Earnings Call: Q2 2020

Jul 27, 2020

Good morning, ladies and gentlemen, and welcome to GLAP's Second Quarter 2020 Results. There will be a presentation followed by a question and answer session. I will now pass the floor to Mr. Pedro Dias, Head of Strategy, Investor Relations. Please go ahead, sir. This is actually Otello here. Good morning to you all. Welcome to GOV's Q2 2020 results conference call. Today, Carlos will provide you with an overview of the recent developments and only a short term outlook given the current volatility. Felipe will then take us through the quarterly results. At the end, we will be available to take your questions when Tore will join us as well. As always, I would like to remind you that we may be making several forward looking statements. Actual results may differ due to factors included in the cautionary statements available at the beginning of our presentation, which we advise you to read. Thank you. Carlos, the floor is yours. Thank you, hotel, and good morning to you all. I hope that in these challenging times, you and your families remain safe and healthy. So as we all knew that the Q2 was going to be a challenging one for everybody. And facing such unprecedented challenges, the priority quickly become adapting our operations to increase the resilience and also the flexibility of our businesses. So still our lighthouse is unchanged and that is to deliver Galp's transformational and growth strategy. Looking at the quarter and looking at our upstream activities, we are seeing that they were only marginally impacted having quickly reinforced preventive measures to ensure the safety of our people. And of course the safeguard of the continuity of our operations. In the downstream operations, however, we had tough times, especially during April May. The resilience of our overall portfolio and the immediate actions put in place have allowed us to mitigate the effects of the pandemic and the crude oil price war. Free cash flow remained positive year to date. We have reinforced our liquidity and remain with a solid financial position. But first, let's look to the market environment evolution so far and I'm on Slide 5. The worldwide lockdown led to an foreseeable demand reduction and the massive environment rebuild up. We have observed Brent prices hit $13 per barrel in April and gradually recovering to just above $40 as we had to buy. On the product side, refining margins were at first supported by ship crudes and cracks were helped by opportunistic trading demand, but this quickly faded and the low consumption resulted for the inventory of inventory buildup as pressures the cracks hold the products. In April and also in gasoline and diesel demand declining over 50% year on year. Hence, lockdown measures in Iberia were gradually lifted picked up better than expected. However, uncertainty remains high. Given the recent developments, we are now adjusting our macro assumptions. We are now using Brent at $40 in 20.20 and increasing by $5 per barrel over each of the following years. Long term brand price has been lowered to $60 per barrel in real terms twenty 19. Of course that we naturally test our balance sheet according to these revised assumptions and no impairments were registered given the quality and I would say also the resilience of our assets. Let's now looking into our operations in the quarter and I'm in Slide 6. As mentioned, our upstream operations so far were only marginally impacted by this pandemic. In May, 2 FPSO stoppages in Brazil resulted from the identification of COVID-nineteen cases. All in all, just around 3,000 equivalent barrels per day impact in the Q2. We have also the new unit that will develop south of Atapu that has started in June ahead of plan. After the unitization agreements, I would like to recall you that Galp has only 1.7 percent stake here, so not that material. On refining, tough times. The significant demand decline and the high level of inventories led us to stop Syms refinery and several units in our Medellin system. The midstream operations were also impacted by harsh environment with the demand destruction and strong supply levels into Iberia putting high pressure on also natural gas prices. With the lockdowns, April May were very difficult months for our commercial business, which shows in oil and natural gas volume sold this last quarter. June was already a more supportive month and keeps improving in July to date. On the renewables front, we have set up a joint venture under which Galp acquires 75.01 percent of the Spanish solar portfolio of 2.9 gigawatts and the ACS group remains as our partner with just under 25 percent with a joint control structure. I would say that this agreement follows the strategy we had set for our Renewable business, which is to develop a competitive portfolio through house partnerships while maintaining a relevant role and integration with Galp's activities. The transaction value remains unchanged, which means that on an enterprise value of around EUR 2,200,000,000 which includes all position, development and construction costs associated with the existing and future portfolio. On a 100% basis, 3 project financing. Galp is to pay an amount that should range between €300,000,000 €350,000,000 at the closing for the stake acquisition and previous development costs with the final value dependent on development steps of some of the projects at the deal completion date. And this includes already 1 or around 1 gigawatt already under operation fully project financed. This agreement maintains the development and construction of the portfolio with Cobre, which is an affiliate of ACS Group. We are happy to have partnered with ACS Group as this JV combines Galp's integrated energy position in Iberian market with ACS, Renewables Engineering and Development expertise. So this is a good combination. The transaction is expected to be completed before year end and likely still during the 3rd Q after the EU competition approval. Moving now to Slide 7. Let's look at the short term call to action programs. So in this front, Gulf responded quickly to the challenging environment resulting from the COVID-nineteen lockdown and also the oil prices fall. Words like resilience, flexibility and adaptation, capacity were and will continue to be critical. Zooming in on what we are doing actively and with visible results already in the quarter. On the upstream, operations continue to be optimized, allowing us to keep production cost consistently below $3 per barrel. The successfully reducing services and other overhead costs. On refining and midstream, we adjusted the level of our operations to deal with a very low demand. And as I mentioned before, high level of inventories. These allowed us to increase our gross margin, mitigating the effect of the more depressed environment and reduce our operational costs. Additionally, this slowdown time was used to bring forth some scheduled maintenance works. On the commercial side, several teams were confident to put in place to enhance the robustness of the business and also to adapt to a unique market conditions The company also took this opportunity to reinvent the business and to reach clients in a more digital and contactless way, innovating the especially in the non fuel offer. We established agreements with several partners like Uber and Global, examples, which allowed us to reinforce and explore different sales channels that are linked with Flask Mile Logistics. But we kept also a very special focus on optimizing our operations and of course our cost structure that will remain. On the renewables and new businesses, we are adjusting our short term plan, keeping strategic development on these new divisions. Our efforts go beyond improving efficiency of our operations and also includes the adjustment of Galp's corporate and business units, organizational structure. The efforts are paying off and Galp remains very much on track to deliver its over €500,000,000 CapEx and OpEx reduction target, having over 90% of the identified initiatives behind and that ambition already being implemented. Looking ahead, and I'm now in Slide 8. So starting by short term outlook, which although limited considering the steel reduced visibility and also high level of uncertainty. Galp and its partners expect to resume the connection of wells and therefore, the ramp up in production. In fact, by the end of June, we connect the 3rd producer well in Berbigao Sururu FPSO. And of course, we remain cautious on how COVID-nineteen may impact our operations in the future. However, we should be able to grow our production at about 10% year on year basis, which is slightly below our initial guidance that was ranged between 13% 17%. As mentioned before, refining environment remains depressed and under pressure and economic incentive to push our system seems not to be there. Utilization of our refineries as well as supply and trading loans will depend on how the market evolves from this point onwards. On commercial, although we are seeing positive supportive signs, we prefer to maintain a cautious approach as the full economic fallout from these prices has yet to be understood. We should see an improvement of this segment contribution, especially during the summer, but uncertainty remains. So on the right side of this slide, we want to flag that despite the challenging 2020 and the attention we need to put on the short term, we are continuing to position Gal for the future of energy. Keep focused on value protection and the management of our key strategic projects as you already know well. And that will play a major role for our future. And of course, we are well aligned with our partners conducting relevant value improvement programs around these key assets. At the same time, we continue to evaluate opportunities to adapt to market trends and also to regulation, increasing our competitiveness and reduce our current footprint as part of our strategy to address the energy transition challenges. We are analyzing the production of lower products, carbon content in our industrial facilities, anticipating market trends and reducing the carbon intensity of our portfolio, namely through co processing or reconfiguration of some existing units. These are potential options to increase gout competitiveness on refining and midstream with marginal investments over our existing industrial base and that may also benefit from the alignment with the EU guidelines. Longer term, we are also analyzing new energy sources and technologies such as hydrogen. In this case, Galp sponsors with other companies a feasibility study for 10 European project leveraging on a cluster that could be implemented in SIEM to develop a green hydrogen supply chain project. These kinds of projects may have a natural given the current circumstances while actively preparing future alternatives that may fit our strategy and also our investment criteria. So to finish on Slide 9, just a couple of words. Clearly, we were significantly impacted by commodities price crash and this obviously impacts cash generation. Still, at the cash spending reduction initiatives are being implemented, we are increasing the resilience of the company, leading to a going forward free cash flow neutrality at $20 per barrel. This assumes a net CapEx that range between €500,000,000 and €700,000,000 that should support our free cash flow on average during this year and next year. However, we need to be prepared to navigate through the uncertainty and volatility expected over the next few quarters, ensuring Galp Financial position to be as strong as possible to protect and support our transformational and growth strategy. With this in mind and as part of the mitigation measures undertaken to preserve the strength of Galp's financial position under unprecedented market circumstances, no interim distribution will be made during the second half of this year in relation with the 2020 fiscal year dividend. This considers the prudency and the short term flexibility we want to maintain as mentioned to you back April. The proposal for the 2020 dividend shall be made considering the full year results expected to be announced in the 1st Q of 2021. Ultimately, our commitment for the rest of this year is to keep our financial discipline employing efforts to control the net debt and therefore to protect balance sheet. So three key message that I want to leave with you from today. We have a highly resilient portfolio and we are successfully implementing value protecting measures that are increasing this resilience even further. Our free cash flow line already tells everyone that. The second point is that we have a unique transformational and growth investment case, well supported on clearly identified projects. And on top of that, several potential options to explore. Thirdly, we are keeping the same discipline that brought us today. So I will now hand over to Philippe to go through the financials. Philippe? Thanks, Carlos. Good morning, guys. I am on Slide 11. Group EBITDA of €291,000,000 in the quarter. This is down more than 50% year on year. And this is from the very harsh environment on most of the businesses we operating in. Upstream EBITDA was €204,000,000 That's 50% down year on year. This with an average Brent of under $30 in the quarter and more than offsetting production growth. Bear in mind here we have about $50,000,000 in positive under lifting effects during Q2. Refining and midstream EBITDA was impacted by the significant slowdown of the refining activity and a lower contribution from supply and trading. Commercial EBITDA of €59,000,000 that's down over 40% from last year, impacted by very, very weak Now this is a reflection of a conservative assessment of Now this is a reflection of a conservative assessment of the discoveries potential. This is not from our lower Brent price assumptions going forward. So we have no impairments coming from the revised long term price assumptions. Financial results of minus €10,000,000 in the quarter with a negative FX exchange variations on our Brazil currency cash positions and losses on CO2 derivatives compensated by positive mark to market valuation of derivatives to cover natural gas price risk. And net income was a negative €52,000,000 whilst under IFRS net income was negative €154,000,000 with a negative So we start with IFRS EBITDA, which includes the negative inventory effects. Working capital release was only $11,000,000 in the quarter with lower capital tied up in inventories, but with elevated payments to suppliers for some cargoes priced during Q1. Taxes paid were €83,000,000 This is significantly higher than what you see on the P and L taxes. And this mainly reflects the timing mismatch of SPT payments for the special participation tax in Brazil, which was affected by the more elevated Q1 rent prices. And all this leads to a CFFO of only 160,000,000 during Q2. CapEx payments were €149,000,000 in the quarter, And we also have the net cash in of €83,000,000 from the equalizations related with the Lula, SEPIA and Atapu unitizations. Please note that our net CapEx guidances always consider these equalization proceeds. And we are expecting further equalization proceeds from the Berbigao Sururu unitization likely next year. The derivative outflow number of €43,000,000 you see here is basically driven by the CO2 licenses impact as per our announcements recently, and this is partially offset by the unwind of the outstanding 2020 refining margin hedges. Now given the current market circumstances and the volatility, we opted to crystallize this value. Free cash flow was minus €10,000,000 in the quarter and positive $52,000,000 during a most challenging 1st semester. Again, some payment phasing impacts on these numbers. And also bear in mind that we include within free cash flow all operating lease payments under IFRS 16, and that is the interest component and the principal amortization component that is within our free cash flow numbers. During the quarter, we have also paid to the Galp shareholders 3.18 in dividends related to 2019 as well as €86,000,000 to Sanopec, our partner in Brazil. And with this, net debt increased $436,000,000 in the quarter. Moving to the balance sheet on my final slide, Slide 13. The net fixed assets decline results from the accounting effects of the unitizations and the exploration impairments of €93,000,000 Net debt to EBITDA was up to 1.1x with the combined effect of both higher net debt and lower EBITDA. And to conclude, during the quarter, we have increased our liquidity to €3,000,000,000 with cash of €1,700,000,000 and undrawn credit lines of €1,300,000,000 We're now happy to take your questions. Thank you. Thank you. Thank you, sir. And your first question comes from the line of Biraj Borkarati from Royal Bank of Canada. Your line is open. Hi, thanks. It's Biraj, RBC. A couple of questions if that's okay. The first one is on your new production guidance. I know Galp typically puts some contingency in this. So could you just outline how much contingency you've put in for either slower well connections or any other potential delays due to COVID related incidents? And then the second one is on the dividend. With the big CapEx cut this year and then obviously the new structure of the renewable deal, at one time is net debt to EBITDA, your balance sheet looks actually quite healthy. So I was wondering, can you just comment on your intention for the dividend going into 2021? Is it just a pause and then the intention is to get back up to the prior run rate or is there anything else within that? Thank you. Hi, good morning, Biraj. Thank you. I will address the dividend question and Tor will address the production guidance. So in relation to the dividend, so we are living in uncertain times and therefore, decision that we are taking now is to guarantee that we are protecting and preserving our balance sheet. And further decision should be based on full year cash availability, also our financial position and of course, the outlook that we will have at that moment. So I think we have to wait for the second half of the year to see how the renewal is going to evolve. Based on these principles, we will take it. Thank you, Carlos, and thank you, Bharat, for your question, which is actually a difficult because the big challenge for us here is actually to estimate the COVID impact. I think you pointed to it very correctly. And as Carlos said in his opening remarks, we have had direct impact on production on 2 units during the first half, and we have also had somewhat slower well ramp up due to COVID and actually the restrictions that we're putting on operation in order to preserve the health and well-being to the people. So we have made a guesstimate for the second half what that would be. I believe that what we have given you as guidance, namely that we are able to increase year on year with 10%, should under normal circumstances be conservative. But the big unknown and which we really don't is what will happen with COVID during the second half of this year. That is the big unknown and have put in some cushion for that. Thank you. Can we move on to the next question, please? Thank you, sir. And your next question comes from the line of Oswald Clint from Bernstein. Your line is open. Oswald Clint, your line is open. There's no response from that line, sir. I'll move on to the next question. Oswald Clint, your line is open. Moving on to the next question, sir. And your next question comes from the line of Mehdi Entebati of Bank of America. Two questions, please. The first one regarding with the working capital. So during the Q1 conference call, I think it was Philippe who guided on the working capital release during the Q2 and this obviously did not happen. So can you explain why? So is it related to the maintenance that you have made? And should we still consider working capital release will happen in the second half of this year or no? And maybe one question as well regarding the refining costs, which were pretty low in the 2nd quarter. So I wanted to know if this is all related to the saving made from the maintenance or if this is also partly due to a cost reduction program that you recently announced, meaning that we should take lower refining cash costs in the near term? Thank you. Hi, Mehdi. Bonjour. Thank you for your questions. Philippe will address the working capital. So in relation to refining, clearly, the decisions that we have taken allows us to reduce relevant cost structure. And therefore, based on environment that we have lived during the Q, it was the ones that has protect cash and cost for the company. So clearly, I think it was the right decision we have taken. Flip, working capital. Good morning, Mehdi. So in Q1, under IFRS balance sheet, we have a release of working capital just because we marked down the inventories, mostly accounting. In Q2, what you see on a cash basis is that we're still paying suppliers, so significant cash outs more than the run rate cash out that you would expect for cargoes you would be acquiring during Q2. Going forward and the 3 moving pieces within working capital clients, suppliers and inventories, of course, it depends to a very significant extent on your views on what the commodity prices are going to be. From this month onwards, we would not expect working capital to change massively if the commodity prices stay within what we're observing today. All right. Thank you very much. Thank you. And your next question comes from the line of Joshua Stone from Barclays. Your line is open. Hi, good afternoon. Thanks for the presentation. I've got two questions, please. First, just going back on the cash flow. So it was particularly weak during the first half of the year. Highlighted a number of factors, timing effects and working capital. Is there a number we should be adding back to get to an underlying cash flow? If I look at that €404,000,000 on the Slide 12 of CFFO, are you thinking about adding something back to help us with those moving parts? And then secondly, on the commercial business, it does look like margins have been pretty resilient there despite the lockdown. The fall in earnings has pretty much matched the fall in volumes. So can you talk about what's driving this and how you managed to perform so well? Thanks. Growth, so $204,000,000 in H1. Clearly, as I've alluded to, this has a number of phasing impacts. If the commodity prices stay where they are, we would expect, for example, to have lower ASP payments going forward than what we would think. We would expect to be paying for CapEx at much lower levels and same with suppliers. So without giving you any hints on what the year end will look like on a CFFO basis, it's hard to imagine that it would be below what we've seen in H1. Hi, Josh. Good morning. So on commercial front and the resilience of our business, so we have shown that we have been hit by 11th demand decrease. Even in those circumstances, we have been able to adapt our cost structure first. And secondly, the sales that we have made it was they were mostly in higher margin segments. So that contributed for sustained even in a specific and complex environment. But these are the 2 key effects that I would say that mostly contributed for that. Thank you. Okay. Thanks. Thank you. We will now take your question. And your next question comes from the line of Thomas Adliss from Credit Suisse. Your line is open. Good afternoon. I couldn't hear you very well, Filipe. So I wanted to ask you a question on the SPT as well. You said it's elect payments, so there's a difference between P and L and cash flow. Can you perhaps say how big of a difference it was in the Q2? Was it something like €50,000,000 or €100,000,000 That's the first question. And the second question, just on the ACS, the solar deal, essentially. And I was a bit surprised that you ended up partnering with the seller. I was wondering if it whether it was at all competitive, the process. Were there other interested parties you were talking to? Thank you. Thank you, Thomas. Good to listen to you. Philippe Willard, SD SPT. Let me just handle the solar process. Clearly, this was an evolution during the negotiation process that we realized that we will be able to combine Galp's integrated energy position in Iberian markets with actually what ACF Renewables Engineering and Portfolio Development expense expertise combined with Galp. So clearly, this is a kind of industrial partner that will fasten, that will speed up our development and clearly achieve the targets that we have established for this process. So we are happy with that. And I think this will contribute significantly for accelerating our renewable projects. So there were no interested party that were willing to pay a better valuation than you did. That was kind of my question essentially. If you ask me if you have open a competitive open tender towards these, the answer is no. If you ask, if you have had signs of interest to partnering without, the answer is yes. So for the time being that has been the decision that we have taken, Thomas. And we are happy. Thank you. Thanks. Thomas, on the SPT, so we pay SPT the month after the end of each quarter. So we pay in January related to Q4 2019. Rent in Q4 2019 was $63 on average. And so come January, we're paying SPT based on rent at 63. In Q1, rent was 50. And so come April of this month of this year, we paid SPT related to Brent of 50. So the drag on the cash out of SPT based on the quarter before is very significant. But the flip side of that is when Brent goes back up, we're still paying low Brent and low we're paying low taxation when we're cashing in higher crude sales. Perfect. Thank you very much. Thank you. And your next question comes from the line of John Rigby from UBS. Your line is open. Yes. Hi. Thank you for the question. The first question, just going back to the dividend a moment. Just so I can sort of understand what the thought process is going to be. You seem to be sort of indicating some sort of hybrid between a progressive dividend and a payout. And I just wondered what sort of thought process you have about what the relationship should be between dividend and earnings or dividend and cash flow? And at what point do you consider the balance sheet sort of intervening to that point? So put another way is, can we expect dividend policy, which seems to have now been changed, to be addressed come February? And where do you think that might be headed? The second question, just a small one, is just intrigued on you cashing out your hedging structures around the refining. I mean, I think you've indicated 2 or 3 times through the speech about the absence of visibility going into 2H, etcetera. So just wondered what the thought process was behind sort of removing an element of sort of protection against exactly that volatility? Thanks. Hi, John. Thank you for your questions or your questions. So how the process is going to be in terms of dividend? So let's recall a little again. 1st, we have to look at our free cash flow position for the year end, I think, is the first point. And still some uncertainty in the market. The second one has to do with cash position on our debt position. So our net debt to EBITDA is relevant. So we know that we are looking at our net debt to EBITDA in a rolling here. And we know that we are considering the first half of this year with the second half of twenty nineteen. So let's see how the second half of twenty twenty will evolve and how that will impact the net debt to EBITDA. And thirdly, it is also important to have not only the outlook in the cash evolution, but also to analyze how the global sector remuneration will evolve. That is also something that is important for us. There's one point that I would like to emphasize this time. We are not considering non dilutive cash distribution whatsoever. So I think that is also Philippe, the second point? Hi, John. So the way we think through our risk modeling on hedges, whilst a few years back Galp was very exposed to refining margins. Now we're a lot more exposed to rent price valuation. What we have seen this quarter and something we have never seen is that at the same time simultaneously, we have our 3 key businesses going, going. So the risk models went through the road. So we know the inverted correlation on each of these. And when we saw our refining margin hedges very, very deeply in the money, we just took the money from that. It was a financial call. Again, the biggest risk we need to protect long term given the upstream increase going forward is plant prices, not so much. Understand. Can you just come back on to Carlos, the second, on the dividend? When you come to consider the dividend in February, will you be thinking about the full year 2020 dividend? Or are you going to be just effectively saying 1H 'twenty, the write off, we're thinking only about what the final dividend is going to be. Would you be thinking about the full year in the round or just the sort of second half? John, it will have to be the full year for sure. Okay. Thank you. Thank you. And your next question comes from the line of Jason Gammel from Jefferies. Your line is open. Yes. Thanks very much. I'm trying to understand how to think about organic capital spending this year, given the guidance on net investment, but also the payment for the solar JV and the inflow from the unionization. I guess the other piece that's out there is unionization at Virgo and Sururu. So can you perhaps discuss whether you expect to be in a net receivable position there and maybe give an idea of the order of magnitude? And then the second question relates to the comments you made about April May being particularly bad for the downstream business. Can you talk about how maybe utilization rates on the refineries currently and how refined product demand has recovered in your markets? Good morning, Jason. Thank you for your questions. So I will address the second one and Philippe will take the first. Utilization rates, this is highly correlated with the demand evolution. So clearly, in the Q2, we were, I would say, at about 50% of utilization rates because we take the decision to shut down or slow down some units because the margins were not there. That was the right decision from the economic point of view. That was additionally affected by the high level of inventory. So looking into the second half, the inventories are still high. We are also looking at the cracks that are still depressed. And the decision of utilization rates, which includes not only atmospheric distillation as always is indexed, but the conversion units will much depend on what it will be the economics and the environment. It always will be an economic decision, not a physical one. So we will keep the going forward as we do always, we will keep that decision based on fewer economics. Flip? Good morning, Jason. Your question on CapEx. So the guidance, dollars 12,000,000,000 to euros 700,000,000 this year. This is all inclusive. So this does include the Solar acquisition, so the equity piece of the solar acquisition. We're still considering asset rotation to meet that guideline. More importantly, and if you look structurally longer term for calc, we are a low CapEx company on a run rate basis. So a lot of what you see in our guidance for the future is our incremental new projects like Mozambique, Bacalhau, etcetera. But if you take that out from the equation, we have Understood. And would you expect to be in a receivable position on the unitization in Perbigas River? Yes, we do. Double digit number, but this is going to be received only most likely only next year. Okay, great. Thanks very much. Thank you. And your next question comes from the line of Alwyn Thomas from Exane BNP Paribas. Your line is open. Hi. Thanks for taking my questions. Could I just a couple for me. Can I just ask for an update on the potential asset sale processes you're considering and whether you would expect any of them to potentially close this year? Or is it now more likely that 2021 is a more likely and realistic impact? And secondly, on the 2 big projects, Mozambique and Bacalhau, could you just give us an update, firstly, on COVID impacts to the projects and whether they're likely to be pushed further. And in Mozambique, in particular, what the security situation is there and the likelihood achieving any material progress in the next 12 months on the project? Thank you. Hi, good morning, Alwyn. I will take I will end on the first question and Tore will go through Mamba and Baqalao, so the two projects that we have under development. So actually, we are considering several assets for potential rotation. And you know that out of them, I've said we have said in the past that there are some candidates that are quite well known. So we will consider all the options open and we will continue with that and execute on any of those optionalities only if we will consider that they are back weight for the company from one side and they are at the right unfair value from the other side. So in what respects to Mamba and Wazideltos? Yes. Thank you, Carlos. Thank you, Alain, for the question. So as it is known in the market, the partnership on Revuuma LNG has decided to delay the FID. We have not given an update to the market yet with respect to for how long. What has been happening right now is that there is intensive value engineering that is being done in order to then to utilize the opportunities in the market. And the same actually happens now with Bacalao, we see that there is an opportunity in the market to fine tune, to optimize, to lower cost, and that is what is happening also on Bacalhau. None of these projects are at this stage impacted by COVID. And actually, as a matter fact, the same also goes for Coral. Coral South is the floating LNG project that we have developing in Mozambique. It is developing very much according to schedule, and we are still on track for first gas in 2022 and no impact of COVID so far on that project either. Okay. Any estimate on how much cost saving you might be able to see as percentage terms? Or are you trying to achieve? We have internal targets and goals for that, Alain, but it would be incorrect of me to communicate that to the market at this stage. But yes, we do see there is opportunity now to further improve the products. Thank you. Okay. Thanks. Worth a try. Thank you. And your next question comes from the line of Alessandro Pozzi from Mediobanca. Your line is open. Good morning and thank you for taking my questions. I just wanted to go back to the ACS assets. I was wondering whether the target of the 2.9 gigawatts still holds for 2023. And if you can maybe give us a bit more color on how you're planning to go there, whether you're really planning to add capacity starting from 2021 and whether we should see a quick ramp up in terms of power capacity? And also given now that we have probably a bit better visibility on what the structure is going to be, can you give us a sense of the earnings potential of the current assets from ACS? I believe we're not going to see any EBITDA, but probably income from associates. So any color on that would be great. Thank you. Good morning, Alessandro. Thank you. So I would say that at the completion of this deal, we will have to reschedule and to review the projects that were in the pipeline. So the ones that are for developing and based on also the existing environment because it is useless to say that some of the COVID impacts also will have to be taken in consideration for the setting up the scheduling for the projects 2020 onwards. What I've mentioned to you before is that they're already under production about 1 gigawatt. And the plan for 2020 onwards is being reviewed in a way that we will be able to address this. Clearly, the structure that is being set up is an independent JV that will be self financed and that will impact Galp throughout the non recursive project solution. And clearly, it's equity associates. Thank you. Thank you. And any guidance on what the earnings could be based on the existing assets that are producing at the moment? I would say it's too soon to release that to the market. We intend to do that Okay Okay. Perfect. I have a second one on Bransfield. You had a bit of an issue with the COVID in the FPSO, but not much in terms of volumes. I believe you mentioned just 3,000 barrels a while a day. I was wondering, can you give us a bit more color on what your protocol or precocious measure you are taking to avoid any repeat of that in the second half of this year? Thank you, Alessandro. Measures that have really been taken, there's 2 sort of key measures. 1, a mandatory quarantine period for the offshore personnel before they are now bordering the ship. Typically, that is between 1 2 weeks. Secondly, of course, temperature is being measured on a frequent basis, both before entering the ship and while on the ship. And thirdly, the number of weeks that the people stay on the FPSO before they are changed is also being no longer. It used to be 2 weeks. Now rotation scheme is 3 weeks, so that you have fewer rotations for the ship. So that's the sort of the key measures that has been implemented. But as we all know, COVID is no small issue in Brazil. So I think we need all to be cautious on it. And but so far, it has been rather limited impact on our production. Thank you. All right. Thank you very much. Thank you, sir. And your next question comes from the line of Sanskant Chilukuru from Morgan Stanley. Your line is open. Hi, good afternoon. Thanks for taking my question. I've quite a few answered already, but I had one for the upstream. It appears that the oil and gas price realizations in 2Q came in at a significant higher discount to Brent prices, more than 25% in 2Q compared to around 12% in 1Q. Can you talk about the reasons behind this, whether this was purely to do with the timing of the cargoes? Also, can you let us know what kind of differentials are you seeing right now after the recovery in oil price and the Brent prices? And if we should expect the differentials to revert from the 2 kilos to a more normalized level in the future? Let me try to address this. So the key effect that we saw during the Q2 is really mainly relating to prices. We have seen in June that it's starting to recover already and but we do see that there is a bigger discount this year than what we initially had expected. So year to date, we are running around $4 per barrel and time versus Brent. Thank you. Thank you. Thank you. And your next question, sir, comes from the line of Michael Alsford from Citi. Your line is open. Thanks. Good afternoon. A question on refining. You've updated your medium term outlook on oil prices. And I just wondered if you could maybe talk a little bit about how you're seeing the medium term outlook for refining margins. I think from the previous plan in February, you were thinking of $4 to $5 And I know clearly we're in an uncertain environment, but I just wondered if you can give a sense as to where you think refining margins might recover towards over the next couple of years. And then just secondly, on the exploration write off, I just wanted to confirm whether the write off included or didn't include any value for the Urupuri well that was recently drilled? Hi, Michael. Good morning. Thank you. So actually, comparing with the world that we have been observing in back in February, we are in a completely the opposite side. So in our days, if you look at where they are, the refining margins, we are barely covering our refining costs, which means that if the demand will not go up and the inventories will not be reducing. It could stand in the market for a couple of months ahead with some refining pressure. And I would say that for the full year, refining might have outside marginal contribution for Gulf. And when it comes to your second question, what I can say to you is that the majority of our impairments in exploration assets is related to our assets in Port au Goir, where we have done a review of the portfolio and decided that there are a few of the licenses where we wanted to step up and then it's natural that we did also the Embraer. What is related to Uria Puri is very, very marginal than what we have incurred this quarter. Okay. And just following up on Carlos' point. Do you think that the refining margins or the refining business has a meaningful contribution in 2021? Or do you think that still refining margins run to pressure as we see the oversupply in the markets maintaining? Michael, that will depend very much on how the markets will evolve and how this uncertainty will evolve. So I think it's highly difficult to have a view on that. We can only play with scenarios. If the more recent times will continue to evolve as positive as they were, we might see a more positive move. If we will have ups and downs and with even with partial lockdowns, this could take more time. So clearly, I think we have hit the floor and step after step we will recover, but the speed of recovery, it will depend highly on how the demand will grow. Okay. Thank you. Thank you, sir. And your next question comes from the line of Matt Lofting from JPMorgan. Your line is open. Hi, gents. Thanks for taking the questions. 2, if I could, please. First, just coming back on dividends and Galp's dividend policy. Clearly, 2020 is an exceptional year in a number of different ways. But when we look forward, can you characterize a bit more specifically the nature of the dividend policy that you're looking to structure Galp around? Is this ultimately a through cycle absolute focus dividend policy where you're looking to grow the distributions commensurate with earnings and cash flow? Or while GAAP remains in growth mode, does this need to be more of a backward looking process on an annual basis where you're pivoting the annual payouts primarily around the macro environment and cash distribution combined with net debt on an annual basis? Secondly, could I just ask on the long term oil price assumptions and carrying values of Galp's assets? We saw you reduce from long term $70 to $60 per barrel. Understand clearly that the Galp's assets are differentiated by being low on the cost curve. Equally, taking $10 off the long term price must have a negative connotation for long term value and cash flow potential. So surprised that there's no relevant asset impairments, if you could just elaborate on that. Thank you. Thank you, Matt. Good morning. So I will take the dividends and I will coordinate with towards the second answer or the answer to the second question. So clearly, this is an exceptional year and from not only for dividend purpose, but also for global business and environment. So once we will be able to back to certain normal, we intend to recover our dividend policy as it was pre COVID, let's say. That said, we have of course certain caveats or restrictions or elements that should be taken into consideration, which is our cash position, which is our net debt to EBITDA that we will continue to follow as a kind of a self covenant below two times. And of course, I have said that before, we have also to look at what is the competitiveness of the remaining markets. But clearly, setting back or backing to the normality, hopefully, we will continue to evolve as it was reviewed in a pre COVID context. In what relates to the long term oil prices that we have now reduced not only in the case of oil, but also in the remaining variables that are also impacting our different business units. Clearly, we are benefiting and has been said already on the fact that we have very low cost producing assets, which means that we can leave couple of years without or with a minimum CapEx in this context. What we can see is that for the assets that are under development, and as Thor already mentioned, it has no impairment impact whatsoever, which reviews the competitiveness of those projects also. That's from my side. I would like to actually complement Matt, on the if you look at our balance sheet, you see that we have virtually no goodwill. So the assets that we have on the balance sheet, mostly the big ones are all discoveries. And we do have a history of accelerated depreciation in most of the assets that we have. So the carrying value of our assets is very, very low. And if you look at our share price, our market cap as a multiple of book value, that kind of gives you a hint. The market is giving us like 2 times book value, which is probably double the sector. That gives you an indication of how low Very good. Thank you both. Thank you, sir. And your next question comes from the line of George Gammerez from JB Capital Markets. Your line is open. Good morning. Thank you very much for taking my questions. I have 3. Firstly, is it possible to give us some visibility about how volumes are evolving in July in Portugal and in Spain, namely in the context of concerns about tourists? The second one would be related on your CapEx comment, CapEx and OpEx reduction. Should I assume that on the over 90% reduction in CapEx and OpEx is already included the reduction in CapEx from the change in the structure of the ACS deal. This would be the second one. And the third one, it's also related to this change in renewable. I thought to understand that you mentioned in the question that you expect the JV to be self funded after the initial acquisition. Is this so? And if not, what are the equity CapEx needs of the JV with the new capital structure? Thank you very much. Thank you, George. Straightforward to your questions. First, volumes. I would say that July today, we are observing year on year mid-ten reduction in Iberia. In CapEx, yes, you should consider that we have already included the deal. In renewables acquisition, so I'll let Filippo go through on that. Thank you. Yes. The ACS transaction on our guidance was already only the equity piece component was filed. And going forward, Elkfondant means that it's the, say, 70% project financed and the Galt equity piece that to be 70% of the equity piece will be our contributions for each of the next few years as we develop the portfolio. Okay. Thank you very much. Thank you, sir. And your next question comes from the line of Alejandro Dimitrilez from NAU Securities. Your line is open. Good afternoon, gentlemen. Thank you very much for taking my question. Coming back to the renewables deal, obviously, you changed your planning assumptions on the oil price. You were talking about downstream also being challenging. But we have also seen electricity prices in Iberia coming down a lot. So the question is, have you changed your planning assumptions on electricity prices? And if so, how is this impacting the value of the deal? So just trying to make sure that we are unlikely to see an impairment of these deals that you just kind of renegotiated. Thank you for your question. Clearly, we have also been reviewing our solar prices or power prices and solar capture prices going forward. And there was no relevant impact in the transaction that we have designed with ACS. And if we look at the returns, they are pretty aligned with what it was our initial decision. So nothing to eluded on this front. Thank you. Okay. Thank you, Raj, for that. And just as a follow-up, is this because you're compensating part of that lower oil sorry, lower electricity price with better financing conditions on these renewable projects. So it's all in all. So when looking at the project in a global perspective, it's all in all. So it's completely, let's say, a single package analysis with combination with the 2 elements that you have mentioned with also what I have already referred that we have related with the scheduling of development of this project. Thank you. Fantastic. Thank you very much. Thank you, sir. There are no further questions on the phone line, sir. I'll hand the call back to yourself. Thank you. I think we conclude the call. Thank you so much. Bye bye. Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may now disconnect.