that we will produce something like 8,000 barrels a day in Mississippi Lime through all the year on average. In Brazil, on average, we do think that Sapinhoá will bring something like 5,000 barrels a day of new production net to us, et cetera. Therefore, in January, we were at 360,000 barrels, and we do think that we will be there. We are already, and we will. In the case of Libya, nothing happened. This is the day-to-day business. Last month, we had a cargo less, because this is how we go, how we move.
Obviously, that cargo will go to January or has gone to January, in terms of selling. We don't see any political threat other than just the whole area, the instability of the whole area in Libya that make us to think that we may suffer. The cargo was a business decision. It went to another operator or to one of our partners, and that's all. The refining margins? The premium we had in our upgrades in the fourth quarter was $2.45 per barrel. On average, 2012 was $2.10 per barrel. January this year, we are on top of $2 per barrel. January was not very good in downstream. We do think that keeping this $2 per barrel. It's something that we may get or we should get very easily through the year.
We have seen that January, we are seeing that this month. I don't see that's going to be a big problem. I remember that by 2016 in our strategic business plan for 2013, we had this $2 per barrel. By 2016, we have to reach the $3 per barrel. I'm just moving up, from $2 today until $3 in three years from now, in four years from now. We are quite confident that the basics that we assume at the time that we approve the investment, upgrading our units in Cartagena and Bilbao remains there and are very solid. Did I answer you, Tom?
Yes. Just one final thing on the margin, just to understand really just between sort of 3Q and 4Q, was this your ability to obviously keep the margins pretty stable, largely as a result of the uplift, or are there other factors that were helping you with that as well? That's more what I was trying to understand.
Well, they are telling me high conversion utilization capacity, the spread of diesel against RIN, et cetera. Maybe if you want to elaborate a little bit more on that, please call Ángel or Maddie, they will answer very deeply. In a very good detail.
Okay, great. Thank you.
Thank you, Haythem. Please, Marc Kofler from Macquarie. Hello, Marc. Please go ahead with your questions.
Hi there, everyone. Thanks very much for taking my question. Most of them have been asked, I wanted to come back to some of the comments made about the high utilization in the downstream going forward. I was just wondering if you could give some indication in terms of 2013. Should we expect a higher refinery utilization on 2012? Thanks.
Yeah. Our plan is in 2013 to have a conversion capacity of something like nine or 10 points more than last year. Conversion capacity will work at 96% capacity, and the distillation capacity will be around 83%. Remember that in 2012, during the first semester, we opened Cartagena and Petronor. Obviously, when we ramp up 2 units like that, you have to solve many problems that just appear on the day-to-day business. We had a capacity in the distillation or in the conversion units lower than what is regular. On average, 2012, conversion capacity was 86%. Now we do think that's going to be 96, 10 points more than last year. Something different? No. The reason was that first semester was not very good because of the ramp-ups of the units. I think that 2013, we will operate under normal circumstances, which means, what do we see?
Distillation at 83% capacity, conversion 96%.
Sorry, can I just reconfirm on distillation, you said 93 or 83?
83 is topping capacity, distillation.
Great.
Conversion units is where we have the money, 96%.
Great. Thanks very much.
Okay. Thank you, Marc.
Okay. Thanks, Mac. Now it's time for Anish Kapadia from TPH. Go ahead please, Anish.
Hi. Good afternoon. My first question was just on the Mississippian Lime, where we have seen well results by some operators coming in below market expectations. You have seen some drop-off in activity, and also recent deal valuations have been relatively lower than what we have seen in the past. I was just wondering, on the back of all that, whether there are any changes in terms of your planned rig count over the next few years, and whether you are looking to bring down your target of 90,000 barrels a day in 2018. My second question, just going back to YPF, you have still got a number of YPF shares. Just wondering if you have got any plans to actually sell those shares in the market this year. I suppose the YPF share price is a bit higher than where it was last year.
The final thing was just, I was wondering if you could give an update on the Sagari-1 well in Peru. Thank you.
Okay. Your first question about the Mississippian Lime, we still think that what we know up to now, based on the more than 200 wells we have done this year, is above our expectations, above the analysis and the assumptions we used at the time that we joined the company. The only thing which is slightly different today is the quantity of gas. We produce more gas than what we thought at the beginning, but we produce the same quantity of barrels. We produce slightly more than our assumptions, but that increase in production was basically gas and not oil. For us, it is too soon to make conclusions other than what I am telling you now. We do have to rely on our partner. We do rely on partners. This year, we will drill something like 700 wells.
The CapEx we will employ will be something like EUR 780 million, EUR 790 million. At that moment, we will have better knowledge. Today, I do not have any reason to believe that what we thought is not going to be there. Another thing is what the operator said to the market, which was not our assumptions. I mean that our assumptions were internal assumptions of Repsol. We have to think that this business is going to perform, and it is in line with what we thought, as I said before. Do we plan to sell YPF shares? No. We do believe that the Argentinian government has to launch a takeover on YPF at a value of something like $18 billion. This is by law. This is in the bylaws and in every place you have that.
If we sell now those shares, I think that we are going to do a bad business, and we have to be very consistent, that this is a problem of the money we have to ask for the 51 plus the money we have in shares. We still think that we have 100% reasons to believe that legally talking, they have to launch a takeover, first. Second, if that is not the case, legally talking, the court of arbitrage will give all the right answers to us and not to Argentina. The last question about Sagari. Sagari is a very good discovery. It will add a lot of gas to Kinteroni. The Minister of Energy mentioned 2 TCF of natural gas there. Nothing to say against, but let's say that as a maximum, maybe 2 TCF.
We will drill an appraisal well in 2014, we will take the final investment decision to develop the well and the discovery by 2015. We are just, as you know, working in putting to work Kinteroni in the same block, Sagari will be very good to increase production in Peru, which, by the way, is a very good place to be.
Thank you. Can I just follow up? Just one question on the Mississippian Lime. In terms of the wells that you're drilling this year, what's the split between the extension area and the original area that you're in?
Let me pass the word to Nemesio, I don't know if he's going to be able to answer this question. Sorry.
Good morning. You mean the split between extension and original in terms of acreage or in terms of production, in terms of wells?
In terms of wells this year.
In terms of wells this year, practically three-quarters of the 600 wells that we have budgeted will be in the original area of Mississippian Lime, not in the extension one.
Okay. Thank you.
Okay.
Okay. Thanks, Anish. Now it's time for Luis de Toledo, BBVA. [Foreign language] Hola, Luis. Go ahead, please.
Good afternoon. Thank you for taking those questions. The first one refers to Canaport and the impairment you will book. It should have the timing. Should we wait until completion of the deal with Shell to book that impairment, or could you advance it? Second question regarding these issues, how you came up with this figure, if it's something that was of the result of the discussions, or it is something that you had in mind previously? The second question refers on accounting issues on the fourth quarter. The non-recurring issues in upstream and downstream has been slightly higher, not very significant. Is this level something that we could expect? Are there many factors affecting these non-recurring issues, or are we identifying in future projections? Thanks. Bye.
Sorry, Luis, could you repeat the last question you made or the two last questions you made, please?
Okay. The last question referred to.
The last question, only the last question, please.
Okay. It referred to upstream and downstream recurrent CCS results and the difference between CCS results. Non-recurring items were slightly higher than previous quarters. If you could help us with the identifications of the issues affecting that figure.
Okay. Luis, when are we going to book the impairment? At the time that the deal is performed and done, executed. We have discussed that with the Comisión Nacional del Mercado de Valores. As always, we have to treat that as a single and as a unique cash unit, we will book for the provision, like for the capital gains, at the same moment. By the end or by the second semester or the beginning of 2014. That's the accounting treatment we have agreed with the auditors and with the stock exchange authorities. In terms of the difference between recurrent and non-recurrent CCS, basically, other than the stock, the inventory effect is some impairments in the chemical business. Remember that I was telling you that we were just clarifying the strategy in chemicals, and that we were just getting rid of those that were not efficient.
We booked some impairment in Ecuador in the ship repair, in the OCP, in the transport company that we have there, that we have to compare all the time with the quantity of oil that we are able to add and others to deliver, and small other things. These are non-recurrent items that justify the difference.
Okay. Thank you, and congratulations.
Hello. We have the last question of today. Please, Fernando Lafuente. [Foreign language] Hola, Fernando. Please go ahead with your question.
[Foreign language] Hola a todos. Buenas tardes. Please, just wondering if you could give us, after this explanation of the working capital for 2013, some guidance regarding the debt you expect by the end of the year, providing that the deal of the LNG assets is done by then. My second question is a follow-up on the question regarding the conversion of preferred shares. I understood, or I don't know if I'm correct or not, that it would be made at the current prices for these shares. Is that correct? Thank you so much.
Let me answer the second question. It will be at market value prices. These preferred shares are today being traded with a discount. Then we will have to see which one is the fair discount to be considered in order to issue the asset, the note or the bond that we are going to issue. Your first question about the working capital, I pass the word to Miguel.
This year, as mentioned before, we obtained a reduction of EUR 750 million, which was based 10% in the stock reduction, 5% in the receivables reduction. Can we keep that for the next year? We think that we have gone a little way over the limit. My prior answer was next year probably would be EUR 600, it would be a -EUR 150. In relation with the impact of the LNG sale, the real impact on our net debt will be EUR 2.2 billion. If the question refers to how the agencies are considering that, I can give you that under our assumption, Moody's debt, with their calculation as of December 2012, was EUR 13.4 billion, and they will reduce it to EUR 8.6 billion. S&P from EUR 13.5 down to EUR 9 billion. Fitch from EUR 12.2 down to EUR 7 billion. Okay.
Okay. Just a follow-up, Miguel. Provided that the working capital is achieved, I was referring more a debt level by the end of this year, reported level. Once made the LNG deal, it would go down to EUR 2.2 billion. What do you expect by the end of 2013, more or less, in comparison to this EUR 2.2 billion that you showed in the presentation of the LNG?
That is going to depend much on other variables, Fernando. It's going to depend much on how we finally act with the treasury stock. We are not providing any hint in relation with our final debt for 2013. Sorry about that.
Okay. No problem. Thank you.
Okay. Thanks. That was all for today. Thanks for attending our webcast and our presentation of results. Please do not hesitate to call the IR team if you have further queries or further questions that you need to be clarified. Thanks a lot, and we'll see you.