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. Otelo Ruivo, Head of Investor Relations. Please go ahead.
Good morning to you all, welcome to Galp's first quarter 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 Filipe Silva to take us through the quarter results and Q&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, Otelo. Good morning, everyone. On slide three, the highlight of some of our key metrics. A strong quarter in an otherwise difficult circumstances. Let me jump straight to slide four 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 EUR 438 million was up 37%. This is quarter-on-quarter with the higher Brent prices. Commercial EBITDA of EUR 69 million was actually quite resilient in the circumstances. Portugal was under full lockdown during most of the quarter, it's no surprise that commercial volumes were down another 20% year-on-year, with jet alone down by three 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 Matosinhos is considered as a discontinued operation, this is Sines 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. One, with the rapid increase in commodity prices, we had negative swing from the lag in pricing formulas. Two, we also had gas sourcing restrictions from Algeria into Iberia, which forced gas purchases on the expensive spot market. 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 million per quarter. Renewables, they're not consolidated in our financials as the operations are mostly developed through JVs. 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 forma EBITDA for this business as if it was consolidated through the equity method, i.e., our equity stake. This renewable pro forma EBITDA was just EUR 1 million in Q1. This is a seasonally weak quarter for solar, of course. This quarter in particular, we had the restrictions with transformers we had flagged before. Happy to say, this is behind us and it's all operating at full capacity.
On the P&L on slide five, with EBITDA RCA of half a billion euros, that's up 22% quarter-on-quarter and driven entirely by upstream. Associates of 0 reflects the sale of GGND and the phasing out of Tupi BV as all this equipment is stocked in the Brazilian entity. Other than that, the international pipelines 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&L taxes were EUR 181 million in the quarter, considering the effect of the strong upstream mix on production and income taxes.
This quarter, we had effectively no contribution on earnings before tax from the lower taxed downstream activities. RCA net income was EUR 26 million and IFRS net income was EUR 161 million. The difference comes mostly from positive inventory effects from the rising commodity prices. On the cash flow in Slide six, we have now added an adjusted operating cash flow indicator. This provides a good proxy of our clean operating performance. This excludes volatile inventory effects, working capital variations, and the special items. Under this metric, we delivered EUR 445 million in the quarter, and that's up 46% year-on-year. This quarter, we had EUR 48 million in dividends from Tupi BV as we unwind this unconsolidated vehicle. CFFO was EUR 377 million, considering a positive inventory effect, which was more than offset by a working capital build.
Free cash flow generation was resilient at EUR 175 million or EUR 514 million, if you consider the proceeds from the sale of GGND. The GGND sale price was EUR 368 million. We have another EUR 25 million 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. This is in line with what our peers do. This is now considered as a reduction of debt, whilst before we had it as a free cash flow outlay. Now on Slide seven and the balance sheet. Net debt was down by EUR 513 million, and with the cash that we generated in Q1, we amortized a half billion euro 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. 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 payment and the last payment for the BM-S-8, the Carcará acquisition, which is a disbursement of about EUR 80 million. Liquidity remains very strong at EUR 3 billion at the end of the quarter. This is all from my side. Thore and I will now take your questions. Thank you.
Thank you. We'll now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Please be reminded we can only take two questions per person. Thank you. Star and one to ask a question. Thank you. Your first question comes from the line of Oswald Clint of Bernstein. Please ask your question.
Thank you, Filipe. Yeah, I'll keep it just related to the quarter. First question was just on the Matosinhos refinery. I think last year you spoke about it saving EUR 90 million-EUR 100 million of costs. Is that proving to be accurate so far after the first quarter? I see some decommissioning costs for that refinery in the quarter. Can you tell us how big those should be ultimately? Secondly, 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 LNG. It looks like they're looking to start that up in the second half. I think you guys are taking 1 million tons per annum of that. Are you expecting to take some of that this year? 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? Perhaps you could add some color, please. Thank you.
Good morning, Oswald. On Matosinhos, the EUR 90 million to EUR 100 million that we have provided you with is an historical number, and that's what it should have been under normal circumstances. We have about EUR 60 million of OpEx and EUR 30 million of recurring run rate CapEx numbers in that number. We have no indication at this stage that the numbers would be different. 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. From a cash outlay perspective, this will take a long time, but no difference from previous guidance. On the venture contract, this is first gas in 2023. We have a number of contracts, such as with Nigeria and Algeria. Those also mature over time.
The destination of the molecules will be wherever we can capture more value. It could come into Iberia. This is an Henry Hub-indexed formula. We could divert some volumes from Nigeria to other places and bring those volumes to Iberia, and we can consider that for trading. 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 Ennebati of Bank of America. Please ask your question.
Hi, can you hear me?
Very well. Hello.
Okay, hi. Perfect. Thanks for taking my question. 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? Are you confident that you will be able to grow the production from the current level in the coming months? 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? 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. If yes, would you say that the amount is substantial or no? Thank you.
Thank you, Mehdi, for your question. I'll take the first, and then Filipe will take the second question. Regarding production, two messages. One, we are reconfirming the guidance for the year of between 125 and 135. Production in April has been ramping up according to our expectation. In April, we were running around 130,000 barrels per day. That's where we are. Further guidance, we will not do at this stage. Thank you. Filipe?
Hi, Mehdi. Most of the Mozambique CapEx we have on the plan and within the guidance we've provided you, half a billion to EUR 700, is mostly related to Coral. Coral 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, good afternoon. Yeah, just two questions for you. One on refining margins, if you could just give us an update of how margins have been trending in April, and any views there. Secondly, essentially, the upstream operating costs per barrel were quite low and impressive in the quarter. Is there anything to note there and the sustainability of that for this year? Thank you.
Morning, Josh. We are comfortably above $3 per barrel month to date in April. It looks better. We see also jet coming back, so middle distillates with less pressure in Iberia. Thore will take the OpEx question. Thank you.
Thank you, Filipe. Joshua, with respect to OpEx, yes, it was low in the quarter at $1.8 per barrel. This is really actually the flip side of COVID. Due to COVID and the restriction that imposes on us, we actually have a POB on board the vessel that is on average around 70%. That's actually the main reason, plus there were some adjustments for some past 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 us do of activities on the installation. Thank you.
Thank you.
Thank you. Your next question comes from the line of Thomas Adolff, Credit Suisse. Please ask your question.
Two questions from me, please, as well. Just on the cash flow statement, the dividends paid to non-controlling interests, essentially Sinopec, it was zero in 1Q. It was more than EUR 100 million in 1Q last year. Can you just say the timing for the payments of the dividend to Sinopec, if any, and the amount of it? Just on the lease payments. If you look at the IFRS 16 interests and the principal leases, the aggregate of that, if you deconstruct the EUR 54, I think EUR 19 is related to IFRS 16, and then you have the reimbursement of EUR 27 each quarter. It's roughly EUR 150-EUR 200 the annual run rate going forward.
Good morning, Thomas. The dividends to our Chinese partner in Brazil is related to the fiscal year of 2020. This should be paid out in Q2. It's related to a relatively weak performance, of course, in 2020 in Brazil. We're guiding to EUR 100 million-EUR 150 million to be paid out this quarter. The lease amounts, so we've got about EUR 100 million-EUR 200 million of interest plus principal every year, and we have deconstructed that within what is real interests 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 Michele Della Vigna of Goldman Sachs. Please ask your question.
Thank you. It's Michele here. Filipe, congratulations on the strong free cash generation in the quarter. Two questions actually relating to cash flow. The first one is the dividend from the associates of EUR 48 million 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. Secondly, on the tax, the cash tax was much lower than the P&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 quarter? Thank you.
Good morning, Michele. The constructs that the consortium had, the equipment was booked under the JVs, 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. It is distributed out to the Galp perimeter, which you never saw that because JV was deconsolidated. There's still more to come, not significant amounts, but there's still more to come over the next two, three quarters, but not immaterial amounts. Cash tax versus P&L tax. We have a phasing effect in that in Q1, we paid for the SPT tax in Brazil related to Q4 last year, when Brent was materially lower. 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 P&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 jurisdiction based on different tax incentives that we have, such as accelerated depreciations, et cetera. Over time, and as per previous guidance, we should expect to see a 40% cash basis and 50% P&L basis throughout the next few years. Thank you.
Thank you.
Thank you. Your next question comes from the line of Michael Alsford, Citigroup. Please ask your question.
Thanks. Good morning, all. A couple of questions from me. On commercial, clearly in the Q1, the volumes were weak given the lockdowns across Iberia. I was wondering whether you could talk a little bit more about the trends that you're seeing now as some of the lockdowns are starting to ease a little bit in Q2. The second question I had just was on DD&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 see the trends there through the course of the rest of the year. Thank 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. Yes, there's a very different environment since the end of the lockdowns. Jet fuel is going up, it's still significantly below. Hopefully, we're way past the difficult period of COVID, we remain cautious until we actually see it continuing on a sustainable basis. It's looking much better now. DD&A in upstream. Now we have lower production in Angola. Hence, unit of production metrics also change. We spread out depreciation based on unit of production. That is the driver.
Okay, thanks. Good to hear that the traffic jams are back in Lisbon. Thank you.
Thank you. Your next question comes from the line of Matthew Lofting of JP Morgan. Please ask your question.
Hi, gents. Thanks for taking the questions. Two brief ones. First, coming back to Thore's earlier points on production in April, so they're working a bit higher. I wonder with the COVID backdrop, et cetera, in the region, if you could just elaborate a bit on operating conditions offshore Brazil currently, the extent to which you're still seeing logistical restrictions relative to the previous two or three quarters. Then second, Galp talked in Q4 last year about submitting with the consortium on Lula/Iracema 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 POB that is on average is around 70% of the normal population. 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. When it comes to Tupi and Iracema, the work in the partnership goes really well. Very good meetings in the partnership with the view and the plans to developing a new plan for operation and development.
The target remains to submit this by the end of this year. It will most likely also include a request for field life extension. Work so far, so good. Thank you.
Great. Very clear. Sure.
Thank you. Your next question comes from the line of Jorge Guimarães of JB 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? 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 you very much.
Thank you, Jorge. I'll take the first one. On gas supply margins, it really depends on the different sources that we have, be it Algeria, Nigeria or spot purchases. The market is more generous, I would say, in April than it was in Q1. Gas prices are going up. The issues that we have, so despite better margins, is we have higher regasification costs in Iberia. That has depressed our 2021 numbers. We expect this to continue until the end of this year. Next question is
Now I think you can hear me. Thank you for the question, Jorge. We acknowledge what Total has announced today. The situation in Cabo Delgado is really severe. It is understandable that the situation needs to be controlled first in order to make sure that the proper safety can be ensured for the people working on the activities. On our side, it doesn't directly impact us because the work for Area four continues to be to optimize and to improve that project in order to move it forward in the value chain. Thank you.
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 first quarter? The second one, you might have mentioned this already, but my line was cutting out. Are there any Carcará payments due through the year? If you could just outline what you're expecting there. Thank you.
Good morning, Biraj. On Carcará, we have about 80 million EUR equivalent for payment of the acquisition of the MSA, of the additional stake in BM-S-8. We are likely to take FID on the overall Carcará project. We will have CapEx. Within our guidance of CapEx, we have the FID as taken, so that's built into the half a billion to 700 million EUR. Gasoline sales into the U.S. is about 20% of the total volume exported. That's about 300,000 tons or so. Thank you.
Great. Thank you very much.
Thank you. I will now hand the call back over to Otelo 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 the event. 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.