Good day, and welcome to the Repsol First Quarter 2016 Results Conference Call. Today's call is being recorded. Today's conference will be led by Mr. Martinez, CFO. At this time, I will turn the call over to Mr.
Furnio, Head of Investor Relations. Please go ahead.
Thank you. Good afternoon, ladies and gentlemen. This is Paul Fournio, Head of Investor Relations at Repsol. On behalf of the company, I'd like to thank you for taking the time to attend this conference call setting out our Q1 results. This call and associated webcast will be conducted by Miguel Martinez, Repsol's Chief Financial Officer with other members of the Executive Committee joining him here in Madrid.
Before we start, I direct you to read our disclaimer. 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. This quarter, we're showing our results for the first time without detailing separately legacy Talisman assets. If you need any further information for modeling purposes, please call or e mail the IR team and we will be happy to help you out.
I will now hand the conference call over to Mr. Miguel Martinez.
Thank you, Paul, and thank you to those online for attending this conference call on our Q1 2016 results. Before we start, on behalf of all Repsol's management and staff, I would like to offer our deepest condolences to the families, friends and colleagues of the victims of last week's helicopter incident in Norway. Let's continue now with the Repsol first quarter conference call. CCS adjusted net income was €572,000,000 and net income was €434,000,000 Before going into detail on the Q1 results, I will summarize the topics to be covering today's call. Firstly, an update on the progress of our strategic plan.
Secondly, some comments on the market environment for the Q1, together with the company's main operational highlights and finally, the quarterly results. Let's begin with an update on the progress of our strategic plan. During the 1st months of 2016, we have seen a continuation of the volatile and challenging macro scenario that we experienced in 2015. In the face of this, our integrated model and the integration of Talisman have allowed us to deliver a strong set of quarterly results. As part of our commitment to provide value on resiliency under diverse price scenarios, Repsol is focusing on delivering the key objectives set out in our strategic plan.
We continue managing the whole company under the principle of protecting our balance sheet and generating cash flow. Therefore, as discussed in our last call, we adjusted our strategic targets to reflect our more cautious view on the recovery of commodity prices. You can see on the webcast a summary of our progress towards delivering our strategic commitments through the Q1. We are on course to achieve our efficiency, CapEx and development targets, while also reducing our overall group and upstream free cash flow breakevens. We are protecting our balance sheet through expenditure optimization.
So far, we have been able to stay below our investment budget and in line with our guidance without impacting our 2016 production profile. Reduced exploration deferral of non critical investments, the capture of sector wide deflation, as well as revisiting our ongoing developments projects for efficiency allow us to maintain our guidance for approximately €3,900,000,000 of CapEx in 2016. This figure represents a 20% reduction compared to the investment level for 2016 2017 assumed in our strategic plan, reflecting our more cautious view of the recovery prices. We also expect to achieve our target to capture €1,100,000,000 from efficiencies and synergies in 2016. And this represents more than half of our longer term objective for 2018.
Starting with the synergies, implementation is on track and we project to reach an amount higher than the strategic plan and align with January 2016 estimates. Close to 90% of the run rate synergies for 20 16 and more than a 65% of the planned synergies by 2020 have already been captured. With respect to our efficiency program, the Q1 results show how Repsol focus on becoming a leaner and more efficient upstream operator together with further improvements in our refining and chemical businesses is already delivering results. It's worth mentioning that the initiative focus on identifying and delivering real cost savings are performing better than expected. Going into detail, in our Upstream business, we are well above our 2016 OpEx reduction target and in line with our CapEx target.
The sum of measures implemented across all countries and business areas had a cash impact of more than €100,000,000 in the quarter. In 2016, we will reduce our APSIM OpEx per barrel by more than 30%, 1-three. In downstream, we are in line with our targets, Initiatives mainly oriented to improving refining margin, increasing reliability and flexibility in chemical facilities and logistics and other operational cost savings are ongoing. In corporate, our current expect savings are in line with our strategic objective. Our quarterly results reflect our efforts to deliver on CapEx reduction together with OpEx efficiency targets and capture synergies resulting from the integration of Talisman into the wider Repsol Group.
As a consequence of these actions, we have achieved a significant reduction in our cash neutrality breakeven and maintain net debt levels even with Brent averaging at around $34 per barrel. Finally, as we continue to review our asset portfolio, we have been able to move ahead with our targeted divestment program, thereby protecting the value of core assets, while benefiting from the additional disposal options across the combined portfolio following the acquisition of Talos in the 1st quarter, with a majority of cash proceeds projected to be delivered later in the year. Firstly, we complete in January the sale of another portion of our pipe LPG businesses for a total of 100 and €36,000,000 This transaction together with the sale completed in September 2015 of pipe gas assets will generate around €800,000,000 of proceeds, out of which €38,000,000 were received in the Q1. Cash in is expected to be finalized before the end of the year. Secondly, reached an agreement to sell our offshore wind power business in the U.
K. To STIC, State Development Investment Corporation of China for €238,000,000 The cash from this sale is expected to be received during the Q2 of 2016. The sale of our LPG businesses in Ecuador and Peru for around $335,000,000 implying a multiple of approximately 8 times EBITDA. Finally, in Upstream, smaller disposals have been completed and funds received. We confirm transaction in recent months totaling €2,800,000,000 and €1,000,000,000 target set in the strategic plan for the period 2016, 2017.
Let me now address the current market environment and the principal operational activities for the quarter. During this quarter, we saw a further weakening of oil price together with a continuous strength of the U. S. Dollar versus the euro. Brent crude averaged around $34 which compares to $44 per barrel in the previous quarter.
In recent weeks, we have seen a partial reversal of the trend with Brent trading well above $40 Gas prices continue at weak levels with Henry Hub operating just $2,100,000 per 1,000,000 BTU. Moving now to operating activity, starting with Upstream division. Production averaged 714,000 barrels of oil equivalent per day. This is 2% higher than in the previous quarter and 100% higher year on year, mainly thanks to the contributions of the startup of Cardon in Venezuela, the ramp up of Chapinoa in Brazil, together with the consolidation of Talisman assets. Key updates of our main upstream development projects are as follows.
In Brazil, the ramp up of the 2nd FPSO in Sarpinoa continues and we expect the project to reach plateau in the second half of the year. In Colombia, the early production scheme for Acacias was temporarily suspended in March due to low oil prices. Project sanction has been rescheduled and the FID is now expected to happen in 2017, awaiting a better oil price outlook. In the UK, we are continuing the progress to the redevelopment of Monarch and flying corridor with a focus on cost efficiency and CapEx optimization, expecting first oil early in 2017. Delivery of this project will significantly improve the economics of our JV.
In Alaska, Armstrong exercised its option to acquire an additional 6% of the development area of the North Slope, assuming operations. After this change, Repsol's working interest is now 49% and 25% in the development and exploration areas respectively. In North America, a focus on controlling and preserving cash flow generation is delivering results. In the Eagle Ford, we reached an agreement with our partner, Statoil, to reduce operations to 1 rig for development activities during the year. In the Marcellus, we are also using 1 rig to maintain production volumes and leverage a strong price realized through our midstream position.
In Greater Edson and Duvernay in Canada, CapEx optimization and preserving cash flow and ensuring we retain valuable land for future development. Regarding exploration activity in the quarter, 3 exploratory and 2 appraisals wells were completed. 1 of the appraisals well registered positive results, 2 exploratory negative results, while 1 appraisal and 1 exploratory well are still under evaluation. The unsuccessful wells did not impact our results because both wells were carried 100% by our partners. In April, we received encouraging news from the Gabia appraisal well in the Brazilian pre salt.
The well encountered a hydrocarbon column of 175 meters in a good quality reservoir and was successfully tested, producing around 16,000,000 standard cubic feet of gas and 4,000 barrels of oil. With this well, we finalized the appraisal activities in the block Campus 33, which comprises the Syed, Gabija and Pavia Sukkar discoveries. Additional contingent resources have been discovered in our appraisal campaign in Southeast Ilesi in Algeria. Turning now to the operational highlights for the Downstream division. In Chemicals, we had a very strong quarter with high margins and volumes.
Thanks to the operational improvements in our sites and to the improving international market environment. For the Q2, we can continue to expect healthy margins, thanks to the favorable international environment that we are currently experiencing. In refining, even though we saw a decline in refining margins due to the narrower middle distillates and narrower light heavy crude spreads, our system obtained a refining margin indicator of $6.3 per barrel. The actual margin capture was $1 above the indicator at $7.3 per bottle. In April, the refining margin indicator was unchanged from the Q1.
The mild winter weakened the performance of our gas and power business, but it remained at breakeven level. The commercial businesses were in line with the Q1 of last year. Spanish motor fuel demand continued to recover and the market grew at rates of 3.4% up to March. Now let's move on to the Q1 earnings performance. Q1 2016 CCS adjusted net income was €572,000,000 and net income was €434,000,000 38% 43% lower compared to the Q1 of 2015 respectively.
Year in which we benefit from a very good set of results with favorable exchange rate movements. The tough price environment affected the results in the upstream, but thanks to the flexibility of the company and the measures put in place in recent months, we managed to maintain positive results, overall along with a positive tax effect due to current currency appreciation and a more favorable mix of production. The strong performance of the downstream businesses, especially in chemicals and refining, helped to repeat the unit's previous strong quarterly results. Looking at the results by division, starting with the upstream business. Adjusted net income for the Q1 stood at €17,000,000 €207,000,000 higher than in the Q1 of 2015.
Year on year performance is as follows: higher production contributed to an increase in the operating income of €526,000,000 Exploration expenses impacted the operating income positively by 190 €196,000,000 mainly as a result of lower amortization of dry wells. Income tax expense has had a positive impact on the adjusted net income of €161,000,000 mainly due to the appreciation of local currencies, especially in Brazil. Higher depreciation and amortization charges decreased operating income by €201,000,000 mainly due to the increase in production, partially offset by lower amortization rates, mainly in the U. S. And Trinidad and Tobago, following impairments taken in 2015.
Lower crude oil and gas realization prices net of royalties had a negative impact on the operating income €5,000,000 Turning to our Downstream division, CCS adjusted net income in the quarter was €556,000,000 4% higher than in the Q1 of last year. Drilling down into the quarterly results in refining lower margins partially compensated by higher utilization rate, reduced the operating income by €135,000,000 Refining margins declined in the period due to the narrower middle distillates and narrower light heavy crude spreads. However, as mentioned before, it remained at a healthy level of $7.3 per barrel. In chemicals, increased efficiency as a result of operational improvements in our sites, higher sales volumes and improved margins aided by a better international environment generates a positive effect on the operating income of €102,000,000 In the commercial businesses, marketing and LPG, operating income was in line with that of the Q1 of 2015. Moving to the cash and power and trading, beyond was €35,000,000 lower than in the Q1 of last year.
Nevertheless, the Gas and Power achieved breakeven in the quarter in adjusted net income terms. Results from equity affiliates controlling interest, exchange rate and taxes explain the remaining difference. With regard to Gas Natura Alfenosa, adjusted net income in the quarter of 2016 amounted €99,000,000 19% lower than that of the same quarter of 2015, mainly due to lower results in the gas commercialization business. As a result of lower margin and in gas and electricity distribution business in Latin America affected by the depreciation of local currencies. Let's move now to the financial results.
Our first quarter financial result was minus €77,000,000 which compares to a net financial result of €655,000,000 in the same period of last year. In the Q1 of 2015, we had a very positive results associated with exchange rate positions. The group net financial debt at the end of the quarter was in line with that at the end of the Q4 20 15 after paying January's dividend and with very limited proceeds from disposals. It's worth mentioning that in March, the 3 rating agencies Fitch, S&P and Moody's confirmed and maintained their previous grade ratings for Repsol at the investment grade level. S&P also revised its assessment on Repsol EUR 2,000,000,000 hybrid bonds and restored the intermediate equity content.
Following Repsol's announcements of a whereby the issuer waives the right to early redemption of the securities in certain circumstances. As of today, all of the 3 agencies assigned 50 percent equity content to Repsol Hybrid Bonds. To conclude, let me underline that during this Q1, the company has managed to deliver a set of results that have maintained net debt, thanks to our integrated model, maturing synergies and efficiencies, and self help measures that are creating value during these turbulent times. Our strategic decisions to lower our exploration expenditure, optimize our CapEx and project delivery and reduce costs are allowing us to realize results, even at the beginning of the strategic plan period in line with our longer term expectations. Our Downstream continues to provide free cash flow to support us as we navigate the current commodity price volatility.
We are very well positioned in the second quarter to maintain this performance. We are continuing to reshape our portfolio with satisfaction of almost having achieved our divestment target for 2016 2017 in just the 1st few months of the year. This progress give us every confidence that we will achieve our overall strategic goals. Thanks so much. And I will answer any questions you may have in the Q and A.
Thank you, Miguel. For those of you on the line, in case you run into any technical problems during the webcast and the Q and A session, please address any incident to our email investorsrelationsrevsol dotcom and we will contact you immediately to try and solve it. Before we move to the Q and A, the operator is going to reiterate the instructions.
Thank
Let's now move to the Q and A. For our first question, we'll go to Hafim Rashid at Morgan Stanley. Good afternoon, Hafim.
Hi. It's Taitim Rashid from Morgan Stanley. Thanks, Paul, and good afternoon, Miguel. Two questions from my side, please. Firstly, I wondered if you could just give us an update on Venezuela.
We get a lot of headlines in the press about the difficulties the government and PDVSA are facing with the lower oil price and managing sort of budgets and power, etcetera. But I just wanted to understand how you're finding it from an operational perspective. What is the impact that you are seeing? And also more arguably more importantly, from a sort of cash flow perspective, are you finding that you're still getting paid? And how are the sort of payments working with yourselves with regards to the country?
My second question is regarding disposals. And just to actually perhaps 2 parts to it. Firstly, just to get a bit of clarification on the $2,800,000,000 that you've talked about is sort of announced so far, how much of that is actually sort of cash in as opposed to, I guess, lower future spend that you might have you would have spent, but now you won't be spending? Just to get a sense of actually how much of that is something you will see as kind of cash in, in the next year or so. And also, given that's obviously quite a sort of large number relative to the target you had for 2016, 2017, are you sort of confident that you might actually sort of go some way beyond that and you've got sort of quite a bit identified that takes you well over the 3.1% or are you essentially implying that from here on we shouldn't expect a lot more incremental on disposals in the near term?
That would be very helpful. Thank you.
Thanks, Ethan. Well, starting with your first question within Venezuela, I may say that operationally talking, we are doing okay. Even I mean, we have even production not only above last year, but also above budget. So we have the extra production of Cardone, but also above budgets. In relation with the payments, what I can tell you is that we are having some delays.
And but these delays is not the first time that happened. So I would say it enter into the variation between the year end and now it's approximately $93,000,000 basically due to the Cardone project. In relation with disposals, you are right, because some of the figures we are adding up here are lower cash, lower future spending and but I'll try to elaborate a little, okay? First, we presented the strategic plan in last October and the disposals are totally linked into a balance variable, okay? So we start to account all the disposals after the strategic plan presentation.
Starting with the LPGs, the pipeline LPGs, it's all in would be around 800,000,000 dollars and would be cash in within this year. The sales are already signed. So the SPAs are already signed and we are pending on administrative approvals. So that would be cash and would be cash within the year. The wind power in the UK will also be cash and cash within the year.
That's the $240,000,000 more or less. The LPG in Ecuador and Peru will be also cash and will be cashing within the year. Then we have 2 divestments or at least we consider those divestments that imply less cash for the following 2 years. 1 is the Eagle Ford Goodrum swap that will generate approximately €400,000,000 of cash between 2016 2017. And then Alaska, Alaska it's a sale of a 21% of our stake in the project that will be paid the $700,000,000 would be paid through abandoning our commitment to carry Armstrong for EUR 700,000,000 in the following 2 years.
And then we have the small things like the CLH that was cashing in October, dollars 325,000,000 the Offshore Canada acreage that we sold also in the end of last year, which account for EUR 70,000,000. And I think that this is basically it. So it's true that we have a part that will be cashing, a part that has already been cash and a part that will be lower investments in the 2016 2017. Finally, if I can go beyond that, well, it could happen. I mean, it depends on the opportunity and we will see.
But our commitment is the 3.1 for between 2,060 I mean, since the issuance of the strategic plan till the end of 2017. Did I answer you, Ethan?
Yes. No, that's very clear. Thank you very much, Miguel.
You're welcome. Thanks a lot.
We'll now move to Brendan Warne at Bank of Montreal. Brendan, please go ahead.
Yes. Thanks, Paul, and thanks, Miguel, for the opportunity to ask questions. It's Brendan Warne from BMO Capital Markets. Just two questions. First question, I guess, is on your results.
And I appreciate you've now got an additional quarter with the Talisman assets under your belt, Miguel. Just out of the 3 regions that you sort of broadly talk about, and I'm referring sort of back to your strategic presentation where you break down to North America, Latin America and Southeast Asia. We've just seen probably some of I hope some of the worst oil and gas prices. Can you just talk about 3 regions broken down by which of the better regions in terms of contribution? Did you see any of them, call it, breakeven in terms of cash contribution?
And what just could we expect for 2016 if we were to sort of average out at a sort of $45 oil price environment? And then the second question, I guess, would relate to your comments you made about the 3 rating agencies, just in terms of what your appetite is for. Still issuing further debt. You were talking earlier about and further issuance of hybrid bonds. And if you could just talk about that as well, please?
Thanks Brendan. I may say that from the 3 regions at least in the Q1, clearly, Asia and South America are the ones that are in positive figures. In the U. S, I mean, Canada and in the U. S, in North America, I would say that there those are the regions that are suffered the most.
What can we do to improve that? Well, I think that we have cut down to 1 rig both in Eagle Ford and in Marcellus while maintaining production. So I think that this will show up. I think that also will show up the process in Eagle Ford in which we have moved from 2 operators into a single one. And I think that savings will come due to this reason.
Also, the $40 scenario have not been reached in the Q1. So if we have to go into a $4 environment, the three areas will clearly improve. But more than that is quite difficult to assess more and to see what the next three quarters will provide us. And in relation with the rating agencies, I think that there is a factor that will come into play in the second half of the year. Once the Central Bank, European Central Bank start to buy corporate bonds, at least I think that the yield of corporate bonds will shrink, even become negative in many cases.
And this will open probably a window for the issuance of hybrids, which would be a good way to increase our capital strength without diluting our shareholders. Did I answer you, Brendan?
Perfect. Thanks for that, Miguel.
Thank you, Brendan. Our next question comes from Biraj Borkhatari at Royal Bank of Canada. Biraj, please go ahead.
Hi, thanks for taking my questions. I had a question on exploration charges and I appreciate that there's a reduced focus on exploration as part of the new strategy, but the charge this quarter was unusually low. I know it can be quite lumpy. I was wondering if you could tell us or give any color on what would be a typical exploration charge on the new strategy going forward and what would be a typical run rate? That would be my first question.
The second one is a similar one for DD and A. Obviously, post the impairments last year, the run rate for DD and A is much lower. And I was wondering is the Q1 number a typical run rate as what we should see for the rest of the year and heading into 2017? And then finally, just a quick one, the breakeven or the free cash flow neutrality target at $40 in 20.15 'seventeen, Can you just remind me what refining margin assumption is baked into that plan? Many thanks.
Thanks, Biraj. Starting with the third one, which is easier, the breakeven was reached at $6.4 per barrel as an index, expecting to gain $0.50 in the actual margin. So it's $6.4 for the index and $6.9 for the whole refining margin. Going into the exploration, I think that the important thing over here is to realize that thanks to the acquisition of Talisman, we have changed our value proposition to the market. I mean, in the past, Repsol was really with a clear proposal of growth through organic exploration.
That implies quite a big penalty short term in the P and L. We have been doing that for years. And now with the acquisition of Talisman, we have more than doubled our size in the Epsilon division. So basically, if you want to have a fair comparison, because it's true that this quarter has been extremely low. I would say that last year we had a budget or an actual figures of 1,900,000,000 dollars in all the exploration.
This year it's going to be $800,000,000 So I think that with these budget figures and taking into account the impact on of the success that you may achieve is where you have the answer. I am optimistic in a sense that we have this year a campaign that it's quite heavy in comparison with last year on appraisal wells, which normally implies lower risk. But I would say you have to play with the €1,900,000,000 last year, €800,000,000 this year and then the rest and the impact on the P and L would depend on the success of the exploratory campaign. Did I answer you, Birak?
Yes, that's perfect. And then just one other question was on DD and A and the run rate for that.
DD and A for the whole year would follow more or less what we have seen in this quarter. There is nothing unusual that we have seen this quarter. So you can take as a proxy the Q1 depreciation figure.
Perfect. That's really helpful. Thanks Miguel.
Thank you, Biraj. Our next question comes from Thomas Adolff at Credit Suisse. Thomas, please go ahead.
Hi, thank you. A few questions as well for me. The first one on the rating agencies, Miguel. They've given you a bit more time to improve your credit metrics. And what we've seen in 1Q is your business is performing really well and you have delivered on your disposal target or close to your target.
Now what the S and P also said when they issued the report is that they do expect an event within the next 3, 2 or 6 months that will significantly improve the credit metrics. So my question is, when you sat down with the rating agencies, did you present to them what you have delivered thus far and a lot of that disposal proceeds has yet to be cashed in? Or should we expect something more to be aligned with what the rating agencies have said? Just to clarify that point, that would be great. The second point I wanted to ask is on working capital.
Now you've provided an adjusted cash flow statement, which is quite helpful. And it looks based on that statement that you've filled about €570,000,000 worth in working capital. My question is how much is that reversible and over what time frame? And the final question for me is, quite finally, before rating agencies have put out their report, I think just over a month ago, Gas Nut came up with a new dividend policy, which surprised a lot of people. You may not be able to answer this question, but I wondered whether this new dividend policy from Gasnap was encouraged by its key shareholders or one that was decided independently from the key shareholders?
Thank you.
Thanks, Tomas. Well, starting with the rating agencies, I mean, rating agencies consider many, many factors, not only the simple ratio flow divided by net debt. In our case, I think that it was clear that in the past, our delivery and commitment to maintain the investment grade was important. I think that a second factor relates to the resiliency of the company. I mean, Repsol delivers better than our peers in the lower part of the cycle, thanks to the downstream division, which is larger to our size than our peers, gas nat and also the dollar euro.
Normally when the barrel is low, the dollar is trends and we have many costs in euro nominated in euros. And the third factor that I think it's important to consider is that the acquisition of Talisman is a transformational process. So you cannot take the photograph day 1, because in that day you have all the depth, but you don't have any synergies, any efficiencies and you still don't cannot see the results of the change in the value proposition at the end the pure transformation of the company. Having said so, it's true that we have to improve our credit metrics, It's true that we have to strengthen our equity. And it's also true that probably some extra divestments above those that we have reached in the 1st months after delivering the strategic plan May took place.
But it's also true that we have 2 variables that are going undoubtedly to impact in the following months. 1 is the one that I referred before, which is the ECB entering into the corporate market bonds. And the second one is the pure barrel price of the barrel. I mean, remember that we were at $27 in February and now we are in $46 $47 per barrel. So I think that all the measures that we are going to put in order to fulfill our commitments with the agencies are going to depend in these two variables.
And we will see probably if the barrel falls down to 20 in the last quarter of the year, they will ask us for more. But it's also probable that if the barrel it's at $50 we can somehow soften our initial commitments with the agency. So it's a matter of seeing how things evolve, but you are right, we have necessarily to improve our rate metrics. In relation with the working capital, the 572,000,000 that we have suffered in this Q1 has a component of I mean, if we go to pure accounting instead of €570,000,000 the peer would have been €360,000,000 to be precise, €357,000,000 And this is due to the fact that we are working and all the data referred to CCS. And I will try to elaborate a little.
I mean, if CCS is higher than MIFO, that implies that the cost of sales that we are including in the CCS calculation is lower. Put it in this word, we are taking cheapest bottles from our inventory. So in order to be fair, we have to increase somehow the working capital for the difference between CCS and Mifo in order to be consistent. So from the 572,000,000, 215,000,000 refers to the MIFO CCS difference before tax. Other factors that are included in the increase are Venezuela, I mentioned it before, we have €90,000,000 there of extra accounts and receivables.
We have €70,000,000 of increase in chemicals due to the volumes we sold within the quarter. We have a tax settlement in BPTT for $53,000,000 that has been paid. And finally, we have an extra £40,000,000 a little more than £40,000,000 that refers to the objectives of the dealers in our network. Normally they have CCS versus MIFO, I mean nobody knows. We hope that chemicals will continue to do well, but we will see.
BPTT will disappear, dealers will disappear. So I think that will be closer to the €200,000,000 figure than the €500,000,000 we have now in front. And finally, in relation with Gasnatt's new dividend policy, I cannot comment much. The only thing I can say is that what Gasnatt has done is to approach his dividend policy to the rest of the European utilities. But that's it.
Okay, Thomas? Got it. Thank you. Thank you very much. Thanks a
lot. Thank you, Thomas. Our next question comes from Anish Kapadia at Tudor, Pickering, Holt. Anish, please go ahead.
Good afternoon, Miguel. I've got three questions, please. Firstly, I was wondering if you could give somewhat of an update on your U. S. Gulf of Mexico plans.
Shenzi has been a plateau for a number of years now. I'm just wondering if you can give some outlook on the production outlook and the impact of the recent Shenzi Northwell? And also your plans for the lower tertiary with regards to Buckskin and Leon? Second question on Talisman. You've talked in the past about buying 2P reserves at $10 per BOE.
If I look at Talisman's year end financial statements, the 2P reserve valuation is $6,300,000,000 using Repsol's price deck of $75 per barrel rail. So that works out to less than $5 per BOE. So on that basic calculation, it looks like you paid double the value of the business based on your price deck. I was just wondering if you can explain the difference there or what I'm missing? And then just a simple question for the last one.
I was just wondering if you can update what your expectations for downstream EBITDA for the full year in 2016? Thank you.
Well, starting by the third one. I mean, I don't have any reasons to think why the results of the downstream would may change in the following quarters. So I would say that as far as of today, I keep thinking that downstream will remain at the same levels than last year. In relation with the activity in the Gulf of Mexico, I mean, in Xemzi, the North Flank will look promising, though we are not only in Gulf of Mexico, but I would say in all the areas we are taking a very, very prudent approach. So in that sense, it also imply prudent CapEx and move, I would say, step by step having a permanent eye on the evolution of the barrel.
Leon needs further evaluation. And so, until the evaluation is completed, I don't have any extra data. And back skiing, we are studying ways to develop it and which type of CapEx will imply the project. So basically and in relation with Sensi that I think it was more or less where you were focusing, I think that looks promising, but we are going to be real slow and prudent in the development of the North Flank. I mean, we can made in relation with the second question, we can made all type of assumption.
I mean, to whether or not we buy cheap or expensive or was a great acquisition or not. The truth is that I tried $7 per share and it didn't work. And we ended up paying one extra dollar So we paid $8 But I think that at the end, we bought 2P reserves at $10.5 But more important, the asset of Talisman were totally complementary with ours, implying less risk of the portfolio being in Canada, Norway, the U. S. And Southeast Asia, it was one main factor.
Also it give us a lot of room to enter in the non conventionals, which is a type of resource that normally the metrics that are included in FAST do not consider. So when you look at the Duvernay, probably the Duvernay is not even included in that type of valuation, but it has value and for us a great one. And once the prices are there, I think that the market would realize that to buy reserves at $10.5 it's I mean, I will keep buying if I will have more money, But it was our move. So I don't think it was expensive. Time will tell us whether or not it was important, because we are going to be on top of those assets for 20 years.
And looking ahead 20 years to buy oil reserves at $10 seems to me reasonable. Did I answer you, Anish?
Yes. Thank you very much, Miguel.
Thank you for the question. Next, we'll move to Irene Himona from Societe Generale. Irene, please go forward.
Thank you, Paul. Good afternoon, Miguel. I had two questions, if I may. So first of all, as you explained, Repsol strategy post talisman clearly moving away from organic growth to value. And so when I look at your return on capital employed this quarter, 6%, it's actually double what it was in Q4.
And all of that improvement, in fact, is thanks to a rise in the numerator, basically, the profit. Your capital employed is largely unchanged at EUR 40,000,000,000. But my question really is given the strength of the Q1 free cash flow generation, given all the internal efficiency measures and so on. Do you anticipate by year end 2016 that you may actually achieve a reduction in the net debt and therefore in the capital employed? And related to that, I realize there's no explicit sort of target for full return on capital.
But what would you say is sort of reasonable for the business? And my second question was just to clarify the net capital expenditure table you show, I think it's on Page 21. Is this after you deduct disposals? Because if I look at European downstream CapEx, it's sort of halved year on year. And I just wonder if it does include disposals, what's the underlying, if you like, gross CapEx basically?
Thank you.
Well, in relation with the first one, the answer is yes. I mean, and we expect at least to reduce the debt, I would say by a little more than the divestments we are able to cash in within the year. So yes, Brisebovenova return on capital, I mean, in this scenario of dollars I will not be able to give you an answer, Irene. I think that this quarter has been good in relation with the prices we have been in, but we will see. And in relation with net CapEx, during the quarter, we have deduct disposals for a little more €110,000,000 or something like that €1,000,000 So not very important.
And for the year for the whole year, the figure of CapEx would be around €4,000,000,000 for the whole company, €3,900,000,000 to be precise. And from those basically 3.1 would be in the Upstream division, between 33.1 in the Upstream division. The rest basically would be Downstream with a small tip on the I mean pocket money on the corporation.
Okay. Thank you very much, Miguel.
Thanks to you, Irene.
Thank you. Our next question comes from John Rigby at UBS. Go ahead,
Jon. Thank you. Hi, Miguel. Can we take a look at tax for a moment? I appreciate the low oil prices tax rates tend to fall over the place.
So I just wonder whether you could help me just sort of disaggregate some of the effects. So if oil prices were to stay where they are right now, let's say, in the mid-40s, ex any further impact from Brazil, what do you think the tax rate would be in the E and P business underlying? What portion of that do you think will be cash tax and what will be accounting tax? And then can you just help me on 2 other points? It looks like you actually received some tax payments in the Q1.
So can you just explain what's happening there? And the downstream tax rate also looks a bit low in the Q1. Is that just a one off in the Q1 or is that something we can expect to recur going forward? Thanks.
Thanks, Jan. Yes, I'm trying to receive taxes. No. Well, I may say that in relation with the first one, I think that upstream business at this level would be around 40% corporate tax level. If we don't have funny episodes regarding the different currency situation, I think that only the difference between I mean, Q1 last year, Brazil penalizes us due to the devaluation of the real in something like 68 €1,000,000 And in this, especially when you have a very low results in the division, which is what we had at this level.
In the Q1, we have received something a little below €300,000,000 in tax payments, But this is due to the fact that the Spanish IRS, I mean, the fiscal authorities charge us based on accounting figures more or less. And there are many deductions that we have the right to that are not taking into account with these metrics. To put you an example, gas natural dividends are taxed are cashed by tax cash by the authorities during the year. But those dividends at the year end are free of taxes. So they'll have to pay the money that we they have captured in advance.
And that's the reason of the tax payments we have received in the Q1. And in relation with the low tax rate in the Downstream division, there are two factors there. The first one is that this year, we have a reduced corporate tax rates in Spain down to 25% from the prior 28 percent that we had in 2015. This in one hand, I mean the other thing that we are still benefiting from the investments we did in the Downstream division in the basically in the Cartagena refinery, which implies deductions. So cash stocking, for sure, the figure is low that the tax rate that now in Spain is 25%.
Did I answer you, John?
Yes. That's great. Thank you.
You're welcome. Thank you, John.
Our next question comes from Rodolphe Ranuille at RBS Fixed Income. Please go ahead.
Yes. Good afternoon. I just wanted to clarify something. When I look at your cash flow numbers, I've got an EBITDA calculation of €840,000,000 I know there's a difference between obviously the EBITDA CTS and the one that you report on the front page of the report. But I was wondering what the difference is.
Thanks, Raul. I think that the difference is due to the fact that one of the figures is CCS and the other is Mifo. So as you have a pretax difference of €215,000,000 in the CCS versus MIFO, I think that this is the main difference you are suffering. But our IR team will give you a better explanation, because that implies the analysis of the whole cost of sales that is implicit in the CCS. So but the truth is that the difference you may found is $215,000,000 pretax, which is the difference between CCS and MIFO.
Okay, Rodolf?
Okay. That makes some sense. It doesn't go 100% to the number, the €215,000,000 from €840,000,000 but it gets close enough, I guess.
But if I mean, our higher people will contact you to give you details sent by sent, okay? Sure.
Thank you
very much. The main of the expansions is the one I told you. Thanks, Robolfo. Thank
you. Rodolfo, we'll be in contact with you. Moving on to the next question, we have Bruno Silva from BPI. Bruno, please go ahead.
Hello, good afternoon. Thank you for taking my questions. Just a few confirmations of data points. First of all, in terms of OpEx per barrel of the Spanish refining business, if you could clarify what has been the level in this quarter and whether or not there is in your refining margin some from any sort of hedging. Is also confirmation in terms of the net profit guidance for this year, if it is a maintenance of what you have said in the recent past?
And then in terms of dividends, after the cutting the Draasenas dividend and the comments that you issued today in terms of the evolution of industry context and as well as the potential issuance of hybrids down the road. How could that affect your stance in terms of dividends to be paid this year versus those last year? Thank you very much.
Thanks, Bruno. I think that I'm not sure about the first question what you refer on OpEx per barrel, but basically I can tell you that at $2.6 per barrel, we have an EBIT at CCS of 0. If we are talking about EBITDA, our breakeven would be 1.5 dollars per barrel. This is basically what I think can help you because in the other hand, we do not hedge our refining production. So those are the two figures that I think can help you in relation with the variable cost in the downs in the refining business.
Regarding the net profit, I mean, I think we have not give any guidance for the net profit and we normally don't do it. So we will see how the prices evolve and we will see. But normally we don't give profit guidance. And in relation with dividends, the dividends for sure is a decision that the Board will have to present to the General Assembly. But basically over there, we'll go step by step and looking permanently how the volatility of the industry we are suffering now evolves.
So we'll have to go 1 by 1 analyzing and till November, which is the month in which normally we have the proposal from the Board. It's going to be quite difficult to make any assumption. And related to the issuance of hybrids, it will not affect under any mean our the dividends we may paid after this year.
Okay, Bruno?
[SPEAKER JOSE RAFAEL FERNANDEZ:]
That's great. Thank you very much. [SPEAKER JOSE
RAFAEL FERNANDEZ:] You're welcome.
Thank you, Bruno. Our next question comes from Lydia Rainforth of Barclays. Lydia, thanks for waiting. Please go ahead.
Thanks, Paul and I recall. Two questions, if I could. The first one, just coming back to the refining outlook. In terms of the you mentioned the $6.4 assumption for this year and the $0.5 per barrel premium margin that you think that is based in there. You did do $1 at the first quarter stage.
Is that the sort of number that realistically you think you can achieve throughout this year and just what's actually driving that? And then the second one was on cost cutting and the impressive moves that you made on the synergy side. Can you just talk a little bit more about where those synergies or where the cost savings are really coming from? Is it primarily the corporate side? Is it upstream?
Or is it across the company? Thanks.
Thanks, Lydia. The answer to the first question, the only one I can give you is yes. I mean, we have actual figures of the Q3 and basically all the data in the April has been totally aligned with what we have seen in the Q1. So I'll have to say yes. I mean, the outlook looks as of today that we will continue this trend.
And in relation with cost cutting and synergies, basically, if you want the split of the figures, basically what we have is upstream, I mean, in relation with the whole figure. Inefficiencies, we have reached a EUR160 1,000,000 more or less. From those, half of it refers to the upstream division and half of it to the downstream division. Corporate was a little behind, though we expect to that also the corporate will reach his goal. So it was €71,000,000 for the E and P and 3,000,000 for the downstream.
For the year end, we expect €350,000,000 for the upstream division and €225,000,000 for the downstream business, while corporate will reach the 160,000,000 in the whole year. And in relation with synergies over here is the opposite and makes quite sense. I mean, corporate is the one that is leading with EUR 41,000,000 over the EUR 50,000,000 that we have achieved. And when I mentioned achieve, I mean P and L in this quarter. For the full year, we expect to reach the EUR 273,000,000 in synergies from those 150,000,000 would be at the corporate level and 100,000,000 in the upstream division.
Logically, downstream doesn't have much synergies due to the profile of Talisman, which basically is upstream. Did I answer you Lydia?
Yes, that's very, very helpful. Thank you.
Thanks, Giv. Thank you.
Thank you, Lydia. Our next question comes from Hamish Clegg at Bank of America Merrill Lynch. Hamish, please go ahead.
Hi, guys. Thanks for taking my questions. Much of this has been covered, but just to go into this in more detail, just on two things, your hybrids or potential for more hybrids and exploration. So just starting on the hybrid, Note I noted this sort of last year where Repsol CDS was trading in the market before you successfully raised €2,000,000,000 of hybrids. And you've said you hope that the ECB would will potentially help the market for this debt instrument open again, and we know it would be credit positive.
Whereas CDS preferred Repsol trading at 200 today, is this something you look at today versus last year? How you consider whether or not you'll do hybrids? How if that is an indicator, what sort of level do you see? Do you feel that you'd be in a position tomorrow if there was a demand to issue nearly €3,000,000,000 as per your target? So that was the first question.
And then the second question was just on the exploration side. Completely understand your strategy here in terms of kind of focusing on the lower risk appraisal. Makes a lot of sense and the expense appeared to be only 12% of the total CapEx in the quarter, which is unsurprising. But what sort of potential expense rate can we consider for the rest of the year, bearing in mind if the rest of the year is reflected in Q1 low risk, it may be the same? And how will that evolve next year?
Will 2017 be an appraisal year? Or will there be some higher risk stuff within exploration spend? Thanks.
Thanks, Anish. I'll say first in relation with the hybrids, I think that if we talk about the volumes, we don't have any commitment with the €5,000,000,000 we initially had agreed with the agencies in December 2014. So but if there is a chance, for sure, we will go for it. I don't know which would be the CDS, but it's true that if you look at our hybrid, they have evolut from more than almost a 10% yield down to a 6% that I think there were today. I expect they to lower and I think that the we have to see how the capital markets evolve with the entrance of the ECB as a player.
So we will see. I cannot give you a figure of the CDS in which I expect to issue because first I would like to see the impact of the ECB in all the capital markets of corporate bonds. In relation with the exploration, I would say that the main budget for the year is €800,000,000 but with low risk. Last year, we have instead of €800,000,000 of budget, we had €1,900,000,000 with a higher risk. And then it's going to depend much on the rate of success.
So it's quite difficult to assess any figure. What I can tell you is that this quarter has been extraordinary in a sense, because also we are playing each game looking for cash. And if you look at it, the 2 wells that were dry, we I mean, our partner was carrying us. So we are looking every single cent in the business that can be extracted. And talking about risk, as mentioned, I expect risk to be lower.
And in relation on 2017, it's way too early. It's way too early because we have to see the price scenario in order to assume whether or not we will move ahead with more exploration or not. So basically, I think that this is what I can tell you both in relation to hybrids and to exploration, Amish.
Very clear. Thanks a lot. Cheers, Miguel.
You're always welcome, Amish.
Thank you, Hamish. Our next question comes from Mark Kofler at Jefferies. Mark, please go ahead.
Yes, great. Thanks. Good afternoon, everyone. Thanks for taking my question. Just a quick one, really.
There's been some quite mixed reports recently around Libya. So I just really wanted to get an update there in terms of if you were seeing any changes from your regarding your assets there? And then perhaps just a reminder in terms of the production, which is offline, and the associated cash flow or earnings with those barrels?
I mean, in relation with Libya, we are quite prudent in all our assumptions. I mean, basically, if something would happens and we hope so, because I think that for Europe is really important to stabilize the country. But if it will come, it would be an upside in all our assumptions. And I think that you also asked about the associated cash flow coming from the Libyan barrels. Basically, as a thumb rule, you can take into account that it's $1,000,000 per day as what normally we're generating.
The data we have about the assets is that they are in good shape. There has not been any report or any data that the asset has suffered vandalism or that they have been attacked. So we expect that if good news arrive and you know that in the last 3 years there has been ups and downs, the quality of the reservoirs is very good. And with 1 week in the past, we have been able to reach plateau. So basically, we are not considering anything in our data.
It would be pure upside. And I hope that things goes for good both for the people in Libya and for the European future. Did I answer you? Yes, that's great. Thank you.
Thank you, Mark. Our next question comes from Giacomo Romeo at Macquarie. Please go ahead.
Good afternoon. Three quick question for me. First one on OpEx. You talked about the 13% reduction in the unitary OpEx in Upstream. Can you just confirm what base you're using if that's relative to 4Q to full year 2015 and whether that's including Talisman?
2nd is on tax. Can you please quantify the actual effects impact from on taxes from Brazil? And finally, at your current CapEx level, where do you expect North American production to go during 2016? Thank you.
Well, first one, the CapEx reduction of 13% refers to the difference in OpEx between Q1 2016. Does it include Talisman? Yes, it does. In relation with the tax question about Brazil, the impact on the taxes is based on the currency fluctuation. Last year, it was something like €69,000,000 of penalty, the one that we received due to the devaluation of the real.
This year has been a little above 38. So all in the difference is the addition of both figures, a little more than $110,000,000 approximately. And in relation with the current CapEx level in North America, we expect a small reduction in North America, basically due to Mid Con. So we expect and a little more in Eagle Ford for the combination of both our reduction of in percentage and a small reduction due to the fact that we are going to work just with 1 rig, flat in the Marcellus. So the main reductions would be allocated both in Mid Con and in the Eagle Ford.
And current CapEx level, I think that I'll have to give you that through our IR people. But normally the figure should stand below $180,000,000 But our IR team will confirm that. Thank you.
Thank you, Giacomo. We'll move to our next question. And our next question is Edward Pivers from BNP Paribas. Edward, please go ahead.
Thanks, Paul. Hi, Miguel. I think you've answered most of my questions already, to be honest. But just one question on the U. K.
Operations. I think it's fair say that, that part of your upstream portfolio is perhaps facing greatest challenges in the current pricing environment. So would you be able to sort of give any further details in terms of the progress you've made on the restructuring efforts?
Thanks, Edward. I agree with you that it is probably one of the toughest challenges, but also has been the one that has improved the most in comparison with what we expected. I may say that the problem in the UK operations had two factors. The first one refers to the main assets, mature assets in the North Sea, which basically is a common problem for the whole industry. The second one was the misalignment with our partner Sinopec.
I think that we have been able to close the second problem. And right now we are working with our partner in good harmony. And we have we are starting to obtain results. I mean, OpEx and CapEx has been reduced importantly. We have been able to increase production.
And I would say that probably to put you an example, we have dismissed more than 300 people that basically we're not doing anything there, in agreement for sure with Sinopex and the whole thing is improvement. I'm saying that with that that we have a great asset there. No, not at all. I mean, it's a bad asset and we knew that since day 1. But to give you just a couple of figures, we have been able to reduce OpEx and CapEx by 25% between 2015% and 2014.
Production was increased by 10% and we expect in the future to go a further down in OpEx and CapEx by between 10% 15% this year, while also increasing the production. So the asset for sure is not a jewel, but is delivering by far better than we initially estimate when we had bought Talisman.
Thank you.
Thank you, Edward. Our next question comes from Jason Kenney at Santander. Jason, please go ahead.
Hi, Miguel, and well done with the numbers today. Now I'm not really looking for more work on restated modeling, but I was wondering if you've considered announcing results on an ex FX appreciation basis, because it's something that Shell has moved to do, particularly with regards to Brazil and also companies like Statoil do this as well. Is it something you might be considering?
Honestly, I can analyze it, but to me it sounds difficult because even if I shift to dollar base I mean, I cannot shift to dollar basis in Spain. I have to make all the info in euros, but we may analyze it. But basically, the main difference comes to me because of local currency versus dollar and then dollar, which is the currency we are using in Brazil to put you an example, then I have to translate it to euros. So but I will check if that provides a better info for all of you. But right now, I think that legally I have to do all my figures in euros.
Okay. Thanks, Jason. Thank you, Eni, for your question and for your suggestion. We will analyze it.
Thank you, Jason. Our next question comes from Kim Fustier at HSBC. Please go ahead, Kim.
Hi, good afternoon. I had two questions, please. Firstly, I noticed you shut in a couple of loss making oil fields in the Q1 in Colombia and in Norway. Just wondered if you could quantify the production impact. And also wondered if there's any other loss making assets that you would be looking to shut in or is that no longer necessary at $45 oil?
And just secondly on CapEx, I think your organic CapEx run rate is a little below the full year guidance of 3.9%. So I just wondered if you're planning to accelerate spending through the year and where? Or is there a chance that CapEx could undershoot your guidance? Thanks. [SPEAKER
JOSE RAFAEL FERNANDEZ:] Well, in the second in your last question is true that we have reduced our CapEx in relation with the strategic plan, but that was all assessed and commented in the full year results presentation. So we have aim to the €3,900,000,000 versus the €4,100,000,000 that we put on the strategic plan, okay? In relation with the loss making assets, I would say that Norway was nil, I mean, it was negligible. There was nothing there. And finally, Colombia implied 3,000 barrels a day of production.
So I mean, as mentioned before, we are looking every cent that moves within the company. And if really it's not generating cash, I mean, we don't play for the sake of having great production figures. We already have it. We have more than doubled our production. So basically our goal is and I think that the whole company is focused on it to aim for cash and efficiency.
And yes, any asset that is either quite small or and that is not generating anything, for sure, will go out. No doubt on that. Okay. Kim?
Yes. Thank you. Just to come back on CapEx, I was referring to the quarterly run rate as your organic CapEx spend, which I think is running at about $800,000,000
for the quarter? [SPEAKER ARNAUD DE PUYFONTAINE:]
I would say that's mainly Q1. So and we are not that far apart. I mean the net figure was 800. If you take the whole the divestments out, then you ended up in 900. So €900,000,000 for the whole year multiplying by 4, lead us to €3,600,000,000 which is quite close to the EUR 3,900,000,000.
But normally Q1, I mean, this will we are going to be quite close to the objective of 3.9%. So for your metrics take 3.9% for the whole year. Okay, Kim?
Thank you.
Thanks, Kim. And I believe we've got one additional question going back to Thomas Adolff at Credit Suisse. Thomas, please go ahead.
Thank you. Miguel, it's me again, sorry. Just wanted to dig into the refining margin premium you've realized over the benchmark. And I guess part of it is shifting yields from diesel into gasoline. Part of it has to do with the ability to process nonstandard crude.
And I wondered which of the 2 contributed more to that premium, so for me to better understand how I think about modeling going forward. And just a small one on LAPA in Brazil, how is it developing there? Thank you.
[SPEAKER JOSE HUMBERTO ACOSTA MARTIN:] Thanks, Thomas. Long time without hearing you. In relation with the refining margins, I'll say that you have to think that the index basically provides you with the type of crudes you used last year with this quarter prices. So normally, our people is able to gain some extra, I would say, over the monkey. So over there, you probably have from the dollar we gained probably around $0.50 are in that line.
The other $0.50 refers to the efficiency program that I have mentioned before. I mean, the efficiency in the quarter, it's aligned with the estimates and it's giving us some extra room around another $0.50 in the margin. Things that we have produced this quarter we have distillate this quarter, if I'm not wrong, something like 68,000,000 barrels. So the gain in efficiency is a little more than the €30,000,000 that were needed to obtain the extra $0.50 And in relation with LAPA, the FPSO, it's already in place. We are right now in discussions with our partner to see which is the optimum plateau for the projects.
And basically, there's no change for the first oil. So by the end of the year, we would be producing Lapa. Okay, Tomas? Thank you. And never mind, I mean, you can put all the questions you want.
Okay.
Thank you, Thomas. And with that, that brings to an end our question and answer session. Any further clarifications can be addressed to the Investor Relations team and I would all be happy to help out. And with that, I will bring to Co's our 1Q conference call for Repsol. Thank you very much for listening.