Welcome to the Repsol Third Quarter 2018 Results Conference Call. Today's conference will be conducted by Mr. Yosu Jon Imaz, CEO. A brief introduction will be given by Mr. Ramon Alvarez Pedrosa, Head of Investor Relations.
Please note that today's call will be recorded. I would now like to hand the call over to Mr. Ramon Alvarez Pedrosa, Head of Investor Relations. Sir, you may begin.
Thank you, operator. Welcome to Repsol's Q3 2018 results conference call. As the operator said, today's call will be hosted by Jose Jon Imas, our Chief Executive Officer, with other members of the executive team joining us here in Madrid. Before we start, I advise you to read our disclaimer. During these presentations, we may make forward looking statements, which are identified by the use of words such as will, expect or similar phrases.
Please note that actual results may differ materially depending on a number of factors as indicated in the disclaimer. I will now hand the conference call over to Joshua Jan. Thank you, Ramon, and
thank you to everyone online for attending this conference call setting out our 3rd quarter results. Today, I'd like to cover the following principal topics. Firstly, I will start with the key messages and main operational highlights for the quarter. Secondly, a summary of the financial results. And finally, an update on outlook for the end of the year.
Let me begin with the key messages of the quarter. At the macro level, the market environment has remained broadly in line with the previous quarter. Brent price consolidated its recent recovery, averaging $75 despite volatility during the period. 3rd quarter EBITDA at CCS and operating cash flow amounted to €1,900,000,000 and €1,600,000,000 respectively, without the material working capital build up this quarter. The cash generated by our operations more than cover our CapEx, interest payments, dividends and the purchase of €400,000,000 of treasury shares under our buyback program.
Net debt at the end of September stood at €2,300,000,000 a €400,000,000 reduction from the previous quarter. Moreover, liquidity amounted to around €9,300,000,000 including cash, deposits and undrawn committed credit lines. Let me underline that earlier this week Fitch improved its outlook for Repsol from stable to positive, maintaining its BBB rating. Upstream operations continue to be focused on the successful development of our projects on time and on budget, benefiting from a better commodity scenario and progressing on the high grading of our portfolio. Plant maintenance and lower volumes in Venezuela had a negative impact on quarterly production.
Under a strong oil price scenario, downstream results were in line with the 2nd quarter, impacted by the ongoing challenging environment in chemicals and of course, the seasonal effect in the results of the LPG and Gas and Power businesses. In low carbon, we continue progressing towards our strategic objectives and the transaction with Biesco is expected to be completed early in November. In addition, we have recently acquired the permits to develop a 2 64 megawatt solar project in Spain. With these two transactions, we will reach more than 70% of our 4.5 gigawatts of unregulated low emissions generation capacity target to 2025. Incorporate on September 4, we started implementation of a buyback program in connection to the share capital reduction approved by our Annual General Meeting in May, Including the shares purchased before the implementation of the program at the end of September, Repsol had bought 32,000,000 shares of the total 68,800,000 shares to be amortized.
The share capital production will be executed within a month after the buyback program is completed. Finally, on September 20, as you know, Caixabank announced its intention to divest its 9.3% stake in Repsol after 22 years as shareholder of the company. At the time of the announcement, half of that stake have already been sold in the market. The remaining position is being sold in an orderly way through a disposal program that will be complete before the end of Q1 of 2019. Moving now into the operational highlights of the quarter, starting with the upstream.
Our accumulated crude realization prices through September have evolved in line with the recovery of the main crude benchmarks in 2018. In contrast, gas realization prices have improved by 16% compared to an 8% decline of the Henry Hub Index. This is a consequence of our limited exposure to North American gas spot prices as most of our production is linked to Brent or another Liquids and Gas references. Our portfolio actions in the quarter included the exit from our positions in U. S.
Mid Continent, Romania and Angola. 3rd quarter production was impacted by planned maintenance in several assets and lower volumes in Venezuela due to lower gas demand in the domestic market. Quarterly volumes averaged 691,000 barrels of oil equivalent per day, a 4% decrease quarter on quarter and in line with the same period of 2017. In Libya, despite security conditions still being a concern, production averaged 35,000 net barrels per day. This is a 3,000 barrels per day reduction compared to the 2nd quarter and 10,000 barrels higher than in the same period of 2017.
Up to the end of September, the total group production has averaged 713,000 barrels per day. Development activity includes the ramp up of Regan in Nigeria, one of our most significant projects in Africa, which reached its plateau production level in August. In exploration, a total of 5 wells were finished in the quarter, 2 of them are currently under evaluation, while the remaining 3 were deemed unsuccessful. Moving now to the downstream and starting with refining. The margin indicator averaged $6.70 Compared to the Q2, the indicator was impacted by narrower heavy to light growth differentials, partially offset by the strengthening of the main product spreads.
Completion of all major planned maintenance in our refineries during the first half of the year allow us to increase our utilization rates in both installation and conversion units. In addition with all conversion capacity on stream during the full quarter, our unit CCS margin was able to generate a premium to the indicator. The chemicals business continued to face a challenging international environment, mostly driven by the increase in the price of naphtha and the production volumes were also affected by the turnaround of Sines that started up at the end of July. Compared to the Q2, the result of the marketing business was positively impacted by the driving season in Spain and Portugal, while seasonality affected LPG and Gas and Power negatively. Finally, our business in Peru finalized the development of the new gasoline desuperioration unit at the La Papilla refinery, which started operation in October.
This project completes a $741,000,000 investment that includes the diesel desulfurization unit that started up in October 2016. Moving on now to the financial results, I'll summarize the main figures for the Q3 of the year and how they compare with the same period of 2017. 3rd quarter 2018 CCS adjusted net income was €588,000,000 €60,000,000 higher than in the same period in 2017. Upstream adjusted net income was €368,000,000 a €220,000,000 increase compared to the Q3 in 2017, driven by higher prices and lower amortization, partially compensated by higher exploration expenses and taxes. In the Downstream division, the CCS adjusted net income was €336,000,000 in the quarter, €166,000,000 lower than in the same period of 2017, mostly due to our lower contribution from chemicals and refining and lower results in LPG and Gas and Power.
In corporate and others, the adjusted net income was €116,000,000 negative, probably in line with the same period in 2017. For further detail on Repsol's results, I encourage you to refer to the financial statements and accompanying documents that were released today. Before closing this first speech, let me now review the outlook to the end of 2018. Considering our progress during the 1st 9 months of the year, there are no material changes to our main financial and operating objective for 20 18. Our previous €4,000,000,000 guidance of total capital expenditure now sits at the higher end of our planning assumption range.
I mean, capital discipline is a must for me and for my management team, and we are going to deliver on that. The efficiency and digitalization programs are progressing across the whole organization having already delivered by the end September the full year targets set for 2018. In Venezuela, during the month of October, we have already received and Petrocarabubu are expected in November, allowing us to reach our cash objective for the year. Looking at our project's 4th quarter drilling activity in the first phase of Akacias in the CPO-nine block in Colombia continues with the objective of doubling production in 2019 with up potential FID for the full development of the field in first half of next year. In the Marcellus, drilling activity will be supported with the addition of a second rig starting in the Q4.
In Pascin, in the Gulf of Mexico, the 2 wells of the first phase have been drilled and development, and we'll continue towards achieving first production in 2019, in the first half of twenty nineteen. In Alaska, our 2 well appraisal campaign in the Pikka area is expected during the coming winter's window in order to confirm recoverable volumes and test the development concept. The appraisal phase of Sagittario in Brazil is expected to start during the first half of 2019. Finally, after getting the final investment decision, the development of Angelin in Trinidad and Tobago is progressing on track with first gas expected during the Q1 of 2019. In the Downstream Unit, the refining margin indicator has averaged around $5 in October, following the sharp reduction in gasoline spreads and narrower heavy to light crude differentials, but these effects have been partially reverted at the last week of the month.
And the indicator is today at a level of 6 point $40 $6.50 per barrel and that is the level in these last days of October reverting these 2, 3 weeks where we suffer these effects from the market. In chemicals, we have adjusted our full year EBIT forecast from €350,000,000 to around €290,000,000 in 20 18, driven by the worst environment and unexpected operational issues earlier in the year. In conclusion, as we faced the last quarter of 2018, we are confident on delivering on all the key objectives set in the 1st year of our strategic update. Supported by an improving commodity price scenario, Upstream has become the main cash flow contributor of the company. This division continues to work to further reduce its cost base and high grade its portfolio, sustaining current production level and developing our projects in an efficient way.
This better price environment is helping us for accelerating our portfolio rotation, completing the exit from positioning non core assets or from areas where we don't have an optimal scale. At the group level, our accumulated results through September demonstrate the benefits of our integrated model. Coming from record levels of refining and chemical margins in recent years, the downstream division continues to generate significant cash flow in a much higher oil price scenario. Moreover, Repsol is perfectly positioned to benefit from the upcoming IMO regulation. And we continue working towards optimizing our refining operations to maximize the value captured by 2020.
The chemical business enjoyed a very favorable environment in the past 3, 4 years, leading to our record level performance in 20 16 2017. The significant positive results generated in 2018 under a more challenging scenario, not only from the international margins point of view, but also from the operational point of view that was overcome and is over, are solid evidence of the turnaround achieved in this business by investing during the previous down cycle. In low carbon, we are quickly delivering on our targets and the Viesco transaction will be the core of our inorganic growth to 2020, becoming the cornerstone of our future low emission gas and power business. Let me finalize by underlining that under a sustained higher oil scenario, our strong balance sheet and financial flexibility will allow us to accelerate our projects while delivering our objective of increasing shares holder compensation by 8% annually as committed in our recent strategic update. With that, I now hand the call back to Ramon, who will lead us through the question and answer session.
Thank you.
Thank you very much, Josu Jon. Before moving to the Q and A session, 2 previous advices. 1 is that in case you run into technical problems during the webcast or conference call, please address any problems to our e mail address investorsrelation.drepsol.com and we will contact you immediately to try to solve it. Also before moving to the Q and A session, I would like the operator to remind us of the process to ask a question. Please go ahead.
Thank you. Let me move to the Q and A session then. Our first question comes from Flora Trinde from Caixabank BPI.
Yes, hello. Good morning. Thanks for taking my questions. I have a couple of questions on guidance. You have maintained the CapEx target of €4,000,000,000 But considering the CapEx in the 9 months, it should mean a strong concentration in Q4.
Is there a specific reason for this concentration? Or are we likely to see a lower figure by year end? And then the second question is on the EBITDA. I think you had previously mentioned a €7,900,000,000 target for the EBITDA. Can you just update that with the recent cut in chemicals and also the update on oil prices we are seeing?
Thank you.
[SPEAKER RAMON ALVAREZ
PEDROSA:] Thank you, Flora. I mean, first of all, let me say that CapEx is going to be €4,000,000,000 as I said before that is the higher range of our approach today at December 31. And in this CapEx is of course, included the €750,000,000 that we are going to pay for Biesco, the asset of Biesco in coming days. So I mean the main reason of this concentration of course is this additional CapEx. And as I said before, I mean, EUR 4,000,000,000 is the high range of our expectation, our guidance today.
Because as I underlined before, I mean capital discipline has to be a must in the company. That is written on stone in the management team and the whole people from this company. As we said before in the strategic update in June, we are going to be very cautious in the disposal, the application of CapEx, guaranteeing that the return is going to come. And let me say that one of the main reasons for this reduction in the CapEx figure is that we are more efficient than expected delivering the growth projects coming mainly from the upstream side, but also projects coming from the downstream. I mean, we are going to gain €300,000,000 in efficiencies over the whole year, guaranteeing that the projects are on track.
We are guaranteeing that the production projects in the upstream are on track with no delay. The CPO-nine, the first phase is going to is growing and is going to be finished in the Q1 of 2019 to take the FID in the first half of twenty nineteen of the second phase. The basket is going to be on track. The IME project is going to be also on track. We are going to apply the second rig of the Marcellus in the last quarter.
I mean all the growth is on track. We are very efficient applying this CapEx and that is going to be the higher range of the figure at the end of the year. As you said, I talked about €79,000,000,000 for the EBITDA of the year in July. I mean, today that is also the guidance for the end of the year, €7,900,000,000 of EBITDA at the end of the year. We maintain this guidance.
It's true, as you said that in the chemical side, I remember that they talk about 350 3.50 million of EBIT and we are going to be in our figure 2 €90,000,000 more or less €60,000,000 below the figure that we commit as guidance in July. The main reason is going to be that the turnaround of Sines was a bit longer than expected. And also the international margins level we have experienced over the last weeks. But let me say that after overcoming this reliability problems and operational maintenance and turnarounds, payoffs we have in our crackers. I mean, even at these oil prices, I think that talking about €350,000,000 as EBIT of our chemical business for 2019, it could be a good approach.
Thank you. [SPEAKER RAMON ALVAREZ PEDROSA:]
Thank you, Flora. Our next question comes from Thomas Klaan from Royal Bank of Canada.
Hi there. Thank you for taking my question. I just had one on Venezuela. You were talking about it before, and you also mentioned it had a negative impact on production in the quarter. Can you quantify that a bit more and provide any more color?
Thank you.
[SPEAKER JOSE HUMBERTO ACOSTA MARTIN:]
Yes, Tomas, of course. In Venezuela, I mean, I think that the economic and social situation is complex. And over this quarter, we were impacted by our reduction of production not because we had any kind of any decline in the gas production not because there are any operational problem, but because some of our clients that are using this gas for producing power in thermal plants in they were shut down. So we have a reduction of demand because the operational problems in some plants that are buying our gas in Venezuela. For that reason, the gas production was at around 20,000 barrels equivalent per day in the Q3.
And let me say that, I mean, on top of that, as I said before, we have some turnarounds and maintenance brimming and planned maintenance periods in the UK, in Monarch. We also have something like that in the Marcellus, in the PM3, in Malaysia, in BPTT, in and Tobago and so on and also in Norway, in Gudrun. But this factor of the reduction of production in Venezuela due to this reduction of demand was behind, I mean, part of the production reduction in the 3rd quarter. But as I said, I mean, even in this complex economic context in the region and in the country. I mean, we have some positive sounds coming from Venezuela in October.
We were paid with 2 cargoes that we have already received them in our plants. And on top of that, they have committed 2 more cargoes in the framework of the financial agreement of Petroqueria in coming weeks before the end of the year and 2 more related to the receivables of the gas of carbon. I mean, I don't know what is going to happen, but taking into account, let me say upfront approach to the picture. I think that the target of being neutral in free cash flow terms in Venezuela this year is going to be there. Thank you.
Thank you, Thomas. Our next question comes from Thomas Adolff from Credit Suisse.
Good afternoon. A couple of questions for me, please. Firstly, just on net debt. Obviously, you had very strong cash flow from operations this quarter, which saw net debt go down to 2,300,000,000. I remember your guidance previously for year end net debt was around €3,500,000,000 And I can get to that as you do quite a bit of buybacks in the Q4.
Can you perhaps talk about what where you see net debt ending and then maybe discuss the moving parts please? And secondly, just in downstream, yes, refining margins seem to have recovered last week and including this week. But I wonder since you use about 50% of heavy crude with Maya being possibly the best indicator for your indicator margin. Whether it's reached a level where it makes sense to go to alternatives? Thank you.
Thank you, Thomas. I mean, first of all, I think that the figure that I have in mind that I talk about, but it's very close to the figure you said, it was €3,600,000,000 in July. But anyway, €3,500,000,000,000,000,000,000,000,000,000,000, that our cargo delivered in the last day of December could move €100,000,000 to €250,000,000 up or down the net debt figure. I mean, we have to take into account that this 4th quarter, we are going to cash out EUR 750,000,000 to pay the assets of Diesco. On top of that, we are going to complete in coming before December 21.
I'm taking into account the rhythm we have that in October 26, we only have EUR 2,900,000 more EUR 2.2 sorry, EUR 8,000,000 €9,000,000 of additional shares to be bought. So that means that we are going to need €600,000,000 in the quarter for the buyback. And on top of that, because the divestment of Gas Natural, we have to anticipate this quarter in the Q4 €400,000,000 to the Spanish treasury and we are going to be paid back in January 2020. So we had anticipation of taxes. So taking into account this combined effect of €800,000,000 approach to pay Biesco 750,000,000 €400,000,000 for the anticipation of taxes for the divestment of the disposal of Gas Naturale, plus €600,000,000 for the buyback in this quarter.
Taking into account these figures and taking into account what we forecast in terms of cash generation coming from the operations in this quarter, I think that this figure of 3.6 I mentioned before could be our most accurate approach for the end of the year. But as I said before, taking into account that we are going to anticipate €400,000,000 that is going to come back and guaranteeing the whole fulfillment of the buyback program. So 3.6 percent, the figure I anticipated in July is today my best approach. But as I said before, we are fully focused on the cash generation and on the efficiency in CapEx. So myself and the whole team is going to do our best if we could, of course, to improve this figure.
Talking about the refining margins, I mean, today we are at $6.5 per barrel in the current business scenario. The average in the 1st 9 months of the year has been $6.9 per barrel. I mean, I think at the end of the year, we are going to be very close to this figure. Perhaps we could be $0.1 or $0.2 below, because the 1st 2, 3 weeks of October that as you know, we were I mean, in October, we could have an average of 5. So that could impact it perhaps in $0.1 per barrel or something like that in the average of the year, but we are going to be there.
I mean, you are right, the spread of heavy oil is impact either in a positive or negative way in our feedstock. We have seen over the last 3 years, I mean, ups and downs. We are adapting our programming every day depending on the spreads and the prices in the market. I mean, if we see that increasing the feedstock of medium API, crude oils, euro and so on and reducing the heavy oil, we are optimizing the basket. I mean, we are going to do that to be sure about that.
All in all, I think that today, the refining margin is not going to be far from $8, $6.8 sorry, dollars 6.9 dollars $6.8 per barrel at the end of the year. And we can't forget that we are impacted by the feedstock in terms of heavy oil, but also a 55% of our yield is middle distillates. I mean, this winter that is now coming and that they arrive to the Iberian Peninsula last week in very hard terms is going to have also an impact on the middle distillate spread. So all in all, we are going to be there. Thank you.
Great.
Thank you. Thanks.
Thank you very much, Thomas. Our next question comes from Lydia Rainforth from Barclays.
Thanks and good afternoon. Two questions please. Firstly, in the strategy presentation, you did talk about the extra cash being used to accelerate the growth projects that you have. Can I just ask when are you prepared to trigger that acceleration or what would make you think actually there are more we can pursue the more projects? And then secondly, and I'm sorry to say a boring question, but what was behind the strong XT affiliates contribution in the quarter?
Thanks.
Lydia, sorry, can you repeat
the second question? The second one, please, Lydia, I have some problems with the sound.
The Equity Affiliates contribution looks very strong for the quarter. And I didn't know if that was just the U. K. And the Sinopec or the Sinopec JV doing particularly well.
So going to your first question, I mean, first of all, Lydia, let me underline that I have here in front of me, I mean, in my office here and everywhere, the cash flow increase that we committed in our strategic update coming from operations. And I mean this target of improving €1,900,000,000 by 2020 per year, the cash flow coming from the operations at flat price of commodities, I mean, we take the case of $50 per barrel is going to be written on the stone in every corner of the company in coming 3 years. And let me say, in the first half of the year, and I anticipated this effect that the $20 per barrel more in Brent price terms coming from the upstream, they were going to be used to build the inventories of the downstream because the weight that the downstream has in Repsol. I mean, we were going to start seeing this cash effect in the Q1 and we are there. We are on track and we are going to fulfill what we committed in our strategic update.
We are going to see quarter after quarter better environment sometimes, worse environments sometimes, but we are going to do our best to deliver what we commit in cash terms in our strategic update. That is the main target, that is the main driver and that is the real objective I have. And as you said, Lydia, if we fulfill and we deliver what we said, we are going to have additional cash because of course, we are going to fulfill and we are going to deliver the buyback program for the whole 3 years period to avoid any kind of dilution coming from the scrip dividend. But on top of that, we are going to use this cash for accelerating some projects. Some of them, of course, the commercialization side in the gas and power in Spain, now that we are integrating the asset of Biesco, the service station program in Mexico, the trading expansion program, the international lubricant expansion program.
And of course, we have also some growth projects in the upstream, potential bolt on projects in areas where we could have synergies like U. K. And so on. The potential acceleration, I mean, in the Marcellus where we are going to invest in the 2nd rig this quarter that is going to add I can't exact figure, but 12,000, 14,000 barrels per day in gas production in the Marcellus. We are going to analyze what we could do in the future development in the Gulf of Mexico and thinking in the back skin, in Leon, in Censy and so on.
And of course, it will be our target to analyze the possibility to take a potential FID in Sidesteri Leci in Algeria also in 2019. On top of that, we are going to accelerate the development of the CPO-nine in Colombia after the early development we are promoting in this last month. So we have projects for that. The organic growth to fulfill what we commit in our strategic update is going to be the priority. And let me say, we have the financial flexibility to do that.
And the only thing we are going to look for, of course, is the high return of these projects to invest in. And talking about the affiliate companies, I think and we could check this figure later if you like with the higher, but we are talking mainly from Trinidad and Tobago, BPTT. Brazil, I think that Brazil, the JV we have with Sinopec is intact in a very positive way. And we also have the JV in UK. As you could imagine Lydia at these oil prices UK and Brazil are 2 JVs that are increasing in a quite significant way the profits in this quarter.
Thank you, Lydia.
Wonderful. Thank you.
Thank you, Lydia. Our next question comes from Rajal Gutar from Bank of America.
Great. Thank you for taking my questions. I had 3, please. First one on working capital. I guess, for the 1st 9 months of the year, you've had quite a significant build and with limited change over the Q3.
And I think at the second quarter results, you mentioned you expected about $500,000,000 of that working capital to unwind over the course of the year. Is that still a valid assumption going forward? Secondly, on Venezuela, can you just remind us on where the receivable stands at the end of 3Q and whether the cargoes that you received in October had much of an impact on that number? And then finally, just looking at the trading business in the Q4, how would you characterize your expectations on performance there? Because we've seen trading deteriorate over the quarter since the beginning of the year.
So I wondered if you have any comments on that. Thank you very much.
Thank you, Rahul. I mean, first of all, the working capital has been flat in the 3rd quarter. I mean, as I said before, we increased in €1,400,000,000 the working capital over the first half. And I mean, all in all, we could think that more or less €800,000,000 could be associated to inventories due to the increase in commodity prices, €200,000,000 could be linked to the growth in some commercial businesses of the downstream, including the working capital there, because the inventory effect €300,000,000 over the whole year could be associated to Venezuela and the receivables from that country and €100,000,000 could be linked to the price effect on inventories in the upstream side. So €1,400,000,000 over the first half of the year and flat in the Q3.
I mean, in terms of working capital, I work on the assumption that we are going to be also flat at this oil prices in the Q4. We are going to work on those assumptions. I mean, but you need I mean, 1 cargo, the last day of the year could move this picture in €100,000,000 or €180,000,000 But that is our target for the end of the year. From now on, I mean, we are not building working capital, we are not building inventories. Talking about the trading business, I mean, the trading business for Repsol is performing in a good way, is increasing in terms of P and L.
Perhaps there is an impact in seasonal terms because I have to check it, but the Gas and Power, the gas American business in North America is included sometimes with the trading activity. And you know that for that season for North America, our gas commercialization and our Canaport activity, I mean, is not in the best season in summer. But the trading is going to increase over these 3 years and is going to increase the contribution to the P and L of the company and this year is going to be there. Sometimes that is a volatile business, but the trend is clear for us. Talking about the receivables, I mean, as I said before, we could have today at the end of the Q3, a total exposure to Venezuela of 920,000,000 dollars €800,000,000 So we are maintaining the total exposure we had before in the second quarter.
Here, we are including everything, equity, loans, receivables and so on. It's the total exposure in financial terms we have to the country. I mean, I think that the receivables that in the 3rd the receivables were or the bills were paid in October, so they are not in the 3rd quarter. I mean, no dollar coming from Venezuela in the 3rd quarter. These cargoes arrived and came in October and our expectation in November December is, I mean, being very prudent because I know what the situation in economic terms is in the country, quite complex.
And knowing that, I mean, I work under the assumption of maintaining this exposure to Venezuela at the end of the year in financial terms and being neutral in free cash flow terms over the whole year in Venezuela. That's the closest assumption I could give you now, I mean, taking into account that there are some factors that today, as I said before, they are not in my hands.
[SPEAKER RAMON
ALVAREZ PEDROSA:] Thank you.
Thank you, Rahul. Our next question comes from Alessandro Pozzi of Mediobanca.
Thank you. I have 2. The first one is in Libya. I think production in the country now is back above 1,000,000 barrel. And I was wondering if we could say that the situation in Libya now looks more stable.
And if it is, just wondering whether you'd be willing to deploy a bit more funds to grow volumes there. And I was wondering how much you're planning to produce from Libya in during Q4. And also a second question on the average gas realizations. As you mentioned, they performed really well. I was wondering if you can give us a bit more color on the various moving parts there.
And also given that heavy up now is around 3.2, 3.3, They should provide a nice boost to our margins in North America, absolute margins in North America. I was wondering if you can give us maybe an update on the economics in the Marcellus as well. Thank you.
[SPEAKER JOSE HUMBERTO
ACOSTA MARTIN:] Thank you, Alessandro. I mean, as you said, the goods coming from the production in Libya are good news. This quarter, we have had an average of 35,000 net barrels per day. For Repsol, 2,000 barrels per day lower than the average of the 1st 6 months, because we had in the last days of July some security concerns in the area and we reduced the production. Our best guidance for the year and taking into account that we are talking about a country with a complex security concern could be at around 38 1,000 barrels per day for the whole year.
That means that the 4 quarter, I mean, the asset is performing in the right way. I mean, the concerns about the stability of the country are there, but let me say, I think that this is important, the oil production in Libya, because Libya is taking the taxes and the cash coming from the operation and all that is helping to stabilize the country, improving the standard of lives of people. And I think that we are we could enter in a virtuous circle in some way. But as I said before, I mean, that is not in our hands. We see that the situation being complex, being challenging could be in stability terms a bit better than it was 2, 3 years ago.
But anyway, I mean, we try, of course, to preserve the security of our people, the safety of our operations. And in this framework we try to optimize the performance of the assets. And I mean and we are of course open to work in Libya and we are also open of course in the framework of a reasonable risk return ratio to explore also new opportunities in Libya being prudent from the financial point of view. But I think that in the complex situation of the country, we have to work together and we are working together with the National Oil Company and with Mr. Sanada to collaborate with them in order to improve the situation of the sector in Libya and increasing, of course, the standard of life of people in Libya, because all that is also good news for the stability of the country.
Talking about the gas prices, I mean, first of all, let me say that in if we take the whole gas production of Repsol that you know that is a 66%, 67% of our whole production, 30% of this production is related to Harvey Hap, 30% to some others international hubs, MBP, J, Kilometers and so on, 20% more or less is Brent, Brent related directly and 20% local fixed prices. I mean, I'm talking for instance, the Spanish heavy hub or heavy hub, sorry, Spanish, I was thinking the Spanish electric pool price or some other local contracts. So for that reason, you could see that even in another scenario where the hybrid hub was down an 8% this quarter, we increased in a significant way the realization price of our gas production. In the case of Marcellus, I mean, I have to remind that the breakeven of this second rig project is in $2.4 $2.5 per million of Btu. That means that I mean, taking into account the current sum of $3.2 or $3.3 per million of BTUs of the heavy hub and the expectation we have for coming 2, 3 years, I mean, we are quite we rely on the profitability of this 2nd rig investment that is going to give us even a $2.5 a positive free cash flow.
Thank you, Alessandro.
Thank you, Aleksandro. Next question comes from Rob Pulley from Morgan Stanley.
Hi, gentlemen. Good afternoon. Just one question remaining from me and apologies if it's been touched on throughout the Q and A. But as I remember, you have a strategy of actively managing the upstream portfolio and actually high grading by I think the idea was to sell sort of 300 barrels, which were maybe less attractive to fund buying 100 barrels, which were more attractive. Can you just give us an update on that strategy, whether that's still the case?
Obviously, you've talked about your CapEx plans and we see the progress there. But how about the active management of the portfolio? Thank you very much.
[SPEAKER MARTIN PEREZ DE SOLAY:]
Thank you. We have taken advantage of this quarter to let me say, I'm going to use perhaps an appropriate word to clean a bit our portfolio and to exit from some countries or some assets where we had either low margins or low expectations. We exit from Romania in the Q3. We dispose our mid continent asset that it wasn't in the best quartile, let me say, of our portfolio. We disposed what we had in Angola.
And we also disposed and we are in the process of permits and so on to conclude this process in coming months. Our assets and some of our assets in Southeast Asia, mainly in the area of Papua. So that means that we are taking advantage of this situation to reduce the scope of countries where we operate to increase the margin per barrel. And as you said, we have to complement all that with perhaps a growth, a new acquisition. At the moment, this growth is organic.
The second week of Marcelo is a good example. I mean, that I don't discard. I mean, some kind of prudent acquisition of new barrels. But let me say, I only going to buy new barrels for the upstream if we could guarantee that even a low oil prices, we could have good returns. And that means that if we are buying assets when the oil price is at $70, dollars 75 per barrel, we have 2 options.
I mean, to take the risk of destroy value for the future and that is not going to be our option. I mean, I prefer, let me say to be conservative, to be moderate, to be very prudent in the capital discipline, in the capital allocation discipline or we could add some investment and that is the way we are exploring of having bolt on acquisitions, adding some new barrels perhaps in areas where we could have clear synergies, clear operational logistics synergies, why not a pool, significant pool of tax credits from the past where we could have, let me say, additional advantages related to some other potential buyers. I mean, we are exploring these possibilities that is open, but I mean I'm going to be very proud. My target written on stone is to fulfill the strategic update to rely mainly on the organic side to increase the cash flow coming from the operations, being very focused on digital efficiency, capital discipline, maintaining the financial prudency in the company, I mean, and relying on the organic growth, but all that is compatible if we could have this kind of, let me say, opportunistic and
bolt on operation where we could add new barrels with significant advantages. Thank you. Thank you, Rob. Our next question comes from Matt Loftin from JPMorgan.
Afternoon, gentlemen. Thanks for taking the questions. 2, if I could, please. I mean, first, 5, 6 months on from the strategic plan, I mean, it sounds like underlying progress on the efficiency and digitization led cash flow initiatives has been very strong. If you look forward, what are some of the key next steps?
How much cash flow do you now expect these programs to contribute in 2019? And is there a case that the more work you do on them, incremental upside starts to emerge? And then secondly, on Chemicals, coming back to the digit Synez and looking forward in terms of the operational outlook, can you confirm that Synez is now fully back and stable in utilization terms and also outline the maintenance requirements in the Chemicals business for 2019? Thank you.
So thank you, Matt. I mean, in terms of efficiency and utilization, my message is we are on track. We committed in June. Anyway, visual that in February in the year presentation of results, I'm going to take advantage to describe the figure in a more accurate way, showing that we are fulfilling the commitments we take in June. But I mean, I could anticipate that we had a target in the digital side for this year of €90,000,000 of new cash coming either for new margins or for cost reduction coming from the digital program.
I mean, and in this Q3, I mean, an 85%, 90% of this target has been achieved. And today, this €300,000,000 of new free cash flow coming from the digital I anticipated, I committed in June by 20 20, I mean, we are going to be fully on track. So if we take there is, let me say on the slide that I love a lot that is in our strategic update in June, we presented the increase of the cash flow coming from the operations over these 3 years, 2018, 2019 2020 by 2020, taking the assumption of a flat commodity prices. I mean, my message is, we are on track of achieving the targets by 2020 we committed in June. Anyway, I'm going to give you some more flavor and more accurate and precise figures about all that at the end of the year in the presentation of result.
I'm going to take advantage of this presentation to show that when we are talking about the efficiencies on digital, I mean, and I suppose that after some years of fulfilling all our commitments in term of efficiency, we have the reliability to say that, that when we talk about that, that is not blah, blah, blah. That is the whole effort of the company that is going to deliver these figures at the end of the year. Talking about Sines, yes, I mean, it was an operational penalty we have this spring. All that is over. We are working in a stable way since July 25, 26 more or less.
And I mean today, I was checking now in my iPad the figure in operational terms, I mean today Sines is operating on 95% of the operation. And of course, this figure is going to be there. And the maintenance for 2019, I mean, taking about the maintenance, we have some maintenance in the refining side in 2019, but mainly to prepare the plants for capturing, let me say, the wind force coming from the IMO in 2020. I remember that we have the FCC and the vacuum unit in Coruna in 2019. We also have the FCC of Petronor, all the hydro treatment including hydrocracker of Cartagena in 2019.
And it seems to me that we also have in the 3rd quarter the maintenance period of Tarragona, the cracker of Tarragona in the chemical side in 2019. And I mean, I have some people from my team, I think that I'm not forgetting any relevant maintenance program in 2019. Thank you.
[SPEAKER RAMON ALVAREZ PEDROSA:]
Thank you, Marc. Good afternoon. [SPEAKER RAMON ALVAREZ PEDROSA:] Our next question comes from Michele Della Vigna from Goldman Sachs.
Thank you for taking my questions. 2, if I may. The first one is on Viesco. You're going to close that transaction next month. I was wondering if you could give us some visibility of what you expect that to contribute to earnings in 2019 and how much you intend to invest organically in growing that business?
And then secondly, a very clear message on increased activity in the Marcellus as you have lowered costs there. I was wondering if you could also provide us an update of activity in the Duvernay and whether you expect to increase to take on more rigs there as well? Thank you.
Thank you, Michele. I mean, I'm sure that you are going to understand my point. You know that I love to give all kind of details about everything. But I mean today, these assets are not legally from ours, are not from Repsol. It's difficult for me to say and to consolidate figures that are not in the hands of Repsol.
I expect that we are going to in coming days, I'm not talking about weeks, in coming days we expect to close the operation and the integration of these assets in the business of the company of Repsol and to launch the project of Repsol Electricity and Gas that is going to be the umbrella for managing these assets. I mean, I could say you, Michel, that we are not going to see big surprises because I mean, if you take the evolution of the electric pulp price in Spain over the last 9 months has been over our assumptions and expectations. I mean, you also know that the assets we are buying of Piesco, they are quite much between commercialization and generation. That means that I mean, having surprises is not going to be easy. I mean, let me say that I'm not going to say more because I mean, they are not our assets today, but no big surprises.
And let me say the CapEx are going to be always moderate as I said before and always in the framework we committed in the strategic update in June. I mean, talking about the Duvernay, I think that by the end of 2019, we are going to be close to take the FID in I mean, we are focusing on the areas where either the condensate or the oil content is higher in the asset, because you know that the gas price in Canada is not experiencing the best time. So the good news from Duvernay is that more or less 35% is oil production, 35% could be condensate and 30%, 35% could be gas. So we are going to focus on the areas with more liquids content. And it seems to me that by the end of 2019, we are going to be close to take the FID in the area of Ferrier East.
And our second target that is GLB perhaps could be at around 2021, something like that. But I mean, I'm let me say more sure about the Ferrier East part. We are analyzing and trying to derisk the Jits area and that is going to come perhaps the new step in the progress in the development of Duvernay. Thank you, Michele.
[SPEAKER JOSE RAFAEL FERNANDEZ:] Thank you.
[SPEAKER JOSE RAFAEL FERNANDEZ:]
Sorry, excuse me, Marcellus, I forgot it. I have here the note and I forgot it, Michele. I mean, we are going to have now the 2nd rig in Marcellus. I think that is okay. We have a quite ambitious gas program by 2019.
And I mean, we are going to increase our production in the Marcellus. I think that this year we could be producing and perhaps I asked to my team to correct my figure if I'm wrong, but producing 450,000,000 cubic feet per day. I mean, our expectation is to increase in that 20% this figure in 2019 due mainly to the addition of this second rig in the Marcellus. Of course, we are always open. Be sure that in case of having a hurry up over the expectation we have, we'll try to use all these additional potential cash that are going to come from the commodity sides to accelerate in an organic way this kind of projects.
But I think that today taking into account the assumptions for 2019 in commodity price and so on, staying with 2 rigs in the Marcellus is a prudent approach for us. Thank you, Michele.
[SPEAKER RAMON ALVAREZ PEDROSA:] Thank you, Michele. Next question comes from Irene Himona from Societe Generale.
Thank you very much. Good afternoon. I had three quick questions, please. Firstly, Libya, can you please tell us what the contribution was in the 3rd quarter and in the 9 months to upstream EBIT and net income? And secondly, LPG, I think it's your lowest quarter in about 8 or 9 years.
I wonder if you can just remind us of how the price formula works in terms of the time lag before you're allowed to increase pricing? And what can we therefore expect over the next few quarters? And then finally, in marketing, I mean, the 9 month EBIT is a nice step up year on year. You do highlight that you now have 100 Mexican service stations. Are they making a material contribution as yet?
Or it's not relevant to the picture?
[SPEAKER MARTIN PEREZ
DE SOLAY:] Yes. Okay. Starting by Libya, please check the figure with the IR team, but I think that we are talking about a net income of EUR 95,000,000 EUR 100,000,000 more or less. But please check later the figure with because it's the figure I have in mind, but you could check the figure. I mean, people are saying that we are there more or less, perhaps I was mistaken in €5,000,000 but not more.
The LPG, I mean, it's quite logical. I think that it's a conjunction of 3 factors. The first factor is the season. I mean, we are talking about summer. The second factor is so mainly 2 factors, sorry.
The first one is the season and the second one is that you know that the LPG business in Spain is regulated. We have a gap of 2 months between the real price of the LPG and the price we are translating or moving to the market. And when the oil price is going up, there is a gap and we recover. Let me say this deficit of tariff, I mean, I'm using not the right term in regulated terms, but we are this gap or this area or this surface, we are losing in the curve when we don't recover the price from the formula, these prices recover in coming months. That means I mean, that is the reason for the negative impact of the LPG business, first of all, season.
And secondly, this gap coming from the application of a gap in the time, some kind of the collage when the price is going up, all that is going to be recovered in coming months. So no concerns because if we analyze our LPG business, we are maintaining our volumes, our market share and our revenues quite stable over the last years. Going to I mean, not the second question, I mean, it's Mexico. This weekend, I mean, I remember I was talking to Mavi Zingony this weekend and she told me that we were achieving the 100 service station figure this 120, sorry, this weekend. So we have 120 today.
I think that we could have more or less 175, 180 at the end of this year. In 2018, there is no P and L positive contribution, but today our main assumption and guidance is that we are going to have a positive in 2019 according to the business plan we checked last week about Mexico. So positive P and L in 2019. Thank you, Irene.
[SPEAKER RAMON ALVAREZ PEDROSA:]
Thank you very much.
Thank you, Irene. Our next question comes from Yuri Kukhtanyk from Deutsche Bank.
Yes. Good afternoon. Two questions for me, please. Following on affiliates question, could you please describe to us how cash in Repsol Brazil is distributed? And is it being loaned to the parent, to Repsol and Sinopec?
Or is it been returned to parent via dividend? That would be the first question. And the second is, what is the targeted return on your solar investment? And how exactly are you going to develop the business? Thank you.
[SPEAKER JOSE RAFAEL FERNANDEZ:] I mean, I'm not able to give you an exact flavor. Of course, you could check this figure with higher, but I think that there are 2 mechanisms and one of them is the distribution of dividends that is decided by shareholders. And the second one, I mean, is the financial mechanism that is called euros that is the interest on equity that is paid to the shareholders. I can't remember now the exact balance between both factors, but of course, Yuri, you could check all that with the IR team. Returns on solar investment.
So at the moment, we don't have any kind of investment. Let me say, we have we acquired EUR 20,000,000 of the we paid EUR 20,000,000 to buy the pipeline to build this potentially 264 megawatts of our solar project. And I mean, we are going to be, as I said, when we presented the strategic plan, the returns are going to be at around 9% in terms of return of the project and combining the project with the commercialization side, we are going to pay. We are going to too much with the generation we are going to have. We are talking about returns that are going to be above 11%, 12%.
Thank you.
Thank you very much.
Thank you, Yuri. Our next question comes from Peter Low of Redburn.
Hi, thanks. Just one quick one for me. You talked about potentially accelerating Sorry,
sorry. Hello? Hi. So sorry,
you've talked about potentially accelerating certain upstream projects. Is that likely to have any impact on your existing production guidance of 750,000 barrels a day by 2020? Thanks. No, because Peter, in case of accelerating some projects, we will take advantage to accelerate the higher grading of the portfolio. I mean, disposing, let me say, the lowest quartile of our assets to improve and to take advantage of this sum to improve the quality of our portfolio.
So managing our portfolio and we maintain the guidance of production we committed in the strategic plan. Perhaps improving that will be our targeting improving margins, improving the quality of portfolio,
but maintaining the
guidance of production. Thank you, And at
this point, I And at this point, I'd like to bring our Q3 conference call to a close. Thank you very much for your attention, and we will welcome you next year, next year. Sure. Thank you.
Ladies and gentlemen, this concludes the Repsol 3rd quarter 2018 results conference call. Thank you for your participation. You may now disconnect.