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 taking the time to attend this conference on Repsol's first quarter 2015 results. This presentation will be conducted by Mr. Miguel Martínez, our Chief Financial Officer. Other members of the executive committee will be joining us as well. Before we start, I invite you to read our disclaimer note. We may make forward-looking statements, which are identified by the use of words such as "will," "expect," or 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, Ángel, and thank you all for attending this conference on first quarter 2015 results. CCS adjusted net income of the quarter was EUR 928 million, 74% higher compared with the same period of last year. Before going into detail with the results, let's review the structure of the conference. Today we will address three topics. First, an update on the acquisition of Talisman. Second, the market environment for the quarter together with the main operational highlights. Finally, the quarter results. We ended the year 2014 with the announcement of the agreement with Talisman's board of directors to acquire the company. In order to consolidate our strategic objective of growing in our upstream division, we decided to enter into this transformational transaction.
During these months, many people from both organizations have been devoting great efforts within the scope of the arrangement agreement in order to successfully close this transaction and achieve a smooth integration. As was already announced in the annual general meeting held on April the 30th, the closing of the transaction will take place tomorrow. Therefore, from tomorrow on, Talisman assets will be a part of Repsol and will consolidate within the upstream division. Repsol enters into this new phase with almost no debt, and the integration will take us to a pro forma net debt to capital employed ratio of 27%. After the closing, our pro forma consolidated liquidity will remain strong at more than $8 billion, representing 2.7 times the short-term debt. We will present information and data on the 2015 combined figures during the second quarter results presentation, once we assign every asset its corresponding acquisition value.
Additionally, the Repsol group will present a new strategic plan before the end of the year that will lay out the foundations for the expanded group's activity, with a very special focus on value creation. With our broader portfolio, better opportunities will be created in order to unlock the value through portfolio management, streamlining CapEx, and through the allocation of capital to the most valuable projects and assets. I'm sure you understand that we are unable to make any comments regarding Talisman assets or results until after the closing. Let me now give you an update on the market environment and the operational activity of the quarter. Starting with the macroeconomic environment during the first quarter of the year, the weakness in oil price continue, counterweighted by a strong US dollar.
Brent crude prices, after a month of January in which a minimum of $45 per barrel was recorded, show a small upward rally, ending the period at the same level with which 2014 closed, around $54 per barrel. At the end of the quarter, we continue observing a certain upward trend in oil prices, which supports our medium-term view of higher prices necessary to achieve the right balance between demand and supply. This scenario has occurred within a context of higher volatility, which we believe will still be the case in the short term. However, thanks to the reverse correlation between oil prices and the U.S. dollar, our earnings are somehow hedged, given that we generate our earnings in U.S. dollars, while a significant part of our expenses are euro denominated.
What is more important is that our integrated model allow us to remain resilient, even in a low crude oil price scenario. Sustained higher refining margins are protecting us in the short term from this situation. The significant portion of our gas production, not linked to oil price, provides further stability. On top of that, we have the likelihood of the dividend flow and results of our affiliate, Gas Natural Fenosa, a stake that provides further optionality to protect the company against any possible scenario. Let me now address the operational activity of the quarter. Starting with the upstream business, in exploration during this first quarter, six wells, five exploratory and one appraisal, were concluded. One exploratory well with a positive result in Russia and one positive appraisal well in Bolivia. The other four wells had a negative outcome.
In April, we conclude two additional exploratory wells in Algeria and in Alaska, both with positive results. Let me highlight the find in Algeria, we're continuing with the successful exploratory campaign, a new gas discovery was made, the TESO-2 well. It's the third one in the Sud-Est Illizi block, a high-potential area in Southeast Algeria. Repsol is the operator of the block with a 52.5% stake. In April, we conclude two appraisal wells with positive results in Alaska. The ongoing exploratory and appraisal campaigns in Alaska, Russia, and Brazil continue advancing with good expectations on the results already obtained. In Alaska, where we have already accomplished all the drilling goals in the limited period of time available, the production tests were positive. In Russia, a new discovery well in Block K1 will add contingent resources.
In Brazil, the Pão de Açúcar appraisal one well consolidated certifiable volumes of resources in BM-C-33. Let me highlight also our activity in the prolific Caipipendi area in Bolivia, where new discoveries in wells Margarita 7 and 7, with a 5 million cubic meters per day production capacity, will add reserves and bolster Repsol gas production in the country. At 30th of April, 12 exploratory and appraisal wells were ongoing. Out of which, seven are exploratory in Angola, Brazil, Peru, Norway, and Romania, and five are appraisal, Brazil, Russia, Bolivia, and the U.S. Talking about our development projects, it's worth highlighting the progress in Sapinhoá in Brazil. In Sapinhoá North, the first well was connected to our second FPSO in place, Cidade de Ilhabela, in November 2014. During the first quarter of 2015, a second well, producing 40,000 barrels per day gross, was connected.
The quality of the reservoir is excellent. Economics per barrel will improve further with the opening of new wells. 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 a plateau of 270,000 barrels per day. In Venezuela, first gas from Cardón is planned for mid-2015. This first phase of the development will produce 150 million standard cubic feet per day. We maintain the original dates for the other phases. Let me also give you an update on the situation in Libya. Unfortunately, our production in the country continues to be interrupted, and we have no visibility on when the situation may change.
International efforts are concentrated on resolving the Libyan conflict. We will be ready to resume operations once the situation is normalized, since our facilities have remained in good shape throughout the conflict. Turning to production, the average production for the quarter stood at 355,000 barrels of oil equivalent per day. The production was 4% higher year-on-year, 10% if Libya is stripped out from both years. The main factors behind the increase are the ramp-up of Sapinhoá and Mid-continent, the start-up in March 2014 of Kinteroni. All partially offset by the suspension of activity in Libya. Compared to last quarter production of 371,000 barrels of oil equivalent per day, the decrease is mainly attributable to the effect of the total interruption of production in Libya during this quarter.
That compares to the 13,000 barrels of oil equivalent per day produced in the fourth quarter 2014, and other minor decreases in Kinteroni and Trinidad and Tobago. In relation with costs, Repsol, as always, especially in the current situation, has applied a strict cost-efficiency culture. Several cost reduction initiatives are already in place and are starting to deliver with regards to high impact drilling and logistic costs. Others have also been identified to be implemented in the near term. This quarter, we already had a 5.7% year-on-year decrease of upstream operating cost on a homogeneous basis. Moving now to the operational highlights of the downstream division. With regards to the refining environment, we have averaged record margins during the quarter, thanks to the strengthening of the spreads of products linked and not linked to oil prices, together with lower energy costs.
We are able to better capture the benefits of this advantageous situation due to the complexity of our refining system Reach of the years after the strategic investments carried out in our refining system between 2007 and 2011, and the self-consumption efficiency program addressed under the CO2 emission reduction program. In 2014, this energy savings rendered an extra premium of $1 per barrel compared to 2011, when this program was put in place. Our refining margin indicator in the quarter was $8.70 per barrel, higher than the $3.90 per barrel reached during the first quarter of 2014. The distillation utilization rate was 82% during the quarter, while conversion capacity reached 99% of utilization. During the beginning of the second quarter, we continue enjoying solid refining margins.
In petrochemicals, the competitiveness program that we put in place some quarters ago has allowed us to increase efficiency, creating operational improvements in our sites. This, together with higher sales and improved margins, allow us to enhance the positive results achieved in previous quarters. In the commercial business, marketing and LPG, we had higher volumes. Let me emphasize that in the first quarter of 2015, sales in our marketing division in the Iberian Peninsula and the market, in general, continued the growth trend seen in 2014. In gas and power, while sales increased, the price environment in North America was tougher. Price fell around 40% year-on-year, and the gas price reference, Algonquin, lost almost $9 per million BTU. Despite these factors, our result was above breakeven. Let me now move to the first quarter 2015 earnings performance.
First quarter 2015, CCS adjusted net income was EUR 928 million, 74% higher compared with the same period of last year. The good results in the downstream business and the one-off gains coming from the exchange rate positions due to the net asset dollar position held for the acquisition of Talisman more than compensated the lower results coming from the upstream business. It's worth noting that even in this challenging scenario, the company has been free cash flow positive during the quarter. Starting with the upstream business, adjusted net income for the first quarter was minus EUR 190 million.
The result has been affected by the lower oil prices, the suspension of our Libyan operations that had an impact of EUR 148 million on the operating income, and EUR 51 million at the net income level, the exploration costs, the unusual tax effects related to the depreciation of the real against the dollar in Brazil in an amount of EUR 69 million, and the one-off adjustments in Venezuela carried from 2014, coming from the operator in an amount of EUR 50 million. The year-on-year performance, excluding Libya, is explained as follow. Lower crude and gas realization prices had a negative impact at the operating level of EUR 349 million. Higher production, thanks to the ramp-up of Sapinhoá, Mid-continent, and the start-up production in Kinteroni in March 2014, resulted in a positive impact of EUR 76 million. Higher exploration costs lead to a decrease in the operating income of EUR 75 million.
The increased costs were mainly due to higher amortization of wells, among which is worth highlighting Aster in Canada, Key Largo in Gulf of Mexico, and Omoshi in Angola. Higher depreciation charges due to higher production had a negative impact of EUR 22 million. Taxes had a positive impact of EUR 42 million. However, the overall tax expense should have been much lower in this quarter, given that the upstream division had a negative operating income during the quarter. The higher tax expense was largely driven by the effects related to the depreciation of the local currency against the dollar in Brazil. Income of equity affiliates and non-controlling interest, the exchange rate effects, and others explain the remaining differences. Turning to our downstream division, CCS adjusted net income in the quarter was EUR 534 million, which compares with the EUR 290 million of first quarter 2014.
Drilling down into the quarterly results, in refining, we saw a year-on-year increase in margins per barrel due to a generalized strengthening of the product spread and to lower energy costs derived from the efforts in efficiency undertaking in the past years. These higher margins, and also a higher utilization rate, had a positive impact at the operating level of EUR 295 million. It's worth noting that EUR 23 million of the increase in operating income corresponds to the improvement of the refining activity in Peru. In the petrochemical business, wider margins and higher volumes allow us to improve the operating income by EUR 97 million. This improvement is due to the competitiveness programs implemented together with a better market environment. In the commercial division, the LPG was the main driver of the EUR 74 million increase in the operating income.
Moving to gas and power, the operating income of this division was positive during the quarter. Higher volumes were commercialized. There was a year-on-year decrease of EUR 210 million that is explained by, on one hand, the outstanding results of Q1 2014, and on the other, the lower commercialization prices in North America. Trading results, the exchange rate effect, and others explain the remaining differences. In Gas Natural Fenosa, the EUR 122 million adjusted net income in the first quarter of 2015 was flat year-on-year. The contribution from the Chilean affiliate was offset by higher financial expenses and minority interests. In the quarter, it's worth highlighting the remarkable performance of the financial result, which registered a positive amount of EUR 655 million. Since we monetized our Argentinian assets, we held a net long cash position in dollars.
In December 2014, this dollar position was further lengthened when Repsol agreed to the acquisition of Talisman. In order to pay the transaction, because our macroeconomic analysis forecasted strong signs of a dollar appreciation in the period to come. Let me explain the reasons behind our forecast based on the divergent Eurozone and U.S. economic and monetary policies. After the IMF increased the probability of a Eurozone recession in October 2014, it has been clear that the euro would weaken substantially against the dollar. The trigger for our view for a further weakening of the euro and a strengthening of the dollar was the ECB announcement of a 1 trillion increase in its balance sheet. This announcement occurred just as the U.S. Fed finished the tapering of its own period of quantitative easing.
These two actions, in effect, were a reversion of the previous two years of ECB contraction and Fed expansion and provided a clear indication of a change in relationship between the dollar and the euro. The results achieved have confirmed our view to be correct, and during the first quarter, we have registered a significant and positive result in the context of the dollar appreciation. From March onwards, with the likelihood of closing of the Talisman acquisition, this dollar position has become an accounting hedge with 0 impact on the company's P&L. I may say that in this quarter, we have delivered a solid set of results with improved performance of our downstream business and the results obtained in financials that offset the lower results in the upstream division.
2015 is the year in which Repsol will consolidate the transformation that began last year with the definite exit from Argentina and the acquisition of Talisman. During this quarter, we have taken the steps in order to achieve this transformation, and we have been able to demonstrate that our integrated model is resilient, even in this low-price oil scenario. We are now focusing on a smooth integration of Talisman, which is already a reality, and thereafter on establishing the strategy of Repsol. Thank you very much, and we will be pleased to answer any questions you may wish to ask.
Thank you.
Thank you very much. Yes.
Just as a reminder, to ask a question, press star one on your telephone keypad.
Thank you. Let's move into the Q&A session. We'll address your questions in principle only by phone, but we will also enable a chat just in case we have any connection problems. Please only use it in case we actually have these connection problems. Now let's start. We have our first questions from Filipe Rosa from Espirito Santo Investment. Filipe, go ahead with your question.
Hi. Good morning. Good morning to you all. Three questions from me. The first one, I would like to know whether at this stage, with the strong results that you delivered in downstream and the fact that refining margins, according to your presentation, remain quite strong in Q2, are you willing to raise your guidance for downstream EBITDA from current, I think that currently it's EUR 2.5 billion. At this stage, the fact that you already delivered close to 40% of that amount in Q1, would you be willing to raise your guidance and to what level? That's my first question. My second question, just to follow up on the financial impact from the FX. I don't know if I understood it correctly, you booked in the Q1 an impact of EUR 655 million.
I don't know whether this is in terms of net income or in terms of financial income. My question is just trying to understand. The fact that the euro dollar has Now move to 113. Would this have any impact on your P&L? You say that your dollar position will become an accounting hedge, no impact on P&L. Just trying to understand on a full year basis for 2015, what will be the impact we should expect? Just the Q1 or you will not account any impact at all? My third question relates to the fact that you have booked tax revenues in your cash flow statement, okay? Instead of paying taxes, you have received taxes. In your P&L, you have taxes that you're supposed to pay. There is a gap between your cash taxes and your P&L taxes.
I would just like to understand what was the main driver for this, and what should we expect over the next quarter should there be any major difference between your P&L taxes and your cash taxes. Thank you very much.
Thanks, Filipe. Starting with the second question. The accountant rules shows you that you have to be really confident so that the probability of the transaction was clear before hedging it. What we have done, and we have done that since May last year, was to be long in dollars through swaps. We increased that position, in December, in January, and in February. If you remember, the first signals that we received that the transaction had good possibilities came after the general assembly of Talisman that was held in February the 18th. Then we have, by the beginning of March, also good input from the authorities that really can generate precedent conditions like Investment Canada. At this moment in which the probability was clear, we hedge.
Answering your question, no impact on the dollar would affect P&L in the following quarter due to the fact that we have hedged our position in the first part of March. In relation with the guidance for downstream EBITDA, it's true that the results are much, much better that we initially estimate. I have to say that in the other side, upstream was a little lower. In global terms, and it shows the resiliency, we are more or less where we should be. I agree with you. It looks like it's gonna be higher, let's say between EUR 2.8 billion and EUR 3 billion at CCS. I think that the EBITDA would be there. In relation with the last one, it's simply a cash situation. We advance cash before to the authorities here in Spain, basically. At the year-end, they have to turn it back to us.
It's just, I would say, a timing difference between the accounting and the cash situation.
Okay. Thank you very much.
For the future. You're welcome, Filipe.
Thank you.
[Foreign language], Filipe. Now let's move on. Let's move on to Brendan Warn, Bank of Montreal. Hi, how are you, Brendan? Go ahead with your questions.
Thank you, and good afternoon, gentlemen. It's Brendan Warn from BMO Capital Markets. I just want to ask a couple of questions focused on the upstream and just focused on a comment. If you can expand on a comment you made in your statement today, just that your operating income of the upstream division would have been positive, excluding exploration costs, in light of no contributions from Libya. Could you just expand upon, if I've caught it correctly, that you've achieved 5.7% operating cost reductions year-on-year in the upstream, just what you believe will be achievable and what will remain. Could you just further expand that in terms of the net CapEx expenditure, in the upstream?
If you could just split out or talk about what was expansion or development CapEx versus maintenance, and again, just what sort of structural maintenance CapEx cost savings do you believe you've been able to achieve and we'll see throughout this year. Thank you.
Thanks, Brendan. In relation with the first one, in a like-to-like basis, we obtain a reduction of 5.7. Looking forward, our objective is to cut $5 per barrel and gain $5 per barrel. From those, one will be main efficiency. Two of them will come from a lower exploration cost. Think that we are moving our CapEx program in comparison with last year from $1.9 billion down to $ 1.3 billion. $2 would be saved in exploration. And finally, the entrance of Cardón and Sapinhoá, which will reduce the break-even point. In comparison with this quarter, we expect a cost reduction of a EUR 5 per barrel on average. In relation with the net CapEx, in the upstream division, we keep with the 27% reduction in comparison with last year in dollar terms. That implies that from the $ 3.8 billion we invested last year.
We are cutting it down to $2.7 billion. I don't have the split with me between maintenance and development, but through our IR people, we'll send you the split of the $2.7 billion between development and maintenance. Okay?
Okay. Thanks, Miguel.
You are welcome, Brendan.
Thank you, Brendan. Let's move to [Haitam Rageet] from Morgan Stanley. Good to speak with you, Haisam. Go ahead with your questions.
Thank you, Ángel. Good afternoon, gentlemen. Just two questions from my side, please. Perhaps if I could just pick up on the CapEx question or the discussion around CapEx in the last question. Perhaps just, Miguel, if you could talk a little bit about the phasing for the rest of the year. You mentioned, obviously, you maintain the 27% cut in dollar terms. When I look at sort of 1Q, it looks like we haven't seen much of a decrease, at least in euro terms. Just to be clear, the 27% cut, does that sort of incorporate a fairly substantial assumption around just FX and the sort of tailwind around FX moves? Or is that a sort of underlying 27% cut ex-dollar/euro moves? Second question that I had was just relating to the Mississippi Lime.
You talked about that being a sort of contributor to growth year-over-year. Looking for the rest of this year, perhaps you could talk a little bit about how you think that will play out in the current oil price environment in terms of activity levels. Also last week, we saw one of your peers take some substantial impairments in the U.S. unconventional upstream. I just wondered where you were at with what you have on the balance sheet for the Mississippi Lime play, whether that's something that you need to revisit or whether you're comfortable with where it is today. Thank you.
Thanks, Haisam. Starting with the first one, I would say that the 27% in dollars refers to a 12% in euro terms. With that, I think that you have the data. Also, it may sound that the figure of the first quarter in CapEx was a little higher, but you have to take into account that in Cardón, we are waiting for the entrance of PDVSA, which will reduce our present stake down to a 32.5%. Right now, Eni and ourselves are holding the whole CapEx of Cardón. We expect to be aligned with the strategic budget, with the budget that shows the figures that I told you, $2.7 billion with a reduction of 27% in dollar terms and EUR 2.5 billion, which is a 12% reduction in euro terms.
In relation with the Mississippi Lime, first, I have to say that last year we took an impairment of approximately $300 million. All impairments are analyzed in a long-term view. Difficult to assess as of today whether or not there will be an extra impairment there. What I can tell you is that we have already paid all the carry of this investment, and we are working now with eight rigs along with the operator. The idea, at least in this first quarter, the production has been flat, and we are only operating with eight rigs, looking more for value than for growth. I think that I answered your two questions.
Yes. Thank you, Miguel Martínez. That's very helpful. Thanks.
Thank you, Haisam, as always. Now let's move to Thomas Adolff from Credit Suisse. Hi, Thomas. Good to speak again with you today. Go ahead with your questions.
Thanks, Ángel. Hi, Miguel. Two questions, please. One on just free cash flow, since Miguel is such a good forecaster. Presumably, you have no visibility on Libya. Let's say there's no production in Libya for 2015. The U.S. is the U.S., SandRidge and Eagle Ford from Talisman, debatable. Cash gain will be tough. If we take that into account with your revised view on downstream and say $65 Brent on average for 2015, where do you think free cash flow will be assuming a 60% scrip take-up? Second question is on BM-S-9. I probably know the answer, but I still want to ask you. You obviously have the first right of refusal, and I wondered whether you would be interested in it. Thank you.
Thanks, Thomas. Thanks for the comment on my capability of prediction. I'm not that sure of it, but in recurrent basis, we ended up the first quarter even, and a little above, taking only the recurring factors, taking out the financial gains. I expect the nine months that we have in front to be a little better than the one we had this quarter for several reasons. We believe that the price deck for the rest of the year would be better than the $54 on average we have had in the first quarter. We have some, I would say, issues in the upstream division, like the EUR 70 million of penalty in Brazil, which doesn't imply cash, but it's a penalty on the taxation due to the relation between the real and the dollar.
Also, I think that the rest of the year would be less risky in exploration terms. We have more appraisals in front of us. Basically, with this 60% scrip, which has already been included in the figures that I provide you about free cash in the first quarter, we paid the dividend in January, the quarter is affected by and penalized by the dividends we paid. I'm a little more optimistic than the neutral free cash we obtained in the first quarter. In relation with the BM-S-9, we don't have the first right of refusal.
I just thank you for that.
I mean, normally these rights of refusal refers to a percentage of a global transaction, and BM-S-9 in comparison with the whole transaction doesn't reach the limit, so we don't have any right of refusal there. Okay?
Thank you. Just to follow up on the first question. When you say free cash flow neutrality is 6% scrip take-up, and that also includes your view on the Talisman assets as and when you integrate them from tomorrow?
For sure it doesn't.
It doesn't. Okay. Got it.
It doesn't. That is done in Repsol on a standalone basis. Okay?
Thank you very much.
You're welcome, Thomas.
Thank you, Thomas. Let's move to Viral Bhojataria from Royal Bank of Canada. Go ahead with your question, Viral.
Hi, Ángel and Miguel. Thanks for taking my question. I had a couple on Sapinhoá in Brazil, if I may. You mentioned the 40,000 barrels a day flow rate for the second well. I was wondering if you could comment on what you are seeing currently on the first well, the second FPSO. Is that number close to 40? Could you comment on when you expect the next wells there to be hooked up? Thanks.
In relation with the first one, they are telling me that yes. The first tie-in well was approximately giving the same results as the one I mentioned in my speech. It has been typical for all the wells we have been tying in Sapinhoá. If you remember, in the first FPSO, initially our plan was to tie in five wells, but due to the productivity of those, simply with nine wells, we were able to really do all the job there. The answer is yes. In relation with the schedule, I'll say that it would be progressive, and the last one would be connected by the end of the year. If you split between now and December, the three other wells will be connected in more or less with the same path. Okay?
That's very helpful. Thanks.
You're welcome.
Thank you, Viral, as always. Well, Matt, Matthew Lofting from Nomura. Hello, how are you? Please, go ahead.
Hey, thanks, Ángel. Two questions if I could. Firstly, just, Miguel, I think on that sort of a gearing perspective, you talked about 27% net debt to capital employed on the closure of the transaction. If you could just, as a point of clarification, flag how much equity treatment on the hybrid issue you're assuming in there. Secondly, on hedging, I know at this point you can't discuss Talisman's assets, but I just wondered if you could discuss the prevailing hedges they've had on the North American business and whether Repsol at this point would think about looking to continue running them or whether you think about monetizing them upfront and then taking the full spot exposure going forward into the second half of the year. Thanks.
Thanks, Matt. We are considering EUR 1 billion out of the EUR 2 as equity, and the other EUR 1 as debt. Okay? In relation with hedges in North America, we are going to monetize it, and we don't hedge our production, we will keep ahead with our policy.
Great. Very clear. Thanks a lot.
You're welcome, Matt.
Thanks, Matt. Now, Nitin Sharma from J.P. Morgan. Hi, Nitin. Go ahead with your question.
Thanks. Afternoon, gentlemen. Two questions from me, please. The first one on shareholder structure. Miguel, I know there's limited what you can say on this, but recent press reports have suggested that one of your, or rather your biggest shareholder, CaixaBank, may be looking at partial sale of stake. Could you share some thoughts on the subject, please? Second one, coming back to the issue of impairments and this time on Libya. Ongoing instability, shut production, and the story has been same for some time in the region. When do you start looking at these assets in terms of impairing them? I ask this question because one of your peers has impaired all of their onshore Libyan assets. I'm just wondering if some of your partners are thinking about those assets in these terms.
Would that force Repsol also to reassess the carrying value of these assets? Thanks.
Thanks, Nitin Sharma. In relation with the first one, the chairman of CaixaBank told us, I think it was last week, that his idea is simply to allocate our shares in CriteriaCaixa instead of the bank. There is not any sale process. It is simply a restructuring of their portfolio. These were his words. In relation with the impairment in Libya, I think that Total, I mean, didn't make any write-off in the research. At least they didn't announce it. We have, if I am not wrong, till 2035, contracts in our fields in Libya. 2035. So, in our opinion, it's a little too early to start with impairment. We have to see how the political situation evolves. On top of that, no other operator, as far as I know, impair their assets in Libya.
As of today, we keep attached to our way of thinking, and we will see. Hopefully, the future would be better for the country, because I think it's totally needed for the people of Libya and for Europe to solve this situation ASAP.
Thanks again. Thank you.
Thank you very much. With Nitin Sharma. Hamish Clegg. Go ahead with your question from Bank of America Merrill Lynch.
Good afternoon, gents. I just would echo Thomas with compliments on your predicting ability. I am sure many hedge funds would be envious. I wondered if you could expand on the underlying position you took in the EUR-USD. If I am not mistaken, it is around sort of EUR 8 billion. Given the gain you made, it implies you may have made slightly more than the 6.2% move seen in the currency. Could you give us a bit more detail on that? Can you tell me if I am right in thinking about this as more of a zero-sum game because the effective price you would be paying for Talisman is higher because of the move in the exchange rate? Would this reverse in the second quarter following closure of the deal? My second question is still on your predicting ability.
Given refining margins are so strong right now, and there is some skepticism in the market, would you consider hedging and locking in some of these high margins? Those are my two questions.
The second one is easier, we don't hedge refining margin either. We will keep attached to our policy, and we will see. There would be no hedges there. In relation with the first one, it is true that afterwards, in EUR terms, the transaction will have a higher price. The only thing is that the only way that accounting you can hedge the position is when you have certainty of the transaction to happen. We have two options. Either don't do anything or really did what we did, which was take long positions in USD, and at the moment in which the certainty of the transaction was there, we hedge. Having said so, fiscally, will not be a major damage because cash stocking, we have shields that we can take in advance. I would say it is no major impact other than that we took the position up front.
If we haven't do it, we would be paying the transaction higher, and we will not have made the EUR 700 million we made with the USD-EUR gain. Okay?
What was the underlying kind of investment? I know you said it was through swaps.
Yeah. All of them were through swaps. Buying and selling basically during January, February, and the first week of March, when the real rally between U.S. dollar and EUR happened.
Okay.
Okay. Thank you, Hamish.
Thank you. Thanks a lot, guys.
Thank you, Hamish. Now, Irene. Irene Himona from Société Générale. Hi, Irene. Good to speak with you again. Go ahead with your questions.
Hello, good afternoon. I have two questions, please. Firstly, a question on the downstream. Miguel, you could possibly talk about the drivers behind the near 10% year-on-year increase in your oil product sales. There was a 13% increase in petrochemical sales. Is it demand-related? Is it sustainable? What does the rest of the year look like? Within the downstream, LPG, year-on-year, the EBIT nearly doubled. Again, can you talk about the drivers and the sustainability into the rest of 2015? My second question, you indicated that by sort of year-end November, perhaps, you will be announcing the new strategic plan for the enlarged Repsol plus Talisman unit. The deal was obviously agreed in December last year. You had originally approached them in July. Why does the market have to wait nearly a year to get more visibility on the new Repsol? Thank you.
Starting with the second one, that is easier. Legally, I cannot have all the information till I close the deal. First comment. You have to think that we have to restate all the balance sheet of Talisman, because we have to allocate the purchase price to the different assets. Once we have hands-on in the company is when we can really start to working. We will have to restate all the figures with the new balance sheet for 2014 in order for you to have a better comparison in the next quarters. It's the way it is.
Legally, today, we do not own Talisman, and we don't have the access to all the data that is required. In relation with the downstream, I have to say that the strong results in LPG also refers to the delay on the formula. The formula refers to a longer period in the past. There is an advantage that we have taken because the price formula refers to LPG prices with six months of differences, more or less. The advantage is that most of the consumption comes during the winter. We have taken the most of the volumes in the moment in which the margins were higher. In relation with chemicals, I would say that the national market is moving up. We are seeing real improvements in almost all the lines, and the activity in Spain is growing, probably would be this year well above 3% in GDP.
What is important also related to our business is that the construction, which is a high consumer, is starting to move up by 2%. All things are moving in the right direction. Sales are looking in the right direction. Okay, Irene?
Thanks very much. Thank you, Miguel Martínez.
Thank you very much, Irene. Let's move to Jon Rigby from UBS. Hi, Jon. How are you? Go ahead with your questions, please.
Hi, guys. Yeah, I'm well, thank you. Thanks. I've got two and a half questions, I guess. The first is just on tax rates. Obviously, it's a weird quarter this quarter in the upstream. I noticed there's a sort of tick down a little bit in the downstream tax rates as well. Can you just run through what your expectation is for segmental tax rates on a go-forward basis around assumptions? I guess the Libya assumption is key in the upstream. The second is just on the couple of the dry hole cost and their tax effects. Is it possible that some of those, I guess, tax credits can come back at some point or other, thinking Canada and the U.S., once you start bringing in some more North American income with Talisman Energy? Then the other big sort of main question is just on Angola.
Can you just run through for me what further commitments you have in Angola and what the carrying value of Angola is on your balance sheet, please? Thanks.
Thanks, Jon, for the two and a half questions. Starting with tax rate, it's going to depend much on prices. It's going to depend, as you mentioned, in Libya. As of today, if I have to make another assumption or to predict, I will grab to something like 41% at the upstream level and 28% at the downstream level. In relation with Angola, we have already committed with all the conditions of the authorities. Having said so, we still have one extra well that has been agreed with our partners. After we finish the ongoing drilling, we have still one well to go, but it's not mandatory. It's just because we have decided to go for it. In relation with the dry holes and tax effects in the U.S. and Canada, I'll have to give it a second thought.
In the U.S., basically, we are making money, so we are discounting the dry holes there. The situation in Canada, it's something I may analyze. I'm not able to provide you a right answer right now. Okay, Jon?
Yeah. Just on Angola, have you got sort of residual signature bonuses and things left in addition to the well commitment? Is there a trigger point if a final well is drilled and not found to be commercial that there's going to be a point at which you then have to look at the carrying value?
Okay. The whole thing that we have put in it has been EUR 400 million as of today. Around EUR 400 million. Okay.
Super. Thank you.
Thank you. Oh, you're welcome, Jon.
Thank you very much, Jon. Let's move to Lydia Rainforth from Barclays. Hi, Lydia. Good to speak with you. Go ahead with your questions.
Thanks, Miguel, and good afternoon. A couple of questions, if I could. Firstly, on Talisman, I appreciate there is not a huge amount you can say at the moment, but how long do you think it will be before you are able to make changes to that business? Effectively, that integration process, is it a case of once the deal closes tomorrow, it then just going to take time before you can make any changes? Are there things that you can do within the North Sea and the U.S., particularly, that you can do much more quickly? The second one was just on the financing. We have done EUR 2 billion of the hybrid already, and I know the plan was up to EUR 5 billion. I just wanted to check that was still the case. Thank you.
Well, in relation with the first one, I will say that we would be in the driving seat next year. Probably to really obtain the full integration will take a little longer. This year, basically all the commitments we are taking, we cannot do much on 2015. Though I think that 2016 would be the first year in which we would be able to handle the combined entity in the direction we want it. In relation with the issuance of hybrids, the answer is yes. Probably in the second part of the year, we will be issuing the other up to 3 extra billion EUR in hybrids. This is a condition that we agreed with the agencies in December, and we will deliver on it.
Okay.
Okay, Lydia?
Thank you. Just as a very quick follow-up and just given the forecasting side, do you have an indication of where you think the pro forma gearing will end the year at?
No idea at the present time, Lydia.
Okay, fine.
Yeah. I refer to the combined entity.
Yeah.
We have to look at it, but I don't expect that the combined entity will be really free cash negative massively. If we start up with a 27, probably it will increase a little, but we have to wait. I don't have the figures. I don't even have the new accounts that we have to generate. It's quite difficult to assess any comment because the first move have to be to assess our purchase price into the different assets of Talisman based on our valuation. The whole accounting will change dramatically, I may suspect. In relation with the hybrids, it's going also to depend on whether or not we issue it perpetual or not. Also a little early, so cannot give you much input at the present time. Sorry about that, Lydia.
No, that's still hugely helpful. Thank you.
Bye.
Thank you very much, Lydia. Now let's move to Anish Kapadia from TPH. Thank you for getting on hold. Go ahead, Anish. Go ahead with your questions.
Hi. Thanks very much. I have three questions, if possible. Firstly, just going back to Talisman again. In their end of year reserve report, I think their proved reserves fell almost 20% in 2014 versus 2013. I was just wondering if that was something that you were expecting at the time when you did the deal or if that came as a surprise to you. Second question was on the U.S. SandRidge has announced a pretty large cut to the number of rigs running in the Mississippi Lime. I was wondering if you can outline what that means for production over the next 12 months or so, but also in terms of cash flow, CapEx for that JV. The final question was just to get your view on North American gas prices. Clearly you're increasing your exposure into North American gas prices.
Also quite importantly, your view on the differentials in Canada and the Northeast. We saw Canadian gas prices averaging around $2 per Mcf so far this year. Just wanted to get an idea of where you see gas prices going in terms of Henry Hub, but also the differentials in the key areas of Marcellus and Canada. Thank you.
Thanks, Anish. In relation with the reserves you mentioned, no surprises, and I think that part of it related to the sale of Montney that were sold in 2014. No surprises in our side. In relation with SandRidge, as mentioned, we are reducing the number of rigs we're using there, and the basic idea is to play for value growth, not for production. CapEx will shrink approximately to a 50% this year in comparison with the last one. Finally, in relation with North America gas prices, I don't have any personal view or any comment we may make. At the end, if you cut the number of rigs that are producing the gas associated with the liquids will imply that we'll have less gas in the offer side.
Probably a figure a little higher than $3, which would be higher than the one we have, the $2.5 we have this year. Probably, I may think optimistically, because on the other side, with this lower price, demand will go up. The logic shows us that demand will grow while at the same time the offer will shrink. I'm optimistic today. I may say that $3 is a figure that may be reachable. Did I answer you, Anish?
I suppose just in follow-up to that, just to get an idea of the cuts that you're making with SandRidge. Just wondering what that kind of implies potentially for Talisman. Are those cuts because SandRidge can't afford the CapEx or are they because you think it's a prudent move in a kind of lower oil and gas price environment? Obviously, you've got to take a decision on Talisman whether you cut back the number of rigs that they're running. I'm just wondering why you made that decision with SandRidge.
I refer to my previous answer. We are cutting CapEx by half and basically we expect the production flat. I don't see the direct relation with Marcellus or with Eagle Ford or with Duvernay. We'll have to see which is the most efficient plan once we take control of the company. Right now that we have only no capability, it's quite difficult for me to assess any comment in relation with Talisman assets, whether in Canada or in the U.S. Okay, Anish?
Okay, sure. That's great. Thank you.
Thanks, Anish.
Okay. Thank you very much, Anish. Now, we have Jason Kenney from Santander, Banco Santander. Hi, Jason. Go ahead with your question.
Hi there. I'm just looking at the Sinopec relationship. Obviously Repsol is strong with Sinopec in Brazil and Talisman involved with Sinopec in the North Sea. I was wondering about the potential for further strengthening of activity between Repsol and Sinopec going forward.
Thanks, Jason. I would say since day one, I think it was three and a half years ago that we have the first agreement with Sinopec. We have been looking forward to have more relations with them going forward and look for opportunities. Yes, the answer is yes. We are permanently looking for doing more things with Sinopec. It's something we look forward. Okay, Jason?
Perfect. Thanks.
Well, with Jason, we finish this conference call of the first results of Repsol, first quarter results of 2015. Thank you very much for attending it. You know that the IR area of Repsol is in your entire service for any further queries or clarifications you may need. Have a nice day. Thank you very much.