Good morning, ladies and gentlemen. Thank you for standing by, and welcome to Repsol's second quarter 2012 results presentation. This conference call will be led by Mr. Miguel Martínez, CFO of the company. I will first pass the floor to Mrs. María Victoria Zingoni, Investor Relations Managing Director, that will make a brief introduction. María Victoria, please go ahead.
Good day, ladies and gentlemen. This is María Victoria Zingoni, Director of Investor Relations at Repsol. On behalf of our company, I would like to thank you today for taking the time to attend this conference call on Repsol's second quarter results. The presentation, as said, will be conducted by Mr. Miguel Martínez, CFO. Other members of the Executive Committee will be joining us as well. After the speech, we'll have a Q&A session. 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, Mavi. Thank you all for attending this conference on our second quarter results. In today's call, we will cover three topics. First, we will give an update on the YPF expropriation on both the status of the legal action and the accounting impact on the financial statements. We will explain the progress we have made on the actions to strengthen the balance sheet, and finally, we will cover the quarterly results and current status of the operations. Let us start with the update on the YPF situation by reviewing the progress on the legal matters. The legal actions are related both to the 51% of the company subject to expropriation and already occupied by the Argentine government, and to the remaining stake held in YPF.
Repsol currently has the right to exercise voting consensual and other powers pertaining to Class D shares of YPF, representing a 12% stake, which is composed of two parts, 6.4%, which was part of the original 57.4 we own and was not subject to expropriation, and an additional 5.4% over which we have those power as a result of the early termination of the loan agreement with the Petersen Group. Repsol rights on the collateral of that loan agreement according to the terms of the collateral pledge. The other shares belonging to the Petersen Group are now in the hands of the banks or institutions, which were part of the loan to Petersen at the time of expropriation. Amongst them, we find the companies of the Carlos Slim Group or Banco Itaú, which are now shareholders of YPF as a result of the exercise of their collateral rights.
The most relevant legal steps taken by Repsol include the following. Repsol notified the Argentine state of the controversy resulting from a breach of the agreement for the promotion and protection of investments between Spain and Argentina, and its intention to file for international arbitration at the International Centre for Settlement of Investment Disputes, ICSID. Second, Repsol filed a claim of unconstitutionality against the temporary occupation of the shares of YPF subject to expropriation.
Third, Repsol lodged a class action lawsuit in New York jointly with Texas Yale Capital for the part of its stake in YPF through ADRs, not subject to expropriation against the Argentine state for breaching its obligation to file a tender offer in the event of gaining control of YPF in accordance with the provisions of Section 7 and 28 of YPF's Articles of Association as approved in 1993, pursuant to the legal regulation on the privatization of YPF. The class action lawsuit also includes the protection of all the ADRs held by the Petersen Group on that date and held in favor of Repsol as a pledge for its loan to the Petersen Group. Those rules were very clear on the procedures to be followed in case an entity wanted to gain control over YPF. These procedures were followed by Repsol during 1999, when we acquired YPF.
The government has failed to comply with the obligation to launch a tender offer to allow the shareholders to decide if they want to remain part of the company with a new shareholder in control, a basic right which is recognized in similar transactions all over the world. In summary, Repsol that has always been open to a negotiated solution to the issues facing in the Argentine energy sector, has been forced to take all appropriate legal actions in defense of its rights as an expropriated party, even against those who may attempt to take unfair advantage of an unlawful confiscation. As current shareholder of YPF, Repsol also will require full transparency, professionalism, and rigor in the management of a private company that is listed in New York and in Buenos Aires. To finalize our update on YPF, we will explain the accounting of the expropriation.
The fact which affects our financial situation is the change of control due to the unlawful taking of YPF's management and assets by the Argentine government. The accounting is as follows. First, the consolidation of YPF, which is the write off of the related assets, liability, minority interest, and translation differences for an amount of EUR 4.7 billion. Second, write off of all the loans related to the Petersen Group, net of the value of the 5.4% claim as collateral for an amount of EUR 1.4 billion. Additionally, we have recognized a provision of an amount of EUR 54 million because of the guarantees granted to Petersen Group. Third, registration of YPF shares that remain our property as financial investments for sale at their fair value. For those shares not subject to expropriation, that is 6.4%, fair value has been calculated according to quoted prices in the market.
For the 51% stake subject to expropriation, fair value should be the amount the group expects finally and effectively to receive as a result of the expropriation process. Considering those valuation criteria, which the relevant bodies and courts resolving the price or compensation related to the expropriation process would reasonably apply. The estimation of the recoverable value entails uncertainty, not only related to the amount, but also to the time and terms of payment.
For those reasons, even though Repsol considers that there are sound and clear legal grounds to be compensated with the market value of the shares subject to expropriation determined by the valuation criteria usually applied by the financial community, and that the value determined by YPF by law is clear and objective, and also consistent with those methods and lead to a value of USD 18.3 billion, we have chosen a more prudent USD 14 billion valuation for the 100% of the company. As a result of this, the 51% of the shares subject to expropriation, EUR 5.3 billion, plus the EUR 6.4 of our current holding, has been registered for a total amount of EUR 5.6 billion. The net effect on the P&L for the above mentioned accounting entries, plus a deferred tax effect of EUR 524 million, results in an accounting loss of EUR 38 million.
As explained in our strategic plan presentation, we are considering various actions in order to strengthen our balance sheets. Let me provide you an update of the implementation of the concrete actions taken so far. First, we have successfully finished the scrip dividend program for the complementary dividend of 2011. The acceptance reached 63.6%. Remember there that our initial estimates was approximately 50%. Second, with respect to the asset disposal program, we have sold our LPG operations in Chile for USD 540 million in July. This transaction, along with the sale of the 5% treasury stock in January 2012, amounts to EUR 1.8 billion, delivered out of the EUR 4.5 billion we have announced as an objective for the five-year duration of the strategic plan.
We continue to actively work on the main alternatives to reduce debt and improve the financial ratios and cash position in accordance with our strategic plan and our discussions with the rating agencies. It's important to point out that both the preference share conversion and the asset disposal process are being handled simultaneously. However, the disposal of the LNG business should not only reduce our debt, but also increase our cash position and will not have a dilutive effect. Therefore, the sale of our LNG business is our first choice. However, we will continue working in parallel with these two alternatives to minimize the risks of not obtaining the required ratio levels. Going into our liquidity position, at the end of the quarter, we have EUR 2.6 billion of cash and EUR 4.7 billion of committed and drawn credit bank lines, covering our short term maturities 4.4 times.
We have executed separate share forward and share swap transactions with three financial institutions for a total amount of EUR 1 billion, using a 10.4% of our stake in Gas Natural as collateral, without any transmission of the shares, nor any limitation to our political or economic rights, and obtained very competitive terms. This transaction demonstrates our access to the financial markets and allow us to have alternatives ways of funding in lieu of the reduction of our EPC outstandings and ensure we keep our liquidity position at a comfortable level in a tough financing environment. Let's move now to the results. As presented on the first quarter results, all numbers exclude YPF and Repsol YPF Gas. During the second quarter, CCS adjusted net income was EUR 481 million, and CCS adjusted operating income was EUR 936 million.
These results were 27% and 34% higher, respectively, than during the same period last year. The good results have been driven by the performance of our Upstream and LNG divisions. In the Upstream front, the adjusted operating income was EUR 518 million, 77% higher than during the same period last year. The return to pre-conflict levels in the Libyan output and the revenues and gas realization price increase, added by the startup of the Margarita project, have been the main drivers of the good results, partially offset by the amortization of the unsuccessful exploratory wells, mainly Cuba. In the LNG division, better margins resulted in an adjusted operating income of EUR 78 million, 47% better than during the same period last year. The increase was due to higher commercialization margins. The results were lower than the previous quarter because of the seasonality effect, mainly in our North American operations.
In the Downstream business, the CCS adjusted operating income was EUR 205 million, 5% lower than in the second quarter of 2011. The improvement in refining margins and the increase in refined volumes could not offset the decline of the petrochemical product demand and the lower sales volumes of direct retail of the market division. The utilization rate of the refining system was 68% versus 70% in the same period in 2011. The low utilization rates of our units was a consequence of shutdowns due to maintenance in the Puertollano and La Coruña refineries, a catalyst change process in the Tarragona hydrocracker, and the revamp of the Petronor refinery visbreaker. Cartagena's new hydrogen and hydrocracker plants also had short shutdowns due to mechanical adjustments. The ban on acquiring Iranian crude caused oil mix and operational changes in our refineries, mainly in Petronor.
In Gas Natural, the adjusted operating income of EUR 232 million was 23% higher than during the same period last year. The good results are a consequence of higher margins in the natural gas businesses. In financial expenses, fixed Gas Natural during the quarter were EUR 88 million, EUR 32 million higher than the same period of last year. The increase is mainly due to the step-up in the interest of the preference shares and increase in gross debt due to the bonds issued in December 2011 and January 2012. Let us now move to the operational performance behind the results. Production in the Upstream division during the quarter was 320,000 barrels of oil equivalent per day, 8% higher than during the second quarter of 2011. The main variations come from Libya, Bolivia, and Trinidad and Tobago.
In Libya, the production reached 47,000 barrels of oil per day, which we have reached pre-conflict plateau levels. In Bolivia, production was 26,000 barrels per day, 24% higher than during the same period last year, due to the startup of Margarita phase 1. In Trinidad and Tobago, we were still affected by maintenance on the offshore platforms and in the Atlantic LNG trains, production reached 119,000 barrels of oil equivalent per day, 16% less than during the same period in 2011. Since early July, production is at record levels of 350,000 barrels of oil equivalent per day due to the recovery of Trinidad and Tobago. We expect to materialize added production from Kinteroni in Peru, Russia, and Midcontinent in the U.S. in the second half of the year. Let me now review the status of the main development projects. The Margarita Field Project is running properly.
Phase 1 of the gas development project start up in May, increasing gas delivery up to 9 million cubic meters per day. The second phase is on track to start up in fourth quarter 2013 and reach a capacity of 14 million cubic meters per day in 2014. In Peru, the Kinteroni project carries on as planned, we expect to reach first gas during the last quarter of 2012 with a gross production capacity of 5 million cubic meters per day, plus associated liquids. The Sapinhoá project, before called Guará, is going as scheduled. We are currently logging the P3S well and drilling 2 producing wells, P4 and P5. The installation of the Guará–Tupi gas pipeline is progressing, we expect to receive the FPSO in December.
In the Lubina-Montanazo project in Spain, we are working on the subsea equipment installation and the hookup to the Casablanca platform. We expect to start production in October. Now, let us review the status of the main exploratory activity. Unfortunately, our well in Cuba was dry, we will not undertake any more activity in the area. We had to suspend operations in the Jaguar well in Guyana before reaching the main objective, because the pressure design limits for safe operations prevented further drilling due to the high pressures encountered, considering the depth we have reached. Samples of light oil were recovered from sands above the primary objective, which is encouraging. We will be evaluating the information of the first well, both for the aforementioned presence of oil in some horizons and the knowledge we acquire about the pressure ramps in order to consider further exploratory work.
We are currently in operations in another 4 wells. Magadi-1 in the Espírito Santo 21st block in Brazil, Sararenda in Bolivia, Sagari in Block 57 in Peru, just start a new non-operated well in Norway. We are working on testing of Sagari due to the positive indications we have. We have been especially active during these quarterly seismic campaigns. We finished campaigns in Indonesia, Portugal, and Alaska, start campaigns in Angola, Canada, and Iraq. We are including in our acreage acquisition, pending final ratification, 2 new important areas, Namibia and Bulgaria. In Namibia, we have acquired a 44% working interest in Blocks 1910A, 1911, and 2011A from Arcadia Petroleum. In Bulgaria, we were awarded exploratory rights in the Khan Asparuh Block in the Black Sea, along with our partners Total and OMV. We have also been high bidders in 5 additional blocks in the Gulf of Mexico.
These blocks are the result of a very selective bidding to balance the current acreage we hold. We are also waiting for ratification from authorities in our entry into the Peniche block in the Portuguese Atlantic Deep Water offshore, and also the award of offshore in Block 23B in Trinidad and Tobago. As for the remainder of the year, we expect to finish around 12 wells, seven new wells to be added to the five that are operating. We also plan to finish testing two additional wells in Brazil, and three wells will be slipping into 2013. The total number of wells drilled in 2012 will reach 22. On the LNG front, PERU LNG produced 575 billion BTU per day, 2% more than during the same period last year. The plant delivered during the quarter, three out of 15 cargos to the Manzanillo plant in Mexico.
In Trinidad and Tobago, deliveries were affected by maintenance on the upstream platforms and on the train three and four. Production was 10% lower than during the same period last year. We have successfully started our delivery of projects for this year, and we are delivering on the actions we had outlined on our strategic plan as essentially to fortify our balance sheets. We have had robust results, with upstream being a solid pillar of the new stage of the company, and we will continue with our delivery of both operational and financial results in the future quarters. I'll now be pleased to answer any question you may wish to put forward.
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.
Bye.
Okay, we will start the Q&A session. There are some names that are not identified, I'd appreciate if you can identify yourself. I will start first with Morgan Stanley. It's Haythem. Haythem, please go ahead with your question.
Thank you, Mavi. Good afternoon, everyone. Haythem Rachid from Morgan Stanley. Three quick questions, if I may. Firstly, just to come back on the financing plan and the dual approach to LNG assets plus the preference shares. I just wondered if you could provide any updates, particularly on the preference share transaction. Any update in terms of the timing? Is it still planned for some time in late 3Q, early 4Q? Any hurdles that need to be overcome before we get to that stage? Secondly, just related to that, I guess, on the LNG business, given the indication around the preference for a sale there. Given previously the comments about the synergies between Gas Natural and LNG, has your view around Gas Natural changed at all since we last spoke?
Would you be more willing to do something around your stake there now, given the potential sale on the LNG side? My third question is just on the downstream environment, just to get your view on the outlook for the second half of this year. Specifically as well, how the upgrade impact is coming through on the numbers and where you are in relation to the EUR 2 to EUR 3 positive impact from the Cartagena and Bilbao upgrades. Thank you.
We have a price target here of EUR 29. I think there is a bull case in there of about EUR 40 if you really- Hi, Haythem. In relation with the first one, all the measures we presented to the agencies and to the market, we have to handle those in parallel. I think it's important to realize those that has already been conclude, the scrip with better result than expected, the gain of liquidity through the prepaid forward, also the sale of the Chilean LPG. The rest, we will move them in parallel. It's difficult to assess any detail about the preference and the conversion, and whether it would be conversion or not. We have to consider this quite cautiously. I will have to see how the LNG process go on, then take decisions about the Prefs.
We will keep advancing, in that sense, we have the authorization of the board to keep moving with the preference shares, though the final decision and the end of the process, it's linked to the LNG process. Difficult to assess now any detail about the conversion of the Prefs. In relation with the second one, I would say that before analyzing Gas Natural, let's see if we are able to sell the LNG. For sure it will imply many things, but let's go step by step. We'll have to think about our situations if the LNG sale goes ahead. Finally, my outlook for the refining in Europe has not modified substantially. I think that Europe is long in approximately 3 million barrels of distillation capacity. I'm basically bearish about the area in the following months till the year-end.
I think that the solution will never come by the demand. Some of this distillation capacity have to be, I would say, converted into logistic terminals or shut down. In relation with Spain, the data we have for the quarter is EUR 1 per barrel, which is below the range we provide the market, which was between EUR 2 and EUR 3, and it was a little lower than in the first quarter. The reasons for that is, I would say, is basically that during April and May, the visbreaker in Bilbao has been revamped. The coker in Bilbao has not worked at its efficiency or to its limit. With the revamping situation, and the existing situation right now, is that we are improving this EUR 1 per barrel. Approximately today, we are at EUR 1.6, EUR 1.7 above, so improving.
I would say that in the second part of the year, in equal conditions, we will improve the results in our refining division. Basically, you have to think that it's not easy to adapt a refinery as Cartagena that was pure hydroskimming into one of the more complex refineries in Europe. First step. Second, in relation with Bilbao, apart from the issue of the visbreaker, you have to think that the change in the diet, closing the Iranian oils and moving into other type of oils which are needing more hydrogen between many other things, people need to adapt and need to know better the behavior of this new diet we are imposing. I think that by the year end, we will be able to reach the range between these EUR 2 and EUR 3. Did I answer you, Haythem?
Great. Yeah, no, that's very helpful. Thank you.
Thanks to you.
Thank you, Haythem. We have the next question from BPI, Bruno Silva. Bruno, good afternoon.
Hello. Good afternoon, everyone. Thank you for taking my questions. I would start with today's news, if you don't mind, on Peru. If you could add more color on the alleged claim from Peru regarding the sale of liquids or gas in the U.S., I guess, and the potential cancellation of any sort of license you may have in the basin. I'm not entirely sure what were the details of that news. The second, going back as a follow-up on the conversion of preference shares. You have been in an intensive roadshow with investors. I just wonder if you have some sensitivity to share regarding those investors in the pref shares, regarding what would be the acceptable conditions to convert in terms of potential discount to face value, and what kind of incentives would be required to convert into common shares.
The final question, if I may, is regarding downstream. You have been repeatedly booking resilient margins in the marketing unit in a context of very aggressive demand fall, most likely competition should be increasing from your peers in Iberia. Just wonder how far you can go, what are you exactly doing to sustain these kind of margins? If you can give us any sort of target number for the full year, I would appreciate it. Thank you very much.
Okay. Thanks for the questions, Bruno. In relation with the first one, I think it's a minuscule. It's a minimum issue. We are talking totally, I think, about EUR 15 million or something like that, from which our portion is a 10%. I think that the issue you point out, forgive you some courage, approximately EUR 1 million. No big deal. In relation with the preference and the conditions, I think that every shareholder or every investor for sure is concerned about the dilution. That's the reason why we have to check first how the LNG business is going to evolve and which will be the impact. I think that the LNG, under the agency's concept, implies a debt of €4 billion. It will have a massive impact on the considerations of the agencies.
I cannot go any forward, because first we have to check the evolution of the LNG process, and then we will analyze the preps. It's important to keep both projects in parallel because one thing is important. What we consider totally necessary is to keep the investment grade. We will see. I cannot be more clear. Okay?
Sure. If you don't mind, a very quick follow-up on that one. You had commented in the strategic presentation a potential dilution over the coming years related with both the scrip and the pref shares. Regarding with that, did your sensitivity on the potential dilution change since then?
Dilution, it's always a great concept because we can talk about dilution in number of shares, dilution in BPA and BPS, profit per share. It's not that clear. When Antonio gave the figure, it was a figure. It's not that we are modifying anything. It also depends on which is the value of the share at a given moment. There is many factors. To me, the important thing is that till now, and you have seen it in all the acts we have been going on in trying to extend the balance, is that we have been rational and we have tried to did our job properly in order to maintain the investment grade. We will continue to do so. Let's analyze first how the LNG goes.
In parallel, let's keep working to have everything ready if a optionality is to be given to the tenants of the preference shares, and we will see afterwards. I cannot advance any more than that. We are working in both areas, and we will see at the end which is the best for our shareholders and for the company. Finally, in relation with the marketing margins. We keep our market quota and we keep good margins. I don't see this type of pressure. Think that the margins in Spain are not that big. We are talking EUR 0.026 per liter. I expect the area to behave quite similar to the results they obtained last year. I keep thinking that the resilience of our marketing is enormous, and the results are there. Okay?
Okay. Thank you very much.
We have next question from Banco Espírito Santo with Filipe Rosa. Filipe, please go ahead with your questions.
Hi. Good afternoon, everyone. Two questions, if I may. The first one, going back to the refining business. I was just wondering that there has been a huge improvement in the refining margin reported by Repsol. Year-over-year, it came from EUR 2.1-EUR 4.7, quarter-on-quarter from EUR 3-EUR 4.7. However, the uplift in terms of EBIT has been quite limited. I believe that your guidance is still for each one additional dollar to add roughly EUR 100 million to EBIT. This has been quite disappointing in terms of the past few quarters. Could you explain what is happening, and whether this could be solved in the near future? The second question relates to the exploration activity. You have significantly scaled down your exploration plans for this year. I believe that you planned to drill around 30 wells in the beginning of the year.
Now you're talking about 22, I believe. What have been the main drivers for such a significant delay? Thank you very much.
You have to consider in the EBIT, the impact of the stock. During the quarter, it was EUR 350 million of impact in the inventory losses in comparison with last year. The second point is that we calculate the index based on the maintenance throughout the year. Within this quarter, we have full maintenance for La Coruña and for Puertollano. Basically, the semester has suffered the whole maintenance for the whole year. I think that this is what really explains the variance. Keep in mind that in comparison with last year, we have an extra depreciation due to the new facilities, Cartagena and Bilbao. I think that if you combine the three factors, the inventories, the increase in depreciation, and the fact that we have the maintenance within this quarter, while in the index is considered all throughout the year, you get the point.
In relation with the number of wells that we are going to drill, there has been delays. The most of it has been first in prospect that we are not the operators as Sapinhoá, which modified from December to January. It's not being delayed, or in the headcount for the year makes a number. Also, it's important to note that within these 30, there were eight wells to be drilled in Libya that we have reduced the figure to two wells and delay the process till 2013. Basically, it's Libya plus some delays of months. No change in our business model.
Thank you very much.
Thank you, Filipe.
Thank you, Filipe. We have our next question from Nomura International with Theepan Jothilingam. Theepan, please go ahead with your questions.
Hi, good afternoon. Thank you for taking the questions. Miguel, just coming back to the LNG business. I just want to understand, in terms of a sale process, would you consider a piecemeal sale within the LNG business? Could you just remind us where some of that off-balance sheet debt lies between the assets? Secondly, on production, could you perhaps give us any guidance on what you think the exit rate on production may be for 2012? Lastly, just on Jaguar, I assume you may write off the cost of that well in the coming quarters. If that's right, could you tell us what you may write off?
Good morning, Theepan. In relation with the LNG, our idea is to sell it as a block. We don't want share repicking, so it would be a single transaction, at least initially. In relation with where is the off-balance debt, it basically refers to all the leases that the rating agencies consider it as debt. Basically, we are talking about 14 tankers and all the pipelines across the U.S. and Canada, which accounts for EUR 3 billion. Basically, the debt we have, it's EUR 1 billion in our balance sheet, and the agencies account the debt for EUR 4 billion, just to the fact that I mentioned. If I have today to give you an idea for the year production, I'm always wrong with my projections, but I think that if you take 330,000 barrels per day on a yearly basis, you will be close. Finally, in Jaguar, sorry.
The Jaguar well was finished in July and would be accrued or write it off in the third quarter of this year. We still have to analyze all the information of the well to drill another one. Also, having said something that the impact on our P&L is not going to be that big because our stake there is 15%. Okay?
Okay, perfect. Coming back to the LNG business, I know it's early days, but can you indicate any level of interest in that you've had so far in that business?
I can tell you that we have a strong team in our side with the Goldmans, the Boston Consulting Group, Linklaters. We have also, I think it's Deloitte or KPMG. We have all the group working, and we have already received interest from more than 10 companies. We will see how it evolves. Our idea is, as mentioned, to move it fast in order to have more possibilities to, in front of the agency, see whether or not we need to go for extra measures as the one we mentioned in our strategic plan. Thanks, Theepan. Thank you.
We have the next question from Barclays with Lydia Rainforth. Lydia, please go ahead.
Thanks, and good afternoon, Miguel. A couple of questions if I could. First one, just on the working capital side, and clearly it was quite a good release of working capital from the quarter. Can you just talk about how you expect that to move for the rest of the year? Then secondly, if I come back to the LNG and the preference shares issues, clearly selling the LNG was not part of the original plan from the strategic side. I just want to understand, is there a maximum level of dilution that you would look at being acceptable for issuing the preference shares? The other bit we haven't talked about is the sale of the treasury shares and where you currently stand on that issue as well. Thank you.
Thanks, Lydia. Congratulations for your promotion.
Thank you.
Well, first one, in relation with the working capital, I think we improved this year, this quarter, approximately EUR 400 million. Reason for that, basically, the price of the oil. My estimate is that by the year-end, in equal terms from the beginning of the year, we should be reducing our working capital between EUR 200 million and EUR 300 million. In relation with the LNG and the pref, no, we don't have a magic figure. We have to keep working, advancing first the LNG process to see where we are, then we will take the decision. One thing is clear, we have to keep the investment grade, we will look first at the results of the LNG, and if necessary, we will go to the preference shares. We keep with both processes in parallel, and we will see.
In today's financial markets in today's Volatility is the name of the game, it's quite difficult to assess what is going to happen in two weeks. We will keep working on the LNG, then we will take our decisions. This is what I can tell you. The final question was, can you repeat it, Lydia?
Just around the treasury shares and how you think about those.
The treasury shares. Sorry. To me, the treasury shares somehow would be the last bullet to keep the investment grade. I think that it would be a very bad signal to the market if we sell our shares at this price, which in my perception are ridiculous.
That's perfect. Thank you very much, Miguel.
Thank you, Lydia. We have our next question from Citi with Alastair Syme. Alastair, good morning.
Yeah. Hi, everyone. At the risk of laboring the same point, just on the LNG, can I just clarify whether this is an either/or with the preference shares, or would there be a scenario where you might consider doing them both? I know you've talked in the past about trying to provide some liquidity to preference shareholders. Secondly, can I just ask, I know it's not your company, but what your thoughts are on the Sofía situation, given that you have participated in that in the past? Thirdly, just to clarify on the PERU LNG cargos that you send away. Where is the tax liability paid on those arbitrage cargos? Is it paid in Peru, or is it paid by corporate Repsol or somewhere else? Thank you.
Thanks, Alastair. In relation with the LNG, the priority is to keep the investment grade. We are going to move faster with the LNG and in parallel with the pref shares. If the LNG give us enough room to working with the agencies, find a status in which the investment grade is not in danger, then we will look for a solution for the preference shares totally different from capital. There are other formulas that can solve the situation of liquidity of the preference shares not being capital. Having said so, I need first to know how the LNG process is going ahead. I will solve both issues. I need a variable to be solved, which is how the LNG and how the agencies will analyze the company once the LNG is sold.
Also, I think it's important to mention, when we talk about LNG, we are not talking about the upstream assets linked to the LNG. Okay? Basically, first step, let's see how the LNG works. Let's solve the problem of the preference shares. If the rating agencies give us comfort, and we know that we can keep the investment grade, then there are formulas to provide liquidity to the tenants of the preference shares, not affecting the capital. Let's say hybrids or many other options. I cannot give you more flavor today because first I need to know how the agencies will react once we move into the LNG process. In relation with Sofía, well, I don't have anything to say on that.
Finally, in Peru, basically the royalties are logically paid in Peru, and those royalties are dependent on the price that the LNG reaches. Basically, depending on their destination, whether it's Europe, U.S., or Far East. It's an issue of royalties. As mentioned in, I think it was Bruno, I think that the major impact for us would be around EUR 1 million or something like that. Okay?
Yeah. Thank you very much.
Thank you, Alastair. We have the next question, Mark Bloomfield from Deutsche Bank. Mark, please go ahead with your questions.
Good afternoon. Thanks for taking my question. Yes, sorry to return to the LNG business, but just a quick question on timing. You've indicated that you'd like to do the preference redemption in October, all other things being equal, of course. Assuming you've not completed the LNG sale by that point in time, but you're fairly confident of doing so hypothetically in the next 2-3 months, have you had conversations with rating agencies about potentially deferring the conversion of prefs to say, later this year, going into next year? Would they give you a period of grace to do so? The second question is just on your divestments target. You obviously outlined a target as part of the strategic plan. You've talked about looking at the LNG assets. You've obviously sold the LPG assets in Chile. Are there any additional assets that you're looking at selling?
If so, could you perhaps give us some sense of scale and timing? The final question is just on CapEx. I think year-to-date CapEx is coming in at around EUR 1.5 billion, pre Gas Natural. The full-year target was around EUR 4 billion. Run rate looks a bit light. Could you give us some indication of whether the EUR 4 billion target is still valid? Have you been able to make some savings on the CapEx front? Thanks.
In relation with the first one, I'll say that we are in permanent contact with the agency. With one of them, for example, we have already talked about this issue. I think that time is there. I think what is important for the agencies is to see the direction in which we are moving. In that sense, I would say that at least the last meeting we had, I ended it up quite optimistic. Basically, the script was there, the initial of divestments was there. We gained liquidity. Basically, it's not a fixed date. I think that if by September we'll have a lot of flavor about how the LNG process will go, and then we will sit with the agencies. Once we speak with them, we will realize whether or not we have to move in one direction or the other.
This is what I can tell you. In relation with divestments, I don't see any major ones. There would be small and non-significant ones, but not any major ones before the year ends. Finally, with the CapEx, I don't know how it happened, but it's always more loaded in the second part of the year. Without Gas Natural, our estimate was EUR 3.5 billion, and we are right now at EUR 1.5 billion. We are EUR 200 million below, which is not much. I think we will end it up in the figure we gave as indication for the whole year, which is EUR 3.5 billion without Gas Natural or EUR 4 billion with Gas. Okay, Mark?
Got it. Thank you.
Thank you, Mark. We have now Peter Hutton from Royal Bank of Canada. Peter, please go ahead with your questions.
Good afternoon, everybody. Miguel, you must be wondering how many questions you're going to get on LNG and the pref. I've got one more, and then onto development and exploration. It's not just this focus. There was one area that Haythem asked about. You've been very clear about the running of these elements in parallel. You mentioned that the selling of the treasury shares would be the last bullet. Not really mentioned about holding in Gas Natural. Would that be a medium bullet in between, or is that no bullet at the moment if there's any delay on LNG? The second question is just a little bit more on the timing that you mentioned on Sapinhoá. I think you said that you were drilling wells 4 and 5.
Just what the lead time on that is and when those start to connect in line with the FPSO fully starting up on first oil next year. The third one, Namibia and the action plan now that you have the 3 blocks at 44% offshore Namibia, where do you go from here and what's a kind of indication on when you'd assess drilling well locations and access to rigs?
Okay. I don't know if I have more bullets or not. My perception is that, and I think it's important, and it's something that we always transmit to the rating agencies. We have a lot of optionality, a lot of them. Both to gain liquidity and to improve the balance. We have to play those in what we think is the best for our shareholders. If at a given moment it's necessary to put Gas Natural on the table We will analyze it as any other optionality. It's not in the plan today. In the plan today, we have LNG and the Repsol. The rating is what really concerns us. In relation with what's happening in HOA, I think that the SP number 4 and 5 will-
Mid-year because of computer
will be mid-year. Broad mid-year. I would say within 3 months they would be there. It's also important to mention that the last development well we drilled was drilling 43 days, which has been the best performance to total depth so far in the Pre-Salt Santos. In relation with Namibia, still in early stages. Before 2014, you shouldn't expect any news from Namibia. This will be more internal works, seismic and geological physical works. Through 2014, Namibia would be, I would say, on the fridge. Okay.
Perfect. Thank you very much.
Thank you, Peter, for your questions. We now have from UBS, Daniel Epstein. Daniel, good morning, please go ahead with your questions.
Thanks, Mavi. Good morning, everyone. Couple of questions. Firstly, on the credit rating. It's a question on how seriously you perceive the risk that you could or your rating could be affected based on the position of the Spanish sovereign in the near term. I know one of the agencies recently downgraded your outlook based not on the company's specific issues, but on sovereign issues. I guess the question would be, in the near term, is your fate entirely in your hands, do you think? Could you elaborate on the dialogue you've had there? Secondly, on refining, just to get a bit more detail. This was clearly not a ratable quarter in refining due to the heavy maintenance activities that were going on.
Could you tell us how costs in this quarter for refining, either on a per barrel basis or an absolute number, would compare to a more normal quarter without the maintenance and with high utilization? Thanks.
In relation with the first one, we will see. For sure, we're in Spain, we would be partially affected, if not totally affected. We will have to see. What we can do is try our best and strengthen the balance to the limit. At the end, we have part of our activity, an important one, which is outside Spain. First point. Second, our liquidity position is quite strong. Third, I would say that our relation with the banks is quite reduced. Only approximately 18% of our debt is with banks. Even if the banking system is affected, it would only affect us partially. We have basically this relation with the banks outside of Spain. We will have to see and see how the agencies react. We are trying to do our best to strengthen the balance.
We started last year, which I think it's an important issue. Remember that we issued bonds in December last year and in January. One of them was EUR 750, the other EUR 850, and we tap also for approximately EUR 250 in the 2019 bonds. We are preparing, and I think it's the mission of the financial area to prepare the company for the worst, and then let's see what happens. This is what we are doing. I cannot predict what is going to happen with the rate of Kingdom of Spain, at least we have to do our best, even getting ready for the worst situation. In relation with the refining, two factors to be mentioned. The first one, I would say that maintenance costs were approximately EUR 40 million.
Also, if we consider that our distillation capacity has been working at 68% in comparison with right now, for example, that we are at 80%, you will have all the data. Let's put it the other way around, if you want. Basically, in a normal year, we should produce approximately or distillate approximately 280 million barrels, which is 70 million barrels per quarter. On average, this maintenance represents roughly EUR 0.50. As we have been distillating only 60%, this will account for a little more, let's say, EUR 0.75, EUR 0.80 per barrel. Okay, Daniel?
Was it EUR 30 million you said for the cost?
4-0.
4-0.
Thank you.
Thank you, Daniel. We have next question from Sanford Bernstein, Jan Pyle. Jan, please go ahead with your question.
Good afternoon. Yeah, thanks for taking the questions. I think most of my questions have been answered, but perhaps on the gas realizations, given that the gas realization has moved up this quarter, I wonder if you could give some more detail on the realization you're seeing from Margarita. Secondly, I wonder if you can comment on the progress with the shale assets you're developing with SandRidge in the U.S. Particularly given the low realizations we're seeing in the States at the moment, whether that has any effect on the future development plans for that. Thank you.
In relation with the first one, basically Margarita, to make a thumb rule, account for 10% of the Brent price, and you will be quite close. As we reach plateau by the end of May, I think it was the 27th, I think that in the following quarters, you will see an extra increase in the gas realization prices once Margarita produces for the whole quarter. Good news there. In relation with the shale assets, the impact would be minimum this year. I think that by the year-end, on average, we will be approximately around 2,000 barrels of oil equivalent per day, with 47% of it being oil. No major impact right now. We keep drilling.
We have right now 22 rigs operating, and we keep confident that the project we have there, it's going to be a good one, and we expect to end up with more than 90 rigs and obtaining the peak of production by 2019, 2020. Right now, no more news there, and for sure, no impact at all within this year. Okay, Ian?
Great. Thank you.
Thank you, Iian. We have now next question from Tudor Pickering, Shola Lako. Shola, good afternoon.
Hello, good afternoon. I have a few questions, please. I'll start with exploration. Could you just talk a little bit about Sierra Leone and Namibia and what your forward plans are for the region given the recent well results? Could you talk a little bit about what you plan to do in terms of drilling activity and exploration activity in Bulgaria? That's on exploration. On refining, I just wanted to clarify a few things. Could you just give us the OpEx per barrel for the quarter as well as the premium that you achieved to Brent, on a per barrel basis for the quarter?
Starting with the exploration, we just entered. Even in Bulgaria, we have not received the confirmation of the award. We know the award. It would be to start seeing any other parts. Seismic works, there wouldn't be any news till 2014, 2015 at the best. In the OpEx per barrel, I don't have the figure with me. I don't work in refining with OpEx per barrel, but you will receive the data through our I&R people. Okay?
Sierra Leone and Liberia?
Sierra Leone and Liberia, we have the disappointment of Mercury 2, our people are analyzing and are studying back all the registers we get from the wells, both Mercury 1, Mercury 2, plus Jupiter. They are studying it, I don't have any extra input to provide you. Okay?
Okay, thank you.
We have next question, Marc Kofler from Macquarie.
Hi there, everyone. Just two very quick questions, please. Given the moving parts around the exploration activity for this year, I was just wondering if there's any material updates in terms of the total exploration budget for this year. Also, given some of that exploration activity previously penciled in for this year is moving into next, I just wanted to clarify if you're still comfortable with around that sort of EUR 1 billion spend on exploration next year. Secondly, just very quickly, I think there was some downtime at Shenzi during the third quarter. Just wondering if you're able to quantify that. Thanks.
Well, in relation with the exploration part, no major changes. I think that the Libyan wells are really cheap. We are talking there EUR 2 million, EUR 3 million, up to EUR 5 million at the maximum per well, no impact there. Also, those that are delayed, as mentioned before with penciled, are delayed from December to January. Within December, there was no more any extra charge. Basically no change in the budget. In relation with Shenzi, I think that our net loss was something as 1,000 barrels per day during four days or something like that. It was totally minor, the impact of the hurricane. Okay?
That's great. Thanks very much.
Thank you, Marc. We have now Thomas Adolff from Credit Suisse. Thomas, good morning.
Morning. Thanks for taking my questions. Three sets of question, please. First, on
The transaction you did recently vis-à-vis your Gas Nat stake, and obviously some other derivatives, stating that you hedged out the Gas Nat share price risk. Can you confirm that this is completely, fully hedged out, so there's no risks to, let's say, if Gas Nat share prices fall? That's the first one. The second one is on refining. Obviously, you just said the utilization rate's gone up to 80%, but in view of the longer-term outlook for European demand, and capacity being added elsewhere in the world, it's fair to assume that utilization rates in Europe will never really go up. If anything, they will continue to decline. Have you thought about any sort of closures of certain CDU units in one of your refineries, like a Total that was Gonfreville or Exxon was the Fawley Refinery? Is that something you would consider doing?
Just finally, on Argentina. Obviously, you had the YPF bylaws. Argentina is ignoring that. I was wondering whether you actually had any other insurances in place, like the Lloyd's political risk insurance, and also following on those recent comments by President Chávez, pushing Repsol for a friendly agreement with Argentina. Can you update us on whether you've had any negotiations or any discussions or approaches with the Argentine government? Thank you very much.
Well, starting by the last part, no. We didn't have any contact from the Argentine authorities. Also one of our concern refers to all the information that the company basically is not providing to the market. We think that they are withholding information. Having said so, and in that, I can include some of the discoveries we have to read in the press, as Orejano and D-129, which were discovered several months ago. I think that Chávez comment, we agree with it. We would be really happy to really close a pact. We have been able to negotiate with many governments. We did so in Bolivia, we did so in Ecuador, we did it in Libya, we did it in the main, Venezuela. I think that Repsol attitude has been totally open to any negotiation process.
I think it's a good idea what Chávez is mentioning. Till we receive this possibility, we have to keep moving in order to protect our shareholders. That's it. In relation with Gas Natural, yes, it's fully hedged. Finally, in relation with refining. As I mentioned, I agree with you that the improvement of refining in Europe is not going to come by the demand side. We are not thinking any closing at all. What we did in the past, and we finished last year, was to put all our refining system in the first quartile. Even if we have low margins, the rest, our peers in Europe, will be losing a fortune. To me, the final picture is closings are needed.
I know that in some countries, the social impact is important, at the end, especially those that are not, I would say, big companies, will not stand for long. Look at Petroplus last year. We'll see a lot of this. There is a lot of small refineries in Europe not integrated, with low conversion, that are going to be the first victims. They will become logistics terminals sooner than later. Till then, at least we know that we will be in the top quartile and obtaining positive results and positive cash. I agree with you in your general view about refining in Europe. Did I answer you everything?
Yeah, thanks. If I can just have a quick follow-up on, if you can remind us on the maturity of your committed undrawn credit facility. I think you mentioned it was EUR 4.5 billion or so. If you can update us on the maturity. Thank you.
In the maturity, we only have short-term, approximately EUR 1 billion. The rest, which is EUR 3.7 plus EUR 1, the other EUR 3.7 are long-term. Okay?
Okay. Thank you very much.
Welcome.
Thank you, Thomas. We now have from Goldman Sachs, Henri Patricot. Henry, please go ahead with your questions.
Hi, everyone. Thanks very much, Miguel, for taking my questions. I've just got three quick questions, please. First of all, in your discussions with the rating agencies, what's the most important metric that they want you to meet in order to maintain your investment grade rating? Secondly, could I just confirm what you said earlier on the call that the total debt that you consolidate from the LNG business is EUR 1 billion of straight net debts plus EUR 3 billion of finance leases? Thirdly, just on Kinteroni, I noticed you'd start up in the fourth quarter of this year. Should I assume that's towards the beginning of the quarter or the end of the quarter for first production? Thank you.
Not saying that 150,000 barrels per day.
Basically, the rating agencies would look for is a division. They put on top of it the cash flow you generate, but a cash flow with their considerations. It's not the cash flow we normally use. They divide that by a debt. That debt is not the debt we are used to. It's also a type of debt they consider. In their metrics, with that, I will answer the second question. They consider the leases. They calculate the present value of these leases and consider it as debt today. In that sense, our LNG division has approximately EUR 1 billion in debt. With the considerations of the agencies, they consider EUR 4 billion. The difference, these EUR 3 billion, are due to the leases, basically the tankers and the pipelines in Canada and in the U.S. Okay?
Thank you.
Finally, in relation with Kinteroni, it would be fourth quarter. If I have to bet, I will go by the end of November.
Great. Thanks very much. Sorry, just to follow up quickly on LNG. Is it then your impression from the ratings agency that if you were to sell this entire business, obviously it depends on the price you get, but that that would be enough to maintain the investment grade and you therefore wouldn't need to convert the preference shares?
It's something we have to reach. We don't know yet which is going to be the procedures we are going to make. I think that the perspective from the rating agencies would be by far more positive if we are able to sell the LNG. Think that the equation they put, and I'm talking just by mine, but probably the EBITDA we have in that division is approximately EUR 600 billion, and if you divide that by the EUR 4 billion they are considering, as you realize that the ratio is quite below what the agencies are asking for as the investment grade. My perception is that it would be, I would say, an important step to keep the investment grade.
That's great. Thanks very much.
Thank you.
Thank you very much, Henry, for your questions. We have now from SocGen, Irene Himona. Please go ahead.
Good afternoon. I had two questions, please. First of all, going back to YPF, you're carrying EUR 5.6 billion as the net book value. Clearly, the credit agencies would assume that is zero. You've already written off the Petersen Group loans. Do you anticipate a time when you might take a write-off on that YPF value? And related to that, is there any time frame for when you may change accounting on Gas Natural away from consolidation to equity accounting?
My second question, it's been obviously discussed at length, but do you perceive that as far as the credit agencies are concerned, there is some sort of, let's say, time limit whereby you have to achieve certain financial milestones by year-end or by a specific date, or is it purely the direction of, for example, asset disposals, that as long as you are progressing on that route, they're happy to see that continue? Is there a time limit on the metrics? Thank you.
In relation with the YPF accounting talking, there would be a change once. Right now we have a financial asset there. At a given moment, once the negotiation started, and we have sent a letter to the Argentine authorities to start conversation with no answer till the moment. Once the Argentine government establish a price, that would be the moment in which our valuation will have to be modified from a financial investment into an account receivable. Even if we ask for more, at that moment, we will have to account the 51% for the proposal of the Argentinians. At that moment, the account will change either in one direction or the other. We should assume a write-off or a net gain, but the moment would be that in which the Argentine authorities offers a compensation.
In relation with the time frame to account for Gas Natural, legally it would be 2014. One idea we are thinking of is to work on the pro forma to start giving you some flavor, but legally it would be January 2014. In relation with the last one, there is no date. With the rating agencies, basically what they want is a clear direction from the company and delivery I think that right now, till now, both are in the good pace. There's no fixed date. It's more direction. What we do is to keep permanent contact with them to let them know how we are moving and why we are taking the decisions we are taking. Okay, Irene?
Thank you, Miguel.
You're welcome.
We have next question from Morgan Stanley from the Trade Research Department, Sasikanth Chilukuru. Sabi, please go ahead with your questions.
Hi. Thanks for taking my question. I promise I'll not ask you anything on LNG. I have two questions now. On your downstream business, what do you think can be a good approximation of your operating income at what you want to end by end of this year? Like assuming maybe 90/95, a bit depressed oil price. What can be the operating income guidance you can have at the end of 2012? Second, on the Cepsa shares, the 5% you have, would you consider anything on the strategic, placing it with a strategic buyer? If you come to the markets now or maybe three or four months, your stock price is too depressed and you can't really get EUR 1.3 billion. Do you want to place it with a strategic buyer?
Thirdly, and most importantly, if your ratings are downgraded to non-investment grade with no fault of your own, like for example, if Spain goes to BA3BB minus, Repsol may have to come down to non-investment grade. Will you still stick to this plan or this balance sheet repair plan that you have outlined, or will you say that, "Okay, look, our ratings have been downgraded, this plan doesn't really hold." Do you think this plan will still hold asset sales or conversion, et cetera, et cetera, in case if it's downgraded beyond your control? Thanks.
In relation with the downstream at the current cost of supply, I would say it would be around EUR 1.1 billion. This is my estimate today. In relation with the preference shares, as mentioned, it's the last bullet. We still have a lot of room to work with other ideas. Sorry, the treasury stock, sorry. It's our last bullet, we still have a lot of things to work on before taking care of those. We haven't had a specific new shareholder already decided. It will be the last bullet and the last area to work in. The final question?
It was the investment grade.
Oh, yeah, the investment grade. As you know, any company can be as far as two notches above their country based on how dependent its financials, its banks, and its business from the country in which it is working. I think that if we follow the divestment plan we are in, we have very good possibilities that even in the case of a loss of the investment grade of the Kingdom of Spain, we would be above it. We have to keep working and do our best, we will see. It's difficult to make that guesses. What I can tell you is that we are putting everything on the table to guarantee the investment grade, even in the worst scenario. Okay?
Okay. Thank you.
Okay, Sabi?
Thank you so much. Thank you.
Thank you, Sabi. We now have from Santander, Jason Kenney. Jason, please go ahead.
Hi there. Firstly, just a small request, if I may. I was wondering if it's possible to put the breakdown by turnover back into the quarterly results release. It would certainly be helpful for my modeling. Secondly, a question. Can you give me the timing of a return to the Guyana well? Sorry if you did mention that earlier, I did have an interruption in the call. When you expect to start redrilling back in Guyana? Going back to LNG, maybe a slightly different angle. In the May 29th presentation, you showed a consensus, some of the parts detail for the LNG business at EUR 2.7 billion at the end of 2011 and EUR 2.4 billion at the end of May 2012. I'm just wondering your view on either of those numbers, which both look particularly low in certainly my estimations.
In relation with the break, Mavi will give you a call. We will say sorry if you don't like the breakdown. In the second one, it's going to depend much in the conversations with the Guyana government, which is what we are involved right now. Still way too early to tell you anything, we expect to have the possibility to be working short term in the second well. In relation with the third one, those are your estimates, EUR 2.7, EUR 2.4. We will see. There are at least 10 different companies which are in the process, and normally, I don't like to advance the result of what third parties are going to put on the table. Okay?
Okay. Many thanks.
Thank you, Jason. We now have from BBVA, Luis Toledo. Please go ahead.
Most of my questions have been answered. Maybe a final one regarding tax rate. What are the reasons behind the guidance increase to 44%? If they are related to recent transactions, or is it a level we can consider reasonable going forward?
44 is the one we expect for the whole year in the existing conditions, and the shift from last year is basically dependent on the ups in division, and especially due to Libya. Okay, Luis?
Okay, perfect. Thanks.
Thank you, Luis. We have the last question from Merrill Lynch with Hootan. Hootan, good afternoon.
Afternoon, guys. Two questions. One, going back to the credit rating, obviously if we did see the sovereign getting downgraded beyond your control and you were then downgraded to junk status, would you consider playing with your domicile? Is that something the management has talked about? Also, coming back to YPF, with regards to the comments that we saw the president of Venezuela make regarding how you deal with the Argentine government will have direct implications on your assets in Venezuela. Has that changed the way that you're approaching the Argentine situation at all, or are you going to completely ignore those comments? Thank you.
Well, in relation with the first one, we are not going to modify our headquarters, so we will keep it in Madrid. Okay? We will see what happens. What we are is working and working heavily to have the most chances to keep the investment grade. In relation with Venezuela, you have to remember that we were the first company to reach an agreement in mixed. I think it was 2005, 2006. We are always open to negotiation, and we need really a response from the other side. Basically, I think it's a good approach, and we will see because we have to defend our shareholders, and till the moment, the only way we have to work out is. We'll be happy to reach an agreement, and if Mr. Chávez will help us in that process, for sure, it will be welcome. Okay?
Fantastic. Thank you, Miguel.
Thanks, Hootan. Thanks for being still the last one.
Sorry about that.
You were young when we started.
Okay. Thank you to all of you. We'll be sending the clarifications that were pending later this afternoon. Thank you again.