Hello, and welcome to the Repsol Second Quarter 2015 Results Conference Call. This conference is being recorded. Today's conference will be conducted by Miguel Martinez, CFO. A brief introduction will be given by Mr. Angel Batista, Head of Investor Relations.
I will now hand the call over to Mr. Bautista. Please go ahead.
Thank you. Good day, ladies and gentlemen. This is Angel Bautista, Director of Investor Relations at Repsol. On behalf of our company, I would like you to thank you for taking the time to attend this conference call on Repsol's 2nd quarter 2015 Other members of the Executive Committee will be joining us as well. I invite you to read our disclaimer notes.
We may make forward looking statements, which are 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. Before we start, I would like to make an invitation. In order to help analysts to understand and model the new Repsol, the Investor Relations team will be organizing workshops to be held in London and in Madrid during the month of September. Please send us your requests in order to organize them.
I'll now hand the conference over to Mr. Miguel Martinez.
Thank you, Angel, and thank you all for attending this conference on the Q2 2015 results. This quarter, we are integrating the results of Talisman assets from May 8, 2015. CCS adjusted net income was €312,000,000 €1,200,000,000 for the quarter and the first half of the year respectively. Today, we will address 4 topics. First, some words about the integration of Talisman second, the market environment for the quarter and the main operational highlights third, an outlook of 2015 and efficiency measures we are undertaking and finally the quarterly results.
Starting with the integration of Talisman, as you may know the 8th May we closed Following the closing, a new organizational structure has been implemented to include the integrated assets in our Absinthe division. This new organization comprises 4 regional areas: Europe, Africa and Brazil North America South America and Asia and Russia. Reporting of results and operating figures in the Absint business will be shown from now onwards according to this new structure. We have already completed the purchase price allocation and the goodwill value has been established in $2,600,000,000 out of which €2,100,000,000 are deferred tax liabilities. This value is firmly supported by the identified synergies we will speak about in a few minutes.
We'll have 1 year to adjust and refine the allocation as accepted by IFRS. Turning now to the market environment and maiden operational highlights. During the Q2 of the year, the weakness in the oil prices continued, counterweighted by a strong U. S. Dollar.
Brent crude prices recorded a maximum of $66.7 per barrel in May and averaged $61.9 per barrel in the quarter, an increase compared to the previous quarter. Nevertheless, during the beginning of this third quarter, we have observed that the weakness of the oil price continues. In relation with gas prices, they were also weak during the quarter. Henry Hub averaged $2.6 per 1,000,000 Btu, a figure that compares with the $3 per 1,000,000 Btu of the previous quarter and with the $4,700,000 of Q2 of 2014. In relation with the operational activity of the quarter, let me start with the Avseen business.
In exploration, during this Q2, 14 wells, 9 exploratory and 5 appraisals were concluded 6 with a positive result, 2 exploration wells in Algeria, the U. S, Alaska 4 appraisals wells in Bolivia, Russia and the U. S. 4 wells had a negative outcome and 4 of them are under evaluation. As of today, 7 exploratory and appraisal wells are ongoing, out of which 3 are exploratory in Romania and in Brazil and 4 are appraisals in Brazil, Bolivia and Algeria.
In the second half of the year, the drilling schedule is composed of a less risky exploration program and will entail lower investment than in the first half. Talking about our development projects, this quarter it's worth highlighting the progress in Brazil, Venezuela, Colombia, Canada, Vietnam and Malaysia. In Brazil, we continue with the ramp up of Sapingora North. The 3rd well was connected to our 2nd FPSO in place Ciudade de Ayabela in May. Gas injection commensurate in June allowing gross production to increase to 90,000 barrels per day in this second platform.
At the end of 2015, peak production is expected to be reached in this second FPSO, which has a gross capacity of 150,000 barrels per day. Together with the first FPSO, the field will reach the planned plateau of 270,000 barrels per day. In Venezuela, some days after the end of the quarter, Repsol has stacked up the first producing well at the Perla field, the largest offshore gas field in Latin America, holding 17 TCFs of gas in place. This first phase of the development will produce 150,000,000 of standard cubic feet per day, rising to 450,000,000 cubic feet per day by the end of 2015. With the startup of this field, the 8 key growth project of our 20 twelve-sixteen strategic plan has been delivered.
In Colombia, the average gross production for CPO-nine block reached 10,000 barrels of oil equivalent per day. The block is operated by Ecopetrol 55% and Repsol owns a 45%. We continue working on the definition of the field development plan for the Acathias project in this block with a final investment decision expected before year end. Exploration activities in other areas of the block are moving forward also. In Canada, in the Duvernay play appraisal drilling of the company's land in the South Duvernay continue.
Drilling operation at a 2 well pad in Ferrier has now finished with completion scheduled in the following weeks. In Vietnam, once the outline development plan of Red Emperor in Block 73 was approved by partners and Petro Vietnam back in January, the commercial declaration was completed in early July. A formal approval of the development plan and associated final investment decision is expected to be taken by the year end. The net investment that will be devoted to this project in the period of 20 15, 2019 is $630,000,000 In Malaysia, a final investment decision has been taken by the end of June for the development of the Kinabalu field with a $200,000,000 net investment in the 20 fifteen-twenty 18 period. Negotiations for a 10 year extension of the license of PM3 Field expiring in 2017 and intended to consolidate our presence in the country are well advanced.
To finalize with the development projects, let me say that the remaining key growth projects of our 2012, 2016 strategic plan, LAPA in Brazil and Regan in Argelia Progresa's plan to deliver production in Q4 2016 for LAPA and in Q1 2017 in Ragan. In Lapa, development will commence in the Northeast area, but the test performed in Lapa 9 well with an initial productivity of 2,000 barrels per day encourage a faster development of La Pucelle also as a second project stage. Turning to production, the average production for the quarter stood at 525,000 barrels of oil equivalent per day. This figure is 55% higher year on year. Production from Talisman assets has been included since May 8.
Out of the overall figure, 182,000 barrels of oil equivalent per day come from the recently acquired assets. Excluding Talisman assets, production increased 1% year on year, thanks to the ramp up of Sapinhoa in Brazil, partially offset by the maintenance work carried out in Trinidad and Tobago. For the full year, we expect a 6% production increase on average on an homogeneous basis. That is to say stripping out Libya from both periods. This increase is in line with the goal established in our strategic plan.
Average production in June stood at 660,000 barrels of oil equivalent per day. The contribution of former Talisman assets in June has been on average 307,000 barrels of oil equivalent per day. Our 660,000 barrels of current production is split as follows: 190,000 barrels of oil equivalent per day produced in North America region Marcellus has averaged 73,000 and the Eagle Ford 25 1,000 bottles with Canada delivering 54,000 bottles. 108,000 barrels of oil equivalent produced in Asia and Russia, most of it in the new South Asia core region. 93,000 of oil equivalent per day produced in Europe, Africa and Brazil, out of which 40,000 come from former talisman positions in Norway and in the U.
K. Unfortunately, we still cannot produce in Libya. 269,000 barrels of oil equivalent per day produced in South America region, out of which 21,000 come from former talisman production in Colombia. Out of these productive areas, let me go into more detail in Marcellus and Eagle Ford, where in June, as mentioned, we produced 70 320 5,000 barrels of oil equivalent per day. Regarding the Marcellus, our acreage is held by production allowing us great flexibility in our CapEx decision.
This year began with 2 drilling rigs, but has been reduced to only 1 for the remainder of the year, which will allow us to maintain a production plateau of above 400,000,000 cubic feet per day net of royalties with self sustained cash flow at the given current price scenario. Gas price will direct the pace of growth of this asset. During the first half of the year, 17 development wells were drilled in our play and production from the French field area continued to ramp up following completion of gas compression facilities. In Eagle Ford, our acreage in the play is mainly held by production, which will allow us to drill in the most prolific areas of the assets. We are lowering costs and improving efficiencies in the play.
Our drilling is focused on liquid rich acreage where economics are superior. This year activity is based on a 3 gross rig program 1 operated by Repsol and 2 by Estatoil. In addition Repsol participates in a third party non operated program focused on the liquid rich part of the play. During the first half of the year, 63 new development wells were drilled in our acreage, equivalent to 19 net wells for Repsol. Let me also give you a brief update about our K.
Operations. In the U. K, the production of Tartan, which had been shut down since the Q3 2012 has been restarted following intensive upgrades and maintenance activities. Monarch and Claymore have performed well also in the quarter and works on platform abroad have been finalized, which has allowed production In relation with in relation with the U. K.
Wide turnaround plan. We can confirm that today is being implemented in a satisfactory manner with a new organization in place, staff optimization and production efficiency measures deployed and more to come. Moving now to the operational highlights in the Downstream divisions. With regard to quarter in comparison with the Q2 of last year. The margin improves in $6 per barrel, thanks to the generalized strengthening of the spreads of products together with lower energy costs.
The high complexity of our refining system and the self consumption efficiency program helped to capture the benefits of the existing scenario. The distillation utilization rate was 89% during the quarter, while conversion run at full capacity. In petrochemicals, we continue seeing an improving environment with higher sales and better margins. This together with the competitiveness plan we put in place a year ago allow us to achieve very positive results during the quarter, continuing the previous trend. In the commercial business, marketing and LPG operating income was lower year on year, mainly due to the regularization of prices that took place during the Q2 of 2014 in the LPG business.
By 1% year on year and wholesale sales by 17% year on year. In Gas and Power, sales volume decreased and the price environment in North America was tougher. The Algonquin gas price referenced average $2.2 per 1,000,000 Btu in the Q2, well below the value registered in the Q2 of 2014, which was $4.2 Regarding the outlook for the rest of the year with a Brent oil price assumption of $59 per barrel and $20.15 and Henry Hub of $3 we expect to achieve an EBITDA between €5,000,000,000 and 5 €500,000,000 for the full year. Talisman assets will contribute with an EBITDA of €800,000,000 Therefore, the outlook for 2015 EBITDA excluding the contribution from Talisman assets is a figure in the same range as to that obtained in 2014. Even in an oil price scenario almost $40 lower than that of the previous year and having no contribution from Libya.
I'd like to stop now to explain what we are doing in order to reduce and optimize costs and CapEx. We have sold as always, but especially in the current situation applied strict cost efficiency culture and is fully committed with the optimization of the OpEx and CapEx program. In downstream, efforts in the last years have been focused on an ongoing energy efficiency saving program, on optimizing oil purchases and on the maintenance and reliability programs, all of which have led to a refining margin increase of $1.2 per barrel as compared with 2011. Efforts continue in this area. In relation with the upstream CapEx, a few review of every single project is underway, stopping or delaying investments in those which value is at risk in the current scenario.
Repsol invested slightly below $4,500,000,000 in upstream CapEx including G and G and G and A in 2014. We'd like to underline that in 2015 with Talisman assets on board since May, Repsol will maintain an upstream CapEx at the same level as 2014. And more importantly, WebSol has the objective of maintaining this investment flat in 2016 in a company with an upstream twice as big. Going into detail with the upstream CapEx, In exploration CapEx in 20.15 for Repsol extalisman will be reduced by 27% from $1,800,000,000 in 2014 to $1,300,000,000 in 20.15. Adding the exploration CapEx budget for the former Talisman assets, we can conclude that even managing a much bigger company, our exploration investment is being materially reduced.
In relation with the development CapEx, it's also being reduced for Talisman for Repsol ex Talisman. It goes down 15% from $2,500,000,000 to $2,100,000,000 All in all, absent CapEx of Repsol ex talisman will be reduced by 21% in 2015. Furthermore, Ormenthalisman assets exploration and development CapEx for the period May December 2015 will be $1,200,000,000 expecting to end with a figure below their guidance before the acquisition. Together with the efforts to optimize CapEx, we launched the GO program this year in order to identify improvement measures to increase our income through efficiency and innovation. This measure comprised among others the renegotiation of contracts.
Within the GO program in our negotiations with contractors and existing contracts in the upstream business, we expect to finalize 2015 with reductions of up to a 6% on average. As these contracts are expiring and we are opening a new bidding processes and our expectation is to obtain additional cuts of between 10% 20% we will endure in our efforts. Last, in relation with our recurrent synergies coming from Talisman acquisition, we have increased our target from $220,000,000 previously established to an annual amount of $350,000,000 now that we have been able to analyze the joint company hands on and in-depth. Of this amount, €70,000,000 are already executed. We have identified more than 80 initiatives from various scopes and areas such organization, IT, purchases, financials, G and A together with business opportunities in trading and commercialization.
On top of that, we are working on further identify possible one off effects of the integration that could add additional amounts to these synergies. So adding up the application of the GO program and the recurring synergies, we plan on improving our operating income by €500,000,000 in 2016. Repsol will present a new strategic plan in November after our Q3 results release with a very special focus on value creation. Now let's move to the Q2 2015 earning performance. CCS adjusted net income was €312,000,000 20% lower compared with the same period of last year.
CCS adjusted net income of the first half of the year was €1,200,000,000 35% higher compared with the same period last year. Starting with the upstream business, adjusted net income for the Q2 was minus €48,000,000 This result has been mainly affected by the drop in crude oil and gas realization prices, partially compensated by the growth in production and the decrease in exploration costs. Excluding the impact of exploration costs, operating income of the Apsin division would have been positive in both the second quarter and the first half of twenty fifteen. The year on year performance excluding the effect of the consolidation of Talisman is explained as follow. Lower crude and gas realization prices had a negative impact at the operating level of €359,000,000 Higher production, thanks mainly to the ramp up of Zafinhoa, partially offset by the maintenance works Gabriel in Trinidad and Tobago, resulted in a positive impact of €37,000,000 Lower exploration costs lead to an increase in the operating income of €128,000,000 and the decreased costs were mainly due to lower amortization of dry wells.
Higher depreciation charges due to higher production had a negative impact of €37,000,000 Taxes had a positive impact of €89,000,000 At current price, Talisman assets have been at breakeven on a net adjusted basis. Positive results in Southeast Asia, Canada, Algeria and Colombia were partially offset by exploration cost and the negative results in Norway and in the non conventional business in North America. Turning to our Downstream division. CCS adjusted net income in the quarter was €439,000,000 which compares with €162,000,000 of the Q2 2014. Drilling down into the quarterly results.
In refining, we saw a year on year increase in margins from 3.1 dollars to $9.1 per barrel due to a generalized strengthening of the product spreads and to lower energy costs derived from the efforts in efficiency undertaken in the last years. These higher margins and also a higher utilization rate had a positive impact at the operating level of €275,000,000 The improvement in operating income of the refining activity in Spain comes together with better results in Peru. In the petrochemical business, wider margins and higher volumes allow us to improve the operating income by €133,000,000 This improvement is due to the competitiveness programs implemented together with a better market environment. In the commercial businesses, the weaker result in the LPG business was the main driver of the €55,000,000 decrease in the operating income. Moving to Gas Power and Trading, this business increased their joint operating income in €24,000,000 The exchange rate effect was positive by net throughout FENOSA, the €105,000,000 adjusted net income in the Q2 of 2015 was lower year on year, mainly due to the fact that in the Q2 of 2014, a capital gain on the sale of the telecom business was registered.
The financial result in the Q2 of the same period last year. Two effects there. The first one is the exchange rate positions, which increased the net spends year on year by €192,000,000 because of the positive results achieved in the Q2 of 2014. The second one is the €36,000,000 increase in interest on debt as consequence of the payment of Talisman and the consolidation of its debt. These figures have been partially compensated by the amortization of the bond offering the cancellation of the preferred shares in the Q2 last year, which had a positive effect of €71,000,000 Turning now to our financial situation.
The group's net financial debt at the end of the second quarter of 2015 amounted €13,300,000,000 an increase of €31,100,000,000 compared to the end of the Q1 2015, due to the payment of the acquisition of Talisman and the consolidation of its debt. Beside these effects, the business cash generation in the Q2 of 2015 was positive, but negatively impacted by the increasing working capital. The increasing working capital has been generated largely because the business has to stockpile inventories in order to take a benefit from the contango structure in the forward effect to be reverted in the following quarters. Our liquidity position is 8.7 €1,000,000,000 including cash and outstanding credit lines. As conclusions, after achieving the integration of Talisman, this is the Q1 in which we consolidate its results.
We have delivered a solid set of results under a challenging macroeconomic scenario, in which the performance of our downstream business offsets the lower results of the upstream 14, given in a
$
14, even in a $40 per barrel low oil price scenario and having no contribution from Libya. The macroeconomic scenario is weaker in the short term than we expected in our projections when we went ahead with the acquisition of Talisman. We have purchased these assets with a long term view and we are aware that we must weather the current situation for some time. Nevertheless, we now have a much deeper knowledge of the acquired assets and we are fully not only committed, but convinced that we will extract value from them even under challenging circumstances like the current ones. From the combination of both companies, series of value addition initiatives are arising and the broader project portfolio is allowing us to prioritize capital allocation to the highest cash flow and net income contributors as planned.
The combined entity has a high degree of flexibility regarding the timing and allocation of capital expenditure. As we have underlined, we have the objective of maintaining our upstream CapEx at current levels, not only in 2015, but also in 2016 in a much larger company. Therefore, the optimization of our joint CapEx with our cost reduction program and the identification and fulfillment of synergies is underway, working to systematically bring down the breakeven price of every assets. Coupled with the strong vertical integration Repsol moves forward on full trust on the generation of value for our shareholders. We'll also remain engaged to financial discipline maintaining a strong balance sheet and competitive shareholder remuneration.
Thank you so much and we'll be pleased to answer any question you may wish to ask.
Thank you very much. Let's move into the Q and A session. We have enabled a chat in the webcast in order to post questions only in the event there are connection problems in the call. You may identify it by a tab called Ask a Question. We will address these questions, if any, at the end.
But please only use it in case we have any connection problems. Now let's move to the first questions. We have first Flora Trinidad from BPI. Hola, Flora, please go ahead with your questions.
Hola, buenos dias. First question is regarding EBITDA guidance that you mentioned. I assume this includes the guidance you had given for downstream of €2,800,000,000 to €3,000,000,000 But just to confirm it and also ask you if it's possible to give us the guidance for the operating income as well for 2015. A detail also on the 2016 CapEx guidance. Can you just give us an indication of how much are you considering for Talisman in this year?
And then just a broad question, there were some news around divestments and they specifically mentioned Venezuela as one of the options up for sale. Are you able at this point to comment anything on divestments? And can you just give us a sense of when can we expect news flow on this front? And just finally, just a detail. I think you mentioned strategic plan in the Q3 results, but just to confirm.
Thank you.
Thanks, Laura, for your question. I mean, in relation with the EBITDA, I think that in the last quarter results presentation, I gave a figure between $2,800,000,000 and €3,000,000,000 as EBITDA. My perception is that we will be a little higher than my prior estimates, it would be around between €3,200,000,000 and 4. So take it 3.3 in a flat situation with the one we have seen in this quarter. In relation with the EBIT for the whole group, with the estimates we have, we expect to be around €2,000,000,000 and Talisman will contribute with approximately 200 minus $200,000,000 in that figure.
And finally, in relation with the divestments, not only about a single country, but I mean we refer to the commitment we had with the agencies which is to divest €1,000,000,000 in the next 14 months. I mean, the agreement with the agencies was that we have to divest €1,000,000,000 and we had 18 months since the closing date of Talisman. So we have approximately now 15, 16 months to deliver in that sense and we will deliver. But I'm not going to disclose which are going to be the assets. Sorry about that, Flora.
Thank you, Ricardo. Thank you very much. Now let's move to Brendan Wong from Bank of Montreal. Hi Brendan, go ahead with your questions.
Yes. Hi, guys. And thanks for the opportunity to ask a couple of questions. And just two questions, if I may. Just first question, I guess, more broadly on the acquisition and referring back to your representation at the time of the acquisition, slide 24 where you talked about creating value and this still being the IRR being above WACC.
Can you give us a sense now having seen the assets and the assets being in your control, just sort of what oil price you expect IRR would need to be for IRR to be above WACC and considering your higher synergy ability of the $350,000,000 And then just second question, could you just zero in on the U. K. North Sea assets just in terms of how much of a drag they are obviously on the performance of the assets that you've bought? And what sort of plans you expect to take forward to sort of create values from those assets please?
With the first one, I don't have a clue. I mean, one thing is clear. We have bought 2P reserves at $10.5 per barrel. And we know that right now the price situation, the price scenario is not in our favor, but we are going to be seated in those assets for 20 years. So all in, I can tell you that at the moment with the transaction with the price deck that we commented at last December, we were above our WACC.
You can have the data if you look at the point that at this level Talisman EBIT is basically 0. So I'll say I don't have the data over here. We can make a calculation, but we are quite optimistic that acquisition of Talisman is going to. The second question refers to the U. K.
And on there, basically, we are following the terminal run plan, which implies the split of the assets taking out those that really cannot deliver much. And in the other hand, looking to increase activity in those that still have some life. But there's no any news other than the ones we have commented before. Things are moving right in the right direction with the turnaround plan. And in the other hand, our valuation includes a negative value for the asset.
So we knew that it was not an asset in which we pretend to really create value other than in front of the value we assign to this asset. Sorry, I cannot be more specific Brendan.
Just in terms of the U.
K. Assets, do you sort of expect the 8% of development CapEx going forward into 2016?
Is that a sort of
a demand that we expect in terms of CapEx commitment to the asset?
You mean in the U. K?
U. K, yes.
I don't have that specific I mean, we're still in the way to work with this strategic plan and with the budget. So I don't have any data for 2016 of any individual assets. What we have is an objective and the objective is to keep the CapEx flat for the upstream division even including all the Talisman assets, but I don't have data for specific assets. Okay. Thanks, Miguel.
Sorry, Brendan, I cannot be more specific. I don't have those data.
Okay. Thank you. Thank you, Brendan. Thank you very much for your questions. Now let's move to Morgan Stanley.
Haitham Rashid, good to speak with you again today. Go ahead, Haitham.
Thank you, Angel. Thank you, Miguel for the presentation. A few questions from my side please, if possible. Firstly, just on coming back to the CapEx, but actually looking ex upstream because you've given sort of obviously detail around your thoughts around upstream. But could you say anything about how you see CapEx for the group evolving as we move into 2016?
Do you think that that can also remain sort of flat or is the downstream investments likely to sort of move higher with Peru? Secondly, just a question on the GO program. Could you perhaps talk a little bit more about the renegotiation of the contracts just in terms of what sorts of what is included in the numbers that you're talking about there when we sort of think about some of the drilling day rates that we've seen, the movements in some of the various different parts, the sort of numbers that have been talked about in the industry in the last sort of couple of months are higher than these sort of numbers and higher than the 10% to 20% that you're sort of targeting towards? Would you say that this is somewhat conservative? Or if you could just give a little bit of color around that that would be helpful?
And then the final question I have is in relation to the upstream OpEx efficiency that you highlighted in the previous call. I think you talked about a $5 per barrel reduction in upstream costs that you were targeting. I wonder if you could just give us a sense of whether that's still the case whether you could maybe do more or any update there would be very helpful. Thank you.
Thanks, Heath. In relation with CapEx in the downstream division, you know that in the past, I mean, 2014 and prior, we have been around €700,000,000 €750,000,000 And this year it's going to be a little higher as you point out due to the investments we are doing in Peru, which will end up this year the whole downstream division in €1,000,000,000 This would be flat by 2016, okay? So that in relation with the CapEx for the Downstream division. Turning into the gold program and the synergies, we'd be able to deliver the following impacts in our P and L. Dollars 280,000,000 in this year, dollars 550,000,000 in 20 16, €700,000,000 in 2017 €750,000,000 by 2018.
How is this being to how is this working? Well, first, the GO program has 217 different initiatives as of today. And they will increase in they are increasing permanently. We have initiatives there of all types. And I can mention some.
I mean in Russia, we are going to optimize the operational structure of our development assets in Bolivia. The we are going to optimize the whole marketing of our production. In Brazil, we are going to adapt the operating structure to current and projected level of activity and restructuring trade agreements. In the U. S.
With cost reduction to improve rates of drilling and well services. In Trinidad and Tobago, we are going to really improve the complex logistics we have there of transportation and storage. In Argelia, new optimization of structures and sites. In Downstream, our refineries have launched a new CO2 reduction program, which implies better results, thanks to the energy consumption, energy cost reduction that goes along with it. In chemicals, we have between many other projects to reduce the cracker capacity in Puertoiano, which will give us extra margins.
So the gold program, it's a long one. Then in the renegotiation process, I would say and I think I mentioned that what we have obtained in existing contracts was a 5% in vessel suppliers and a 7% in Talisman ones. But this is on expanding on the region more than in any other area, our reduction between 10% 20%. I mean, perhaps we may sound conservative, but it's what we are seeing. Finally, and as it may be a question may arise at a given moment because it's totally linked to the gold program.
In the synergies, we are also and I would like to mention some of the initiatives of the synergies. Some of them as mentioned are already implanted. We can start with the removal of Talisman board and listing cost, Talisman top management restructuring, integrate and optimize the spacing calculation, optimization of discretionary G and A, IT system optimization, scale effects, action plan for smaller offices already ongoing Singapore, Amsterdam, Erbil, Algeria, Jakarta, Luxembourg, Lima and Oslo optimization of the Intergroup financing mechanism for the Talisman entities services and activity within retrocurrent agreements reinsurance programs. I mean, we have more than 90 different activities going on and the whole company is moving in the same direction. Remember that our origin has always been downstream.
And in downstream, we are quite efficient and costs it's a must to be assessed. In the past years, our goal in the upstream division was growth. And this is a turning point. I mean, in the existing scenario, I think that the culture is going to the Downstream culture is going to help us also to reduce CapEx and OpEx in the upstream division. And finally in relation with the $5 I mentioned, if you remember $1 was cost reduction, dollars 2 were due to exploration reduction and the other 2 were due to the mix of our production because we have several projects that are ramping up.
So the extra cost of the new barrel is much lower than the ones we had in the past. So the combination of those is $5 per barrel, which is what I mentioned in the last quarter results. How much it will be, but our goal, our objective, it would be to reach the $9 per barrel of reduction in which I include the $5 I mentioned before. So $4 extra dollars is the objective. Whether we reach it or not, it would be
on our hands.
Thank you, Miguel. That's very helpful. Just a quick follow-up. On the 10% to 20% that you expect to reduce sort of new contracts by over what time frame are we talking here? Is it over a sort of 12 month period or something less or?
Once we renew it, I mean, it's not the term that affect us, but the maturity of the contracts. When a contract is mature, we have been capable of really reduce up to this 20% that I mentioned. So it's not a matter of when it will happen. It's a matter of each contract is being renegotiated when it's finished. Okay?
Okay. Very clear. Thank you very much.
You're welcome. Thank you very much, Haitam, as always. Now let's move to Anish Kapadia from Tudor, Pickering, Holt, CPH. Hi, Anish. Go ahead with your question.
Hi, good afternoon. I
have three questions, please. The first one was, could you just give us some idea of you're going to have a CapEx reduction in 2016. What was the impact of production what's the impact on production of the CapEx reduction in 2016? And would it lead to a reduction in improved reserves in North America in a low oil price environment? The second one is related to the hybrid bonds.
I think you've still got €4,000,000,000 remaining. It seems like the hybrid bond market has got a little bit worse relative to your expectations of it getting better. Just wondering if you're still confident of getting the €4,000,000,000 of hybrid the way? And if you can't, what's the abandonment abandonment liabilities. If I got it right, I think Talisman had about $7,000,000,000 of abandonment liabilities on its balance sheet.
Just wondering are you carrying that same amount? Has it changed? And should we expect some of the spending on that to be brought forward in places like the U. K. Where I think you've got $100 per barrel operating cost?
Thank you.
Well, thanks Anish for the questions. In relation with the first one, you have to think that we don't expect any impact in production, I mean, due to this CapEx shortage. 1st, because the projects we have in front of us are ramping up. Carton will be ramping up. Chapinhula will be ramping up next year and by the end, Lapa would be there as well.
On top of that thing that in this year we have been the whole day without Libya, the whole year without Libya. So if you combine only these four areas, short term for sure there would be no impact at all. Talking about the hybrids, first comment is that it's not $4,000,000,000 that we had left. We issued €2,000,000,000 in the this quarter. 1 of them was a non call $60,000,000 the other was a non call $10,000,000 And so we still have $3,000,000,000 to be issued.
And I'm positive. I mean, I think that the suffering that the fixed rent has been in the last month and a half if you wanted is totally related to I'll say Greece in one hand, the doubts about the Fed position in the other, and finally, some news about China. But I mean the market is so volatile that we will see what happen. But I think and I am positive and I still confident in Mr. Draghi and his €60,000,000,000 per month, which I hope that at the end
will move
the yields in the direction I expect. And in the final one in relation with the Talisman Abundant Liabilities, of today, we don't have any material increase. So after our purchase price allocation analysis, we have somehow confirmed what they have in their books. So basically, as of today, no changes
there. Just going back to the first question. What I was just trying to get any sense is more in terms of North America. Given you're reducing CapEx over there, would you expect production to fall in North America next year? And given the reduction in CapEx
and low oil
prices, would you
expect reserves to have to be debottled?
First, I would say first, I would say that a possible reduction in production in North America, which is possible because as we mentioned in the speech, we are going to drill for cash. And free cash could be a reduction, but it's not our main concern. I mean, globally production will grow. And in North America, we'll drive for those as much as the scenario allowed us to. In the existing scenario probably would be CapEx reduction and reduction of the main production.
But I don't see it as a major concern. Okay Anish?
Anish? Yes. That's okay. On reserves?
On reserves, I mean, you have to think that the whole company mindset has changed. I mean, with the acquisition of Talisman, we are by far larger in reserves that we never expected. And we'll have to wait for the budget to really provide you a better question I mean better answers to that question. But on average in the last 4 years, we have been above 200% on reserve replacement ratio as Repsol. And with the addition of talisman really the reserve figure is something that will appear once we end our budget work.
But our concern today is totally focused on free cash generation and not in size. I mean, as mentioned, with the organic capabilities of Talisman assets and Repsol assets would be reaching more than 900,000 barrels of oil equivalent as production per day. And this is not the objective. This is also one advantage we have right now, because we don't have any need as others may have to maintain our production. I mean, it's not our goal anymore.
We are looking for value, not for size. Okay? Okay. Thanks, Miguel.
Thank you, Anish. Okay. Let's move on. Hola Felipe, Bangor Spiritus Santo Investment. Hello.
Go ahead with your question.
Hi. Good afternoon, everyone. So two questions for me. The first one just a follow-up on the synergies that you are now targeting. Two questions associated to that.
The first one is basically if you have included in those €350,000,000 any OpEx savings associated with exploration expenses? That will be my first question related to exploration to the synergies. And also associated with that, you have raised your target to $350,000,000 Has that implied higher restructuring charges? Could you update us a little bit on that front? What will be the currently what is your best estimate for restructuring charges?
And what will be the split between 2015 2016? My second question relates to downstream and the strength in refining and in the Chemicals business. You have done a significant restructuring in the Chemicals division. Refining margins are I don't know. I think that everyone is surprised by their resilience.
Going into 2016, are you assuming a reduction of your profitability in the downstream a scenario of a stabilization of oil price? Or do you think that in a scenario of stable oil price at the current level, your industrial businesses in downstream could maintain their profitability? Thank you.
Thanks, Felipe. In relation with the first one, the synergies did not And in relation with the best estimates of restructuring charges as of today, Talisman did some before the closing something like 250 people were lay off there. And we expect in to and we have included a cost €50,000,000 in Repsol, I repeat. And finally, you have to think that we are under the agreements with Investment Canada, which are a confidential agreement. So basically we will fulfill the agreement, but I cannot disclose more than what I told you.
So already 250 people were layoff, restructuring. And in relation with the second one, whether or not I'm expecting a reduction of profitability in the downstream business. I would say that probably in the chemical business once the crackers that are now under maintenance will come back to work, probably there would be a slight reduction there in the chemical business. But other than that, I do not see or I do not have any reason to expect a reduction on the profitability of the downstream business.
Okay. Thank you very much.
Now let's move on to Thomas Sadoff from Credit Suisse. Hi, Thomas. How are you? Go ahead with your
question. Hey, Angel. Hi, Miguel. Quick questions, please. Just firstly on Perna or Cardon, whatever you want to call it.
Do you still expect PDVSA to exercise the back end rise? Or should we just assume fifty-fifty going forward between Repsol and ENI? And just a quick one on your production growth ex Libya of 6% this year. I believe you used to say 60% where is the shortfall? And then just finally going back quickly to Anish was discussing on the upstream CapEx in 2016.
Perhaps can you kind of split it out between where is the reduction coming from? Is it deferral and rephrasing of certain projects and are more interested outside of the S. And how much is related to cost deflation reengineering etcetera? Thank you.
Thanks, Tomas. In relation with the first one, it's on PDVSA. I mean, it's their decision and I cannot I don't have any hint or any idea of which would be their final decision. In the production, if you remember, we gave a 7% growth for the 7 years sorry, for the 5 years of the strategic plan. So the 6% ex Libya, I wouldn't say it's a shortfall.
I mean we are totally aligned with the figures we provide in 2011 when we launched the strategic plan. So we are totally aligned. And in relation with the upstream CapEx for 2016, we still have not finished the budget nor the strategic plan. So the figure I mentioned to keep that CapEx flat for the old division, it's an objective. So still it's on the business to decide how to fulfill or to reach this objective and how to split their CapEx.
So I don't have the split. Is the business the one that have to work out how to reach this 4.6 $1,000,000,000 of CapEx for the next year. But I don't have the data. Thank you, as always. You are welcome, Thomas.
Thank you, Thomas. Now we're moving to John Rigby
from UBS. How are you, John? Go ahead. Hi, guys. Hi, Angel.
Hi, Miguel. Two questions, please. Can you just now we've got the numbers just talk around the refining business. I think your refining margin was up, throughputs were up, but it looks like the contribution from refining was down. So maybe the context on a sequential basis, maybe in the context of 1Q to 2Q, some of the moving parts?
And I know you're optimizing crude supply and so on, so maybe some color around that if you could. The second question is, I think you year. And I'm interested in the context of you talking about the budget not yet being fixed for 2016 and the plan not being ready for the end until the end of November. I just wondered whether you feel comfortable in sanctioning a project, those projects when you really only got them onto your roster in the last few months and in the context of the industry slowing down on FIDs to make sure that they're being done optimally whether careering straight into sanctioning them within a few months of completing Talisman is an appropriate time frame?
Thanks, John. I don't know if I have the answer for the first one. Sometimes the refining business beat the index, sometimes it doesn't. And I don't have the slightest idea on why last quarter they improved by I think it was something like $0.60 or something like that index while in this quarter they have been almost at the same level. I think they're something like $0.10 below.
But I don't have the slightest I mean, I don't have answer other than that in Bilbao, in Petronor, there was a maintenance for something like 15 days that may have affected the CCS margin that we have reached this quarter. But it's the only reason that I can think of right now. In relation with the second one, the answer is yes. We are quite comfortable because both projects are quite strong And they even we stress under the more the asset scenario we are using, which is 55, 65, 75 and they work out perfectly well. So it's there are 2 good projects.
So the answer is yes. We were comfortable while sanctioning both Ampere and Alcafias. Okay, John? Thanks,
let's move to Matt Lofting from Nomura. Hi, Matt, go ahead with your question.
Perfect. Thanks, Angel. Thanks for your comments, Miguel. Just two things if I could. Firstly, just on cash flow and the cash cycle, if you could just add any sort of comment in terms of how you see the sort of the cash cycle on an underlying basis this year and then perhaps next year at sort of current forward curve oil prices given the sort of the additional comments you've made around CapEx plans, assuming I guess in the background that you continue to sort of look to utilize the scrip on the dividend side?
And then just secondly, if you had any guidance on depreciation going forward on a either quarterly or an annualized basis including Talisman? Thanks.
Thanks, Matt. In relation with the cash flow, I can provide you my estimates for 2015. I don't have data for 2016 as you may imagine. For 2015, the total cash generation would be minus €8,350,000,000 From those you have to take €1,000,000 From
those you have
to take out the €8,000,000,000 we paid for Talisman. So it would be negative by €350,000,000 euros This is my estimate for the end of the year. So basically without taking I mean without the acquisition of Talisman and not considering any divestment would be around €350,000,000 negative, okay? In relation with the script, the idea is to keep it at least for but for sure it's a decision that it's on the Board and in the General Assembly. If we take out the 3 largest shareholders that all of them have gone for the cash, we have made a 60 63% we have obtained a 63% acceptance ratio over a 75% or 74% number of shares.
So it's almost 90% or 80% high 80% of acceptance and the idea is to keep it. In the projections I gave you about the cash flow about the free cash flow or total cash generation for 2015, I include dividends for in the last dividend we paid. And in relation with the guidance for depreciation for the fee may be around €3,100,000,000,000 3,200,000,000 Okay, Matt?
That's great. Many thanks, Miguel.
You're welcome, Matt. Thank you
very much, Matt. Now let's move to Hamish Kleck from Bank of America Merrill Lynch. Hi, Hamish. Go ahead with your question.
Good morning, guys. Thanks for taking my questions. I wondered if you could give us just a little bit of an update on Mississippi Lime. You mentioned some of the other assets in North America, but it's one of the regions basins that's been coming under a bit of pressure recently. I just wanted to check everything was going well there.
Also, I wondered if you could maybe clear up just a question I had on the CapEx side. I just wanted to be very clear about this. You said that 2016 CapEx would be the same as 20.40. Can you just confirm that 20.14 CapEx will be with or without the legacy Talisman CapEx in it? Is that a Repsol standalone CapEx number that's being compared to a Repsol Talisman CapEx number in 2016?
And then I was going to say the final question is, can we expect you to also review the dividend in the Q3 strategic update? Or will it just be an operations update? And those are my questions. Thanks.
Thank you, Amish. The update that I can provide you in relation with the Lime is that we have include an impairment during the quarter of $110,000,000 And the book value we have at the present time in the whole asset is US900 $1,000,000 The activity has slowed down and we are aiming there always also for cash. And I think that there's a total agreement with our partner in that sense. So I don't expect much activity or increase of activity there as long as the price scenario remains the same. In relation with the CapEx guidance, the figures I mentioned 4.5% last year, 4.5% this year and 4.5% next year includes Talisman legacy assets.
One thing, 2015, it's a projection of what we expect to end up. 2016, it's an objective, okay? So it's still pending. But yes, it does include all the Talisman asset. And the last one with the dividend in relation with the strategic plan, we have to end the strategic plan, but the idea is to keep the euro per share with the scrip initially.
At least as far as I know, we'll continue with this policy €1 and the scrip. Okay, Hamish? Very good. I really appreciate it. Thank you for your questions.
Well, thank you, Hamish. And now let's move to Irene Aymona from Societe Generale. Hi, Irene. How are you? Go ahead please.
Thank you. Thank you. Good afternoon. I had two questions please. Firstly, Miguel you closed the deal on May 8, I think you mentioned.
Between then and now as you went through finally taking hold of all the details and the numbers and consolidating, Was there something that particularly surprised the Repsol management either positive or negative in the deal? And then my second question, I was looking at page 25 of your statement. New group capital employed nearly €45,000,000,000 and current sort of return on capital is about 4%, which is clearly below your WACC. And you outlined today cost cutting plans to I reckon add another 1% to that return. When you say you look to turn Talisman into a value creating deal, what do you think that Raja should be?
And in a world of $60 to $70 oil for a while, is it achievable unless you shrink very materially the denominator of that ratio? Thank you.
Thanks, Irene. In relation with surprises, I would say that with the existing price scenario, there has not been any surprise. I mean, positives and negatives have been balanced and none of them has been big to surprise us, not in the positive, not in the negative side. So that's clear. In relation with the ROACE, I think that a 4.3%, which I think is the figure that appears in the notes, you have to think that we have put and that we have right now $25,000,000,000 more or less of capital employed in the upstream division, which is not delivering any EBIT at the present time.
So should I be concerned? Well, I'm concerned about the price situation, but not about the acquisition. The 80, 50 world scenario is something that is going to be here forever. Our perception is that it's not. It could be 1 year, 2 years.
But also we were a company that had the chance to play that game first because we have the cash. 2nd because of the resiliency of the company. Look at the EBITDA. I mean we have been able to generate the same EBITDA as we did last year in this first half of the year simply because of our downstream, our gas net, the dollar euro, which always help us when the barrel goes down. So I'm concerned about the price deck, but not about the acquisition.
And at the given moment, the price will fluctuate and we are going to be in these assets for, as I mentioned before, 20 years. And those are reserves that were bought at $10 So thinking in a longer term, I think that we have done a good move. If we look at it in a $50 scenario and $2.4 per 1,000,000 BTU as Henry have, for sure ROCE will not be there and returns will not be there, but it's not our estimate. Okay, Irene?
Thank you, Miguel.
Thank
you. You're always welcome, Irene.
Thank you very much, Irene. Now let's move to Mark Kupler from Jefferies. Hi, Mark, how are you? Go ahead with your questions.
Hi, afternoon, all and Miguel. Thanks very much for the presentation. Just two questions for me please. And I suppose the first one is sort of building on the previous question. Acknowledging your comments around the current scenario weathering the storm so to speak, are you able to put a time out there as to when you think the Talisman asset can be free cash flow generative?
And then secondly, this one's probably more mechanical. Given the strategic update plans for early November, should we expect some potential divestments before that update? Thanks.
I would say that if you tell me when the price will go up, I'll tell you when the company will generate free cash, I mean, we have the data there. You have the knowledge that the company at EBIT level, it's neutral with this with the existing prices with the $60 we have had this quarter. You also have the depreciation figure for Talisman for the year. So it's a matter of calculation. So I think that everyone knows the price today and everyone expects the price at a given moment to reach the $80,000,000 $90 The question and I think that your question in that sense is totally right is when will this happen.
And there we have forces that are playing against each other within the business and other factors Difficult to say, but one thing is sure, it will not last forever at this level of prices. So I cannot answer the first one saying when will it be free cash flow positive. But we have talisman depreciation. It's around $1,100,000,000 per annum. And you have all the data.
So it's on you to put the price you may think and then you will realize. But one thing is clear at 60, we are EBIT breakeven. And sorry, your it takes time. So could happen and probably some of them will happen. But we will see.
I mean this process as you know the day you started, but not so easy the day you close. I would say that for sure with a high probability, we will announce some transaction before to assess. Okay? Marc?
Yes. That's great. Thanks very much. Just on the first question, could you maybe if we took the macro environment flat from today, is this sufficient excuse me, flexibility on the capital spending program for 2016 to achieve cash flow neutral level do you think?
I mean, this year, we have been almost cash neutral, including dividends and including interest. So this year €350,000,000 negative. If it's going to depend much on the price for next year, but if the figures remain and the price deck remains exactly the same as this year, we basically will have the same figure with the difference of 4 extra months of talisman. So it's a matter of $700,000,000 I mean this from $300,000,000 which is our deficit $2015,000,000 up to 700, 2016, if everything remains the same. And in this figure, we don't have any divestment.
So for sure, I think that, yes, the answer is yes. I expect considering divestments to be cash neutral next year.
Great. Thanks very much.
Okay. Thank you very much for your question. Luis Buenoz Diaz or Buenas Tardes, go ahead with your questions. Luis de Toledo from BBVA.
Thanks everyone. And I have one question. It's relating to geographical reporting, the breakdown you have provided, the new breakdown including Brazil in the region. I was wondering if there's some specific rationale for that move. It will if it could change the way you manage the Brazilian operation in any sense, whether you have chosen that for some equilibrium in your capstone portfolio or if there is a specific division?
Thanks.
Thanks, Luis. Rafael Luis. There's one clear reason. I mean, we want to align the manager, who is Tomas Graciel Blanco, who is who has been leading the Brazilian operation in the past to have all the relation with Sinopex. So to have the U.
K. Business and the Brazilian business, we thought it was a good idea to have the same manager who will have the relation with the Sinopex in both areas. And that's the main reason for it, Luis.
Thank you very much, Peter.
Much better, Luis. Now let's move
questions from my side. First one on divestments again or kind of divestments. Divestments. With pressure increasing on your balance sheet, how comfortable are you with your holding in Gas Naturale? I ask this question because in past you flagged the stake as an option.
And the second one is regarding your comments on the commitment made with agencies to divest assets of €1,000,000,000 in next 18 months. Maybe just clarify have you also committed to a net debt to EBITDA multiple? Thank you.
Well, I was starting to get concerned because nobody was asking anything about government. So thank you, Nitin for your call. I was starting to only and put only and put that in I mean only if it's totally necessary to maintain the investment grade, we will think of divesting gas natural, okay? So it would be somehow the silver bullet, if you want to call it that way. And the second one, you mentioned that if I am committed to EBITDA to net debt multiples and the truth is that we are not.
I mean to me my concern is to have multiples that fit with the agencies in order to keep our investment grade. And those are the ones that are really our goal, our objective and our commitment, which is to keep the investment grade. And that's it. And if it's needed to have a net debt to EBITDA, we'll look for it. Right now, I think that I used to put this ratio the other way around.
So net debt to EBITDA and it's we are right now our estimate is to end up the year at 2.4%. But it's not the ratio that normally the rating agencies work with. They are more in the flow from debt. And this is where adjusted net debt. And this is where we will do our efforts to really cover all the multiples they ask us.
So as an answer, I would say EBITDA to net debt is not committed flow from operations to adjusted net debt. The way the agencies analyze both is what we are committed with.
Thanks, Miguel.
Well, with this last question from Nitin, we've finished with our Q and A session and our Q2 2015 conference call. You know that any further queries or clarifications you may need or want to put on Repsol, the IR area is at your entire service. And obviously, we're also waiting for your request for the workshops in order to help you to model the new Revsol on September, whether in London, Madrid or in any other place, if you may need it. Thank you very much and have a nice day.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now all disconnect.