Good day. Welcome to the Repsol first quarter 2016 results conference call. Today's call is being recorded. Today's conference will be led by Mr. Martínez, CFO. At this time, I will turn the call over to Mr. Ferneyhough, Head of Investor Relations. Please go ahead.
Thank you. Good afternoon, ladies and gentlemen. This is Paul Ferneyhough, 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 first quarter results. This call and associated webcast will be conducted by Miguel Martínez, 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 email the IR team and we will be happy to help you out. I will now hand the conference call over to Mr. Miguel Martínez.
Thank you, Paul. Thank you to those online for attending this conference call on our first quarter 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 EUR 572 million and net income was EUR 434 million. Before going into detail on the first quarter results, I will summarize the topics to be covered in today's call. Firstly, an update on the progress of our strategic plan. Secondly, some comments on the market environment for the first quarter, together with the company's main operational highlights. Finally, the quarterly results. Let's begin with an update on the progress of our strategic plan.
During the first 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 and 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 first quarter.
We are on course to achieve our efficiency, CapEx, and investment targets while also reducing our overall group and upstream free cash flow break evens. We are protecting our balance sheet through expenditure optimization. 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 EUR 3.9 billion of CapEx in 2016. This figure represents a 20% reduction compared to the investment level for 2016 and 2017 assumed in our strategic plan, reflecting our more cautious view of the recovery prices.
We also expect to achieve our target to capture EUR 1.1 billion from efficiencies and synergies in 2016. 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 2016 and more than a 65% of the planned synergies by 2020 have already been captured. With respect to our efficiency program, the first quarter results show how Repsol's 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 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 EUR 100 million in the quarter. In 2016, we will reduce our Upstream OpEx per barrel by more than 30%. 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 expected 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 maintained 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 Talisman in the first quarter, with the majority of cash proceeds projected to be delivered later in the year. Firstly, we completed in January the sale of another portion of our piped LPG businesses for a total of EUR 136 million. This transaction, together with the sale completed in September 2015 of piped gas assets, will generate around EUR 800 million of proceeds, out of which EUR 38 million were received in the first quarter.
Cash in is expected to be finalized before the end of the year. Secondly, we reached an agreement to sell our offshore wind power business in the U.K. to SDIC, State Development & Investment Corporation of China, for EUR 238 million. The cash from this sale is expected to be received during the second quarter of 2016. Third, the sale of our LPG businesses in Ecuador and Peru for around $335 million, implying a multiple of approximately 8 times EBITDA. Finally, in Upstream, smaller disposals have been completed and funds received. We confirmed transactions in recent months totaling EUR 2.8 billion, 1 billion 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 continued 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 averaging just $2.1 per million 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 Cardón in Venezuela, the ramp-up of Sapinhoá 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 second FPSO in Sapinhoá continues, and we expect the project to reach plateau in the second half of the year.
In Colombia, the early production scheme for Acacías 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 U.K., we are continuing the progress to the redevelopment of Montrose and Flyndre, 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 one rig for development activities during the year. In the Marcellus, we are also using one rig to maintain production volumes and leverage a strong price realized through our midstream position. In Greater Edson and the Duvernay in Canada, CapEx optimization and preserving cash flow ensuring we retain valuable land for future development. Regarding exploration activity in the quarter, three exploratory and two appraisal wells were completed. One of the appraisal well registered positive results. Two exploratory negative results, while one appraisal and one 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 Gávea 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 million standard cubic feet of gas and 4,000 barrels of oil. With this well, we finalize the appraisal activities in the Block Campos 33, which comprises the Seat, Gávea, and Pau Brasil discoveries. Additional contingent resources have been discovered in our appraisal campaign in Southeast Illizi 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 second quarter, 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 $6.30 per barrel. The actual margin capture was $1 above the indicator, at $7.30 per barrel. In April, the refining margin indicator was unchanged from the first quarter. The mild winter weakened the performance of our gas and power business, but it remained at break-even level. The commercial businesses were in line with the first quarter 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 first quarter earning performance. First quarter 2016, CCS adjusted net income was €572 million, and net income was €434 million, 38% and 43% lower compared to the first quarter 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 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 first quarter stood at €17 million, €207 million higher than in the first quarter of 2015. Year-on-year performance is as follows. Higher production contributed to an increase in the operating income of €526 million.
Exploration expenses impacted the operating income positively by EUR 196 million, mainly as a result of lower amortization of dry wells. Income tax expense has had a positive impact on the adjusted net income of EUR 161 million, mainly due to the appreciation of local currencies, especially in Brazil. Higher depreciation and amortization charges decreased operating income by EUR 201 million, 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 of EUR 225 million. Turning to our downstream division, CCS adjusted net income in the quarter was EUR 556 million, 4% higher than in the first quarter of last year.
Drilling down into the quarterly results, in refining, lower margins partially compensated by higher utilization rate reduced the operating income by EUR 135 million. 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 $7.30 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 EUR 102 million. In the commercial businesses, marketing and LPG, operating income was in line with that of the first quarter of 2015. Moving to the gas and power and trading, the OMB was EUR 35 million lower than in the first quarter of last year. Nevertheless, the gas and power achieved breakeven in the quarter in adjusted net income terms.
Results from equity affiliates and non-controlling interest, exchange rate, and taxes explain the remaining difference. With regard to Gas Natural Fenosa, adjusted net income in the quarter of 2016 amounted EUR 99 million, 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 EUR 77 million, which compares to a net financial result of EUR 655 million in the same period of last year. In the first quarter of 2015, we had 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 fourth quarter 2015, after paying January's dividend and with very limited proceeds from disposals. It's worth mentioning that in March, the three 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 billion hybrid bonds and restored the intermediate equity content. Following Repsol's announcements of a deed of undertaking, whereby the issuer waives the right to early redemption of the securities in certain circumstances. As of today, all of the three agencies assign 50% equity content to Repsol hybrid bonds.
To conclude, let me underline that during this first quarter, 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 the satisfaction of almost having achieved our divestment target for 2016 and 2017 in just the first few months of the year.
This progress gives us every confidence that we will achieve our overall strategic goals. Thanks so much. I will answer any questions you may have in the Q&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&A session, please address any incident to our email, investor.relations@repsol.com, we will contact you immediately to try and solve it. Before we move to the Q&A, the operator is going to reiterate the instructions.
Thank you. If you would like to ask a question at this time, please press the star or the asterisk key, followed by the digit 1 on your telephone. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question.
Let's now move to the Q&A. For our first question, we'll go to Haythem Rashed at Morgan Stanley. Good afternoon, Haythem.
Hi, Haythem Rashed 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 budgets and power, et cetera. I just wanted to understand how you're finding it from an operational perspective. What is the impact that you are seeing? Also, arguably more importantly, from a cash flow perspective, are you finding that you're still getting paid, and how are the payments working with yourselves with regards to the country? My second question is regarding disposals. Actually, perhaps two parts to it. Firstly, just to get a bit of clarification on the EUR 2.8 billion that you've talked about or announced so far.
How much of that is actually cash in as opposed to, I guess, lower future spend that 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 the next year or so. Also, given that's obviously quite a large number relative to the target you had for 2016-2017, are you confident that you might actually go some way beyond that, and you've got quite a bit identified that takes you well over the EUR 3.1 billion? 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, Haythem. Starting with your first question within Venezuela, I may say that operationally talking, we are doing okay. We have production not only above last year but also above budget. We have the extra production of Cardón, but also above budget. In relation with the payments, what I can tell you is that we are having some delays. These delays is not the first time that happened. I would say it enter into a normal situation within Venezuela. Having said so, the variation between the year-end and now, it's approximately EUR 93 million, basically due to the Cardón project. In relation with disposals, you are right, because some of the figures we are adding up here are lower future spending. 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.
We start to account all the disposals after the strategic plan presentation. Starting with the LPGs. The piped LPGs, it's all-in would be around EUR 800 million and would be cash-in within this year. The sales are already signed, the SPAs are already signed, and we are pending on administrative approvals. That would be cash, and would be cash within the year. The wind power in the U.K. will also be cash, and cash within the year. That's EUR 240, more or less. The LPG in Ecuador and Peru will be also cash, and will be cash-in within the year. We have two divestments, or at least we consider those divestments that imply less cash for the following two years. One is the Eagle Ford, Gudrun swap that will generate approximately EUR 400 million of cash between 2016 and 2017. Alaska.
Alaska, it's a sale of a 21% of our stake in the project that will be paid. The EUR 700 million would be paid through abandoning our commitment to Carry Armstrong for EUR 700 million in the following two years. We have the small things like the CLH that was cash-in in October, EUR 325 million. The offshore Canada acreage that we sold also in the end of last year, which account for EUR 70 million. I think that this is basically it. It's true that we have a part that will be cash-in, a part that has already been cashed, and a part that will be lower investments in the 2016 and 2017. Finally, if I can go beyond that. It could happen. It depends on the opportunity, and we will see.
Our commitment is the EUR 3.1 since the issuance of the strategic plan till the end of 2017. Did I answer you, Haythem?
Yes. No, that's very clear. Thank you very much, Miguel.
You are welcome.
Thanks a lot. We'll now move to Brendan Warn at BMO Capital Markets. Brendan, please go ahead.
Yes, thanks, Paul, and thanks Miguel for the opportunity to ask questions. It's Brendan Warn 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 three regions that you broadly talk about, and I'm referring 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 three regions broken down by which are the better regions in terms of contribution? Did you see any of them call it break even in terms of cash contribution? What just could we expect for 2016 if we were to average out at a $45 oil price environment?
The second question, I guess, would relate to your comments you made about the three rating agencies, just in terms of what your appetite is for still issuing further debt. You were talking earlier about further issuance of hybrid bonds. If you could just talk about that as well, please.
Brendan. I may say that from the three regions, at least in the first quarter, clearly, Asia and South America are the ones that are in positive figures. In the U.S., Canada, and in the U.S., in North America, I would say that those are the regions that suffer the most. What can we do to improve that? Well, I think that we have cut down to one rig, both in Eagle Ford and in Marcellus, while maintaining production. 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 two operators into a single one. I think that savings will come due to this reason. Also, the $40 scenario have not been reached in the first quarter. If we have to go into a $4 environment, the three areas will clearly improve.
More than that, it's quite difficult to assess more and to see what the next three quarters will provide us. 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 Borkhataria 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 is 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&A, but obviously post the impairments last year, the run rate for DD&A is much lower, and I was wondering, is the Q1 number a typical run rate of what we should see for the rest of the year and heading into 2017?
Finally, just a quick one, the break-even or the free cash flow neutrality target at $40 in 2016 and 2017. 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 break-even was reached at $6.40 per barrel as an index, expecting to gain $0.50 in the actual margin. 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. 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&L. We have been doing that for years, and now with the acquisition of Talisman, we have more than double our size in the upstream division.
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 $1.9 billion in all the exploration. This year it's going to be $800. I think that with these budget figures and taking into account the impact 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. I'll say you have to play with the $1.9 billion last year, $800 this year, and then the rest and the impact on the P&L would depend on the success of the exploratory campaign. Did I answer you, Biraj?
That's perfect. Just the one other question was on DD&A and the run rate for that.
DD&A, for the whole year, would follow more or less what we have seen in this quarter. There's nothing unusual that we have seen this quarter. You can take as a proxy the first quarter 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 from me. The first one on the rating agencies. Miguel, they've given you a bit more time to improve your credit metrics. 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. What the S&P also said, when they issued the report is that they do expect an event within the next 3 to 6 months, that will significantly improve the credit metrics. My question is, when you sat down with the rating agencies, did you present to them what you have delivered thus far? 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. You've provided an adjusted cash flow statement, which is quite helpful. It looks, based on that statement, that you've built about EUR 570 million worth in working capital. My question is how much is that reversible and over what time frame? The final question from me is, quite funnily, before rating agencies have put out their report, I think just over a month ago, Gas Natural 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 Gas Natural was encouraged by its key shareholders or one that was decided independently from the key shareholders. Thank you.
Thanks, Thomas. Well, starting with the rating agencies. Rating agencies consider many factors, not only the simple ratio flow divided by net debt. In our case, I think it was clear that in the past, our delivery and commitment to maintain the investment grade was important. I think a second factor relates to the resiliency of the company. 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 Natural and also the dollar-euro. Normally, when the barrel is low, the dollar is strong, and we have many costs denominated in euros. The third factor that I think is important to consider is that the acquisition of Talisman is a transformational process.
You cannot take the photograph day one, because on that day you have all the debt, but you don't have any synergies, any efficiencies, and you still 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. It's also true that probably some extra divestments above those that we have reached in the first months after delivering the strategic plan may take place. It's also true that we have two variables that are going undoubtedly to impact in the following months. One is the one that I referred before, which is the ECB entering into the corporate market bonds. The second one is the pure price of the barrel.
Remember that we were at $27 in February, now we are in $46, $47 per barrel. 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 on these two variables. We will see probably if the barrel falls down to $20 in the last quarter of the year, they will ask us for more. It is also probable that if the barrel is at $50, we can somehow soften our initial commitments with the agency. It is a matter of seeing how things evolve. You are right, we have necessarily to improve our credit metrics. In relation with the working capital.
The EUR 572 million that we have suffered in this first quarter has a component of If we go to pure accounting instead of EUR 570 million, the figure would have been EUR 360 million. To be precise, EUR 357 million. This is due to the fact that we are working and all the data referred to CCS. I will try to elaborate a little. 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 these words. We are taking cheapest barrels from our inventory. 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. From the EUR 572 million, EUR 215 million refers to the MIFO CCS difference before tax. Other factors that are included in the increase are Venezuela.
I mentioned it before. We have EUR 90 million there of extra accounts receivables. We have EUR 70 million of increase in chemicals due to the volumes we sold within the quarter. We have a tax settlement in BPTT for EUR 53 million that has been paid. Finally, we have an extra EUR 40 million, a little more than EUR 40 million, that refers to the objectives of the dealers in our network. Normally, they have objectives for the full year that are paid in the first quarter 2015. For the following months or quarters, I would say, CCS versus MIFO, nobody knows. We hope that chemicals will continue to do well, but we will see. BPTT will disappear. Dealers will disappear. I think that we'll be closer to the EUR 200 million figure than the EUR 500 million we have now in front.
Finally, in relation with Gas Natural new dividend policy, I cannot comment much. The only thing I can say is that what Gas Natural has done is to approach his dividend policy to the rest of the European utilities. That is it. Okay.
Got it.
Thomas?
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 at 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 North well, 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 $6.3 billion using Repsol's price deck of $75 per barrel real. That works out to less than $5 per BOE. 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. 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.
Starting by the third one. I don't have any reasons to think why the results of the downstream may change in the following quarters. 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, in Shenzi, the North flank 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. 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. Till the evaluation is completed, I don't have any extra data.
Buckskin, we are studying ways to develop it and which type of CapEx will imply the project. Basically, in relation with Shenzi, that I think it was more or less where you were focusing. I think that looks promising, we are going to be real slow and prudent in the development of the North flank. In relation with the second question, we can make all type of assumption to whether or not we buy it cheap or expensive or was a great acquisition or not. The truth is that I try $7 per share and it didn't work. We ended up paying 1 extra dollar. We paid $8. I think that at the end, we bought 2P reserves at $10.50.
More important, the asset of Talisman were totally complementary with ours, implying less risk of the portfolio being in Canada and Norway and the U.S. and Southeast Asia. It was one main factor. Also, it gave 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. 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. Once the prices are there, I think that the market will realize that to buy reserves at EUR 10.50, it I mean, I will keep buying if I will have more money. It was our move. 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. Looking ahead 20 years to buy oil reserves at EUR 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 Ferneyhough. Good afternoon, Miguel Martínez. I had two questions, if I may. First of all, as you explained, Repsol strategy post-Talisman, clearly moving away from organic growth to value. When I look at your return on capital employed this quarter, 6%, it is actually double what it was in Q4. 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 billion. 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?
Related to that, I realize there is no explicit sort of target for return on capital, what would you say is sort of reasonable for the business? My second question was just to clarify the net capital expenditure table you show, I think it is on page 21. Is this after you deduct disposals? If I look at European downstream CapEx, it is sort of half year-over-year. I just wonder if it does include disposals, what is the underlying, if you like, gross CapEx, basically? Thank you.
Well, in relation with the first one, the answer is yes. 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. Yes. Renewable return on capital, in this scenario of $30 to $40, I will not be able to give you an answer, Irene Himona. I think that this quarter has been good in relation with the prices we have been in. We will see. In relation with net CapEx, during the quarter, we have deduct disposals for EUR 100 million, a little more, EUR 110 million or something like that. Not very important. For the whole year, the figure of CapEx would be around EUR 4 billion for the whole company, EUR 3.9 billion to be precise.
From those, basically, EUR 3.1 billion would be in the upstream division, between EUR 3 billion and EUR 3.1 billion in the upstream division. The rest basically would be downstream with a small tip, I mean, pocket money on the corporation.
Okay. Thank you very much, Miguel.
Thanks to you, Irene.
Thank you. Our next question comes from Jon 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 fly all over the place. I just wonder whether you could help me just sort of disaggregate some of the effects. If oil prices were to stay where they are right now, let's say in the mid-$40s, X any further impact from Brazil, what do you think the tax rate would be in the E&P business underlying? What portion of that do you think would be cash tax and what would be accounting tax? Can you just help me on two other points? It looks like you actually received some tax payments in the first quarter. Can you just explain what's happening there? The downstream tax rate also looks a bit low in the first quarter.
Is that just a one-off in the first quarter or is that something we can expect to recur going forward? Thanks.
Thanks, Jon. Yeah, it's trying to receive taxes, huh?
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, first quarter last year, Brazil penalizes us due to the devaluation of the real in something like EUR 68 million. In this, especially when you have very low results in the division, which is what we had at this level. In the first quarter, we have received something a little below EUR 300 million in tax payments. This is due to the fact that the Spanish IRS, I mean, the fiscal authorities, charge us based on accounting figures, more or less. 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. Those dividends at the year-end are free of taxes. They'll have to pay the money that they have captured in advance, and that's the reason of the tax payments we have received in the first quarter. 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 rate in Spain down to 25% from the prior 28% that we had in 2015. This in one hand, in the other thing that we are still benefiting from the investments we did in the downstream division, basically in the Cartagena refinery, which implies deductions.
Cash stocking, for sure the figure is low that the tax rate that now in Spain is 25%.
Okay.
Did I answer you, Jon?
Yep, that's great. Thank you.
You're welcome.
Thank you, John. Our next question comes from Rodolphe Nuyts 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. I know there's a difference between obviously the EBITDA CCS and the one that you report on the front page of the report, I was wondering what the difference is.
Thanks, Rodolphe. I think that the difference is due to the fact that one of the figures is CCS and the other is MIFO. As you have a pre-tax difference of EUR 215 million in the CCS versus MIFO, I think that this is the main difference you are suffering. 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. The truth is that the difference you may found is EUR 215 million pre-tax, which is the difference between CCS and MIFO. Okay, Rodolphe?
Okay. Yeah.
Thank you.
That makes some sense. It doesn't go 100% to the number, the 215 from 840, but it gets close enough, I guess.
Our IR people will contact you to give you details cent by cent. Okay?
Sure. Thank you very much.
The main of the explanations is the one I told you. Thanks, Rodolphe.
Thank you.
Rodolphe, 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 effect 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. Then, in terms of dividends, after the cutting the last announced dividends, 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'm not sure about the first question, what you refer on OpEx per barrel, I can tell you that at EUR 2.6 per barrel, we have an EBIT at CCS of zero. If we are talking about EBITDA, our breakeven would be EUR 1.5 per barrel. This is basically what I think can help you, because on the other hand, we do not hedge our refining production. Those are the two figures that I think can help you in relation with the variable cost in the downstream, in the refining business. Regarding the net profit, I think we have not give any guidance for the net profit. We normally don't do it. We will see how the prices evolve, and we will see. Normally, we don't give profit guidance.
In relation with dividends, the dividends for sure is a decision that the board will have to present to the general assembly. Basically, over there, we'll go step by step, and looking permanently how the volatility of the industry we are suffering now evolves. We'll have to go one by one analyzing until 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. Related to the issuance of hybrids, it will not affect under any mean the dividends we may paid after this year. Okay, Bruno?
That's great. Thank you very much.
You're welcome.
Thank you, Bruno. Our next question comes from Lydia Rainforth at Barclays. Lydia, thanks for waiting. Please go ahead.
Thanks, Paul. Hi, Miguel. Two questions, if I could. The first one, just coming back to the refining outlook. In terms of, you mentioned the EUR 6.4 assumption for this year and the EUR 0.5 per barrel premium margin that is based in there. You did do EUR 1 at the first quarter stage. Is that the sort of number that realistically you think you can achieve throughout this year, and just sort of what's actually driving that? The second one was on cost-cutting and the impressive moves that you've 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. We have actual figures of the third quarter, and basically all the data in the April has been totally aligned with what we have seen in the first quarter. I'll have to say yes. The outlook looks as of today that we will continue this trend. In relation with cost-cutting and synergies, basically, if you want the split of the figures, basically what we have is upstream, in relation with the whole figure. In efficiencies, we have reached EUR 160 million, 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 that also the corporate will reach its goal. It was EUR 71 million for the E&P and EUR 83 million for the downstream.
For the year-end, we expect EUR 350 million for the upstream division and EUR 225 million for the downstream business, while corporate will reach the EUR 160 million in the whole year. In relation with synergies, over here is the opposite. Makes quite sense. Corporate is the one that is leading with EUR 41 million over the EUR 50 million that we have achieved. When I mention achieve, I mean P&L in this quarter. For the full year, we expect to reach the EUR 273 million in synergies. From those, EUR 150 million would be at the corporate level and EUR 100 million 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?
Yeah, that's very helpful. Thank you.
Thanks to you. 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 a little more detail just on two things, your hybrids or potential for more hybrids and exploration. Just starting on the hybrid. I noted the sort of last year where Repsol CDS was trading in the market before you successfully raised EUR 2 billion of hybrids. You've said you'd hope that the ECB will potentially help the market for this debt instrument open again, and we know it would be credit positive. With CDS for 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? 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 EUR 3 billion as per your target? That was the first question. 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. The expense appeared to be only 12% of the total CapEx in the quarter, which is unsurprising. 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 reflective of Q1 low risk, it may be the same. How will that evolve next year? Will 2017 be an appraisal year or will it be some high-risk stuff within exploration spend? Thanks.
Thanks, Hamish. 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 EUR 5 billion we initially had agreed with the agencies in December 2014. 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 hybrids, they have evolved from more than almost a 10% yield down to 6% that I think they are worth today. I expect them to lower, I think that we have to see how the capital markets evolve with the entrance of the ECB as a player. 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 EUR 800 million, but with low risk. Last year, we have, instead of EUR 800 million of budget, we had EUR 1.9 billion with a higher risk. It's going to depend much on the rate of success. 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. If you look at it, the two wells that were dry, our partner was covering us.
We are looking every single cent in the business that can be extracted. Talking about risk, as mentioned, I expect risk to be lower. In relation with 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. Basically, I think that this is what I can tell you both in relation to hybrids and to exploration, Hamish.
Very clear. Thanks a lot. Cheers, Miguel.
You're always welcome, Hamish.
Thank you, Hamish. Our next question comes from Marc Kofler at Jefferies. Marc, please go ahead.
Great. Thanks. Afternoon, everyone. Thanks for taking my question. Just a quick one, really. There has been some quite mixed reports recently around Libya. I just really wanted to get an update there in terms of if you are seeing any changes 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. Thanks.
In relation with Libya, we are quite present in all our assumptions. If something good happens, we hope so, because I think that for Europe it's really important to stabilize the country. If it will come, it would be an upside in all our assumptions. I think that you also ask about the associated cash flow coming from the Libyan barrels. As a thumb rule, you can take into account that it's EUR 1 million per day. That's 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.
We expect that if good news arrive, you know that in the last three years there has been ups and downs, the quality of the reservoirs is very good, and with one week in the past, we have been able to reach plateau. 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?
Yeah, that's great. Thank you.
Okay.
Thank you, Marc. Our next question comes from Giacomo Romeo at Macquarie. Please go ahead.
Good afternoon. Three quick questions from me. First one on OpEx, you talk about a 13% reduction in the unitary OpEx in upstream. Can you just confirm what base you're using, if that's as relative to 4Q to full year 2015, and whether that's including Talisman? Second is on tax. Can you please quantify the actual effects impact on taxes from Brazil? Finally, at your current CapEx level, where do you expect North American production to go during 2016? Thank you.
First one, the CapEx reduction of 13% refers to the difference in OpEx between first quarter 2016 and first quarter 2015. Does it include Talisman? Yes, it does. In relation with the tax question about Brazil, the impact on taxes, it's based on the currency fluctuation. Last year, it was something like EUR 69 million of penalty, the one that we received due to the devaluation of the real. This year has been a little above EUR 38. All in, the difference is the addition of both figures, a little more than EUR 110 approximately. In relation with the current CapEx level in North America, we expect a small reduction in North America, basically due to Mid-Continent.
A little more in Eagle Ford for the combination of both a reduction in percentage and a small reduction due to the fact that we are going to work just with one rig. Flat in the Marcellus. The main reductions would be allocated both in Mid-Continent and in the Eagle Ford. 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 million. Our IR team will confirm that with you.
Thank you.
Thank you, Giacomo. We'll move to our next question. Our next question is Edward Pibus from BNP Paribas. Edward, please go ahead.
Thanks, Paul. Hi, Miguel. I think you've answered most of my questions already, to be honest. Just one question on your U.K. operations. I think it's fair to say that that part of your upstream portfolio is perhaps facing the greatest challenges in the current pricing environment. Would you be able to 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 U.K. operations had two factors. The first one refers to the main asset, 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 this second problem, and right now we are working with our partner in good harmony. We are starting to obtain results. OpEx and CapEx has been reduced importantly. We have been able to increase production.
I would say that probably, to put you an example, we have dismissed more than 300 people that basically were not doing anything there, in agreement for sure with Sinopec, and the whole thing is improved. I'm saying that with that we have a great asset there. No, not at all. It's a bad asset, and we knew that since day one. 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 farther down in OpEx and CapEx by between 10% and 15% this year, while also increasing the production. 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 Kenny at Santander. Jason, please go ahead.
Well, hi, Miguel, and well done with the numbers today. I'm not really looking for more work on restated modeling. 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 USD basis in Spain. I have to make all the info in EUR. We may analyze it. Basically the main difference comes to me because of local currency versus USD, and then USD, which is the currency we are using in Brazil, to put you an example, then I have to translate it to EUR. I will check if that provides a better info for all of you. Right now I think that legally I have to do all my figures in EUR.
Okay. Understood.
Thank you 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 first quarter 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? Just secondly, on CapEx, I think your organic CapEx run rate is a little below the full-year guidance of EUR 3.9. I just wondered if you're planning to accelerate spending through the year and where. Is there a chance that CapEx could undershoot your guidance? Thanks.
In your last question, it's true that we have reduced our CapEx in relation with the strategic plan. That was all assessed and commented in the full-year results presentation. We have aim into EUR 3.9 billion versus EUR 4.1 billion that we put on the strategic plan. Okay. In relation with the loss-making assets, I would say that Norway was nil. It was negligible. There was nothing there. Finally, Colombia implied 3,000 barrels a day of production. As mentioned before, we are looking at every cent that moves within the company, and if really it's not generating cash, we don't play for the sake of having great production figures. We already have it. We have more than double our production. Basically, our goal is, and I think that the whole company is focused on it, to aim for cash and efficiency.
Yes, any asset that is either quite small or that is not generating anything, for sure will go out. No doubt on that. Okay, Kim.
Yeah. Thank you. Just to come back on CapEx, I was referring to the quarterly run rates of your organic CapEx spend, which I think is running at about EUR 800 million.
Oh, sorry. Okay.
for the quarter.
I'll say that's mainly first quarter, we are not that far apart. The net figure was EUR 800. If you take the whole divestments out, you ended up in EUR 900. EUR 900 for the whole year, multiplying by four, leads us to EUR 3.6 billion, which is quite close to EUR 3.9. Normally first quarter, we are going to be quite close to the objective of EUR 3.9. For your metrics, take EUR 3.9 for the whole year. Okay, Kim?
Yeah. Thank you.
Thanks, Kim. 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. I guess part of it is shifting yields from diesel into gasoline. Part of it has to do with the ability to process non-standard crude. I wondered which of the two contributed more to that premium. For me to better understand how I think about modeling going forward. Just a small one on Lapa in Brazil, how's the development there? Thank you.
Thanks, Thomas. Long time without hearing you. In relation with 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. Normally, our people is able to gain some extra, I would say, over the monkey. Over there, you probably have from the $ we gained, probably around $0.50 are in that line. The other $0.50 refers to the efficiency program that I have mentioned before. 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 million barrels.
The gain in efficiency is a little more than the EUR 30 million that were needed to obtain the extra $0.50. 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 project. Basically, there's no change for the first oil. By the end of the year, we'll be producing Lapa. Okay, Thomas?
Perfect. Thank you.
Never mind. You can put all the questions you want, okay?
Cheers.
Thank you, Thomas. With 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. With that, I will bring to close our 1Q conference call for Repsol. Thank you very much for listening.