Earnings Call: Q1 2021

Apr 26, 2021

Good morning, ladies and gentlemen. Welcome to Galp's First Quarter 2021 Results Presentation. This conference is being recorded today. I will now pass the floor to Mr. Otello Ruivo, Head of Investor Relations. Please go ahead. Good morning to you all, and welcome to Galp's Q1 2021 results presentation. I hope that you are all in good health. This should be a shorter than usual call focused on quarter results only. A broader update will be made during our upcoming Capital Markets Day to be virtually hosted by late May or June. Dates and details will be circulated soon. Today, we will have Felipe Antoria to take us through the quarter results and Q and A. As usual, I would like to remind you that we'll be making forward looking statements that refers to estimates, and actual results may differ to factors included in the cautionary statement at the beginning of our presentation, which we advise you to read. I will now hand over to Filipe. Thank you, Otalo, and good morning, everyone. On Slide 3, the highlights of some of our key metrics. A strong quarter in an otherwise Difficult circumstances, but let me jump straight to Slide 4 on the key drivers of that. Q1 EBITDA was really an upstream story as downstream in Iberia was still struggling its way out of the COVID 19 restrictions. Upstream production was marginally up quarter on quarter to 125,000 barrels. This was still impacted by the operational and logistic restrictions. EBITDA of €438,000,000 was up 37%. This is quarter on quarter with the higher brand prices. Commercial EBITDA of $69,000,000 was actually quite resilient and the circumstances. Portugal was under full lockdown during most of the quarter, So it's no surprise that commercial volumes were down another 20% year on year, with jet alone down by 3 quarters. Happy to say that things are looking much better now in April with the end of the lockdowns. On refining, margins improved slightly, averaging $2 per barrel in the quarter, supported by improved gasoline cracks. Still, this barely covers our cash costs. And Matozinghos is considered as a discontinued Operation, so this is Sinesh only. Although middle distillate cracks remained under pressure, capped by weak demand. We are seeing improving market conditions with our refining margin currently above $3 per barrel. On Midstream, The contribution was rather neutral, impacted by some headwinds this quarter, With 1, with the rapid increase in commodity prices, we had negative swing from the lag in pricing formulas. 2, we also had gas sourcing restrictions from Algeria into Iberia, which forced gas purchases on the expensive spot market. So this squeezed our otherwise more supportive margins in the quarter. We also had extra costs to access the regasification terminal in Portugal, which we had flagged before, impacting results this year to the tune of around EUR 10,000,000 per quarter. Renewables, they're not consolidated in our financials as the operations are mostly developed through JVs. So this shows under the associates line. However, to enhance visibility and highlight The value of this business, we are starting to also provide a pro form a EBITDA for this business as if it was consolidated through the equity method, I. E, our equity stake. So this renewable Pro form a EBITDA was just €1,000,000 in Q1. This is a seasonally weak quarter for Solar, of course. And this quarter, in particular, we had the restrictions with transformers we had flagged before. This is happy to say this is Behind us, and it's all operating at full capacity. Now on the P and L on Slide 5, With EBITDA RCA of €500,000,000 that's Up 22% quarter on quarter and driven entirely by upstream. Associates of 0 Reflects the sale of GG and D and the phasing out of 2 PBV as all this equipment is booked in the Brazilian entity. Other than that, the International Pipeline's contribution was offset by the negative net income from renewables, which is still in the early stage of development. Under financial results, we are now booking as special items, the mark to market swings on client driven Derivative and FX Hedges. This removes unhelpful volatility in our RCA net income line. These are client related hedges with little relevance to measure the underlying performance of the business. P and L taxes were $181,000,000 in the quarter, Considering the effect of the strong upstream mix on production and income taxes, so this quarter, we had Effectively no contribution on earnings before tax from the lower taxed downstream activities. RCA net income was €26,000,000 and IFRS net income was €161,000,000 And the difference comes mostly from positive inventory effects from the rising commodity prices. On the cash flow in Slide 6, we have now added an adjusted Operating cash flow indicator. This provides a good proxy of our clean operating performance. And under this metric, we delivered EUR 445,000,000 in the quarter, and that's up 46% year on year. This quarter, we had EUR 48,000,000 and dividends from 2 PBV as we unwind this unconsolidated vehicle. CFFO was €377,000,000 considering a positive inventory effect, which was more than offset by a working capital build. Free cash flow generation was resilient at €175,000,000 or $514,000,000 if you consider the proceeds from the sale of ggnd. The GGG and D sale price was R368,000,000. We have another R25,000,000 to be received now in this second quarter. You will have noticed that we are now booking the reimbursement of principal on IFRS 16 leases below the free cash flow line. So this is in line with what our peers do. So this is now considered as a reduction of debt, whilst before we had it as a free cash flow outlay. Now on Slide 7 and the balance sheet. Net debt was down by €513,000,000 And with the cash that we generated in Q1, we amortized €500,000,000 bonds in the quarter. Our net debt to EBITDA now stands at 1.1 times, with the last 12 months EBITDA capturing entirely the difficult COVID impacted period. Now the EBITDA denominator is expected to start rising meaningfully from April onwards, also with commercial and refining contributions, whilst the net debt nominator should rise this quarter with the dividend payments and the last payment for the BMS-eight, the Carcara acquisition, which is a disbursement of about EUR 80,000,000. And liquidity remains very strong at EUR 3,000,000,000 at the end of the quarter. So this is all from my side. Thor and I will now take your questions. Thank you. Thank you. We will now begin the question and answer session. Thank you. Your first question comes from the line of Oswald Clint of Bernstein. Please ask your question. Thank you, Philip. Yes, I'll keep it just related to the quarter. First question was just on the Matanzinos Refinery, I think last year you spoke about it saving €90,000,000 to €100,000,000 of costs. Is that proving to be accurate So far after the Q1 and I see some decommissioning costs for that refinery in the quarter. Can you tell us how big those should be ultimately? And then secondly, I mean, just talking about gas and some of the sourcing restrictions you have, but I was more interested in What happens with something like Venture Global? It looks like they're looking to start that up in the second half. So and I think you guys are Taking 1,000,000 tonnes per annum of that, are you expecting to take some of that this year? And what happens? It comes into Portugal and then You're going to be selling at some of the pretty high gas prices that we see today. Is that how that contract is going to work? Or perhaps you could add some color, please? Thank you. Good morning, Oswald. On Matos Ingos, So the €90,000,000 to €100,000,000 that we have provided you with is an historical number, And that's what it should have been under normal circumstances. So we have about EUR 60,000,000 of OpEx and EUR 30,000,000 of recurring run rate CapEx numbers in that number. So we have no indication at this stage that the numbers would be different. So we will be We are stopping some of the units. Actually, the units should be all stopped by the end of this month. And we are starting the decommissioning phase. Decontamination will come much later. So from a cash So from a cash outlay perspective, this is going to this will take a long, long time, but no difference from previous guidance. On the venture contract, this is first gas in 20 20 3. We have a number of contracts Such as with Nigeria and Algeria, those also mature over time. So the destination of the molecules will be Whatever and whatever we can capture more value. So it could come into Iberia. This is an Henry Hub Indexed formula. This could come we could divert some volumes from Nigeria to other places and bring those down to Iberia, and we can consider that for trading. So too early to tell exactly What the risk management will be around those molecules, but we will be short gas over the next few years If we don't renew the Nigerian contracts. Thank you. Okay, got it. Thank you. Thank you. Your next question comes from the line of Mehdi Enabati of Bank of America. Please ask your question. Hi. Can you hear me? Very well. Hello. Okay. Hi. Hi, perfect. Thanks for taking my question. So two questions, please, if I may. First question regarding your production, please. Can you please update us on your production at the end of April? And are you confident that you will be able to grow the production from the current level in the coming months. Or on the contrary, would you say that the uncertainty remains currently Quite high due to the pandemic situation in Brazil, which remains, according to the news, out of control. And second question regarding your CapEx guidance, please. I just wanted to know if there is a portion of your CapEx guidance this year, which is related to Mamba project in Mozambique? And if yes, Would you say that the amount is substantial, Arnaud? Thank you. Thank you, Mehdi, for your question. I'll take the first and then Filip will take the second question. Regarding production, Two messages. 1, we are reconfirming the guidance for the year of 125,000,000 and 135,000,000. Production in April has been ramping up according to our So in April, we were running around 130,000 barrels per day. So that's where we are. And Further guidance, we will not do at this stage. Thank you. Philippe? Hi, Mehdi. So most of the Mozambique CapEx we have on the plan and within the guidance we've provided you, EUR 0.5 billion to EUR 700 is mostly related to Corral. So Corral is advancing very nicely and according to plan. We are expecting a low burn rate on Mamba given the circumstances. Thank you. Thank you. Thank you. Your next question comes from the line of Joshua Stone of Barclays. Please ask your question. Thanks and good afternoon. Just two questions, clearly. 1 on Refining Margins, if you could just give us an update of how margins have been trending in April and any views there? And then secondly, essentially the upstream operating costs per barrel were quite low and impressive in the quarter. Is there anything To notes there and the sustainability of that for this year. Thank you. Good morning, Josh. We are comfortably above $3 per barrel month to date in April. So it's So it looks better. And we see also jet coming back, so middle distillates with less pressure in Iberia. And Tor will take the OpEx question. Thank you. Thank you, Philip. Joshua, with respect to OpEx, yes, it was low in the quarter at $1.8 per barrel. However, this is really actually the flip side of COVID. Due to COVID and the restriction that imposed So onethos, we actually have a POB on board the vessel that is on average is around 70%. So that's actually the main reason, plus there were some adjustments for some pass costs in Block 14. We are still comfortable guiding you that it will be below $3 per barrel. How far below will depend very much on what COVID will let Thank you. Your next question comes from the line of Thomas Adolff, Credit Suisse. Please ask your question. Two questions for me please as well. Just on the cash flow statement, the dividends Take to non controlling interest, essentially Sinopec, it was 0 in 1Q. It was More than €100,000,000 in 1Q last year. Can you just say kind of the timing for The payments of the dividend Sinopec, if any, and the amount of it. And then secondly, just on the lease Payments, so if you look at the IFRS 16 interests and the principal leases, The aggregate of that, I mean, if you deconstruct the 54, I think 19 is related IFRS 16 and then we have the reimbursement of 27 each quarter. So it's roughly 150 to 200 the annual run rate going forward. Good morning, Thomas. So the dividends to our Chinese partner in Brazil is related to The fiscal year of 2020, this should be paid out in Q2. We're guiding and it's related to a relatively weak performance, of course, in 2020 in Brazil. So we're guiding to EUR 100,000,000 EUR 150,000,000 to be paid out this quarter. The lease amounts, so we've got about a €100,000,000 to EUR 200,000,000 of interest per plus principal every year, and we have deconstructed that within what is real interest And amortization of the principal as a debt reduction. Okay. That's great. Thank you. Thank you. Your next question comes from the line of Michel de la Vigna of Goldman Sachs. Please ask your question. Thank you. It's Michele here. And Felipe, congratulations on the strong free cash flow generation in the quarter. And two questions actually relating to cash flow. The first one is the dividend from the associates of EUR 48,000,000 in the quarter. My understanding is that We're unlikely to see more dividends from associates in the coming quarters, but let me know if that's not correct. And secondly, on the tax, The cash tax was much lower than the P and L tax in the quarter. I believe most of it was due to Delayed timing in terms of oil pricing for the taxes in Brazil. How do you expect that to evolve in the coming quarters? Thank you. Good morning, Michele. So The constructs that the consortium had, the equipment was booked under the PVs, And it was charging the consortium in Brazil with a cost plus margin basis over time. As we unwind that vehicle, we are distributing the amounts That were captured over time through that margin. So it is distributed out to the kelp perimeter, which You never saw that because to BBV was deconsolidated. There's still more to come, Not significant amounts, but there's still more to come over the next 2, 3 quarters, but not Immaterial amounts. Cash tax versus P and L tax. So we have a phasing effect in that we are in Q1, we paid for the SPT tax Brazil related to Q4 last year when Brent was materially lower. So if you assume Brent prices to remain flat for the rest of the year, That will gradually be captured over the next few quarters. Mind you as well that when you look at the cash at the P and L tax line, this is an RCA Tax calculation, whilst we are taxed effectively on a cash base based on IFRS numbers and taxed locally in every jurisdictions based on different tax incentives that we have, such as Accelerated Depreciation, etcetera. So over time and as per previous guidance, we should expect to see A 40% cash basis and 50% P and L basis throughout the next few years. Thank you. Thank you. Thank you. Your next question comes from the line of Michael Alsford of Citigroup. Please ask your question. Thanks. Good morning all. A couple of questions for me. On commercial, clearly in the 1Q, the volumes were weak given the lockdowns across Iberia. I was wondering whether you could talk a little bit more about the trend that you're seeing now as some of the lockdowns are starting to ease a little bit in 2Q. And then the second question I had just was on DD and A in the upstream. It was a bit lighter, I think, than some were expecting. I just wondered if you could just talk a little bit about how you Thank you, Michael. If we look out of the window, we see for the first time in many, many quarters Traffic and traffic jams. So yes, there's a very different environment since the end of the lockdowns. Jet fuel is going up, but it's still significantly below. So hopefully, We're way past the difficult period of COVID, but we remain cautious until we actually see it Continuing on a sustainable basis, but it's looking much, much better now. DD and A in Upstream, now we have lower Production in Angola. So hence, unit of production metrics also changed. So we spread out depreciation based on unit of production. So that is the driver. Your next question comes from the line of Matt Lofting of JPMorgan. Please ask your question. Hi, gents. Thanks for taking the questions. Two brief ones. First, coming back to Thor's earlier points on Production in April sort of working a bit higher. I wonder with the COVID backdrop, etcetera, in the region, if you could just elaborate a bit on Operating conditions offshore Brazil currently, the extent to which you're sort of still seeing logistical restrictions relative To sort of the previous 2 or 3 quarters. And then second, Galp talked in Q4 last year about I'm submitting with the consortium on Lularisima Refres development plan this year, including a potential, I think, Field life extension request, I just wondered if you could update us on the status of that. Thank you. Thank you, Matt. Let me first then address your question regarding production and COVID. As I said, as we are running right now, we are running with a POV that is on average is around 70% of the normal Population, and that is due to minimizing the level of people that are exposed to the pandemic. That has an impact on what we can do of maintenance. Of course, Operationally critical maintenance is not sacrificed, but when it comes to connecting new wells and doing Other maintenance preventive maintenance, we are behind schedule. That is maintained for the time being with the current situation in particular in Brazil. And when it comes to TUPE Erasema, The work in the partnership goes really well. Very good meetings among the in the partnership with the with a view and the plans to developing a new plan for operation and development. And the target remains To submit this by the end of this year, and then it will most likely also include a request for a fee life Your next question comes from the line of Jorge Guilmaris of JP Capital. Please ask your question. Hi, good morning. Two quick ones. Firstly, is it possible to elaborate on the evolution of Supply margins in gas and electricity in Portugal on the commercial division. And the second is Do you have any view on today's announcement by Total that it is declaring force majeure in the Mozambique project? Thank Thank you, Georges. I'll take the first one. So on Gas supply margins, it really depends on The different sources that we have, be it Algeria, Nigeria or spot purchases. So The market is more generous, I would say, in April than it was in Q1. So gas prices are going up. The issues that we have, so despite better margins, is we have higher regasification costs in Iberia. So that has depressed Our 2021 numbers. So we expect this to continue until the end of this year. No, I think you can hear me. Thank you for the question, George. So we acknowledge what Total has announced Today, the situation in Capo del Gado is really severe. So it is understandable The situation needs to be controlled first in order to make sure that the proper safety can be ensured for the people working Yes, on the activities. On our side, it doesn't directly impact us because the work for Area 4 continues to be to optimize and to improve that project in order to move it forward Thank you. Our final question comes from the line of Biraj Borkhataria of RBC. Please ask your question. Hi. Just two quick ones, please. The first one is what proportion of your gasoline sales went To the U. S. In the Q1. And the second one, you might have mentioned this already, but my line was cutting out. Are there any pakora payments due Through the year, could you just outline what you're expecting there? Thank you. Good morning, Dheeraj. On Carcara, we have about EUR 80,000,000 equivalent For payment of the acquisition of BMS-eight, of the additional stake in BMS-eight. And we are Likely to take FID on the overall Caracalla project. And so we will have CapEx. Within our guidance of CapEx, we have the FID as taken. So that's built into the €500,000,000 to €700,000,000 Gasoline sales into the U. S. Is about 20% Of the total volume exported, that's about 300,000 tonnes or so. Thank you. Great. Thank you very much. Thank you. I will now hand the call back over to Artelo for the closing remarks. Thank you. This concludes our call today. Thank you for all your questions. Please contact our IR team if you need any additional clarification from our side. Our next event will be our Capital Markets Day. As we said at the beginning, we will announce soon the date and details for the webcast. We look forward to having you all there participating at events. Have a great week. Enjoy the rest of the earnings season, and keep safe. Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.