Ladies and gentlemen, thank you for standing by, and welcome to the Galp third quarter 2019 results and strategy update. During the call, all participants will be on a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question during this time, you will need to press star one on your telephone keypad and wait for your name to be announced. I must advise you that the call is being recorded today, Tuesday the 22nd of October 2019. I shall now hand over to your speaker for today, Mr. Pedro Dias. Please go ahead.
Good morning, ladies and gentlemen. Welcome to the conference call for Galp's third quarter of 2019 results and strategy update. Carlos will go through the presentation. We will be available to take your questions at the end. Filipe and Thore are also here with us today. 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, Pedro. Good morning to you all. Thank you for attending to our call of our 3Q results and strategy update. Today, I will start with a reference to Galp's recognition for the eighth year running as an industry leader for the Dow Jones Sustainability Index. Galp ranks number 1 in Europe, ranking thirdly globally. This is a result that encourages us to continue to pursue the best practices in our activities. Of course, I'm grateful to see our team and our strategy recognized once again. Now to the results. Starting with the free cash flow, which was solid during the first nine months and already covered the full year dividend distributed to Galp shareholders. We think that we could comfortably meet the guidance we provided you with earlier this year.
I will go through the performance of our divisions. I will start with downstream on slide number five. During the Q3, we performed the planned maintenance in our Sines crude distillation unit, as we have anticipated to you. We used the opportunity to implement additional energy efficiency initiatives, which are part of our additional EUR 1 per barrel program. We are now already able to capture EUR 0.70 per barrel in our refining margin. We also had an upset during September, driven by a lower than expected utilization rate in our conversion units. The units are now running in normal conditions. September throughput and refining margins were affected. You saw that in our results. Considering the lower than expected performance year to date, we may stay slightly below the anticipated EUR 4 a barrel margin for the full year.
October margins have been, until now, between $4 and $5 per barrel. We see upside potential from the pre-IMO period, which is upon us. On this matter, Galp is fully prepared to supply compliant fuel according to the IMO specs. Oil marketing and gas and power provided, once again, I emphasize solid results, maintaining its important and resilient cash contribution. During the quarter, we have established PPA, which is the power purchase agreement, correspond to around 10% of our current electricity sales based on renewable solar photovoltaic generation projects. This is part of our strategy related to our power business integration, aiming at providing our clients access to efficient and environmentally sustainable energy solutions. Moving to upstream on slide six, you see that working interest production was up quarter-on-quarter, benefiting from the ramp-ups in Brazil and Angola.
In Brazil, we have one more unit at plateau, only 10 months after its start-up in Lula Extreme South. In Lula North, the unit number 9 is already ramping up nicely. In Iara, the FPSO number 10 for Berbigão and Sururu is expected to start production in about a month or so. We are currently producing around 130,000 barrels a day. Under normal circumstances, we could get to or even beat the high end of our full year guidance that we have provided to you in a range between 8% and 12% growth year-on-year. On forthcoming projects, we have an additional unit for Atapu, the FPSO number 11, and another one for Sépia, the 12th FPSO, which are expected to see first oil in 2020 and 2021 respectively. Still on pre-salt exploration activities, the high-potential Uirapuru wildcat is expected to be spudded before year-end.
On Mozambique front, construction of the Coral South LNG is progressing according to plan. Importantly, key EPC contracts have been awarded for the first phase of the large Rovuma onshore project to allow us to advance the preparatory work ahead of the project's final investment decision in the first half of the next year. First gas for Coral is expected for 2022 and 2025 for Rovuma onshore. On slide number eight, we can see the results. Group EBITDA was EUR 690 million in the quarter, down year-on-year, driven by lower contribution from refining, which more than offset the stronger upstream performance. Net income was considerably down year-on-year, driven by refining and non-cash entries below the line. Here we have currency translation adjustments related to IFRS 16 lease obligations in Brazil and mark to market of derivatives to cover natural gas prices risk.
On cash flow on slide number nine, you can see that year-to-date free cash flow amounted to about EUR 700 million, covering the full-year dividend payments to Galp shareholders. This was supported by the robust operational contribution with net CapEx amounting to EUR 564 million. Where the CapEx for the full year should stand below our previous guidance that has been provided to you of around EUR 900 million. This cash generation continues to support our strong financial position with the net debt to EBITDA standing at 0.8 times. I will now go over the strategy update, starting by slide 11. The capital allocation guidelines are consistent with our trajectory. We will primarily focus on very selective investment program, not only in the upstream, but all across the energy value chain.
We will pursue the integration with lower carbon energy solutions, allowing to adapt to customer needs and reducing our carbon footprint. We will continue value-driven company and sustainable long-term growth. Doing this, at the same time, rebalancing growth investments with a progressive shareholders distribution. On the CapEx side, we will be focused on extracting additional value from our large and promising asset base while exploring new value opportunities around it. This means developing our outstanding upstream portfolio and continue to optimize efficiency, costs, and recovery rates. Any portfolio addition would be to maintain or to enhance our differentiated upstream value proposition. On Mozambique LNG projects, we will, of course, and this project has a key role in increasing the weight of the gas in our portfolio. We are also increasing our commitment to low-carbon power generations.
We are gradually developing a renewable power generation business, which will provide a natural edge to our commercial business. All in all, equity investments in renewables and also in new businesses should account for 10%-15% of our net investments in the coming years, provided project returns are according what we expect. On the downstream, the plan is to further improve the performance of our midstream and commercial activities. In refining, we will continue to increase the competitiveness, efficiency, and suitability of our system in line with demand patterns and regulatory changes. These are primarily incremental projects. Larger potential projects may be considered if and when, and only when we get confident on the sustainable value creation to Galp.
Required returns from this project should rank competitively with other portfolio projects. On the downstream, we are progressing on building a natural gas and LNG portfolio, which could be leveraged by our Mozambican equity gas production. On the commercial side, we intend to grow and leverage on our Iberian client base with an integrated offer where the client is at the center of our strategy and organization. We are currently reshaping our multi-product organization to that purpose. Over 40% of our planned net CapEx is meant to capture the opportunities coming from the future energy demand patterns while reducing our carbon footprint. Our priority is to create sustainable value across all businesses and increase portfolio resilience for the next decades. Project returns will, of course, vary considering their characteristics, namely size, risk profile, and financing structure.
The competitiveness of our future investments will remain aligned with the group's ROACE targeting of 15%. We also keep our commitment to remain below two times net debt to EBITDA and would rotate existing assets, if required, to create space to fund inorganic opportunities. Now on the shareholders' distribution. We are now targeting a dividend per share increase of 10% per year for the next three years. This underpins the confidence we have on our plan resilience. CFFO on slide 12, you can see that is expected to grow at an average of 8% per year up to 2022, even though it should be more front-loaded. This is very much in line with what we had guided before, even if we are now assuming lower refining margins going forward.
During that period, and we are focusing the next three years, net CapEx is expected to range between one and EUR 1.2 billion per year on average. This includes room to accommodate now the largest member trains and/or buy versus lease decisions for upcoming FPSOs and new projects on top of our organic base. Around 70% of our investments grow our company, the benefits of which to come beyond the presented timeframe. To conclude, I would like to retain the key message that you can find on slide 13. Galp has a unique and distinctive asset base, highly competitive and resilient to different macro conditions. This is our unique profile. Our commitment is to continue to reinforce our portfolio to generate sustainable growth for the long term, being part of the ongoing energy transition and gradually reduce the carbon intensity of our activities.
We will be selective in additional investments, those will be contingent to attractive returns and to meeting our commitment to keep a strong balance sheet. We will continue our differentiated investment to grow the company balanced with a competitive shareholders' return, assuming now a 10% annual increase dividend per share. We are now happy to take your questions. Thank you.
Thank you very much. Ladies and gentlemen, we will now begin the Q&A session. If you wish to ask a question, please press star one on your telephone keypad. Please be advised that participants should limit themselves to two questions to begin with to ensure everyone gets their question answered. Our first for today is Biraj Borkhataria from RBC. Please go ahead.
Hi. Thanks for taking my question. I have one for Thore and one for Carlos. On Brazil and the ramp-up at Iara, is there any reason that the latest FPSO, the pace of the ramp-up would be different to the 10 months you achieved in the latest one at Lula? The second question is for Carlos. In the context of your capital allocation and shifting towards gas, what are your latest thoughts on Transfer of Rights and doing more in Brazil? Obviously, it would probably be higher return, but it doesn't tick that transition box. Any thoughts on that would be appreciated.
Hi, good morning, Biraj. Thank you. I will take the second question as you asked. Effectively, we are looking at Brazil and carefully analyzing the bid rounds for coming. We have what we can say, a kind of an insight in some of the areas, namely the ones where we are already. This is a very competitive round, and with demanding terms and conditions, as some of industry players already mentioned. We are looking to this very carefully. We will keep our financial discipline, even though, from the strategic point of view, it makes all the sense. The terms and conditions are really demanding. That's what I can comment to you. I will pass now to Tor.
Thank you, Biraj. What I can say is that in our plans, what we have used in Galp, we're using 15 months for the ramp-up. You are very correct on pointing out that for the latest FPSO, actually, we reached plateau in 10 months. There might be a slight opportunity for some improvement on the next FPSO going to Iara Berbigão and Sururu more specifically. That is not what we are factoring into our plans. We stick to our 15 months as the base case for it, and then we work hard to do it better.
Thanks very much.
Thank you very much. Our next question for today is from Flora Trinidad from CaixaBank . Please go ahead. Flora, please check that your line is not muted, as we can't hear you. I think we'll go to our next question. Flora, if you do have a question, please press star one again. The next is from Thomas Adolff from Credit Suisse. Please go ahead.
Good morning, good afternoon. First question is on production and the realization in upstream. I noticed your realization in the third quarter improved a little bit, from a discount of $7.80 to $7.30. I wondered whether you are starting to see realizations improve on your medium sweet crude from the Lula field. Secondly, just on your statement on production, currently at 130,000 barrels per day. Where can production go to once FPSO number 9 in Brazil and Kaombo Unit 2 both are at plateau production? Finally, just coming back to the point you made earlier on terms and conditions as far as the Transfer of Rights is concerned. In your presentation, you've highlighted that your aim is to keep a group ROCE, return on capital employed of about 15%. When we consider Mamba LNG , that isn't going to generate a 15% return.
That was stated by one of your neighbors in Mozambique. I wondered whether the Transfer of Rights opportunity actually meet that 15% threshold. Thank you.
Thomas, good morning. I will take the two of the questions, I will let the production for Thore. In terms of realization price, we have in the past continuously highlighting that we did see Lula medium heavy sweet grade to increasing their valuation in the market as the IMO were approaching. Effectively, what we are observing is that Lula is clearly trading today above Brent. We see still room space to continue to increase that trend. In what respects to the return on capital employed. Effectively, new additions to our portfolio has to be consistent with these targets. You have mentioned specifically Mamba LNG. I will not enter in details, but I only can tell you that I don't review myself on the comments that you have mentioned, whatsoever.
We are looking at Mamba LNG as one of the most competitive projects around the world from itself, and we are comparing with U.S. green field or brown field projects, and in addition with the location. I think that Mamba will clearly contribute for this return on capital employed over time. More important, you should also bear in mind that there are some common facilities that are being developed today that will be used and shared by future trains. All in all, we are confident that Mamba will play an important role in this. Passing to Tor, but not before saying to you that for the realization price is also important, not just the quality of the Lula, but also the liquidity that is increasing in the market. Both together, they are really contributing for that.
I will now pass to Thore to speak about the production.
Thank you so much for your question. We will come back to you with a more precise update in the beginning of next year when we have our fourth quarter outlook with respect to production and what sort of production target we can go for the next period. We are in the midst of the process of now consolidating the numbers, putting them together. I will be a little bit careful today to be too firm on it. What I can say is that on days where things are going really well, we now have a production capacity that gets very close to 140,000 barrels per day. This is operation, and things are not always going well every day. That's not what it is.
There will be continuous effects that you know you need to factor in, and as you know, in our plans, we expect a production efficiency in the order of around 90%. We will come back to you with better numbers and more precise numbers in February/March.
Did you say 140 KBD, just to clarify? On good days.
Yes.
Okay. Thank you.
Very close. Yes.
Okay. Thank you.
Okay.
Thank you very much. We have Flora back from CaixaBank. Please go ahead, Flora. Your line's open.
Yes, hello? Hello? Hello?
Yes, Flora. Can you hear me?
Yes. Sorry, I have some technical issues here. On the EUR 1.2 billion limit of CapEx you mentioned, I assume this is an internal limit, so you won't go beyond this, because you mentioned assets rotation as a possibility. Can you just give us an idea of what kind of assets could be in this list for rotation? Also, if you can just clarify, I assume you are not telling us whether you will go for the ToR plus bid or not, I will skip that one. Just wondering if you could just give us an idea of what kind of renewable energy businesses are you looking at. I assume it's greenfield, can you just give us some color here? You just mentioned the potential CapEx, can you give us details on technologies and locations? Thank you.
Okay, Flora, thank you. Trying to answer your questions with a single answer. Effectively, our CapEx location is on average within that range. We will not see anything on average, first, and secondly, we are not seeing any chance to overpass that level, to be above the highest, the right side of the range. That said, how we will split and what are the main considerations that we should take on going forward. I have already mentioned the ToR, so I will not comment more. It's undergoing process. The only thing that I would like to emphasize is terms and conditions are demanded and demanding, and we will always look at value over any volume or other variable decision. In terms of the new transition or the renewable, we are looking preferably to solar PV, but not disconsidering other technologies.
We are not excluding, for instance, wind or any other technologies. Clearly our primary focus will be solar PV, where we are already developing a set of internal projects in Galp that will play an important role on edging and complementing our power business that clearly is without no power production. We are speaking about greenfield projects, so mainly in this case. Looking for the most important assets that we have to develop internally, and that also will play an important role for the energy transition, clearly is our Mozambique and gas project. That will take an important part of this CapEx. Of course, another portion is related with Carcará. Carcará is the new kid in town, if you would like to say that. That will have us involved and actively work on for the next coming years. Still different stages.
The stage 1, which is in development concept, is progressing quite well with some decisions recently taken towards that project. Second phase, still in early stage, and we have to work more in detail. Carcará is another relevant project. Finally, a word to say that we are clearly committed to cost reduction and to increasing on recovery factors by using different techniques that we have already shared with you many times. To clearly extracting more value from the existing set of assets is something that is for us important. At the same time, we are putting new units under production in Iara Field, in Sépia, in the coming years. That's what I have to say to you. Thank you.
Thank you very much. Just on the assets rotation, I don't know if you can just share your thoughts on what could be included here.
Flora, as you may understand, we are not commenting on possible divestments. We'll speak about real things and nothing that is hypothetical. The only thing that I think it is important for all of us, is understanding that our commitment for organic, and if any inorganic projects will come, is to stand within this range. We will consider at time, and based on real opportunities and the returns, alternatives to take decisions. Thank you.
Okay. Thank you, and apologies for the technical issue.
Okay, thank you very much. Our next question for today is from Jason Gammel from Jefferies. Please go ahead.
Yes, thank you very much. I just had a couple on the downstream, if I could please. You made the comment during the presentation that Galp was going to be fully prepared to supply compliant bunker fuel for the new IMO regulations. I was wondering if you could reference that to the fuel oil production during the third quarter that was 18% of your yield, and how much of that would currently be compliant with IMO standards. The second, and I think closely related question, is that your crude slate during Q3 was 91% medium and heavy. How much flexibility does your distillation capacity have to lighten up that slate if the economics of fuel oil relative to diesel were to really close on that heavy fuel oil?
Jason, good morning. Thank you for your questions. Effectively, we are really prepared for compliant fuel oil, that we will start to supply the market during November month. You have also to bear in mind that during the third Q we were in a special operating mode with our crude distillation unit under a stoppage, and therefore, it's hard to take conclusions for the yields that come from that. Flexibility and yields, the two points that you have mentioned. Starting by the flexibility. We have been using more medium-heavy sweet crudes rather than sour, due to the fact that sweet crudes were very competitive comparing with the sour. The reason behind that is the fact that the sour crudes were not discounted as previously anticipated. They were, one can say, more expensive than it should to be more competitive with sweet.
We still have some flexibility. We have between 20% and 30% to increase our sweet in our crude basket diet. In average, you can consider that we stand between 60%-70% sweet, and 30%-40% sour going forward. In what relates to yields, we have flexibility to produce compliant or high sulfur fuel oil content. Here, the decision, which will be based on a pure economic approach, and therefore, what we are preparing ourselves is to have flexibility to use the different feedstocks to allocate them to one or to the other, or to both, according the economics. I hope this clarifies your question. Thank you.
Yes, that's very helpful. Just a quick follow-up, please. Are you actually seeing demand for low sulfur fuel oil already in the market yet, given that we're getting pretty close to the end of the year?
The answer is yes. There's plenty of demand in the market, and we do see for the coming years that demand will decrease, but it will stay over there. Again, our decision, it will be based on pure economics. We will tend to use more conversion and desulfurization or less, depending on the economics.
Very helpful. Thank you, Carlos.
Okay, our next question for today is on the line of Giacomo Romeo from Macquarie. Please go ahead.
Hello. Thanks for taking my question. Just two very quick ones left for me. The first one is back to your 10%-15% investment in renewables indication. Just wondering if the focus over this will be Portugal or the broader Iberian Peninsula, or if you will be considering investments outside of Europe, whether when you talk about the 10%-15%, you're looking at levered or unlevered. The second question is just back to the concept of asset rotation, given that we haven't seen any asset rotation from you in the recent years. Would this happen above EUR 1.2 billion as a sort of to make sure that you remain within that financial constraint. How would you consider the rebalancing of the portfolio? Is it driven by exposure to type of hydrocarbon rebalancing of regional rebalances?
Just want to understand a little bit more in terms of what is behind this statement.
Hi, good morning. Giacomo.
Yeah.
Thank you for your question. From the renewables point of view, simple and straightforward, we will start where we have our client base, we will start in Iberia. This is levered CapEx. I think if there is a strategic advantage, it's precisely to increase our upstream of the electricity precisely where we have already a relevant base of clients. You have also addressed the asset rotation. We have done few but small assets rotation in the recent years. The biggest one was early in this decade when we have divested 30% on our Brazilian subsidiary. The reason why for doing that was to ensure that we will have the full resources to develop the amazing assets that we have at that time.
We didn't done many assets rotations because we do think that we are the best owners for the time being on the assets that belongs to our portfolio. Going forward, effectively, we cannot limit ourselves that we will only do assets rotation if we will go beyond 1.2. It depends. What is our commitment is we will keep within the range of a net investment between one and 1.2 maximum. If that implies assets rotation, we will do it. If we will do it, is because we do see more value for the company going forward than with the existing portfolio. I hope this answers to your question. Thank you.
Yeah. Understood. Thank you.
Ladies and gentlemen, just as a reminder, it's star one on your keypad if you wish to ask a question. The next is from Michael Alford from the City. Please go ahead.
Yeah. Hi there. Thanks for taking my question. I've just got a couple, please. Just firstly, on the cash flow growth target of 8%, 2018 versus 2022, I just wonder whether you can give us some underlying assumptions as to how you see cash taxes evolving. I'm assuming that's partly the reason for why you see a little bit more front-end-loaded cash flow growth in the guidance. I guess if you could maybe relate to that, what's the spending levels you're expecting, particularly around Brazil, I guess, to get us to that cash tax number? That'd be my first question.
Secondly, on the downstream, I appreciate you mentioned that the larger potential investments you are doing more work on. I was wondering whether you can give a little bit more color as to what type of projects you are thinking about, what could be the strategic nature of those in order to get more sense of the central CapEx involved. Thank you.
Michael, good morning. Good to listen you. I will ask Filipe to go throughout the cash flow and the spending level. I will take the CapEx question. Effectively, I've mentioned that in the downstream we might see inorganic CapEx. What I can tell to you is that until now, we have been analyzed several options for optimizing our refining system and to make it competitive and adequate to product specifications. We have rolled out some of those projects. We don't have a specific when. What we are looking at is how we can deepening and extracting value from our midstream, increasing our conversion and increasing the quality of the products and the valuation of the products, that we have in our midstream system. We are still analyzing feasibility and expected returns, and I don't think we will have anything close by in the next year or so.
We have just considered, because it's a three years plan, and within this time frame it might appear, but we don't have a specific one now to consider. I will now pass to Filipe.
Hi, Michael. In all likelihood, this is to answer why is it front-loaded, the cash growth. In all likelihood, 2020 will be a very good year for us, given how much equipment we have been deploying over the.
quarters. Production has a significant increase next year. We also had a pretty tough refining environment during 2019. We would expect 2020 to be much stronger also on the downstream front. Taxation does not really play a role in this. We're still looking at overall cash taxation of mid-40s% on a cash basis going forward. Thank you.
Great. Thanks to you both.
Okay. Our next question for today is from Joshua Stone from Barclays. Please go ahead.
Thanks. Got two questions, lastly. One just for CapEx for this year. It seems to be trending a bit below where we thought, so want to clear up this, is where you think 2019 CapEx will end up. A follow-up on the refinery investment. Appreciate you're not looking to make a decision within the next year, but what do you think a likely budget that could be attributed to that, or the sorts of things you're looking at? How big would we be looking? Thank you.
Hi, Josh. Good morning. What we have for this year, and you see part of this CapEx guidance for 2019 being below what we have appointed. As to do one of the elements is precisely with our Mozambican projects, that the FID will only be taken in the next year. Therefore, part of that is a delay. This rolling up CapEx spending. Mamba is a CapEx that has to consider not only the full upstream activities, but also the midstream and all the common facilities. We do see Mamba rating in terms of global CapEx in the mid-$20 billion. Being competitive, as I mentioned to you, a competitive project. The other projects or the other CapEx is more allocated to refining. We still have some maintenance refining and also some downstream activities.
Which we should bear in mind that typically when we put midstream with commercial activities, we should spend on average between EUR 250 or so million a year. Effectively, Mamba, Carcará from one side, our downstream, together with the midstream in the other, and accelerating our renewable projects, gives you a global perspective of what we will spend in terms of CapEx for the year to come. Thank you.
Sorry, if I could just quickly follow up. Just for 2019 CapEx as opposed to I don't know if that was for next year. Is there a budget for this year? Thank you.
2019, as I mentioned to you, it stands below EUR 0.9 billion.
Okay, great.
the number that we are working with.
Thank you.
Okay. Thank you very much. The next question is from Irene Himona from Société Générale. Please go ahead.
Thank you very much. Good afternoon. My first question on the three-year plan. If you were to run the numbers using not $65-$70 Brent, but let's say $10 lower, $55-$60, which is what we are looking at right now. On the same CapEx, on the same dividend commitment, how shall we think about the CFFO growth? What happens to the 8% growth and net debt to EBITDA ratio? That's my first question. My other question is specific to Q3 Upstream. Firstly, unit production cost in Q3, excluding IFRS, and $3.30. Can you just remind us of your guidance on the new basis of those unit costs in the medium and longer term, please? Also in Q3, I note E&P net income from associates crashed from $17 million the quarter before to just $3 million.
Was that just the price effect, or was there anything else in there? Thank you very much.
Hi, Irene. Good morning. I call your attention for slide 12 in what CFFO relates. You see that we have done a kind of a sensitivity analysis. You see that there is for a $60 a barrel decrease in the CFFO. One can consider that instead of 8%, we can have a 6% growth in rough terms, CFFO increase. I think that responds to your question. You see that the margins that we are using, and we have also here, this CFFO is net of taxes. Therefore, there's more flexibility on that. In terms of production costs, we have two effects here. Just to simplify, and Tor can complement me if needed. We have two units ramping up in Brazil, and therefore, the dilution costs have clearly increased, which means that the operation costs are decreasing. That's effectively one of the key elements.
Another one has to do with reserves review of 2018, that we have saw our reserves increasing, therefore, from the technical cost point of view, this is not only OpEx, I'm speaking now about DD&A, that's ending the technical cost. That also allow to dilute the same CapEx for more volumes. From the DD&A, we also see a decreasing. All in all, OpEx plus DD&A, which ends in technical costs, are clearly impacted by those two elements. You have also the opposite in Angola, which is less contributive, because we have two units in comparable basis that we're ramping up. One is already at plateau, the other, Kaombo South, is still ramping up. Which means in comparable terms, we have more costs in the system, therefore in Angola, up to the stabilization at plateau level, we still see some increasing.
Once we have full production, the dilution will come, and it will apply the same that I have mentioned for Brazil. I don't know if Thore would like to complement.
Just for the I think the second part of your question was on the outlook. When it comes to the outlook for production costs, expect that to be around about where we had in third quarter. We will continue to benefit from the ramp-up effect. On the other hand, there is currently in the plan, somewhat more workover work that is planned for fourth quarter. This around $3.3, $3.5 per barrel should be a sort of good guidance for the fourth quarter. Thank you.
Thank you very much.
Our next question for today is from the line of Matthew Lofting from J.P. Morgan. Please go ahead.
Afternoon, gents. Thanks for the presentation. Sticking to the points around capital allocation, when I look back at the last couple of years, the dividend increases have also been around 10%-15% as a range. It's probably questionable how relevant a benchmark that is as Galp enters something of a fresh cash cycle 2020 and beyond. Can you discuss and help us to understand how the 10% CAGR has been calibrated to 2021? Secondly, given the sort of the planning deck around long-term $70 Brent and also higher refining margins, can we expect that Galp can prioritize that 10% dividend growth also under lower macro scenarios? Thanks.
Hi, Matt. Good morning. From the balancing between dividend and the capital allocation. First, we should bear in mind that Galp continues to be a growth company, growth for value. Therefore, we still are in one of our phases of continuing to add projects to our portfolio that will bring value for this company in the next decade, all over the next decade. That said, how did we get the dividend target that we have announced today and has to be subject to shareholders' approval? We have looked at a balance growth in terms of what is our cash flow generation, and what is our dividend increase. You see that are quite in line. We are speaking about a CFFO growing of around 8% per annum and a 10% on dividend growth. It was one of the key rationales without any major considerations.
Of course, keeping a strong balance sheet, keeping our financial discipline, and ensuring that we will allocate that CapEx to value-created projects. All in all, and try to simplify a more complex analysis, I would say it's a balance between CFFO and dividend growth. I will pass now to Filipe to take the second part of your question.
No, Matt, I would just add that dividend visibility is quite high, even on the very adverse macro scenarios. If I go back to slide 12.
You see how insensitive our cash flow from operations would be with the different Brents. Again, we have an integrated portfolio, so the refining and the downstream tends to do better in a lower Brent environment. You also have taxation plays a big role in the upstream. If Brent prices come down, there's a very significant cash outflow that will not be around. Same for working capital, also very positively sensitive to declining Brent prices. Yes, we see cash flow from operations resilient over the next few years, and that should not jeopardize our dividend policy. Also, bear in mind that we have a very significant minority in Brazil, where most of our production comes from, and our minorities would take a similar hit on their dividend distributions and share the pain with us in an adverse scenario. Thank you.
Thanks very much.
Our next question is from the line of Alwyn Thomas from Exane BNP Paribas. Please go ahead.
Hi. Morning, guys. Just a couple of questions left from me. Firstly, I just wanted to get a quick update on where the unitization process is with Berbigão-Sururu, and whether we should expect that to happen before production starts up at the end of the year. Secondly, just coming back to CapEx and budget, specifically on the exploration budget. Firstly, your take on how much you expect to spend on exploration each year and whether, given the projects you have in the portfolio, your plans to be part of the energy transition, should we expect exploration spend to gradually step down on that basis, particularly in frontier areas? Thanks.
Hi, Alwyn, good morning. Just to say good morning, really, because I think Thore is keen to answer to your question.
When it comes to the unitization process on Berbigão-Sururu, we do not expect that that will be finalized this year. We're looking for this to be accomplished during the course of next year.
Exploration.
Yeah. On exploration, yes, we are not giving any guidance when it comes to sort of exploration spend. What we have, and as Carlos also highlighted very much in his introductory remark, we are very excited that we are going to spud Uruaçu-Puru now in this quarter. That is, for us, was a very sweet win in not that recent, or quite recent Brazilian bid round. Very excited to spud that. Then we continue to mature our positions in São Tomé and Príncipe and in Namibia. We might spud our first well in São Tomé and Príncipe towards the very end of next year, beginning of 2021. Thank you.
Okay, thanks.
Thank you very much. As a reminder, it is star one for any questions. The next is on the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead.
Hi. Good afternoon, everyone. Most of my questions have been answered, but I had a couple related to slide 12 once again. Looking at that, it does feel like the cash break-even for the dividend right now for the next three years is around $60 a barrel or $5.5 to $6 per BOE on the refining side. Just wanted to confirm again that whether should the macro be significantly lower, either on the oil price or on the refining margin, you would probably be looking to raise debt now to cover the dividend or increase your net debt levels, or will it come at the expense of CapEx? Just following up with the same slide again, does this strategy effectively rule out a chunky disposal of any cash-generating entity, be it in the upstream or the downstream? Thanks.
Good morning, Sasikanth. I think in the slide 12, you see that, yes, you're right, and we have a relevant part of our CapEx that is allocated for growth. That reveals in which side we are and what are the framing of the topology of our CapEx location. In what relates to the divestments, I have already mentioned that to Flora previously. We cannot comment on which kind of assets specifically we will consider. What we have to look at is, based on real and tangible situations, we have to look at those that are better fitting our portfolio, and decide at that time. You might anticipate one or the other, because I have already mentioned that in the past. We have then in the recent years some divestments, namely in regulated assets.
I prefer not to enter in comment on the divestment problem, which we don't have, and that has to be solved at the light of the value creation for the company. Thank you.
Thanks.
Thanks very much.
Thank you very much. Our next question is on the line of Christopher Kuplent from Bank of America. Please go ahead.
Thank you very much. I think these are all just confirmatory questions, I think. If you wouldn't mind, can you remind us why exactly you've chosen this new refining margin assumption into the 2020s? What's changed in terms of your outlook? I think your oil price outlook hasn't changed, the $70 you'd mentioned before. Then, another go and ask you about your CapEx. Can you perhaps tell us how much has been committed already? We obviously are aware of a number of very important growth projects. As you already said, there is refining, there is chemicals. I'm guessing that a lot of that EUR 1 billion-plus a year has not been committed yet. Any light you can shed on that, please. Thank you.
Good morning, Christopher. Refining margins, our looking forward, what has changed? As the IMO is approaching, we are fine-tuning, and we are looking at sweet-sour spreads. We are also looking at the different cracks, mainly the middle distillates and also the very low sulfur fuel oil that is now pricing above Brent, which is almost surprising. Therefore, we have reviewed our assumptions downwards in what respects to refining margins due precisely to this effect. Previously we were addressing, or we were guiding, between EUR 6 and EUR 7 per barrel. Now what we think is could stand slightly below, between EUR 5.5 and EUR 6. That's what it is in the footnotes in Slide 12. This is the basic assumption. By the way, again, for Galp, we have both contributions on this. We have positively contribution.
It is slightly positive in refining going forward, but is strongly positive in the upstream, taking in consideration more liquidity on Lula, on grade, and at same time, how the sweet crudes are being priced in the market. I think that's it. That's the points that you have raised. Thank you.
Thank you very much. Our next question is from Jon Rigby from UBS. Please go ahead.
Oh, hi. Yeah, good morning. One question. There's a sort of acknowledgement in the strategy that you're now discussing that the balance sheet is starting to look pretty strong. You're obviously well below one times EBITDA on your net debt. My question is if when applying the criteria for investment, you find that you don't see anything large enough or significant to make an investment in, what will you do with that excess balance sheet capacity? When does gearing on the downside start to become an issue for you in terms of your capital structure? Thanks.
Hi, Jon. Good morning. We don't see our balance sheet as an issue, by the opposite. Nowadays, thanks to a disciplined financial decision and the execution mode that we enter in the last 2 years. We clearly have today a starting point that is really strong.
Sorry to interrupt, but that was my point, is that the balance sheet is getting a lot stronger.
Yeah.
You're sort of acknowledging that you have inorganic opportunities that you may consider to invest in. What if you don't?
Let's see. We will not burn money. To clarify and go directly to the point. If we will not find projects according the risk profile and the returns that we expect, and that's the reason why the commitment of a ROACE of 15% is important for us, of course, we have to distribute to the shareholders. Hopefully, we will be able to continuously to make this company grow, and having that in a well-balanced way. Bringing value to the shareholders at the same time, that will be complement that with distributions to the shareholders. That's the only comment that I have to set aside.
Okay.
Filipe would like also to complement that. Go ahead, Filipe.
Jon, if the guidance we're giving you is an envelope, it's a framework on where we will operate. Within that, you'll have multiple possible scenarios. One thing, if you do the math, if we bid for Transfer of Rights, if we do more downstream investment, if we do more renewables, if we do Carcará and Mamba all at the same time, it will be more than $1.2 billion. It will be a combination of some of these investments. There would be rotation if need be within the envelope. We are not giving you granularity on specific investments, but for distribution to shareholders, this is the long-term CapEx framework you should be thinking about.
Okay, thanks.
Thank you very much. Our final question for today is from the line of Jason Kenney from Santander. Please go ahead.
Good morning. Thanks for the time and the presentation. I was just wondering what portion of your refining output is hedged in 2020 and at what level, and if you've had any challenges with that strategy considering the review of margins, in your assumptions. Secondly, can you just remind us of the mark-to-market adjustment features that we could potentially anticipate over the coming months and the natural gas? Has that played out now? Thanks.
Hi, Josh. Good morning. Jason, sorry. Good morning. We have for 2020, hedged around 10% of our refining throughput and with a comparable It's not a straightforward calculation, but it's a comparable margin that stands between $5-$5.5 per barrel. We have only, as I mentioned to you, hedged around 10%. Filipe, would you like to speak about the mark-to-markets?
On hedging, we've had the similar issue before, so we have an imperfect accounting treatment of the risk protection that we're effectively building. We have clients that ask us for natural gas under certain formula. We source it differently, but accounting-wise, we cannot match. We have some P&L volatility that pans out and goes to zero at the end of the contract. It's wider this quarter. It will close as we approach maturity. Thank you.
Thanks.
Thank you very much. There are no further questions. I'll now hand the call back to Mr. Dias for closing comments.
Thank you, ladies and gentlemen. We hope you have found this update useful, and I remind you that the IR team is always available for additional clarifications you may need. Have a great day. Thank you.
Thank you very much, sir. Ladies and gentlemen, that does conclude the call for today. Thank you all for participating. You may now disconnect.