Hello, welcome to the Repsol third quarter 2015 results conference call. For your information, today's conference is being recorded. Today's conference will be conducted by Mr. Miguel Martínez, CFO. A brief introduction will be given by Mr. Ángel Bautista, Head of Investor Relations. I would now like to hand the call over to Mr. Bautista. Sir, you may begin.
Thank you. Good day, ladies and gentlemen. This is Ángel Bautista, Director of Investor Relations at Repsol. On behalf of our company, I would like to thank you for the time to attend this conference call on Repsol's third quarter 2015 results. This presentation will be conducted by Miguel Martínez, our Chief Financial Officer. Other members of the executive committee will be joining us as well. I invite you to read our disclaimer note. We may make forward-looking statements, identified by the use of words such as "will," "expect," and similar phrases. Present results may differ materially depending on a number of factors, as indicated on the slide. I now hand the conference over to Mr. Miguel Martínez.
Thanks, Angel, thank you all for attending this conference on the third quarter 2015 results. In today's call, we will address three topics. First, some remarks on the Strategic Plan 2016-20 that the company presented on October 15th. Second, the market environment for the quarter, thirdly, the quarterly results and the main operational highlights. Let me start with some remarks about the new Strategic Plan that we presented in last October. The acquisition of Talisman culminates our previous Strategic Plan, in which we deliver all the targets that we committed to back in 2012. To put it in a different way, it was the first step of our new Strategic Plan. Our strategy for the period 2016-20 focuses on value and resilience.
Seeking to harness the group's increased scale and balanced portfolio to create value even in a low oil price environment through increased efficiency and flexible portfolio management. We are aiming for a more competitive and leaner company, adding value by avoiding unnecessary complexity. We will reduce our organic free cash flow breakeven after CapEx, dividends, and financial costs below $50 per barrel by the end of this plan. Strong cash flow from the businesses, together with a more efficient portfolio, will allow us to generate more than EUR 10 billion of cash for dividends and debt, even under a $50 per barrel flat scenario. The first driver to achieve our targets of value and resiliency would be efficiency. In this regard, we have launched a company-wide program with specific targets, monitoring, and accountability. We aim to achieve OpEx savings up to EUR 1.5 billion.
Half billion euros correspond to the upstream division, half a billion EUR to the downstream, and the rest will come from the corporation and the capture of synergies from the acquisition of Talisman. We will provide regular updates of the progress of this program from the first quarter of 2016. Active portfolio management will be the second driver for delivering value and an important tool to increase focus on the areas where we can excel. We will increase our resiliency through a reduction of our free cash flow breakevens and company gearing under any scenario. We will divest more than EUR 6 billion through 2020, and our strategic plan includes the impact of the disposals to be made over the next five years. This target has been calculated with an estimated 6x EV to EBITDA multiple without capital gains. For 2016 and 2017, our objective is to divest EUR 3.1 billion.
We are not in a hurry, but we have already accomplished EUR 1.6 billion through the partial disposal of our piped LPG business in Spain, transaction that will be closed and cashed in 2016, the dilution of our position in Alaska, and the sale of our stake in CLH. We will initially divest assets whose value is not linked to the oil price. The aforementioned sale of part of our piped LPG business for a multiple close to 4x EBITDA shows how Repsol keeps a wide range of assets with hidden value that can be divested in the near term, achieving great multiples without penalizing the company ability to generate cash. In Alaska, we have reached an agreement to transfer to Armstrong a 15% of Repsol's interest in the North Slope, plus an option for a further 6%.
The value of this transaction is around $750 million, reflecting the quality of the asset as valued by a player with a deep knowledge of the area. Our upstream CapEx flexibility allow us to reduce our investment for 2016-2017 by more than 35%, compared to the combined amount of Repsol plus Talisman in 2014. Of this EUR 2.4 billion reduction, EUR 1.1 billion corresponds to a lower exploration effort, EUR 600 million comes from the capture of cost deflation across the industry, together with operating efficiencies, and the other EUR 700 million is a result of lower activity. Turning now to the downstream, it will remain as a strong free cash flow generator during the 2016-2020 period, providing an average of EUR 1.7 billion or free cash flow per year.
Approximately 50% of the expected EBITDA of our downstream comes from the refining division, with the other 50% being quite stable, thanks to our commercial business and our chemicals division. In our strategic plan, we have established a $6.4 refining margin reference. I would like to clarify that figure, which has raised some controversy among the oil and gas analysts. The base Repsol crack margin indicator used for the plan is $2.7 per barrel, which would compare to the margin of an average European refinery. This figure is 25% lower than the average base margin of the last 10-year cycle, where we had periods of low, medium, and high margins. We are using for the plan a premium of $3, which compares with an actual of $4.3 during 2015.
Our margin indicator was EUR 8.8 in the third quarter of that year, and has averaged around EUR 7 in October, being currently around EUR 9. To finish with this recap of the strategic plan, I would like to reaffirm Repsol's commitment with shareholder remuneration in line with our current practice. Our priority is to deleverage the company, nevertheless, we firmly intend to analyze the potential removal of the scrip dividend from 2018 on, provided that the conditions are favorable. Turning now to the market environment and outlook for the full year 2015. During the quarter, the weakness in oil price, together with a strong dollar, continued. Brent crude prices averaged $50.5 per barrel, more than $11 lower than the previous quarter, and less than half the average price in the third quarter of 2014. In relation with gas prices, they were also weak during the quarter.
Henry Hub averaged $2.8 per million BTU, a figure that compares with the $2.6 of the previous quarter and with the $4.1 seen in the third quarter 2014. In refining, we saw a year-on-year increase in margins from $3.9 to $8.8 per barrel due to the strengthening of the products and light-heavy spreads. On top of the lower energy cost derived from the efforts in efficiency undertaken in the past years, the margin premium, thanks to our refinery upgrades, has averaged $3.8 in the quarter. Utilization rate of the distillation capacity was 94.5% during the quarter, while conversion continues to run at full speed. In our marketing activity, we have experienced a 1% growth in gasoline and diesel sales in services stations, and 4% growth in the wholesale segment.
Based on the current price environment, Repsol estimates CCS adjusted net income for the full year 2015 will be in the range of EUR 1.6 billion and EUR 1.8 billion with an estimated net income in the range of EUR 1.25 billion and EUR 1.5 billion. Now let me move to the third quarter 2015 earnings performance and operational highlights. Third quarter CCS adjusted net income was EUR 159 million, 62% lower compared with the same period of last year, and 49% lower than in the second quarter. Operating income stood at EUR 511 million, in line with last quarter. CCS adjusted net income for the first nine months of the year was EUR 1.4 billion, 5% higher compared to the same period of last year. Third quarter results have been impacted by several atypical effects.
First, at the adjusted level, we suffered the effect in tax charges of the devaluation of several local currencies, mainly Brazil, Colombia and Malaysia. This made our negative operating income equal to our net adjusted result. Under non-recurring items, we book impairments in the Mississippian Lime and in the gas and power business units, partially offset by the net gains from the sales of our remaining 10% stake in CLH and our offshore exploration acreage in Canada. Looking at the results by division, starting with the upstream business, adjusted net income for the third quarter was minus EUR 395 million, which is EUR 580 million lower than the same period of 2014. This result has been mainly affected by low realization prices, high exploration expenses, the absence of production in Libya, and the atypical effects in the tax charges previously mentioned.
These effects were partially compensated by higher production, mainly as a result of the contribution of Talisman assets and the ramp-up of the strategic projects in Brazil and Venezuela. Higher exploration expenses due to the write-off of two wells in Angola that were previously under evaluation, together with another negative well in Norway, have materially impacted our results in the quarter. The remaining drilling schedule for the last quarter of the year, in line with our strategic plans for 2016-2020, is made up of less risky exploration. Good news come from the successful completion in November of the second appraisal of the Pão de Açúcar discovery in Campos Basin. Before the end of 2015, Repsol Sinopec Brasil plans to test a well in the Seat discovery in the same block. Average production in the quarter stood at 653,000 barrels of oil equivalent per day.
This figure is 79% higher year-on-year and 24% higher than in the second quarter of 2015, which include less than two months of production from Talisman assets. In October, daily production has averaged 685,000 barrels of oil equivalent per day. Year-on-year performance excluding the impact in results of Libya and Talisman contribution is explained as follows. Lower crude oil and gas realization price had a negative impact at the operating level of EUR 464 million. Taxes had a positive impact of EUR 185 million due to the lower results, partially offset by the impact of the devaluation of the local currencies, mainly in Brazil. Higher exploration expenses lead to a decrease in the operating income of EUR 70 million. Higher production, thanks mainly to the ramp-up of our Sapinhoá project in Brazil and Cardón in Venezuela, result in a positive impact on the operating income of EUR 36 million.
Other minor effects explain the remaining difference. The impact of the disruption in Libya was minus EUR 131 million and minus EUR 42 million in the operating and adjusted net income, respectively. Operating income of Talisman asset was minus EUR 57 million. We had positive results in Southeast Asia and Colombia that were offset by exploration expenses and the negative results in Norway, Australia, and North America. The contribution to the adjusted net income has been minus EUR 90 million due to the mix of results with different effective tax rates and the impact in taxes of the devaluation of local currencies, mainly Malaysia and Colombia. Turning to our downstream division, CCS adjusted net income in the quarter was EUR 682 million, significantly higher than the EUR 190 million of the third quarter of 2014 and EUR 243 million above the result of the second quarter.
Adjusted net income for the first nine months of the year was EUR 1.7 billion, 158% higher year-on-year. This improvement in earnings is mainly driven by better refining and petrochemical margins and an enhanced performance in the commercial and trading businesses, partially offset by lower results in gas and power. Drilling down into the quarterly results, in refining the higher margins together with higher utilization rates, had a positive impact at the operating level of EUR 273 million. In the petrochemical business, we continue the previous positive trend, improving operating income by EUR 186 million. We are profiting from enhanced efficiency as a result of operational improvements in our sites, higher sales volumes, and margins. In the commercial business, operating income increased EUR 24 million year-on-year, driven by sales growth in service stations and in the wholesale business.
Moving to gas power and trading, these businesses increased their joint operating income by EUR 65 million. With regard to Gas Natural Fenosa, the EUR 103 million adjusted net income in the third quarter of 2015 was higher year-on-year, mainly due to the contribution of CGE Chile that offset the lower result from gas commercialization and lower contribution from the gas and power distribution businesses in Latin America. Moving now to the financial aspects. Our third quarter financial result was EUR 223 million of net expense, compared to a financial expense of EUR 12 million in the same period of last year, due mainly to two effects. We book a positive exchange rate position result of over EUR 100 million in 2014, while accounting a small negative in 2015. The second reason is a EUR 65 million increase in interest payments on debt as a consequence of the consolidation of Talisman.
The group's net financial debt at the end of the third quarter amounted EUR 13.1 billion, a decrease of EUR 141 million compared to the end of the second quarter of 2015. Our liquidity positions stands above EUR 9 billion. As a conclusion, we may say that we ended a challenging quarter where atypical effects like the exchange rate impact on our taxes and non-recurring items have lowered our net income. Focusing on the underlying performance at the operating level, our results have been in line with those of the second quarter. With our new strategic plan, we have begun a new era for Repsol. Thanks to our larger scale, we have given ourselves the tools to improve value for our shareholders through a more flexible and focused allocation of capital, while implementing our company-wide efficiency program. Thanks so much.
Thank you very much. We are moving now to the Q&A session. In case you run into any technical problems during the webcast, please send an email to investorrelations@repsol.com and we will contact with you immediately and try to solve it. Now we are moving into the Q&A. Our first
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Well, we are starting with Brendan Warn from BMO Capital Markets. Hi, Brendan. How are you? Please, your questions.
Good afternoon, and thank you. Thanks for taking my question. I'll keep it to one, considering we've had the strategy update. I was gonna say, Miguel, could you just talk through the 307,000 barrels a day contribution from Talisman? Seeing this is our first full quarter, can you just talk through the margins you saw per barrel, and if you could just break it down a little bit further from region. Obviously, you got support from Southeast Asia. Could you just talk through which assets contributed positively and negatively and in terms of the price effect being at $50 this quarter, please?
Thank you for your question, Brendan. Basically, I may say that, as you show, we clearly have a defense in the Southeast Asia assets because of the PSC type of contracts. This has been the positive part along with Colombia and Algeria, also PSCs, in Algeria, I mean. Basically, those have been the positives. I'm not going to disclose the operating margin one by one, in the other side of the equation, for sure, Norway is in the negative part of the equation, while Canada and the U.S. have been almost even, in the negative side of it. This is as much as I can clarify.
Cheers, Miguel.
Okay.
Thanks, Brendan.
Thank you very much, Brendan, for your questions. Now we're moving to Flora Trinidad from BP. Sorry, Flora, for that spelling of your name. Please go ahead with your questions.
Hello. Good morning. No problem. The first question is on the specifics of results. Considering the strong losses in upstream this quarter, can you give us an idea of what are the trends for Q4 and effectively what this does mean for your expectations for everything in the upstream division throughout the year? Secondly, on downstream, the performance of the chemicals business has been outstanding. What part of this do you believe is sustainable? What would be a reasonable level for next year, for instance? Finally, I'd like to ask a question regarding the hybrid bonds. There was a decision by the S&P on the equity weightings. Just wondering if you are working on any changes in the clauses or if you are looking for alternative funding options. What are your thoughts on this?
I noticed that you haven't changed the accounting in this quarter release. Just wondering if you could share what you think about it now. Thank you.
Thanks for the questions, Flora. Starting with the third point. First, we don't have to change the accounting because what has changed is the ruling of an agency, but the IFRS remains exactly the same. Under an accounting point of view, the agencies, at least in that area, don't account too much. In relation with the rest around the hybrid bonds, I may say that in December, as of December 14th, we reached somehow an agreement in which it was a package. A package which includes EUR 5 billion of issuance plus EUR 1 billion in divestments, plus EUR 1 billion as net present value of the synergies. As of today, the agreement also includes 18 months since the closing of the transaction of Talisman. We still have almost a year to go ahead to fulfill this agreement.
I have to say that it's a package, and right now, our synergies are their net present value is closer to EUR 2 billion than to EUR 1 billion. I'll have to say that the divestments only in this first six months have been around EUR 2 billion. We are doubling these two parts of the agreement. We'll have meetings with the agencies once we have the closing of the year, probably by the end of February, we will see which is the new way we found out. One thing is clear, we keep totally committed to maintain the investment grade. In relation with the first question about the results in upstream, I may say that for the fourth quarter, if we take out the impact of EUR 127 million due to the devaluation of different currencies.
Also you take out, let's say, approximately EUR 80 million from the exploration costs. If the rest of the variables remain even with the third quarter, we should improve this quarter results by EUR 200 million approximately. In relation with the downstream performance, especially in the chemical business, I would say that approximately 60% of the improvement comes from the market conditions, and 40% is all the homework that has been done in the business in the last, I would say two or three years, in which we have modified the structure of the business, we have downsized it, we have changed the feedstock of the whole business, and additionally, including extraordinary measures to be energy efficient. I would say that 40% of the improvement is permanent, and the rest will be on the market. Did I answer you, Flora?
Yes. Thank you.
Thank you very much, Flora, for your questions. Now we move to Filipe Rosa from Haitong. Hola, Filipe. Please go ahead with your questions.
Hola. Morning to everyone. Three questions from me as well. The first one in terms of CapEx outlook. I know that you have just done your strategic plan, but the Brent price continued to drop. The natural gas price in U.S. continues to drop versus, I think three, four weeks ago. My question relates to 2016. What will be your flexibility to lower your CapEx if the oil price and the Brent in the area stay at the current level? If you could provide some guidance for the output in 2016 and what could be the risk associated to the need to lower CapEx because that CapEx would not be profitable at the current level of the Brent and of the area. That would be my first question. My second question relates to asset divestment.
I would like to ask whether you feel more pressured now than you were three weeks ago to accelerate the asset divestments as, again, there's been a further deterioration of the pricing backdrop in the industry, and whether you believe that you could announce further asset divestments still during this year. That will be the second. Thirdly, just to follow up on the chemicals business, could you just give us an idea what is the free cash flow or the EBITDA that you are considering in your guidance for the downstream business? What is the component allocated to the chemicals? Just for us to have an idea what would be your expectation for recurrent EBIT coming from this division. Thank you very much.
Thanks, Filipe. Well, starting with the CapEx flexibility, I may say that the easiest part or the most flexible part would be the exploration wells that are not committed. We have some room there. Other than that, I would say that there's not much flexibility. Perhaps hundreds, but we are not talking about huge flexibility. Having said so, you have to think that, basically, we don't look in any of our investments just to today's price. I would say that basically would be some hundreds at the exploration level, but not much. This over the EUR 4.8 billion, that was the CapEx estimate for 2016.
Sorry. In U.S., you have some flexibility because you are saying that you are now about breakeven. The oil price in Q3 was higher than it is now. The area was also higher than it is now. You probably lose more money if you continue to invest there. Could you, for instance, cut your CapEx in U.S. if there is this persistently low oil and gas prices?
We are reducing the number of rigs to one in Marcellus and to two in Eagle Ford. It is going to depend much on where the price goes. If it remains at this level, we think that with this is where we will keep working. If the prices, and you are looking at a scenario totally different from the around $50 we are in today, for sure we will modify that. I was thinking more in this $50 world in which we have projected our figures. You are right in a sense that if it goes to a really low level, we will take measures. Basically, we are playing for cash, both in Marcellus and in Eagle Ford. As mentioned in the strategic presentation, the production growth is not an objective anymore. We will play for cash.
In that sense, my perception is other than some exploration, it would be only hundreds what we can reduce. Okay?
Okay. Thank you.
In relation with the asset divestment and feeling more pressure, I don't feel any pressure at all, believe me. We haven't started yet the period of the strategic plan, and we have already coped with one third of the divestments. On average, I'll have to divest something like EUR 800 million per annum. Having a total capital employ of around EUR 43 billion-EUR 44 billion, I don't feel any pressure for the pricing backdrop. In relation with the chemical business, can you repeat the question, please?
Just so to have an idea what could be your EBIT assumption in your business plan, how much you are assuming in terms of contribution from chemicals? Because you just spoke about the split between 60% market, 40% your own homework. Just so to have an idea. You made EUR 200 million in a quarter. What could be your expectation for the EBIT of chemicals in, for instance, 2016? What are you incorporating in your business plan?
Sorry, Filipe, we don't give the split per business. Sorry about that, thank you.
Okay.
I was going to tell you, but.
Thank you, Miguel.
Sorry about that, Filipe. I'm the bad guy, I know. Thanks, Filipe. Thank you very much. Let's move to Hamish Clegg from Bank of America Merrill Lynch. Hi, Hamish. Go ahead, please.
Hi, guys. I've just come back from the U.S., meeting a lot of U.S. E&Ps who've been amazing me with the amount of efficiency gains they've managed to capture. I was wondering if sort of six months in, you could give us maybe a little bit of a guidance on what sort of efficiencies you're managing to get in your U.S. onshore portfolio. Maybe what some of the sort of easiest wins are you're seeing, and what the challenges are. Any color on average drilling days, length of laterals or down spacing would be very welcome. That was my upstream question. Just in the downstream, looking at that chart where you showed us the real deltas between Q4 last year and where we are today, how much of that gain can we put down to the sort of Brent-Maya spread?
I wasn't sure where the feedstock element of that came in that chart. Would it be in the sort of refining bar, or is it sort of spread equally between some of them?
Okay, starting with the second one, the Maya spread has opened up to $14, it's really maintaining an important part of the margin in this quarter. We have moved from the driving season into the, I would say, winter season. I think that we are going to depend much on the temperatures for the year-end in relation with the spread about the diesel. Right now, the whole margin, it's more or less at the same level we had in the third quarter, with a small reduction during October due to the contango situation of the diesel. It has recovered quite well. It's difficult for me to assess a percentage of it.
I would say an important part of it has been due to the increase in the spread, so on heavy and light. Okay?
Okay.
In the guidance, in relation to efficiency, I would say that the first thing we have to assess, at least in my opinion, is to really gain efficiency in the Eagle Ford asset. Right now, to have two operators in the same asset doesn't make much sense. Other than in operations, I think that we should reach agreements with Statoil in order to really improve the area. In relation with the drilling, Ángel is telling me that 33% of improvement in drilling costs per foot is what we have obtained from 2014 full year to this quarter in 2015. I don't know if that's much help or not. Okay?
Yeah. That's good. I think you're probably exceeding some of your U.S. peers with that.
I'm sorry for not being able to be with you in Florida. In the previous days, because having the presentation of results just a day after, it was difficult for me to move there. Next time, I promise I will be there. Okay?
Always a spot. Thank you.
That was Hamish Clegg from Bank of America. We're moving to Biraj Borkhataria from RBC. Hi, Biraj. Always nice to speak with you. Go ahead.
Hi, guys. Thanks for taking my questions. I've got two. First one on the downstream conversion utilization remains above 100% and has been for a few quarters now. I was wondering what number is baked into your plan and what numbers should that be on a sustainable basis going forward? The second one was on the portfolio as a whole. One of the historical problems with Talisman is that there are a large number of potentially suboptimal assets with subscale. You said before you may look at asset swaps to concentrate the portfolio. I was wondering, are you seeing opportunities at the moment to execute these asset swaps, outside of the Eagle Ford, potentially? Thanks.
Well, in relation with the first one, we can work our conversion at 100% permanently other than taking into account the maintenance, especially the pluriannual maintenance, which in fact, for the next year, Cartagena and Bilbao will have maintenance basically for the cokers in both refineries and the idea is to work almost at 100%. The assumptions in the strategic plan were that conversion will work at 96% in 2016 and for the rest of the year at 100%. This 96%, as mentioned, is due to the maintenance both in Cartagena and Bilbao. In relation with the suboptimal assets, we are looking to the market and we are permanently thinking on opportunities to really achieve this EUR 6.2 billion of divestments as well as optimizing the main portfolio. I do not discard any transaction, but if there were any, for sure, I will not tell you.
Sorry about that. Okay? We look permanently on any option we have, Biraj. Okay?
Thanks, guys. Thank you.
Thank you, Biraj. Moving to Thomas Adolff, Credit Suisse. Hi, Thomas. How are you? Go ahead, please.
Thanks. Sorry, I missed your strategy update. I do have a few questions. The LPG assets, you sold some assets, very good valuation. Aside from those, I wondered how much more of the EBITDA you consider non-core, in the LPG business. Question on Alaska, you may have put out a press release, might have gone into my span, but EUR 750 million is a good value for 15%. I wonder whether that's cash straight in, or whether there's some form of a structure around that and whether you can give some color on reserves, resources, and commitments. Presumably, Armstrong isn't just going to hand over EUR 750 million and sit on it without it being developed. The last one maybe, since you've started production on Cardón, payment-wise, has that been going smoothly? Thank you.
Thanks, Thomas. In relation with the assets sold, we still have an extra 200,000 contracts to dispose. We are already working on those, and probably we will add that to the transaction you just mentioned. I expect both to be closed in 2016. Remember that the assets sold implied an 18% of the total EBITDA generated by the LPG. Other than the pipelines, I consider the rest as a core business. We'll keep the unit the way it is without the pipelines. In relation with Cardón, it's running smoothly. Yes, we have a minor incident in August, but it's running smoothly, and we expect to increase production up to 400 million cubic feet a day by the year-end. Everything is working smoothly.
I was referring to payments.
Yes, we have received payments. July and August have been paid, and we're expecting September, so no problem at all. The contract also was a favorable one. The final agreement reached with the authorities was a good one. No major problems on it. In relation with the resources we have announced 100. We haven't split much, but if you want through IR, they will provide you some more color. Okay, Thomas?
Thanks. Just Quick one on the LPG again, just to clarify. You said apart from what you've announced so far, you're not going to sell more of the LPG business, or you said there is going to be another 200,000 contracts to be sold?
I'll say that, yes, we are going to sell the rest of the contracts linked to the pipelines.
Okay, got it. Thank you.
Okay. You're welcome, Thomas.
Thank you.
Thank you very much, Thomas. Now it is Lydia Rainforth from Barclays. Lydia, good to speak with you again. Please, go ahead.
Thanks, Ángel. Good afternoon. Just two questions, actually, if I could. Ángel, can I get you to come back to the non-Talisman upstream performance? Even if I adjust for the exploration and the deferred tax impact, it still looks like the core Repsol business lost money and under Talisman. Can you just talk through a little bit more detail around that and where the biggest area for concern actually is? The second one was a very quick question, just as to where you are seeing the indicator refining margin right now. Thank you.
Thanks, Lydia. The second one is easy, 8.8 as of today as index. We are back on track with the margins we had in the third quarter. October was a little weaker due to the diesel situation of high contango. We reached EUR 7 on index in October, we are back to the high eights, lower nines in November. In relation with the non-Talisman upstream performance, you were asking me, Lydia, about the comparison with Repsol assets or Talisman itself?
If I take out Talisman, if I just go back to what you would have had just as standalone Repsol without Talisman. Even if I add back the exploration charge and the deferred tax charge, it still looks like that business lost money in the existing environment. I'm just wondering if there's a particular area that concerns you, be it Venezuela or one of the other areas, or whether there was anything unusual during the quarter.
Well, at operating level, we have EUR 395 negative result for the whole division. Okay?
Yeah.
If I reduce that figure by the EUR 266 million of exploration, I ended up with something like EUR 130 million of losses. Okay?
Yeah.
From this, EUR 57 is, I think, the figure of Talisman. Repsol assets has been around EUR 63. Taking into account that we are a little larger in barrels produced than them, I think that we are more or less even on that. If I have to mention areas of concern, I will say those that are more sensitive to the oil and gas prices. In that sense, I would say that Trinidad, Venezuela are areas of higher sensitivity than Southeast Asia, to say something. On the quarter, I didn't perceive. If I move the figures through the operating results, I see more or less a similar behavior from both the assets of Talisman and those of Repsol. Okay, Lydia?
Perfect. Thank you very much.
Thanks for the questions.
We're moving to Matt Lofting from Nomura. Hi, Matt, how are you today? Please go ahead with your questions.
Hi. Thanks, Ángel. I'll limit myself to one question, actually. Miguel, can I just ask about exploration activity going forward and specifically the exploration expense line? I guess partly following up from Lydia's question. You talked, I think, earlier about the expectation of a lower risk, lower cost program going forward. I guess, though, the exploration expense write-downs that we continue to see coming through the P&L are chunky again in Q3. Can you just confirm how you see that expense line trending going forward and whether there's any other similar to Angola high-cost work-in-progress asset sitting on the balance sheet that you see a significant risk of needing to write down over the next few quarters? Thanks.
Matt, I would say that we still have some commitments that we have to go through. Talking about those high risk, I will mention that we have a commitment with Eni in Angola for the next year. We have a commitment as well in Bulgaria, but it's not, I would say, a very expensive exploration program there. Finally, the rest is onshore Colombia, which will not be that expensive. Then we have lower risks in Vietnam, Malaysia, and Indonesia. Basically, we are moving as it was assigned in the strategic plan to lower risk exploration program. Also we are reducing, as mentioned before, from the $9.3 per barrel produced at risk in exploration down to $3.2. I think that we are aligned with the strategic plan.
Other than the commitment with Angola, I don't see any major risk in front of us for the following quarters.
Okay, perfect. Thanks a lot.
You're welcome.
Thanks, Matt. Now, Jon Rigby from UBS. Hi, Jon. Good to speak with you again. Please go ahead.
Hi, Ángel. Miguel, can I ask a question about Brazil? There's two related questions, actually. The first is that if I look at the cash and receivables that you have sat in there that come from the original relationship, it looks to me that they're actually starting to rise a little bit. Is it right to infer from that Brazil is effectively self-funding? In which case, I guess that begs the question, is there a mechanism that's starting to become relevant about clearing some of that cash back to Repsol itself, and what that mechanism is? The second is related to that.
If you were to look to try as part of your disposal program to sell anything in Brazil or farm down, is there an issue with that between yourself and a third party with your existing partner that would complicate the structure of any kind of disposal or sell down? Thanks.
Thanks, Jon. If you remember when Sinopec entered in Brazil, it was through a capital increase. Basically, we really have cash, and Brazil will be for sure self-funding. In a quite relaxed mood, I would say. The truth is that we don't need any claim cash back there. Both partners have a percentage of the excellence of the cash we have in Brazil. Each of the partners have the right to their percentage. 60% in our case, 40% for the Chinese. We don't need a claim to cash back because we already have the cash of the 60% of excess that we have there. In relation with the second one, actually we'll have to look at any type of transaction. If the Sinopecs are with us and they want to sell combined, there wouldn't be any problem. If not, we'll have to analyze it.
For sure, it's by far more complex when you have a partner within a company than when you are in a standalone basis. I would say yes, it will complicate the structure of the disposal.
Just one other follow-up of that if I could. On a previous question, I think we discussed the Angolan commitment wells first quarter, and I think you said then that the final well was at the partners' discretion to drill. Is that still the case? Is it absolutely certain that you would have to drill the final well?
No, the Eni well is a committed one. In other of the areas, we had the option to have a discretional one, but this is committed.
All right. Thanks for the clarification.
Thanks, Jon.
Thank you. Thank you, Jon. Let's move to TPH, David or David Gamboa. Please go ahead with your question.
Hi, Ángel. Hi, Miguel. Thank you. I just have one quick question on the operational side, particularly-
Sorry, can you speak a bit louder?
Yeah. Is that better? Can you hear me there? Hello?
Yes. Much better.
All right. Sorry about that. Just one question on the operational side in the upstream in Brazil. Just wanted to know if you can give an update on the situation at BM-C-33. We saw the last appraisal of the oil discovery there was a bit gassier and actually flowed a bit of condensate as well. Just wanted to know about your updated thoughts of the discovery over there, and if that impacts any potential timing on the FID. That will be it. Thank you.
Well, taking into account the size of the project, timing is not an issue. First comment. We'll see, and we have to agree with our partners where to go. Think that there was a lot of condensate. We're talking something close to 200 or 180 barrels per million standard cubic feet of condensate. We don't see a major problem there, though it's true, your comment that the discover was gassier, and we have to think of it. In front of us, we have at least two years of appraisal before taking any final decision about Campos 33.
That's very clear. Thank you.
Thank you very much, David. We move to Irene Himona from Societe Generale. Hi, Irene. How are you? Go ahead with your questions.
Hi, Ángel. Thank you. Miguel, I had two questions, please. Firstly, obviously the CCS adjusted tax rate is a little bit complicated by the effects of the currency devaluations. I just wondered if you can give us your best estimate for full year 2015, CCS adjusted tax, and then perhaps for 2016, 2017 under your $50 scenario. My second question is on the balance sheet. Obviously, Q3 is the first full quarter with Talisman, and you show a goodwill of EUR 3.2 billion at the end of the quarter. I noticed that this is 16% higher than the EUR 2.8 billion of goodwill at the end of June. Of course, in June you had already consolidated Talisman. I wonder if you can please explain where the goodwill increase has come from, what has changed between June and September. Thank you.
I'll start with the second one. That seems easy to me. When we change the price deck, something that we did in October, we have to reanalyze all the impairments of all the assets, both Repsol's and Talisman. The accounting rules allowed you to have a year before finally closing the PPA. What we did was really reanalyze all the Talisman assets with the new price deck. Instead of the EUR 2.6 billion we have accounted as goodwill at the end of the second quarter, we ended up with EUR 3 billion by the end of this quarter. We have increased the goodwill in EUR 400 million. In relation with the devaluation and tax rate CCS estimates, I would say the tax rate for the year, our best estimate today is going to be a little below 40%. Between 39% and 40%.
In relation with 2016 and 2017, I don't have the figure at hand. Basically if you take the rule that we move from around 25% at the downstream level, and at the upstream for sure, depending on Libya, will vary, but something around 40%-45% would be the figure for the upstream. That's one of the reasons why this quarter has been really strange, because of the currency devaluation, which has impacted in EUR 127 million due to the devaluation basically in Brazil. This is the most color I can provide you. If you want, Ángel will provide you with the tax rate we have been using for the whole strategic plan on a yearly basis. Okay?
Thank you very much, Miguel. Thank you.
You're welcome, Irene.
Thank you, Irene. Now, moving to Alastair Syme from Citi. How are you, Alastair? Good to speak with you again. Let's go ahead, please.
I'm good, Miguel. Thank you very much. Can I just ask, I think Thomas asked a question on the Armstrong deal, I'm not sure that we got an answer. Can we just clarify the mechanics of that deal and is the EUR 750 million relating to the 15%, or is it for the option as well? Thank you.
No, it refers to the 21%. It's EUR 750 million, which is the carry that was pending on our side. Okay?
Cash in is?
It's a non-cash out. Put it that way. Okay?
Just in terms of the resource base that you have in Alaska then?
Well, as mentioned, Ángel will provide you some color about the resource base. We have been talking in our press release about hundreds, Ángel will let you know better. Okay?
Finally, can I just quickly come back to your prepared remarks? You were summarizing the strategy presentation. You made a comment on the scrip dividend. Can I just clarify what your view is on moving to a point of getting rid of the scrip? Thank you.
I would say that for us, the base is the investment grade. If we reach the comfort zone, which to me it's the Triple B, medium range of the Triple B, I think that then there would not be any reason to maintain the scrip dividend. We don't think we are going to reach that level in the first two years, we'll keep the scrip for the first two years, if the conditions are there and our level is a balance or a stable Triple B, we will erase the scrip dividend.
Okay. Thank you very much.
Hi, thanks a lot, Alastair. Now, we have Nitin Sharma from JP Morgan. Hi, Nitin. How are you?
I'm good, thanks. Afternoon, gentlemen. Two questions, if I may. First on downstream. The contribution from petrochemicals business has been particularly strong. Maybe you could give us some color on the outlook for this business, and an update on what sort of self-help measures have helped you improve the profitability of this business. Second, more a clarification. This is in relation to divestment target of EUR 6.2 billion. Is it fair to say that you still see potential to meet this target even under your $50 oil price scenario, given that you suggest that you'll rely on non-oil assets if oil price remains low? Thank you.
In relation with the first one, I think that Ángel already kicked against my legs, I cannot disclose more, sorry about that. In relation with the second one, the answer is yes. Think that the EUR 6.2 billion didn't include any net gain. With the first EUR 2 billion, and I'm including something that has not been signed, which is the last part of the pipeline gas, we will obtain all in EUR 700 million of net gains. For the rest EUR 4 billion, it's not that difficult to really fulfill the EUR 6.2 billion. If you look at the past, you will see it clearly. In the last three years, for different reasons, we divested more than EUR 10 billion, EUR 4.5 in the LNG business, in a good moment, and EUR 6.3 billion from Argentina. Even without starting the 2016-2020 period, we already have EUR 2 billion.
I don't see any problem at all to really obtain the extra EUR 4 billion that are needed, even in a low scenario.
Thanks.
Thank you very much, Nitin. Well, with this, we have finished the Q&A session of our third quarter 2015 results. You know that any further queries, clarifications you may need, the IR, Investor Relations, sorry, department of Repsol is entirely at your service. Have a nice day. Cheers. Bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.