Good afternoon. This is Paul Foniho, Head of Investor Relations at Repsol. On behalf of the company, I'd like to thank you for taking time to attend this conference call setting out the company's Q2 results. This conference call and associated webcast will be delivered by Miguel Martinez, Repsol's Chief Financial Officer, with members of the Executive Committee joining in here in Madrid. Before we start, I advise you to read During this presentation, we may make forward looking statements, which are identified by the use of words such as will, expect and 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 Mr. Miguel.
Thank you, Paul, and thank you to those online for attending this conference call on our Q2 2016 results. CCS adjusted net income was €345,000,000 €917,000,000 for the quarter and the first half of twenty sixteen, respectively. In today's call, we will address 3 main topics. Firstly, an update on the progress of our strategic plan secondly, the market environment and the company's main operational highlights and finally, a review of the quarterly results. The first half of the year has seen a continuation of the challenging macro environment that the industry has been facing over the last 18 months.
Compared to the Q2 of 2015, lower commodity prices in the upstream were offset by increased production volumes, lower cost and lower exploration expenses. In the Downstream, the quarterly result was lower than in the same period of 2015, when we achieved record refining margins and we're benefiting from full refining capacity throughout the quarter. In the Q2 of 2016, the plant turnarounds at the Cartagena and Tarragona refineries have reduced as expected both our distillation and conversion capacity utilization. As a result of this, our actual margin for the quarter was close to Repsol refining margin indicator. Nevertheless, the sustained strength of the chemical business and improved commercial results delivered another good quarter from this division.
Let's now continue with an update on our progress towards the delivery of our strategic objectives. Moving on to our efficiency and synergy program, we continue to make good progress in 2016 and are on track to deliver the cost savings targets set out in our strategic plan. By the end of the second quarter, projects have commenced that will secure approximately 7% of our savings target for 2016. For the full year, we expect to surpass our previous guidance of capturing €1,200,000,000 of synergies and efficiencies, which represents more than half of our EUR 2,100,000,000 commitment for 2018. Remember that this EUR 1,200,000,000 includes EUR 300,000,000 on CapEx efficiency.
Focusing on post acquisition synergies, by the end of the second quarter, more than 90% of the run rate target for 2016 and 70% for the planned synergies by 2020 have already been implemented. In the first half of twenty sixteen, results include a pre tax cash impact of around $140,000,000 from synergies, more than 50% of our commitment for the full year. More generally, the implementation of cost saving initiative across all parts of our business has progressed as expected in the 2nd quarter, with highlights as follows. In upstream, in the first half of the year, we have achieved more than 50% of our full year objective. And by year end, we speak to we expect to be well above the OpEx and CapEx reduction targets that we have set for the year.
In downstream, we remain in line with our objectives for 2016 with initiatives mainly focused on improving refining margins, increasing the reliability of facilities and reducing other operational costs. Finally, at the corporate level, our expected savings for 2016 are higher than our initial projections. Overall, the pre tax cash impact from synergies and efficiencies in the first half of twenty 16 has amounted to more than €600,000,000 with more than 50% of this figure coming from the upstream division. We continue working to deleverage the company and strengthen our balance sheet through divestment and expenditure optimization, and expect our capital investment to remain below the €3,900,000,000 guidance level for 2016. The cash flow from operating activities generated during the first half of the year covered net investments, interest and dividend payments.
Looking forward, although oil price improved in the 2nd quarter compared to the lower levels observed early in the year, we remain cautious on the short term recovery of commodities and continue to focus our efforts on achieving cash neutrality at around $40 price level. With regard to portfolio management, our divestment program has delivered proceeds of approximately €600,000,000 this quarter from transactions that closed in the period. In total, in the first half of the year, we have received proceeds from disposals of around €700,000,000 and expect to receive an additional €700,000,000 before year end from transactions already announced. To conclude, lower net debt through improved cash flow in the quarter was helped by the recent dividend increase approved by Gasnat. In addition, Repsol expects to receive another €100,000,000 of gas natural dividends in the second half of twenty sixteen based on a projected interim dividend due in September.
Before going into detail on the results, let me now describe the market environment and main operational highlights in the quarter. At the macro level, during the second quarter, oil price recovered marginally and Brent crude averaged $45 per barrel compared to $62 in the Q2 of 2015 and to $34 in the Q1 of the year. Gas price were stable in the quarter with Henry Hub averaging $2 per 1,000,000 Btu lower than the $2.6 observed in the Q2 of 2015. In recent weeks, there has been a change in this trend with Henry Hub near month future contracts seeing some support and averaging around $2,800,000 per 1,000,000 Btu. Equity markets suffered from significant volatility in the quarter, in particular with ongoing uncertainties associated to the referendum in the UK.
During the Q2, the U. S. Dollar maintained its strength against the euro and has further strengthened since the British referendum result. At the present time, Repsol does not expect a material economic impact from Brexit in the short to medium term and we don't expect any changes to our current operations framework. We will monitor the situation closely and react should any unexpected circumstances arise.
Turning now to the operational activity, let me start with the upstream. Average production in the quarter stood at 687,000 barrels of oil equivalent per day. This is a 33 percent higher year on year, mainly due to a full quarter of volumes from acquired assets versus only a partial contribution in the Q2 of last year. Together with the ramp up of Cardon in Venezuela, Sapingoa in Brazil and contribution from Goodrum in Norway along with higher production in Peru. Compared to the Q1 of 2016, production was 2% lower, mainly due to the shutdown of the backfill in Norway, maintenance work in Trinidad and Tobago, the impact of higher prices on royalties in Southeast Asia, PSCs and the temporary suspension of production in Acacias in response to low prices.
These effects were partially offset by the ramp up of Chapinon and higher gas production in Peru. In the month of July, production has continued in line with the Q2. In exploration, a total of 3 exploratory and 3 appraisal wells were finished in the quarter. The 3 appraisals delivered positive results. 2 exploratory wells were negative and one remains under evaluation.
Results from the appraisal of wells have improved the prospectivity and economics of future developments in Alaska, Campos 33 and Southeast Ilesia in Algeria. The appraisal well at Gabi in Brazil was completed successfully at significant lower cost than budget and in line with the efficiency measures contemplated in our strategic plan. In Brazil, the hookup of the FIEBCO at Lapa has been concluded and the installation of flow lines is currently ongoing. According to the operator, first oil is expected in the 3rd 1 quarter ahead of schedule. In the UK, we continue to reduce our lifting costs with CapEx and OpEx below plan and production ahead of schedule.
While development projects Monarch and Flindra and Codor progress towards first oil in the first half of twenty seventeen. In North America, production in the Marcellus has increased year on year, while reducing drilling activity to 1 rig, with a cash breakeven close to the $2 per 1,000,000 Btu. This asset is cash generative at gas price levels observed since the end of the quarter. Moving to Latin America. In Peru, the gross production from Quinteroni increased in April to 160,000,000 square cubic feet of gas per day.
The development of the Sagari discovery is continuing with first gas planned for 2018. This development will raise total production from Block 57 above 200,000,000 square feet of gas per day once on stream. In Trinidad and Tobago, the execution of projects to increase production is ongoing. The development of Juniper is reaching its final stages and a startup is planned for 2017. This offshore shallow water project will reach a peak production of 95,000 barrels of oil equivalent per day and is 100% owned and operated by our VPTT joint venture, where Repsol holds a 30% stake.
In Vietnam, we are progressing the development of the CRD project, also known as Red Emperor. This project, economic at current price levels, has taken advantage of falling industry cost and recently tendered 2 major facility contracts. Final project sanction is expected in the Q4 of this year and fresh production is planned for the end of 2019. Finally, in Malaysia, following the announcement of the 10 year extension at PM3, progress on the development projects at Bonga Pacma and Kinabalu in Sabah continue with first production projected for 2018 and 2019 respectively. Now let's move to our downstream business starting with refining.
The schedule maintaining stoppages at Cartagena and Tarragona were completed on time and on budget. This planned outages reduce our distillation and conversion capacity utilization in the quarter. We achieved an actual refining margin of $6.60 in the period, dollars 0.10 over the indicator. Despite the market environment, we obtained a healthy refining margin indicator of $6.50 slightly above the Q1. We have now complete our major maintenance program for 2016 and expect our actual margin to recapture the full benefit of our industry leading facilities in the second half of the year.
In the month of July, the real margin has been on average $1 above the indicator, in line with the pre maintenance delivery. In Chemicals, the 2nd quarter saw another strong performance, thanks to a steady sales and strong margins. The increased cost of naphtha was offset by the positive price environment across most petrochemical products. For the remainder of the year, we expect margins to remain solid, supported by a favorable international environment and strong demand. Commercial businesses contribution to results remained strong.
LPG in Spain benefited from price adjustments of previous periods, while in marketing the sales in service stations increased due to seasonality. The Spanish motor fuel demand maintained its recovery and the market has grown by 3.6% up to the end of May. The resiliency of refining margin despite the evolution of international price and scheduled maintenance activity together with the sustained strength of the chemical business and the stability of our commercial division has resulted in ongoing strong cash flow delivery from the Downstream division. Now let's move on the 2nd quarter earnings performance. 2nd quarter 2016 CCS adjusted net income was €345,000,000 100% higher compared to the Q2 of last year.
CCS adjusted net income of the first half of the year was €917,000,000 26% lower compared to the same period of last year that include significant post tax gain coming from the exchange rate positions due to the net long cash position in dollars held for the acquisition of Talisman. Looking at the results by division, starting with the Fcim business, adjusted net income for the 2nd quarter was €46,000,000 positive, €94,000,000 higher than in the same period of 2015. Overall, compared to the same period in 2015, lower oil and gas price realization in the Q2 of 2016 were offset by the impact of higher volumes, lower cost results resulting from our efficiency project and lower exploration expenses. Reduced exploration expenditure together with a portfolio targeting low risk has contributed to the overall optimization of upstream CapEx and reduced the volatility of our exploration cost within the income statement. Year on year performance is explained as follows.
Higher production contributed to an increase in operating income of €290,000,000 Thanks to volumes from the acquired assets, ramp up of Cardon and Sapingua fields, the contribution from Gudrum and higher production in Peru. This was partially offset by maintenance work in Trinidad Tobago, production at Bargain, Norway and lower activity in Mid Continent in the U. S. As a result of lower exploration activity, principally due to lower amortization of dry wells, the operating income increased by EUR 144,000,000 excluding the exchange rate effect. Lower crude oil and gas price, net of royalties had a negative impact on the operating income of €372,000,000 Income tax expense had a positive impact of €32,000,000 mainly due to the positive effect from the appreciation of some local currency, principally in Brazil.
Income of equity affiliates and non controlling interest, depreciation and amortization, exchange rate and others explain the remaining difference. Turning to the downstream division. CCS adjusted net income in the quarter was €378,000,000 14% lower than in the Q2 of last year. Drilling down into the quarterly results in refining, lower utilization rates along with lower refining margins due to the plant maintenance reduced operating income by €224,000,000 The refining margin indicators declined in the period compared to the Q2 of 2015, due to narrower middle distillate and light heavy crude spreads, partially offset by lower energy costs. In chemicals, higher sales volumes improved margins aided by a better market environment generate a positive effect on the operating income of €14,000,000 In Marketing and LPG, operating income was higher by €54,000,000 compared to the Q2 of 2015.
In Gas and Power and Trading, the operating income was €18,000,000 lower than in the Q2 of 2015. 15. Results in other activities, equity affiliates and non controlling interest, exchange rate and taxes explain the remaining difference. With regards to Garnet to Alfenosa, adjusted net income in the Q2 of 2016 amounted to €96,000,000 9 percent lower year on year, mainly due to the lower profit in the gas commercialization business attributable to the current price environment. Moving now to the financial aspects.
Our 2nd quarter net financial result was negative €185,000,000 broadly in line with the Q2 of 2015. During the last few Redflow has taken advantage of market conditions to reduce its average cost of debt. The group's net financial debt at the end of the second quarter amounted to €11,700,000,000 a decrease of around €300,000,000 compared to the end of the previous quarter. The group's liquidity at the end of the first half was approximately $6,700,000,000 including undrawn credit lines, which represents 1.8 times coverage of short term maturities. To conclude, we remain cautious on the pace of long term commodity price recovery and expect further volatility going forward.
Under that framework, we will continue to strengthen our balance sheet through portfolio actions, whilst maturing synergies and implementing self help measures that will reduce the group cash neutrality breakeven to our $40 objective. In the upstream, our reduced exploration costs have allowed us to more than breakeven at the adjusted net income level even at current prices. The average production level in the first half of twenty sixteen stays within our strategic plan objectives and our OpEx and CapEx optimization measures are on track to reduce our upstream free cash flow breakeven. In downstream, having completed all major planned maintenance for the year, we are now able to capture all the potential from our refining conversion capacity for second half of the year, maximizing the cash flow generation from this business. Finally, we have almost achieved our divestment target for the period to 2017 and we'll continue assessing our portfolio for further divestments that will allow us to realize full value.
In summary, we remain committed to our long term strategic goals and are delivering against our shared term commitments. Thank you very much for your attention. And I will hand the call back to Paul, who will lead us through the Q and A session.
Thank you very much, Miguel. For those of you on the line, in case you run into technical problems during the webcast or conference call, please address any problems to our Investor Relations e mail address, investorsrelationsrepsol.com, and we will contact you immediately to try to solve it. Operator, please can you remind the audience of the process for Thank you. Now we'll continue with the question and answer session. Our first question comes from Biraj Borkhatari at Royal Bank.
Go ahead, Biraj.
Hi, guys. Thanks for taking my questions. I had 3, if I may. The first one was on exploration. And I know you had a pretty low charge again this quarter.
I was wondering if you could just remind us of the wells you're going to drill in 3Q and 4Q and any significant well results due in that timeframe? Second question would be on the corporate and other cost line. That remains pretty volatile. If I'm looking kind of 1 or 2 years ahead, what would be a sensible run rate for that number, obviously, including Talisman in there? And then the third question for Miguel would be, I wonder if you could just talk a little bit about refining margins.
There's been a lot of talk about weak gasoline margins recently. And is there any comments you can make on the potential for that to spill over into Europe on the middle distillate side and how that would impact Repsol? Thanks.
Thanks, Biraj. In relation with the exploration for the rest of the year, I will say that basically what we have, it's a modest project. And not only modest, but also I will say a low risk one because we have focused more on appraisal wells. Having said so, the 3 basic wells we have in front of us are going to be Bulgaria, which is an offshore prospect, Papua New Guinea and onshore prospect and Colombia also onshore. Other than that, there is going to be a small activity.
In relation with the corporate level, I agree with you, but you have to take into account that in the Q1, we have the gains from the conversion of the Canadian bonds. We repurchased those and this is probably what is changing the creating volatility in that line. I'll say that if you without any extraordinary items, the figure would be around EUR 1,300,000,000 for the whole year. So more or less is a little above EUR 100,000,000 per month. In relation with refining margins, only if I knew, I would be really happy.
I mean, basically what we have seen in during the month in July is a weakness due to a narrow margins between heavy and light in one hand. 2nd, the gasoline spreads that were quite nice, I would say, in the first half of the year has shrink, which makes sense due to the end of the driving season for the refiners. And we have not seen yet the increase in the diesel spreads. So all in right now is true that the refining margins are a little low. Having said so, I think that the main factor is going to be the weather in the Q4.
And also one thing we have realized since June when we finished both the maintenance in Cartagena and Tarragona is that we are well above the index. I mean the improvement in operational capabilities plus the energy efficiency we have gained with this maintenance is giving us an extra room and then we will have to see. But this is what I can tell you.
Thank you. That's very helpful.
Thanks, Biraj. Thanks, Biraj. Our next question comes from Felipe Rosa at Haitong. Go ahead, Felipe.
Hi, good morning, everyone. So 3 for me as well. The first one on the LIBOR bonds, if you could update us on where do you see a potential timing for you to come up with further issuance of these bonds? The second one relates to this new project, Lapa. I think that it's a little bit more complex than Sapingo.
Could you just give us an idea where do you think it's the breakeven price for both projects? And finally, could you just update us on the situation in Venezuela? What's the current impact on the balance sheet? And what are the prospects to try to solve this situation? Thank you very much.
[SPEAKER JOSE HUMBERTO ACOSTA
MARTIN:] Thanks, Felipe. I think that as I mentioned in the Q1 results presentation, I thought at that time that the entrance of the ECB acquiring corporate bonds was going to deflate the yields and then a window for the hybrids may open. If I look at our hybrids in the 1st days of the year, we reach a 10% yield. Right now, it's around 5%. I'm talking about the non call 6%.
So it's true that the trend goes in our direction. And potential timing, I will say 4th quarter looks to me at the present time the right moment, because I think that the influence of the ECB is going to be stronger month after month. In relation with Lapa, I'll say that if we talk about CapEx and OpEx, the breakeven for at least our estimate is around $55 per barrel. Compared with Chapinoa, which had 30, well, it's true that it's a little more difficult, but you have to think that, a, it's a smaller prospect, it's a smaller which implies extra fixed cost. And also that this estimate it's based on the first phase of Lapa.
A second phase in the southern part of Lapa will probably reduce a little this breakeven point. And finally, in relation with Venezuela, Venezuela right now the financial team of PDVSA, it's in Madrid in our offices and we are trying to work out a way to somehow make the financials of all the JVs to move ahead. Right now, they are somehow block. This is one issue and let's see through the idea of the SCRO account that we have been working with them for, I would say, probably 18 months, we are able to really start moving and generate the liquidity that is needed for the operations. In relation with Cardon, there was a contract amended that has blocked somehow the payments.
Last week, our CEO, Josu Jon Imas and Head of Absinthe Luiz Cabrera were in Venezuela and the whole thing has been solved. We already have received the first payment for $25,000,000 And I think that the difference that were or the differences we had with them was what part of the fee was going to be paying dollars and which party in bolivars. At the end, it's going to be good for cost till the year end. And this is what I can tell you. I mean, we keep operating there and we expect, a, that in Cardon, the new situation will allow us to obtain the recovery of our built straight.
And we also hope that the 2 financial teams that are meet today in this week in Madrid will solve the issue with the SCRO account in order to make the JVs work financially. Did I answer you, Felipe?
Thank you very much, Miguel.
You're welcome.
Thank you, Felipe. Our next question comes from Hamish Clegg at Bank of America. Go ahead, Hamish.
Hi, guys. Just a couple of quick ones expanding a little bit on things you've talked about. First, just on the refining margins, you mentioned a couple of times that we're likely to see a premium and we are seeing a premium already over your benchmark. Could you maybe just extract what the main things are giving you that premium? Is it the sort of increased product yields?
Or is it the flexibility to purchase cheaper crudes? My second question was just regarding the hybrid. You mentioned that Q4 is the right time for it. Could you give us an idea of size and scale of what would be appropriate? A year ago, you guided us to $3,000,000,000 of EUR3,000,000,000 of hybrid, sorry.
Actually, maybe it was a little bit more than that. Could you update us on what sort of scale we're talking about? It was 5 actually. Are we looking at potentially another 3? And just finally, could you clarify a little bit how we can expect tax to impact the business going forward?
I appreciate there was a currency impact in the second quarter. How should we think about modeling tax going forward? Thanks.
Thanks, Amish. In relation with the refining margins, I think that there are several factors. The first one is the conversion. I mean, we have all our 5 refineries in the 1st quartile. So our conversion is higher than those of our peers.
2nd, I may say that this allowed us to optimize the slate of crudes. So that's the first point. The second one, which I also think is important is that we operate the 5 refineries as a unit. So we maximize the group. Normally companies that have refiners here and there, they simply optimize refineries individually.
To have all the refineries connected give us the option to maximize the group. And I think those are the 2 main factors that give us always an edge. In relation with the hybrids, my thoughts move more in the direction of $1,500,000,000 I think is the limit. And this is more or less the limit we may aim at. And in relation with the tax to model tax is quite complex.
Honestly, because basically only the impact we have been suffering from the differences on foreign exchange really blow out any model you may put in. I mean the real move from $3,200,000 last year up to $4,000,000 something and then back down to 3.2 dollars sorry, BRL3.2 per dollar. The impact of this is it's an enormous thing that we have to calculate. If you have €2,000,000,000 of capital invested there in dollars and all of a sudden the currency you are playing with reduces to a 50% its value, then you have to recognize day 1 the loss in depreciation that you are going to suffer because in fiscal terms, your asset has ring to half of it. So it's really difficult, especially in a call like that.
But we are totally open if you want to sit with our tax people and they will try to clarify a little better than me. But believe me, it's not easy to model that. Sorry, Hamish.
Same way. We'll try and figure out a rule of thumb. Thanks.
Thank you, Hamish. Our next question comes from Bruno Silber at BPI. Please go ahead, Bruno.
Good morning, everyone. I have three quick questions, if I may. The first one, just a clarification. I didn't quite understand if the level of breakeven in upstream of the $60 that you mentioned in Page 24 versus the $65 that you have in the strategic plan and reinforced in the Q1. If that's relating to a different time horizon or if you are actually upgrading your ultimate goals on this front?
The second one is related with the already mentioned CapEx execution this year. You said that it should be below the average target for the 2016, 2017 period. Are you now in a better position to be more precise about the CapEx guidance for the year and how much it will come from upstream? And finally, just a detailed question regarding the working capital evolution. I was revisiting your statements in Q1 conference call when you already added something from Venezuela, but I'm still struggling to understand what could be a good figure for working capital change for the full year.
So I would appreciate if you could help me guiding through. Thank you very much.
Thanks, Bruno. In relation with the first one, for the year, while 60 is for the period 2018 2020, okay? So sorry if we generate some confusion, but I mean we have the upstream division have objectives for every year. So sometimes we refer to the 2016, sometimes we refer to 2018. Sorry, we have generated confusion there.
Going into the CapEx, you may think that for the whole year, we expect to be a little below 3,900,000,000 euros From those approximately 800,000,000 will come from the Downstream division. So the rest would be absent because corporate will not have any significance. And working capital is a good question. It has made me think a lot because within the year, we have increased our working capital by 750,000,000 more or less, 730,000,000 Within that, we have the following impacts. In order to see where it's going to end up at the end of the year.
First, we have Venezuela, which has implied an increase of EUR 215,000,000. I think that part of this is going to be recaptured in the second half of the year. Then we have a factor that was somehow surprising to me, which is due to the reduced level of investments, our accounts payable have shrink, which is going against the working capital figure. And finally, for sure, there is a third factor that has been also important in this €730,000,000 that we have suffered in the first half of the year, which is the price increase and the activity. So I may say that the first two can be a range and the third one is something we may guess based on the price finally final price of oil you have in your estimates.
But one thing is clear, I think that we should shrink that figure before the year end. I cannot measure whether it would be €100,000,000 €200,000,000 or €300,000,000 but for sure it will shrink and will help the free cash flow of the company. Is that okay?
Yes. Perfect. Thank you very much.
Thank you, Bruno. Our next question comes from Anish Kapadia at TPH. Anish, go ahead.
Good afternoon. A few questions. Firstly, on CapEx for 2017. I was wondering if you could just update where you are kind of thinking at the moment and where the flexibility is regionally in terms of upside and downside to that CapEx number. Secondly, just wondering if you could talk a bit more detail about pet chem.
It's interesting that we're seeing a kind of different dynamic, it seems, in terms of petchem demand versus the refining demand for the gasoline and middle distillate. So just wondering kind of what you're seeing there and why I suppose you're more confident on pet cans? And then just finally on Trinidad, I see you've got new project coming on stream to boost volumes over there. But it seems like it's an area with pretty low reserve life. I'm just wondering, are there kind of license renegotiations going on at the moment to extend out your contract?
And what's your kind of longer term outlook for Trinidad production? Thank you.
Thanks, Anish. In relation with the CapEx for 2017, we are starting now the process for 2017 budget, which probably will be more accurate at the strategic plan figure. But as I would say to give some color, I would say that EUR 3,940,000,000 would be the figure for the whole company in 2017. In relation with the second one, if I understood the question was somehow, and if you can confirm, Anish, it was which
question?
Well, no, it's more that I think the petrochemical market looks stronger than the gasoline and diesel market in terms of demand, I think in terms of where margins are at the moment. And you mentioned you expected kind of pet chem's demand to stay strong. Just wondering how you're seeing in terms of your kind of current demand estimates, why pet cans is kind of staying so strong whilst gasoline and diesel is weakening?
The only answer I can give you it's A, demand is going to be much dependent on GDP. I mean, chemicals refers to GDP quite well. Spain is improving and also our European markets are doing quite well. So if I have to take a clue, I'll go along with the GDP volume stocking. Margin stocking, I'll say that all the flexibility we have been working on in the last 3, 4 years plus all the impact of the dual capacity to feed our crackers either with gas or with naphtha is giving us the flexibility needed to optimize the crackers.
So basically, if the GDP remains and it looks like it's doing that well, I mean, July, it's been delivering okay. We don't have any doubt that probably would be around €600,000,000 €650,000,000 of EBIT by the year end. And in relation with the Trinidad Tobago new project, I'll say that license are still there. So it's not a license negotiation. The only thing that it's up, it's a some of the gas contracts that have to be renegotiated, but they are in process.
So I cannot give you more data about that. But basically, the license are not in discussions and renegotiation refers to some of the gas contracts. Is that okay, Anish?
That's great. Many thanks.
Thanks, Anish. Our next question comes from John Rigby at UBS. Go ahead, John.
Thank you. Hi, Miguel. Could you just go back well, 2 questions. The first one is, can we just go back to the hybrid? I take the point about the cost of the hybrid coming down, but I think you note in the release that some of your sort of shorter to medium term bonds have been issued close to 0 interest rate.
So how do you sort of square up the relative cost of that kind of debt issuance and what the sort of respective advantages of issuing more expensive hybrid debt versus sort the standard bond issuance is because clearly you've been quite successful in bringing down overall debt in any case dispute between yourselves and Sinopec, how it might get resolved and just confirm it's being sort of compartmentalized and not affecting your day to day relationship in both the North Sea and Brazil?
Thanks. Hi, John. Nice to hear you. A, I think that the point there is not cost under certain limits. I mean, we are not issuing because of liquidity needs.
I mean, basically, we are issuing for need of equity content. And that's the point. I mean, for us to maintain the investment grade is a must and the issuance of the hybrid despite having an extra cost, It takes advantages in front of the ratios that the rating companies use. So to me, the point taking into account that it has a consideration of half of it, its capital, its equity. Well, if we take into account the cost of equity, well, that for a 50% that shows somehow where it should be.
But as mentioned, it's not a liquidity issue. In relation with Sinopec, I mean, a, you know that according to the arbitration procedure rules, I can I'm under total confidentiality agreement. What I can do is refer to our press release date, June 16, in which we include the information. Having said so, I think that the arbitration has made the corporate relationship between Sinopec and Repsol increasingly complex and difficult. Operationally, our teams keep working in both JVs, North Sea and Brazil, delivering well, ensuring effectively safe operations and delivering business objectives.
So we will see. One thing is clear, Repsol is mindful of the interest of the JVs, and we will continue to honor all the commitments undertaken. And we expect that Adas Sinopex do the same. But it's all I can tell you. I mean, it's a pity that probably we have lost possibilities to have more corporate transactions with them.
All
right. Just going back to that point you make about the hybrid. Do you would you sort of consider that the loss of investment grade and then the additional cost of borrowing that would come with that in a standard sort of borrowing environment exceeds the cost of retaining investment grade by issuing the hybrid. Is that the way to think about it?
No. I will not lose the investment grade. For us, the investment grade is a must. I can mention at least five reasons why. A, you cannot enter in upstream multibillion projects if you don't have the investment grade.
B, in trading activities with very low margins, if you have to if your personal guarantee is not enough and you have to go to the bank for a NLC, then you're out of the trading activity. C, financing without the investment grade would be by far more expensive that the extra cost of the hybrid versus a senior bond. 4th, some of the shares would be affected because some of the funds only invest in investment grade companies. And 5th, but not last, which I think it's important, it forced the company to a discipline that really helps all the company working in one direction. And considering the five factor, I would say that no, we are not going to lose the investment grade.
That's pretty compelling.
Thank you.
Thanks, John.
Thank you, John. Our next question comes from Thomas Adolff at Credit Suisse. Go ahead, Thomas.
Hi, thank you. Three questions as well for me. 2 fairly straightforward ones. I just wanted to go back to Lapa. In Lapa, you talked about Phase 2, the 1,000 part.
Just wanted to make sure that this is a tieback to extend the duration of the plateau. And if that's indeed the case, what is the base case for the plateau duration? Secondly, on Zagari, you talked about that being developed and just wanted to get an update on was it a 1 to 2 Tcf field? And if so, then I guess the 200 Mcf per day is the gross peak production. Finally, Miguel, we've always had this discussion on the credit ratings and etcetera.
And now the oil price is where it is and who knows what the future brings. But what is it you need to deliver from now until you meet with the rating agencies next, if anything? I recall when the S and P published a note a couple of months ago that they expected something material to happen to improve the credit metrics in the short term and that's the next three to 6 months. So is that more disposals and if that's indeed more disposals aside from the hybrids? I had a question specific to upstream in Tangu.
You have a small stake there, BP took FID there. You intend to monetize that minority holding? Thank you.
Thanks, Thomas, for the questions. In relation with Lapa, the answer is yes. I mean, there is no a second FPSO, it's simply a tie in. Basically, what we are thinking as of today is that the first phase will probably produce around 80,000 barrels of oil per day and the second phase will add up approximately 20,000 extra. And in Sagari, the only that I have and the only I can tell you is that, a, we are doing good progress below budget and the productivity of the wells, it's extraordinary.
It's very good productivity. In relation with the rating, I mean, the point here is and it's clear after the acquisition of Talisman, we have to strength the balance sheet. And we'll keep doing that by 2 ways. There would be more divestments, which I'm not going to talk about for sure or to disclose. And also we need some strength in the equity or in the capital, if you want.
And we'll be doing that during the second half of this year. But it's not that the term is 3 months. I mean, I think that our track record with the agencies is clear. We have been in tougher situation. Remember Argentina, and we have been delivering with them and doing what we have promised.
So we keep quite comfortable that we will deliver and that there would not be major problems. Is that okay, Thomas?
Thank you.
Thank you, Thomas. Our next question comes from Irene Himona at Societe Generale. Go ahead please.
Thank you, Paul. Hello, Miguel. Two quick questions, please. Firstly, U. S.
Upstream, if you can perhaps update us on progress made in terms of unit OpEx, specifically cost benefits you've seen after selling your Eagle Ford interest to Statoil last year? And then related to that is the second one. You referred to it before, obviously, in the cash flow, you have a tax credit, so you received a payment. How much of that was due to the Norwegian deal with Stadrill, your acquisition of the Goodjoint interest, please? Thank you.
Irene, thanks for the questions. I mean, basically, if we take the option, we have been able to reduce a total of €895,000,000 already booked in the P and L. If I apply that to the OpEx per barrel, starting by 2014, it would be $21.5 per barrel. We reduced that in 2015 by $18.7 and we are now this year at 15.7%. It's true that this is a mix because the barrels were different.
We didn't have in 2014 the barrels from Talisman. But the other figure, if you want to somehow fix the whole thing is that as of today, in the P and L, we have reduced or we have obtained synergies and efficiency in OpEx for €195,000,000 and that by the year end, we expect €492,000,000 in the upstream division, okay?
Sure.
Sure.
Also you asked about Eagle Ford. Eagle Ford, the efficiency we have obtained we measure it in approximately $10,900,000 in the quarter is what we have obtained as of today. Could this improve? I think it will. We still have the commercialization issues with our partners at oil and probably this figure will improve.
I mean, if you take taking back to the 4.92 €1,000,000 this year with a total production of 250,000,000 barrels per year, it would be around $2 per barrel of reduction. Okay? [SPEAKER JOSE RAFAEL FERNANDEZ:] Thank you. The second question in relation with the tax rate, how much was due to the deal with Statoil. I think that the deal with Statoil didn't help us, but I'll ask my tax people through the IR to answer you.
I think that the tax credit we obtained in the past was due to former losses that Talisman had in Norway. And those were cash in, if I'm not wrong, in 2015. But our IR people will
Next we have Nitin Sharma from JPMorgan. Please go ahead.
Thanks, Paul. Afternoon, Miguel. Two questions from my side, if I may, please. First one is on operating cash flow. And I think you touched on part of that, but so obviously, difficult to predict the macro factors.
Assuming a flat operating environment, would it be fair to think that ex working capital €2,500,000,000 or €2,000,000,000 post payments interest payments and leases can be doubled in 2016, if you can give some flavor on that? And the second one, you mentioned in the last slide that you continue to evaluate portfolio a
possibility
a possibility to strengthen the balance sheet here? So those would be my 2 questions. Thanks Miguel.
Well, in relation with the operating cash flows, I mean, this quarter this semester, sorry, this first half of the year, we generate a free cash flow of 7.70 €5,000,000 before dividends and interest. We already have paid the whole interest for the year. Those were EUR 232,000,000. And so this EUR 232,000,000 will help us. In the other hand, we have the working capital, which I think is going to shrink.
So it will help us in the second half of the year. The penalty that we received in this semester was EUR 731,000,000. So if we are able to block that, we'll have some extra 700,000,000. And in relation with the divestments, remember that we have to cash in the pipelines, the propane pipelines that have been signed. By the way, last week we obtained the antitrust authority for the transmission.
So probably the transmission to the buyers would be most of it in the Q3 and part of it in the Q4 of the year and that implies another $700,000,000 which is more or less the divestments we have had in the first half of the year. So I'm quite positive that really the free cash flow is going to be well above what we have seen in this first half without considering further divestments. And now I turn to the second question, which I will not answer, because I mean, we have always mentioned it in that gas nat has always been an optionality and we consider that both as a business and financially. And we keep attached to that. I mean, we'll keep divesting.
We have a strategic plan, which is our goal of €6,200,000,000 for the 5 years. We'll keep going ahead in that direction, but I'm not going to speak about any particular asset. Sorry about that, Nitin.
Understood, Miguel. Thank you.
Thanks for calling and for the questions.
Thank you, Nitin. Our next question comes from Mark Koffler at Jefferies. Please go ahead, Mark.
Yes. Hello and afternoon, everyone. Just one remaining question from me, please. It's now been around sort of 12 months since integrating the Talisman asset. And I was just wondering if there were any comments around the decline rate for the group as a whole now.
And if you could just give us some color if there have been any changes from, I think, what historically you'd said was a very low decline rate for the whole group? Thanks.
[SPEAKER RAMON ALVAREZ
PEDROSA:] Yes. I remain in that position. I mean, 94% of our production by 20 20. If we do not do anything, we'll come from our existing producing assets. And this is within 4.5 years from now.
So the answer is yes, declining is quite low. I think that there are many reasons for that. A, because we are quite gassy. 2nd, because the nature of all the North American assets in Talisman being non conventional really don't give us much declining. And yes, we have a very low decline as a group.
Great.
Thank you, Mark. Our next question comes from Fernando Le Fuente at Nplusone. Please go ahead, Fernando.
Hello, Paul. Hello, Miguel. Just a quick question on the dividend, the $1,000,000 question. What are your views on how can it be decided and when and your feelings of what can be done? Thank you so much.
I mean, a dividend is something that it's on the board, not on me. But I think that the board has been quite sensitive, all of them, all of the members. And when the company needs flexibility, as it happened last in the last payment, they delivered. So I think that we are not going to change the dates. So probably would be announced in October, November.
And the figure it's on the board, not on me. I mean it's going to depend much on how the situation evolves for sure. But up to now it's improving or at least in the direction we were expected. And we keep thinking that we work for a company that can be able and sustainable at $40 per bottle. Is that okay, Fernando?
Great. Thank you, Miguel. Thank
you, Fernando. There's no further questions at this time. So we can bring this 2nd quarter call to an end.