Ladies and gentlemen, good morning, and welcome to Galp's first quarter 2020 results and certain outlook presentation. I will now pass the floor to Otelo Ruivo, Head of Investor Relations. Please go ahead.
Good morning, ladies and gentlemen. Welcome to Galp's Q1 2020 results conference call. I hope all is well with you and your families in these challenging times. By now, I guess we have all adapted to this new way of working. As always, the IR team continues close to you and here to help. We look forward to seeing you soon, as soon as we are all safe. Today, Carlos will provide us with an overview of the recent developments and only a short-term outlook, given the current volatility. Filipe will then take us through the quarterly results. At the end, we'll be available to take your questions, when Thore 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 statement available at the beginning of our presentation, which we would advise you to read. Thank you. Carlos, please go ahead.
Thank you, Otelo, and good morning. I hope to find you all and your families safe and healthy during these unprecedented times, which are demanding the very best of us, both as human beings and as professionals. Before starting, let me welcome Otelo to his new position, and also thank Pedro Dias for all his dedication as Head of Strategy and Investor Relations over the last six years. It has been a great journey, and I'm sure Pedro will continue to give the best of him, acting now as the new CFO of our Upstream business. Now starting on slide four. The extension and the full impacts of the current health crisis are still to be understood. Resilience, flexibility, and also adaptation capacity are critical. Oil prices are currently 60% below their average of 1Q level, at just above $20/ bbl.
The unforeseeable demand drop due to the pandemic emergency measures and the high levels of supply has led to very high crude and product inventory levels, which will put pressure on prices over the next several months. Such environment has an obvious impact in our upstream performance, as we were planning on oil prices of around $65 /bbl, as we have shared with you during the Capital Markets Day. On the product side, with demand at risk and the inventories increasing globally, cracks are truly constrained for the upcoming months, and signs pointing to further declines before stabilizing. Future contracts are still showing weak price levels, and we need some more signs of recovery for this to normalize. In Iberia, where we have our commercial activities, we are being significantly impacted by the economy slowdown and the driving restrictions.
Oil products demand is expected to be down over 50% year-on-year during this month of April. In what respects to gas and power markets are also being hit, even if to a lower extent. It is too soon to anticipate the demand behavior once the lockdown periods end. All in all, uncertainty is a given, and whether recovery is faster or slower, we are focused on protecting our people, adopting a flexible and efficient business continuity according to the required utilization levels and market conditions during each phase of this crisis. Moving to slide number five. As a first step to provide a response to this situation, our main priority has been to safeguard the health and safety of our people and customers.
We have been also determined to provide social support to the communities where we operate, having deployed a package of measures in coordination with several national health entities, which included the donation of ventilators and promoting free virus testing where it was needed, providing also energy solutions to new emergency facilities. Well, helping where we can. At the same time, we remain focused on ensuring the company's operational continuity, asset integrity, and cash preservation. On the upstream, the operations are quite in line with our production plans. We have adapted our commercial activity and prepared ourselves to increase the flexibility of our refining and midstream operations. We must be ready to react promptly and to any disruption or rapid degradation of market conditions. In our refining system, we have slowed down our operations, given pretty full inventory levels.
We are also prepared for the post-lockdown, designing an exit strategy to allow us to respond quickly once the economy picks up. We have also adapted our short-term plan, stress-tested it to different macro scenarios to evaluate the financial impacts which may result from this crisis. I'm now on slide six. In all scenarios, Iberia demands will be substantially weaker than initially expected for this Q2. We could have a potential impact of over EUR 1 billion in our 2020 cash flow from operations under a pessimistic scenario. Have now in place measures to protect the company's financial position under such circumstances. As part of adopting and adapting our operations, we are preparing a set of initiatives aimed at preserving the company's liquidity and financial strength, started to implement internal measures, and are preparing others alongside our upstream partners.
As a result, as announced earlier this month, we are now expecting a substantial reduction in the group's cash spending during 2020 and 2021 when compared with what we have presented to you all at the Capital Markets Day. CapEx and OpEx are now expected to be reduced by more than EUR 0.5 billion per annum over the next two years. In 2020 and also in 2021. These initiatives include the deferral of some of the investments across the value chain targeting our future growth, such as early-stage or pre-sanction projects, as well as some project optimization and non-essential short-term spending adjustments. For this year, around 90% of this reduction relates to CapEx, with some measures already in place, which will also drive reductions well into 2021. Further cuts next year will depend on the evolution of the demand recovery and the global macro conditions.
As you can see, Galp has a very high flexibility to adapt its investment plan to the current environment as most CapEx is geared towards our next growth cycle. Just you know, over 70% of our CapEx is uncommitted, and therefore, the adjustments are expected to be deferral rather than cancellations. We will not provide details on specific projects at this point, apart from the information already made public around the Rovuma LNG postponement in Mozambique. However, we can say that the reductions will be felt across the different businesses and include exploration commitment adjustments, the reschedule of upstream uncommitted development activities, the realignment of refining initiatives and commercial expansion projects, the phasing of maintenance of activities, and also cost reduction initiatives, which, to some extent, may become structural. Most of these initiatives can be resumed rapidly, depending on market conditions evolution.
As we said back in February, portfolio management initiatives are also part of our strategy, and we will continue to pursue value creative opportunities. Considering the short-term outlook, our results will be impacted versus what we anticipated during our February Capital Markets Day. However, at this stage, we think it is too soon to provide a revised operational and financial guidance. Still, the cash spending reduction initiatives will increase the resilience of the company, with free cash flow neutrality reachable with Brent prices as low as $20 /bbl. That also assumes, and I underline, a significant deterioration of the downstream contribution and a prudent approach on the upstream production profile. Just to give you a clear idea of how we have stress test our operations. I'm now on slide seven, and in this slide, although adjusting to the short term, our long-term ambitions remain in place.
We rely on Galp's financial robustness to handle the adverse circumstances ahead of us, where liquidity is fundamental. For speaking on liquidity, the total liquidity was over EUR 2.6 billion at the end of the quarter. Our 2020 net CapEx has now been reduced from the range between EUR 1 billion and EUR 1.2 billion per year to a range of EUR 0.5 billion-EUR 0.7 billion a year. Our AGM last Friday approved the 2019 dividend of EUR 0.70 per share, which is in line with what had been proposed. The 2019 dividend considered the performance during the year, also the current financial position, and the identified initiative to address the current circumstances. Going forward, our capital allocation strategy, including future dividend distributions, shall be adjusted according to actual evolution of market conditions, the cash generation, and also the protection of our financial position.
On my side, I'm on slide eight to provide you an overview on what we expect for the very short term, I mean, for the 2Q of 2020. Starting by the upstream. In the upstream, although our operations have been going according to plan, we need to be prudent. Ensuring the safety of our people may lead to operational restrictions. The supply chain may be affected, and inventories may cause logistical constraints. We are not in the position right now to maintain nor revise our production guidance for the full year, which stood, and just remember you all, between 13% and 17% increase in a year-on-year basis. On the refining side, we have been able to find outlets for our products, mainly for those that are May delivery related.
We had some slowdown in fuels production in our northern refinery, so at Porto, already during this month of April. We are now planning to stop Sines Refinery during May. This stoppage is the consequence of the low expected demand and the already high inventory level. Depending on how the macro environment progresses, we will expect to start ramping up Sines in June. In the midstream, our results should also be impacted. While commercial, we are currently seeing significant sales drop in Iberia, mostly in aviation, marine, and retail segments. On the renewables front, the solar PV acquisition in Spain is going through the various closing procedures. We are also keeping our plans to share some of the equity with a partner, which should lead to the deconsolidation of the business. We would like all this to occur during 2Q.
We will continue to monitor the evolution of the market environment over the next weeks or months, and get back to the market with an updated guidance based on a more stable view of the short term and its implications for the long run. Filipe will now go through the quarterly results. Thank you. Filipe, please, the floor is yours.
Thank you, Carlos. Good morning, guys. I am on slide 10. Group EBITDA was EUR 469 million in the quarter. That's down 5% year-on-year. This is driven by the lower contribution from upstream. The sharp oil price decline impacted the realizations during the quarter. We also had almost EUR 114 million in negative changes to our underlifting positions and over EUR 17 million in revaluation of inventory in the quarter. Upstream production in the quarter was 131,000 bbl a day, that's higher year-on-year, but down quarter-on-quarter, given the planned maintenance in two units in Brazil. Within refining and midstream, here we have different effects. Within refining itself, it's impacted by weak margins and the planned maintenance in the hydrocracker.
Within midstream, gas supply and trading suffered from the lower volume sold during the period, but oil supply saw a positive swing in price lag effects. Here, we have also a base effect as the price lag had been negative in Q1 last year. The commercial activity was stable year-on-year, supported by the recent turnaround measures introduced in our commercial activities in Spain. Bear in mind, however, that from what we saw during the second half of March and from what we are observing now in April, Q2 should be weaker here. Net income was down year-on-year, driven by the weaker upstream performance and entries below the line. Here we had non-cash currency effects of EUR 56 million due to the Brazilian real depreciation impact in Petrogal Brasil .
We also had negative mark-to-market variation of EUR 84 million in open derivative positions. These are to cover natural gas price risks, and this is recovered as the underlying gas volumes get delivered to clients over the coming months. On the plus side, we have a positive cash contribution of EUR 105 million from Brent derivatives, which we monetized in March. On a IFRS basis, net income was a -EUR 257 million. This is considering the post-tax inventory effect of EUR 278 million. This takes me to slide 11 and cash flow. Here on the left-hand side bar, we have effectively EBITDA under IFRS. This includes a large negative inventory effect. This accounting effect leads to a large release in working capital as the mark-to-market value of the capital tied up in inventories is also reduced.
As a reminder, under IFRS, EBITDA is also negatively impacted as IFRS considers the last three months' average high price for the refinery index. Taxes seem high given the context today, but these reflect payments related to previous periods when earnings were, of course, much higher. Net CapEx also includes payments from the previous quarter, and the balance is way more elevated than what you see on our Q1 economic CapEx. In a nutshell, cash flow from operations was EUR 244 million, which after operating leases, interest, CapEx, and derivative cash gains, this left us with EUR 63 million in positive free cash flow. Distributions to our Sinopec partner in Brazil were EUR 108 million. The balance sheet on slide 12 was quite stable compared to December 31st.
The inventory markdowns under IFRS reduced working capital, this adjustment flows through the P&L and hence impact our equity as well. Net debt was also stable at around EUR 1.5 billion, net debt to EBITDA unchanged at 0.7x. Debt redemptions for the remainder of 2020 are now only EUR 50 million, the average debt maturity has been extended. Our liquidity is high at over EUR 2.6 billion, we are negotiating additional funding and liquidity facilities, this is mostly to pre-fund our 2021 maturities. As alluded before, given the announced CapEx reductions, our free cash flow pre-distributions should remain positive as long as Brent stays at over $20 this year and next. This is very important for our creditors as well. I will stop here, we're happy to take your questions. Thank you.
Thank you. Ladies and gentlemen, we will now begin the Q&A session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please note only two questions per participant. You can cancel your request at any time by pressing the hash key. Once again, that's star one on your telephone, and please be aware only two questions per participant. Thank you. We'll open our first line to the question, and it comes from the line of Biraj Borkhataria. Your line is open.
Hi, thanks for taking my question. It's Biraj at RBC. Two questions, please. The first one, in the upstream, we're seeing some very significant divergences on the various crude benchmarks. I was wondering if you could comment on what you're seeing in April, and what you're achieving on your Brazilian crude sales versus kind of normal benchmarks like Brent, and maybe you can comment on Angola too. Then the second question is on the $20 /bbl breakeven. Carlos, you mentioned you've stress-tested with a significant deterioration. Could you just give some details on what refining margins you're using and what utilization you assume? Thank you.
Hi, Biraj. Good morning. Good to hear you in these challenging times to you all. In terms of our upstream crude benchmarks, what I can share to you is that we are still continuing to reach our Asian markets. Clearly the differentials over benchmark has slightly improved in the 1Q. During this 2Q, the challenging is more that we were looking at the different alternatives outlets that we have been find. So far, I think we are acting pretty well under the circumstances because the key point is the price levels that we are experiencing and our upstream operations have behaved quite well during the period and still are. We are still slightly above what we have in the 1Q.
Relating to the assumptions, let's say to do our stress test we are not releasing or disclosing to the market for the time being. Just to tell you just a couple of principles. We are looking at refining margins close by to zero. We are looking at demand decreasing that is more than 50%. We have been really stress-tested and taking into consideration the constraint and the confinement to the circulation that the emergency states have been imposing during the last couple of weeks. Effectively, you may trust that the $20 /bbl is one of our views, and as I mentioned during my intervention, that are under pessimistic market conditions. As someone used to say we have to prepare for the worst and hope for the best. Thank you.
Thank you very much.
Thank you. We will now take your next question. Your next question comes from the line of Oswald Clint. Your line is open.
Oswald, thank you, and good afternoon to all four of you, and I hope you're all well. First question, Carlos, please. I'd just like to see if you could give us a bit more granularity around each of the product categories that you're experiencing imports or at least the Iberian Peninsula so far in April, perhaps in terms of demand, gasoline and diesel. I see you're producing quite a lot of VLSFO in the first quarter. Perhaps you could just talk around each product specifically. You mentioned that you're still exporting or you're still getting an outlet for most of your products. What about your exports, things like surplus gasoline that you would normally have put over to the U.S.? Second question, just obviously a lot of discussion around Petrobras closing fields and platforms, obviously in other basins, Campos Basin onshore.
Any discussions or anything going on around the Santos Basin, please? Thank you.
Oswald, good morning also, good to hear you. From the demand side, this is pretty aligned, not only in Portugal, but it's Portugal and Spain. Spain has started before Portugal. This crisis migrates from east to west. What we have done or what we have saw especially during April, because we have slightly been affecting during March, January and February were completely good months I would say. What we are seeing is the diesel being affected of around 50%. In what relates to gasolines is above 60%. What is more challenging is in what relates to jet fuels, which are above 90% reduction. Clearly, that is where we see less room space to recovery. In the opposite side, we are looking to the LPG, for instance, that has increased, and it is behaving quite well.
The impacts of the middle distillates, it's quite flexible for us because we can do what is the migration from jet to diesel, and therefore, we are less concerned about that because we can produce full diesel and less jet, and the portion of jet is relatively small in our P&L. You have also referred the very low sulfur fuel oil. We have only produced very low sulfur fuel oil during the Q. Actually, we were not producing almost any low or high sulfur fuel oil. What the market has, again, surprised everyone, was to see the cracks of high sulfur fuel oil and low sulfur fuel oil, not so negative as it was anticipated. It is more or less what is happening. In what relates to the United States. United States, our heavy components are quite important to blend the American gasolines.
We still see room space. We were exporting in the 1Q in regular conditions, so we were above 240,000 tons during the Q. During April, we have been observing the gasoline demand in the United States to decrease to around 50%. If you ask me, do we continue to have room space to continue to export gasolines to the United States? Yes. The answer is yes because we have a grade, we have a component that is highly valued. Our decisions have to do with all the inventory levels that we are today and the global economic optimization. Therefore, we have taken the decision that I have shared with you. In what respects to the Petrobras curtailments or the worldwide curtailments, Brazil has committed also to contribute for that.
We don't have any impact in our operations, and we hope it won't be the case. As I mentioned to you during my introduction, it is important that we take into consideration that curtailments could be impacting everyone, not only due to the OPEC+ agreement, but also because we are still managing a pandemic crisis that puts people and people's safety on top of priority. There is a set of safety rules and procedures that have been implemented that protects and anticipates the safety of the production, but so far, nothing else to add to you. Thank you, Oswald.
Thank you.
Thank you. We'll now take our next question. Your next question comes from the line of Thomas Adolff. Your line is open.
Hi, good afternoon. I've got two questions, please. Just firstly, I think you do have a net debt-to-EBITDA ceiling target of two times or that ratio shouldn't exceed two times. Would you cut or suspend your dividend only when that level is reached or breached, or would you consider doing so much earlier than that? Secondly, just on your solar business, I might have misunderstood you during the presentation. You expect the deal to close in the second quarter. Did you also say that you expect to announce a partner to the solar venture in the second quarter? Does your net investment guidance of 0.5- 0.7 include some proceeds from the farm-out of the solar business or anything else? Thank you.
Good morning, Thomas. Also good to hear you. In what relates to the dividends, I think that has to do with global capital allocation. Of course, our capital allocation that includes the future dividend distributions, has to take in consideration everything. The actual evolution of the market conditions, also our ability to generate cash, and also to protect our financial position. Clearly, it is too soon to make any further questions rather than this one. I think it is prudent not to go ahead, clearly we will put the dependence of future dividend distributions on these three elements. In what respects to the solar acquisition? Yes, we are preparing ourselves to conclude, to complete the deal during the 2Q.
Simultaneously, we are also working in a way to find out a partnership that allows that we can have the full deconsolidation of the business from our balance sheet. Yes, the net CapEx includes equity cash needs. Thank you.
Okay. You expect this farm-out deal to happen in 2020, right? The feedback you're getting so far, is that positive?
Thomas, it's not in 2020. It's in the 2Q of 2020, which is our expectation.
Okay. Thank you.
What I'm trying to tell to you is that we are working hard to align the completion of this deal in one single shot.
Okay. That's great. Thank you.
Thank you so much.
Next question.
Thank you. We will now take our next question. It's from the line of Michael Alsford. Your line is open.
Hello, good morning. I hope you're all well. Couple of questions from me. You mentioned cash neutrality of $20 /bbl pre-dividend. I wondered if you could give us an indication of what you see the neutrality to be, and what you think about the current dividend policy and also the payments to minorities during 2020. Secondly, on the upstream, I think clearly you announced your Uirapuru exploration well in Brazil recently. I think from memory at the Capital Markets Day, I think Thore said that this could prove up around 2.5 billion bbl of oil. I wondered whether those expectations are still valid. Third, to confirm what you said on the previous question, are you assuming in your CapEx guidance other disposals to get you to your net 0.5-0.7? I'm thinking the natural gas business. Does that include, as I say, other potential disposals in the business? Thank you.
Thank you, Michael. Basically, we have addressed three questions. I've already addressed the free cash flow neutrality at $20 /bbl, but I will ask now Filipe to complement me on that and Thore also to address the exploration well. In what relates to other disposals, we are not considering that in what we have presented, even though what we are working is looking to the optimization of our known core assets. You may see that natural gas regulated infrastructure is one of the assets that we clearly are putting on top of the priorities to be one of the candidates for that. I will pass now to Filipe.
Morning, Michael. The cash neutrality, as you say, is pre-distributions. As Carlos said, it's too soon to tell what the board will decide over the next few months. The integrity of our operations and our cash flow rank at the very top of our priorities. I will also add that if you look at our balance sheets, we have almost no goodwill. Our assets are booked at quite low historical devalued levels. We have a fully funded pension liabilities. We have no reserve-based lending, so no redetermination risk. The visibility that we have is really driven by Brent, the guidance of $20 gives you the comfort that as a management team and the board will see, can we continue to generate cash in over $20? Then how it's distributed depends on how long this will take and what the Brent levels will be.
That applies to both the Sinopec distributions and to the Galp distributions. Thank you. Thore?
Yes. With respect to Uirapuru, what I can tell you is that we have made a discovery, but it's very early days. We have now collected a huge set of data, which is now being very carefully analyzed. Before we've analyzed this thoroughly, we are not in a position to give you any further information.
Thank you. We'll now take our next question, Your next question comes from the line of Mehdi Ennebati. Your line is open.
Hi. Good afternoon, everybody, and thanks for taking my questions. Two questions, please. One regarding the asset disposal. You've highlighted that regarding Solarig, you might find a partner in the second quarter. Regarding GGND, you said that this is non-core. Are you making some progress here? You were pretty, let's say, optimistic during the Capital Markets Day. Should we consider that an asset disposal of GGND might be made in 2020? Do you think that the current macroeconomic environment is probably pushing forward any GGND asset disposal? First question. Second question, regarding the refining. You've announced one month maintenance at Sines Refinery in May. Can you please tell us what level of cash cost should we expect in the second quarter for your refinery, and what utilization rate are you targeting in the second quarter? Maybe one question on the high sulfur fuel oil.
You said that, if I understood well, that your output of high sulfur fuel oil was relatively low in the first quarter, the market totally changed. Do you intend to increase your high sulfur fuel oil output in the coming months? Thank you.
Hi, Mehdi, good morning. In what respects to disposal? We tend not to disclose any potential divestment, but you know that GGND is one of the candidates. That's the only thing that I can tell you. If and when we consider that should be at the right price. In what relates to the cash costs for our refineries and utilization rate, it's too soon. I have gave you just a flavor of what is going on. Our fuel plant in Matosinhos Refinery has been suspended during April. We intend to suspend our Sines Refinery during May, and hopefully, we are expecting that we can ramp up during June. The average utilization rate is quite in line with this approach.
From the cash cost of the refinery, and if you look at what happened in the 1Q, the 1Q was impacted by a planned turnaround in our hydrocracker. Which is if we normalize the cost, you should consider they will stand between $2 and $2.2 /bbl. I'm not sure I follow your third question, if it was related with very low sulfur fuel oil. Can you?
No, high sulfur fuel oil.
Enlighten me?
High sulfur fuel oil, not low sulfur fuel oil, but high sulfur fuel oil margin improved quite significantly. I just wanted to know if you are able to increase your high sulfur fuel oil output. If I remember well, around 10% of your output could be high sulfur fuel oil. Just wanted to know if you intend to increase it and if there is a demand for that product currently.
Okay. Thank you for clarifying that. That decision is always based on a value-driven optionality. We normally look at this in a permanent way. We are quite flexible on this respect, and we can change for high sulfur fuel oil or keep on very low sulfur fuel oil, depending on the cracks. We will do what it will maximizes our P&L. That's what I can tell to you. Flexibility is part of the game. Thank you, Mehdi.
Thank you.
Thank you. We will now take our next question, and your next question comes from the line of Flora Trindade. Your line is open.
Yes. Hello. Thank you. Good morning. I have two questions, if I may. The first one on cash flow. You paid over EUR 100 million to Sinopec this quarter. From what I could see, results from Brazil seem to have been very low. Can you just help us understand what kind of, or what the level of dividends could be for Sinopec in the full year? The second question on upstream, very low production cost in the quarter. Can you give us also a reference for the full year? Thank you.
Hi, Flora. Good morning. Thank you for your two questions. I think I will ask Filipe. This is a minority payment, I will ask Filipe to address the question to you. Thank you.
Bon dia, Flora. The dividends to minorities are based just like the dividends for Galp shareholders. It's based on the balance sheets and the cash flow rather than the earnings that you see. We don't decide on dividends based on a quarterly hit. The decisions that will guide our future decisions will be based on our longer-term views on the integrity of the balance sheet and the cash balances, and our views on the severity of the current crisis. I would not read much about the Q1 payment that is related to 2019. Thank you.
Good morning, Flora. What I can say with respect to upstream cost is that we expect that we will be running more or less with the same rate as we have done in the first quarter, namely around $2.5, $2.7 /bbl. That is also the outlook for the rest of the year. That's the best guidance we can give at this stage. Thank you.
Thank you.
Thank you. We will now take our next question. Our next question comes from the line of Alwyn Thomas. Your line is open.
Hi. Good morning, gentlemen. A couple of questions from me. I just wanted to ask, going into 2Q and perhaps looking at 2Q, maybe 3Q earnings. Given some of the measures you've taken, and obviously some of the working capital benefit we got in the first quarter, perhaps what downside protection to cash flows and earnings do you see happening in the second quarter from what you have? Whether it's hedging or on cash taxes, are there any sort of mitigating effects we should expect in the second and third quarter that might help you out? My second question, a little bit more, perhaps longer term. Perhaps, Carlos, if I could get your thoughts on what you think this crisis might do to longer term impact on oil and oil product demand?
Maybe does it accelerate your desire for low carbon ambitions or are you actively looking at M&A opportunities as a result?
Good morning, Alwyn. I will address the second questions, and I will ask Filipe to help me on the first one. Looking more to the long term. I think it is still soon, but In the middle of a storm, it's quite difficult to anticipate what might happen. But there are things that will not stand like they were before. I think the world will have to handle with many consequences from this crisis that open clearly new business areas. We are seeing that, for instance, digital commerce and last mile logistics are becoming more and more relevant. There are things that even for our legacy business will require an adaptation and a fast change.
From the product demand point of view, there are products that for sure they will stay, they will seem require more time to recover. I'm speaking about for the international travels. There are all, in the other side, others that it might recover in a more fast way due to the fact that the people, to gain confidence and to gain trust, they will use public transportation with less people in the same vehicles, which means that we have to have more vehicles running in the streets. If this will fasten or not the low carbon ambitions, I'm not sure. I don't have the crystal ball.
What I can tell to you is that as we are adapting and flexibilizing our short-term operations, we keep our lighthouse, our strategy into the future and our ambitions are untouchable because we will think that sooner or later, the world will move in that side. It could be more difficult due to the fact that we will be more focused on handle things that becomes more priority in our lives as never saw. I think we are fighting, we are in the middle of a war as unprecedented as our generation has not lived since the Second World War. Therefore, I think it will be quite complex to manage the next coming years and the allocation of the different priorities. It will be still difficult to see the fog that is in the horizon. Filipe, can you go through the first question, please?
Good Morning, Alwyn. Unlike Q1, where we had the drag of CapEx and cash taxes coming from Q4 last year. Going forward, the cash flow statement will or should look much better. Cash CapEx goes down in line with the revised guidance we have provided. Clearly, taxes go very materially down going forward, assuming Brent is as low as we see today. We will have a real working capital effect. I say real because that's opposed to what we have seen in Q1. In Q1, you have accounting markdowns in balance sheet balances of certain items such as inventories. That's not a real cash saving. That's a release of working capital, but it's effectively just a mark to market and against, and that's also booked under IFRS, EBITDA.
From now on, we are seeing already that we are buying crude at a fraction of the price that we used to. We're still getting money from clients at older invoice levels. Clearly we will have less help from suppliers balances, but that's less than what we gain on inventories and on the client side. We should see working capital release on a cash basis going forward. Thank you.
Thank you, Filipe. If I could just quickly touch on something else on that then. Maybe the second quarter is the most important here, but just on that, on the physical crude prices you're receiving at the moment from your upstream operations in Angola and Brazil, are you actually able to get cargoes away and perhaps what discounts you're seeing on recent cargoes or future ones? How have you protected that in the next quarter?
Alwyn, we are not doing protection on that because the full integrated profile of Galp in somehow is self-hedging our position. Therefore, what is important is looking at what I have already mentioned. It's how we are selling our Lula and Iracema oil in comparison with Brent. In that respect, we are taking outlets that are evaluating it more than our own refining system. I think that responds quite well to your concern. Thank you.
Thanks.
Thank you. We will now take our next question. Your next question comes from the line of Michele Della Vigna. The line is open.
Hi. Thank you very much for taking the time for my question in this difficult time. It's Michele Della Vigna. Two quick ones. First of all, I wanted to ask you if you've already received a request from Angola to cut down some of the production in Block 32 on the back of the OPEC cut decision. Then second, I was wondering if you could expand a bit more on the potential impact of COVID-19 on your supply chain, particularly in Brazil, and which parts of that chain you find most at risk. Thank you.
Hi, Michele. Good morning. Answering to your both questions. The answer to the first one is no, and I think it's a clear point. In relation to the supply chain COVID-19 actions, I think Thore could help us because there's a set of actions that the operators are being implementing in order to guarantee that we have safe operations that could clearly protect our production. Thore, can you please share with Michele some thoughts on some actions that we have implemented in this case?
Yes. Thank you, Carlos and Michele. What I can share with you is that there is put in place quite rigorous systems, including quarantining of personnel before they go offshore in order to try to minimize the chances that there will be a COVID situation offshore. There is also ongoing measures being taken offshore in order to see if any of the personnel is being affected. So far that has worked well. We have minimized exposures as much as possible. That means that non-critical maintenance has been delayed. Maintenance activities that is now is taking place is really focused on safety and maintaining production, i.e., so the personnel that goes offshore is also being minimized. So far that has worked quite well, but we all know that this is a tricky virus, so we will have to monitor that on a daily basis. Thank you.
Thank you.
Thank you. We will now take our next question. Your next question comes from the line with Sasikanth Chilukuru. Your line is open.
Hi. This is Sasikanth Chilukuru from Morgan Stanley. Most of my questions have been answered, I had one quick clarification, please. I was just trying to see if you can provide details of the hedging program in the upstream and in the downstream divisions, particularly in 2Q and for the rest of 2020.
Sorry, Sasi, can you repeat the question? I can't hear you very well. Thank you.
Yes. Sorry, I was just trying to understand if you could provide the details for the hedging program in the upstream and in the downstream for 2Q and 2020.
Good morning. Sasik anth. The hedging program that we have in force, it's related with the refining margins. What we can say is that we have around 10% of our throughput hedged on a yearly basis with a refinery margin of about $4/bbl . It's more or less where we are. In the upstream, we don't have anything for the time being. Thank you.
Thank you.
There's one point that it might be interesting to also, and I'm sorry for complementing what you have asked, because you asked the hedging program in force. I didn't mention, and I think none of us, neither me nor Filipe has referred to that, but we had a put option program for Brent that we have monetized during the Q1 that is in the accounts of the Q1. Just for sake of clarity and to guarantee that I'm answering with full information to you. Thank you.
That's quite helpful. Thank you very much.
Thank you so much.
Thank you. Your next question comes from the line of Matthew Lofting. Your line is open.
Hi, gents, and thanks for taking the questions. Two questions if I could please. I mean, firstly, just on the impact of the cost reduction initiatives implemented for 2020 and 2021. If you put near-term operational uncertainties to one side, could you share a sense of Galp's normalized ability to mitigate the impact of lower CapEx on early 2020s production and underlying cash flow linked, for example, to its high investment bias to longer term growth? Remind us of, if you could, of the starting point breakdown of your CapEx mix. Secondly, if I could just come back to and expand on the earlier point on cash flows. I think Filipe, you've tended to refer in the past to the embedded cash flow hedge, the minority dividend stream to Sinopec in Brazil brings in particular.
We've probably not seen that yet in the first quarter owing to the time lag. When we look forward to the second quarter and beyond, could you just elaborate on the duration attached to each of the key cash flow time lags that have weighed on Q1, particularly the Sinopec payment and cash taxes, and whether any of them extend into Q2 and beyond. Thank you.
Hi, Matt. Good morning. I think good question. They are quite related, but I let the floor to Filipe to address those questions. Thank you. Keep safe.
Matt, if I understood your question was on the Brazilian distributions to Sinopec and how that interrelates with our CapEx cuts. Is that correct?
Yeah. The first question, Filipe, is the extent to which you can manage or mitigate medium-term production in the context of the CapEx cuts that you've implemented for 2020 and 2021. In other words, the extent to which those CapEx cuts could impact not 2020 production, but when we think about 2021 and 2022, absent of operational uncertainties, I put them to one side. Then secondly, the duration of the time lag on the cash flows related to both the Sinopec payment and the cash taxes. Thanks.
Got it. Given where we are at Galp, as you know, we can cut CapEx big time without compromising production over the first few years and until 2023, 2024. That's just the way where we are in the cycle. We have most of our CapEx going to growth CapEx, i.e., new projects. Most of Brazil is getting completed. It's a recent portfolio. Brazil was starting to have much, much lower CapEx before Bacalhau kicks in. Mozambique was delayed, as you know. It just so happens that from a production, we are going to ride the wave of past CapEx for quite a while until we have differences in production profile. As you know, Galp does not need to replenish reserves anytime soon.
Given our production profile. Yes, some of the CapEx we're cutting is also related to Brazil. We won't go into details, but a lot of it is Mozambique-driven and some in Iberia as well. We would expect the ability of distributing out of Brazil to remain relatively strong for the foreseeable future . Thank you.
Thanks.
Thank you. I take our next question, and your next question comes from the line of Jon Rigby. Your line is open.
Oh, hi. Yeah, thank you. Two questions. The first is on Brazil. If you look over the next nine months, obviously you're also, I guess, somewhat reliant on contractors supporting Santos operations. I just wonder whether you could elaborate on whether there's any new wells, workovers, or planned maintenance on any of the FPSOs due over the course of the nine months that might be compromised as a result of COVID. The second question, just to go back to the option that you cashed in on the Brent contracts, what was the genesis of that? Why were you carrying that derivative in the first place? Thanks.
Hi, Jon. Good morning. I will let the first question to Thore, and try to answer to the second one. The derivatives that we have, basically, it makes part of our risk management program. It's a kind of insurance. We have set up this based on our assumptions that was released to all of you. We were expecting $60 plus /bbl across this year. At the same time, we have buys and puts in order to protect ourselves at very cheap below a certain level of oil prices. What we have analyzed, these puts across the time, we lose money, we lose value. During this process, we have realized that this could be an important moment to cash in and to increase the cash position of the company.
Contrarily to the insurance program that normally these should be used, it is one-off decision that we have taken to reinforce our cash position. Thore, can you help me on the first question? Thank you.
Thank you, Carlos. Hi, Jon. What I can say is that, I alluded to that in my previous intervention as well, actually, is that we are minimizing maintenance activities to really focusing on safety and production, to try to reduce the exposure versus COVID-19. So far that has been worked out well, so it is no major impact on our operation. Actually, as a matter of fact, in Mozambique, in connection with the Coral project, we had drilled six of the top holes, but decided to postpone the remaining of completing those wells until next year, which then leads to saving this year and is then reducing also the possible COVID-19 impact on it. This has been an ongoing effort to try to optimize operations. Thank you.
Just to round up, it's fair to say you're trying to minimize the reliance on third parties through this year?
I would say it is more that you're trying to optimize operation and reduce exposure as much as possible. It is not per se a desire to minimize the usage of third parties, but it's a question of reducing risks related to the operation. That implies as well, actually, that some of these operations that are non-critical, they are being delayed also because of the focus on cash preservation in the sort of turbulence that we are in right now.
Right. That makes sense. Thank you.
Thank you. I take our next question. That comes from the line of Raphaël Dubois. Your line is open.
Hello, this is Raphaël Dubois from Société Générale. Would like to come back one second on the put options. Can you give us a feel for the sort of oil price at which you unloaded those products? Just to make sure I got it right, were those products initially supposed to be unloaded more smoothly over the year? Was it purely opportunistic to unload them in one go?
Bonjour, Raphaël. Good to listen you. As I'm trying to explain to you, this makes part of our risk management strategy. This is more like an insurance program to protect our position in global hedging strategy. This is one-off initiative, and it was related to this market volatility. We didn't mention, for instance, that we are in a contango position in the markets. We have several initiatives that we have set in place, contango related, that we will capture in the coming months, not only Qs, but months. Logistics today and tank farms today is a luxury. Effectively it was one of initiative. Thank you.
Thank you.
Next question please, operator.
Thank you. We want to take our last question, sir. Your last question comes from the line of Jason Kenney. Your line is open.
Oh, hi there. I just wanted to say thanks to Galp for all the commitment you've put into Portugal for the frontline workers in particular. I noted some of the press commentary on that, very supportive of what you've been doing inside Portugal. I do have a question on the new commercial division. I know in the trading statement you're splitting out volumes oil versus gas versus electricity. I'm trying to get a sense of where the margin split will be on a normalized basis. I know we're not in a normal period at all. It's obvious that we want to focus on the renewables business going forward. The way that the divisions have been reset will help us understand the contribution of renewables.
In commercial, I think the three different volumes, oil, gas versus electricity, is still difficult to understand how best to model that, really. Secondly, on the liquidity position, EUR 2.6 billion I think you mentioned. How much of that is undrawn credit facilities currently, and will you be looking to extend your debt and that liquidity position at similar levels going forward, please?
Hi, good morning, Jason. Good to hear you, and thank you for your sympathy. I will address the first one, the first question. Filipe will go throughout the second one. The commercial division has been set up based in a way that we can have a one-stop shop for all of our customers and consumers. The way we optimize the business in any case is in an integrated way, I think. Independently of where the margin is placed, we always take in consideration the global Galp optimization. That said, of course, and we have referred the cases of renewables, and we have referred the cases of the gas. Our native markets are the regional markets, and clearly the optimization between, for instance, the sourcing of these markets has to take in consideration looking at the full entire supply chain.
There is a role play in every single business line that is quite important to guarantee that at the same time that we are doing our commercial activities, not only in Portugal and in Spain, but overseas in Africa, we are doing it maximizing the value for the company. Sometimes you will see part of that in the commercial terms. In the commercial P&L. Sometimes part of that is also related with the midstream activities. In any case, the internal transfer price, that is something that we don't speak about because makes no sense. It's always market related. It's in a way that we guarantee that we are optimizing our commercial activities. Like we have today in our refining activities. Effectively, the decision to buy or produce, it's based on arm's length approach.
The way we sold locally, regionally, or internationally is always based on value optimization driven and on an arm's length basis. I think the best explanation for that is that you see very few cargos we are processing in our refining system due to the fact that we are able to maximize the value by selling in the international markets instead of processing in our refining system. It's basically to give you the idea that the main point is guaranteeing that we touch the consumers and clients and customers, in an integrated way, which is important. That we can have a portfolio that optimizes and that amplifies the cross-selling. That we can have a single contact point with our clients in a way that we can provide a better service to all of them. Filipe, liquidity, please.
Jason, on our slide 17, you have the split of what is cash and what is undrawn credit facilities. EUR 1.485 cash and EUR 1.16 undrawn credit facilities. You are absolutely right, investors and creditors now should be focusing on financial resilience, liquidity, and balance sheet. On that front, if you look at our operations, we're not bleeding even at these levels, which shows how competitive our portfolio is. More than looking at changes in net debts, at the end of the day is where you see who is generating cash and who isn't. EUR 2.6 billion overall liquidity. We're working on 2021 redemptions, so that would be debts to substitute older debts.
Okay, many thanks. Maybe just one follow-up on the commercial division, if I may. Is there likely to be any seasonality in that earnings profile for that particular division that we should be thinking about?
Jason, during the 2Q, it will be quite hard. As I mentioned to you, we are still revising the numbers, so it's still soon to see that. It depends how the market demand will rebound. Our previous guidance to all of you, it was between EUR 400 million and EUR 450 million pre-COVID-19. The 2Q, it will be challenging. I think it is too soon. We will have to come to all of you possibly early in June or so, or July, I don't know. July, at least, during the 2Q presentation. As soon as we will have a more clear view, we will come to you and share our short-term views. Thank you.
That's great. Many thanks.
Thank you so much.
Thank you, all. That concludes today's call. Please call the team if you have any further questions. Have a great day, and keep safe.
Thank you. Ladies and gentlemen, that does conclude our conference call today. Thank you all for participating. You may now disconnect.