Good morning, ladies and gentlemen. Welcome to Galp's First Quarter 2019 Results Call. I will now pass the floor to Mr. Pedro Dias, Head of Strategy and Investor Relations.
Good morning, ladies and gentlemen, welcome to the First Quarter of 2019 Results Conference Call. Today, Carlos will start with a quick overview of Galp's strategy execution and operational update of the quarter. Filipe will go through the results. At the end of the presentation, we'll be available to take any questions you may have. Thore is here with us as well. I would like to remind you that we may be making several looking-forward 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. Carlos, the floor is yours. Thank you.
Thank you, Pedro, good morning to you all. During the Q1, Galp delivered a resilient set of results in a context of lower oil prices, weaker refining margins, and refining operational issues. Our cash flow from operations was healthy in the quarter, and our downstream commercial activities performed well across all products, notably in gas and electricity. Let me briefly go through the performance of our divisions, starting with E&P on slide five. As you may see, the working interest production was flat quarter-on-quarter as planned. The FPSO #9 has started in February in Lula North and the FPSO #8 is still ramping up in the extreme south of Lula. Having these two units ramping up, this was offset by planned maintenance in Mangueira unit, placed in Iracema South. Again, this is consistent with the plan we presented to you back in February.
The unitization of Lula is now in place, and meaning that from April 1st onwards, our stake has been reduced to around 9.2% of the wider Lula reservoir, including the area outside the BM-S-11 concession. Iracema, as you know, is a separate field, and therefore, our stake will remain unchanged at 10%. This is in line with what we assumed in our plan guidance for the 2019 year. Equalization of past costs and also CapEx supported over the original 10% interest and profits received thereunder are being finalized amongst the partners. A similar process will follow for the Iara fields, with Galp standing in an overall net receiver position. In Iara, works are proceeding according to plan towards the first production in the second half of this year from Berbigão and tieback from Sururu. Both fields belonging to the Iara area.
In Carcará, we continued the appraisal works in Carcará North, where we also confirmed hydrocarbons' presence in the second well drilled in the area in the east side of the Carcará North. Results are still being analyzed, we are positive on the potential of this area. Moving to Angola and on Blocks 14 and 32, they have been contributed steadily to production. The Kaombo South FPSO started production at the beginning of this month of April, we expect to full ramp up the unit before the year ends. In Mozambique, the Coral FLNG execution is progressing according to plan. As for the first phase of the large Rovuma LNG onshore liquefaction project, the consortium is getting ready to take the FID over the next few months.
On the exploration side, we have concluded around 3,000 sq km of seismic acquisition in our immediate operating concession in PEL 83. Overall, Galp's Q2 production is expected to be quite stable Q and Q, considering the impact from Lula unitization and the ramp-up of the most recent units in Brazil and in Angola. This unitization effect was considered in our plan and is within our guidance for the year that I recall to you, is an increase in production between 8% and 12%, comparing with 2018. Moving to our downstream activities now on slide number six. Refining had a challenging quarter, with a significant decrease in refining margins, pressured by weaker gasoline cracks.
The upset in Matosinhos refinery we had mentioned back in February to you, and industrial action during the quarter. Galp's margins have been at around $4 per barrel during this month of April, with a healthier market environment and higher availability of the units. For now, we are maintaining our guidance of $5 to $6 per barrel for the year. We do not expect major maintenance activities before Q3, where we expect the Sines refinery atmospheric distillation unit to stop for 40 to 50 days. This should not compromise the operational availability of the conversion units. I would like to notice this and underline this. The conversion units will continue to work, the respective margins are expected to happen.
On the marketing front, we continue to benefit from supportive sales to direct clients across all products such as the diesel, gasoline, jet, and the bunkers that are really outstanding during the year. As for the gas and power business, this was a strong quarter, benefiting from the performance of the natural gas and electricity commercial activities, where we are implementing a set of initiatives to be more efficient, to increase our competitiveness, and the value of our services to the clients. Looking forward, we expected our network trading activity to continue having volumes. Additionally, we are aiming at strengthening our commercial initiatives in Iberia and securing a competitive long-term natural gas and electricity sourcing basket. Filipe will now go through the financials. Filipe?
Thank you, Carlos, and good morning. I will start with the P&L on slide eight. Group EBITDA was EUR 450 million, excluding the positive effects from IFRS 16. Under IFRS 16, EUR 44 million in operating lease costs are excluded from EBITDA. If we ignore this, the uplift from IFRS, on a comparable basis, group EBITDA was flat year-on-year as the higher production in E&P was offset by a lower contribution from refining. E&P EBITDA of EUR 341 million, again, ex IFRS 16, was up year-on-year, and this was mostly driven by rising production. Compared with Q4 last year, E&P EBITDA was flat, driven on the one hand by lower oil prices, which were down almost $6 per barrel. On the other hand, you will recall Q4 had been hit by over EUR 50 million of underlifting effects.
On refining and marketing, EBITDA was only EUR 59 million ex IFRS 16, and that's down both quarter-on-quarter and year-on-year, driven by the weak refining contribution Carlos alluded to before. Gas and Power had a strong quarter with EBITDA up EUR 14 million year-on-year, reflecting a stronger performance from the natural gas and electricity commercial activity. Below the line, I would highlight the positive swing in financial results with the reversal of the mark to market of financial derivatives we alluded to during our last call. This is as expected. Also on this financial results line and considering IFRS 16, we have EUR 35 million in operating lease interest and some IFRS 16 driven non-cash exchange rate effects. Net income under RCA was down year-on-year and marginally up quarter-on-quarter.
Under IFRS, net income was affected by a non-recurring EUR 98 million related to the Lula unitization, where we have recognized the effect of past costs and profits. These are net of tax and minority interests. On cash flow on slide nine. Cash flow from operations in Q1 was a healthy EUR 353 million, and again, this is ex IFRS 16. CapEx was only EUR 152 million, as normally Q1 is lighter in terms of investment payments. Group free cash flow reached, therefore, EUR 159 million. You will please note that our free cash flow includes all operating lease payments that is deemed interest and the principal repayments.
We are considering IFRS 16 to be neutral at the free cash flow level, reflecting the substance of the operating lease payments. As Brazil became cash positive last year, in Q1 we distributed a dividend of EUR 68 million to our partner Sinopec from the Brazil JV.
Also, the remaining EUR 176 million of the loan to Sinopec was fully reimbursed by Sinopec against a capital reduction in the JV. On the balance sheet on slide 10, assets increased by about EUR 1.2 billion, driven by the inclusion of the right of use of assets which are under operating lease contracts. An equivalent amount is recognized as a liability. The other assets liabilities line includes, as of March 31st, an amount payable of EUR 133 million related to the equalization estimate under the Lula unitization process.
This amount does not yet include the estimate of payments to be received by Galp to compensate for the share of Lula investments borne by [TPDZ] and for the unitization of the Iara fields. As we stated before, Galp expects to be in a net receiver position of about EUR 100 million. Net debt, ex the lease liabilities, was down to EUR 1.6 billion.
Net debt to EBITDA was 0.7 x, with EBITDA here also stripped out of the IFRS 16 uplift. Including the lease liabilities as debt, our EBITDA also inflated according to IFRS 16, the ratio would be 1.3x . I will stop here and we're happy to take your questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Callers may ask two questions. If you wish to cancel your request, please press the hash key. Once again, please press star and one if you wish to ask a question. Your first question comes from the line of Oswald Clint from Bernstein. Please go ahead, your line is open.
Thank you very much. Carlos, good morning. First question, just on your confidence, I guess, around the refining margin for 2019 at $5 to $6 per barrel. Obviously, it's $2.3 per barrel in the quarter. You mentioned $4 per barrel so far, but you really need to step that up to, I guess, $5 and $6 per barrel to get to that sort of margin environment. Could you perhaps just talk around what your expectations are here on, is it product pricing? Is it the light heavy differentials expanding again? Is it something operational through the rest of the year that gives you the confidence you can still hit that sort of refinery margin level, please?
That's the first question, and I guess the second question, I was just curious around some recent news flow from, I think from Petrobras around a bit of a pilot FPSO on Jupiter by early 2023. Seems a bit more specific than some of the indications from Galp. I just want to clarify, is that a project that's moving forward a little bit quicker than we might have expected before? Thank you.
Good morning, Oswald, and thank you for your two questions. Effectively, in refining margins, what we will expect is clearly that the spreads between heavy and light, or if you prefer, with sour and sweet crudes will increase all across the year once the IMO approaches. Which means that the cracks of diesel, so the demanding of marine diesel and the middle distillates also will increase, and therefore it tends to press up the cracks and therefore the refining margins. You also should consider that the dollar-per-barrel project that we are implementing, that is midway, should be completed by the second half of this year. We tend to conclude the year in a better position. In respect to Jupiter, I will ask Thore to take the question. Thank you.
Thank you, Oswald. When it comes to Jupiter, you know that we have a very comprehensive R&D program going on for Jupiter. With respect to maturing the development of this very interesting but challenging field. The first step for us now is really now down to make sure that the testing of the HISEP pilot on Libra is being conducted during the second half of 2019. Thereafter, we plan internally in the JV to see whether we can pass a well one during the course of 2019 as well. That is how far we have firm plans, and over and above that, it is too early and too premature for us to make any conclusions. We are very dependent on the outcome of these tests.
Okay. Super guys, thank you.
Thank you. Your next question comes from the line of Biraj Borkhataria from RBC. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. Two, please. The first one is on the production guidance. Carlos, could you just talk through what would it take for you to be at the top or the bottom end of your production growth guidance for 2019 and some of the key moving parts there? The second question on the downstream, could you just update us on the industrial action that impacted Q1 and how that impacts Q2 at all? Thank you.
Good morning, Biraj. Concerning the production, as we have mentioned to you back in February, we are considering our guidance that the unitization process was already considered, and also all the planned maintenance for the year of 2019. We have anticipated some maintenance during this first Q. We have already from first April onwards, the unitization process effective. The range that we have provided to you in the beginning of the year was precisely considering the in definition of all those variables. We are confident that the guidance that we have presented to you, it is still the reality. In relation to industrial action, we have during this quarter some initiatives from the unions that were related with some benefits or pre-retirement benefits they are trying to recover from the past.
I think we are having good discussions with the unions. We hope that the situation might be stabilized in the next coming weeks. Thank you.
Thank you very much.
Thank you. Your next question comes from the line of Mehdi Ennebati, Société Générale. Please go ahead. Your line is open.
Hi. Good morning, and thanks for taking my questions. Two questions, please. The first one regarding Petrogal Brasil dividend payment to the shareholders. We can see, as you highlighted that Sinopec received EUR 68 million. Of course, you received the remaining part. I would like to know what is, let's say, the frequency of that dividend payment? Is it a quarterly dividend? Is it a half-yearly dividend? Is it a yearly dividend? Could you also tell us if there is a clear policy regarding that dividend payment? Is it correlated to the free cash flow generation of Petrogal Brasil? Is it correlated to the earnings? Just for us to try to forecast it. Second question regarding the refining. The utilization rate has been relatively low compared to Q1 last year.
I wanted to know if that was in order to preserve the refining margins or if there was some other reasons. If the refining margins remain, let's say, close to the current level, should we expect that the utilization rate would remain in line with the first quarter 2019, excluding maintenance impact, of course. Thank you.
Hi, Mehdi. Good morning. Concerning the dividends paid in Petrogal Brasil, and as Filipe has mentioned, this is a one-off event. Of course, we are seeing that Petrogal Brasil is generating a free cash flow positive. Of course, this free cash flow has to be considered for future needs or future requirements related with new projects and new investments in Brazil. Otherwise, the cash generated will turn back to the shareholders. You know that we have 70% in the JV and Sinopec has 30%. You should not make any direct relation with the dividends paid in Q1 and the free cash flow, and as well, the dividends policy. In the plan that we present to you back in February, we have already considered that dividends could stand between EUR 100 million and EUR 150 million in a yearly basis.
You cannot extrapolate, but you can see over time that this will originate dividends to be paid to the shareholders, including to Sinopec. Concerning to the utilization rate in refining. There are two contributions here. The refining margins were historically low, and therefore that put some pressure in terms of the refinery utilization also. What you can see is that going forward, our conversion capacity should stand at the maximum as possible because that is where we can get more value from our throughput. That's what we will expect. As I mentioned before to Oswald, it is expected that as the year goes by and the IMO approaches, we may see that the differentials between sweet and sours and at the same time the cracks in the diesel and also in the very low sulfur fuel oils will increase.
That together and related also with the dollar-per-barrel, we do see that we might have a second half of the year that could be really positive for refining. The utilization rate always will take in consideration the optimization based on the economics that we provide to our refining system. Thank you.
Thank you so much.
Thank you. Your next question comes from the line of Flora Trindade, CaixaBank BPI. Please go ahead. Your line is open.
Yes, hello. Very short questions. Just wondering regarding the refining outlook, can you just update us on the OpEx you expect for the full year? Also regarding Iara, you mentioned unitization expected. Do you expect unitization agreement still during this year? Thank you.
Good morning, Flora. Thank you for your two questions. Concerning the refining OpEx, the levelized refining OpEx should stand close by to $2, $2.1 per barrel. If you take out the maintenance effects that we are taking for the interventions in the units. The only intervention that we are planning for this year with relevance is, as I mentioned before, is in the atmospheric crude unit in Sines, and it is to implement one of the relevant initiatives related with the dollar-per-barrel. For your consideration, should be between $2 and $2.1 per barrel. Concerning Iara, what I have to say is that all the agreements that will be required between the parties are already concluded, they have been delivered to ANP, so to the regulator, we are now expecting that ANP will properly and timely answer to that.
Thank you.
Thank you. We will now take our next question, the question comes from Thomas Adolph, Credit Suisse. Please go ahead. Your line is open.
Good morning. Just one quick question, please. You have three key projects in 2019 and two of which have started up. FPSO #9 , in line with the revised guidance, Kaombo in early April, slightly ahead, and then the remaining project is Berbigão Sururu. I just wanted to better understand what you assume for the ramp-up pace on FPSO #9 and where we are exactly on Berbigão Sururu and how many wells have been pre-drilled there. Thank you.
Thomas, good morning. I will split the answer between myself and Thore. In terms of ramp-up, what we have considered in our plans is a 15 months' ramp-up period of time. You may know that the previous experience that we have in more recent units, we stand between 11 and 12 months. The plans that we have presented to you have considered 15 months. That is one of the flexibilities that we may have. I'm speaking about Brazilian units, and that refers the two that are ramping up. In relation to Kaombo, and as I mentioned to you, we expect to have the ramp-up completed and the plateau production before the end of this year. Which means between six and seven months.
Concerning Berbigão, I will pass to Tor just to pointing out that we have a different perspective in terms of which is the most likely scenario. We are assuming that Berbigão could be on stream in the fourth quarter of this year, I will let Tor to elaborate on this subject. Thank you.
Thank you, Thomas. Just a few facts on Kaombo. We have actually drilled nine of the 16 wells that we are planning to drill with respect to producers on Kaombo Sul. We will, however, ramp up Kaombo Sul slightly slower than on Kaombo North in order to make sure that we are managing the reservoir in a good way. By the end of the year, it should reach plateau, a little slower than what was done in Kaombo North. When it comes to Berbigão and Sururu, there is six wells that is drilled already in Berbigão and Sururu, two of which is completed, so are ready to be connected whenever the [lake] is on time. We are following this project very closely. We lately had a group at the yard one and a half week ago.
The execution of this project is going to be very crucial. All the necessary equipment is at the yard. However, it is a project that requires the utmost attention and focus in order to be able to be completed within the timeframe. For now, we maintain before the end of the year for first oil. Thank you.
Quickly, if I may, just to follow up. Assuming Berbigão Sururu slips into 2020, what does that mean to your 2019 production growth guidance of 8%-12%?
In our production forecast for 2019, we have not factored in a huge contribution from Berbigão Sururu anyway. This will not have any major impact on our 2019 production forecast. Thank you.
Perfect. Thank you.
Thank you. Your next question comes from the line of Jason Kenney from Santander. Please go ahead. Your line is open.
Hi there. I'm going to have another go at the production number, if I can, for 2019. I think you're guiding relatively flat Q on Q for second quarter. What kind of exit rate do you think we could see in 2019 from all of your particular projects? The second question is on the unitization with Iara and the, I think you mentioned EUR 100 million net compensation this year. Can you split that EUR 100 million versus, well, between the Lula effects and the Iara compensation? Maybe just a third question, if I can. Where do you see tax rates moving to in the second quarter with refining bouncing back? Is there a normalization back towards 50%? Thanks.
Hi, Jason. Good morning. Again, the guidance that we have provided to you, I have to reinforce because there's a lot of questions on that, it continues to be 8%-12%. The exit production is worthless because what is important is the pace of growing during the year. That is the most relevant one. We should stand above 120,000 bbl a day as an exit rate. What is important is the pace that we reach there. In terms of unitization and recovering one of the questions that Thomas has also addressed. The unitization in Iara fields are now waiting for ANP decision that we expect to have it during 2019. What has been mentioned, and Filipe has alluded to that, is that Galp is in a net receiver position concerning both Lula and Iara, and it is around EUR 100 million.
You can easily see that if Lula is negatively impacting around EUR 100, the remaining part comes from Iara. Thank you.
Okay. On the tax?
Tax, yes. Filipe will address the tax part. Thank you.
Good morning, Jason. Yes, indeed. In Q1, we have a higher optical tax rate on the P&L. This is a mix effect. We have negative results in Downstream, we have results in Upstream. The weight of Upstream is higher, as you know. We should expect normalization in Q2 as Downstream comes back. Thank you.
Okay, thanks.
Thank you. Your next question comes from the line of Rob Pulleyn from Morgan Stanley. Please go ahead. Your line is open.
Thank you, gentlemen. If we can go back to refining, is the $4 margin you referenced for April meant to be indicative for 2Q, especially given the improvement in U.S. gasoline market? Secondly, could you update or remind us on how the remainder of 2019 looks on how much of the refining is hedged and at what level? Thank you.
Hi, Rob. Good morning. Your first question, the answer is yes, the $4 per barrel is indicative. What we are seeing is that the gasoline cracks, they have recovered. Just to give you an idea, we came out from Eurobob gasoline from $57 per ton to more than $145 per ton. If you go to the RBOB gasoline, which is the reference for the U.S., it comes from $95 to $190. Effectively it's a huge difference between quarters. I think with the gasoline season coming and with recover on the gasoline cracks. We might see the refining margins going up. In any case, it's our reading about the market. Concerning the hedging strategy, as mentioned before, for 2019, we have hedged around 20% of our throughput at around $4 per barrel. Thank you.
Yeah, thank you very much.
Thank you. Your next question comes from the line of Matt Lofting from J.P. Morgan. Please go ahead. Your line is open.
Morning. Thanks for taking the questions, two, if I could please. Firstly, with preparations for a 4Q Transfer of Rights auction appearing to move forward in Brazil, could you share any latest thoughts on the opportunity set there and some of the key drivers that will influence how Galp looks to allocate capital towards it? Second, coming back to the questions on refining margins, could you give a sense of how tightened year-to-date light heavy spreads are affecting Galp's ability to extract a margin premium? If we relate that back to the full year plan you presented in February, how much better you'd assumed the second half of the year would be versus the first half? I'm still just trying to understand the confidence interval around hitting the $5-$6 for the full year. Thank you.
Hi, Matt. Good morning. In Brazil and the excess of Transfer of Rights that has been recently announced, it's quite still some unclear how the auction will happen. Key points for Galp. We are attentive. Of course, Brazil is a strategic geography and geology for Galp. We are there for more than 20 years. We know quite well the geology. I think we have good partners there, therefore, we will be attentive on that. That said, it's still unclear for us which will be the terms and conditions for the excess of Transfer of Rights. Therefore, we need more information to have a more informed position. Of course, it's something that we were waiting for some time ago, and we are prepared to move if we will think there is a right value on that. Concerning the refining margins.
Everything that we can say, it's clearly speculative because it's based on the reading of the market. What we are observing today is that gasoline cracks are increasing. We are also see that there are some fears in the market due to the sanctions that U.S. have now against some countries that are putting more pressure on the heavy grades. Therefore, there are concerns about the capacity of full supply the market in terms of fuel oil. That is sustaining the fuel oil spreads and the IMO is coming. The maximum conversion capacity will also be required. We are in a compound of different contributions that are each one individually seems easy to explain and to see the impacts that might happen to the refining margins. Globally, we cannot say that all will be aligned favorably.
We do think that the $5-$6 a barrel, it's a probable case and that's the reason why we are reaffirming our guidance for the year. You can see also at the same time that the yields related with the crude slate that are in the market are reducing the fuel oils. That is putting also pressure or complying with IMO in the middle distillate. Effectively, we have here a compound that is unique. It will be repeatable possibly in the coming years. Could be triggering what someone could call, and let me put that under brackets, a perfect storm related with this business. Thank you.
Clear. Thanks, Carlos.
Thank you. Your next question comes from the line of Alwyn Thomas, Exane BNP Paribas. Please go ahead. Your line is open.
Hi. Good morning team. I just wanted to ask initially on your exploration and drilling plans for this year, including the rest of Carcará, whether you're able to give a little bit more detail on that. Separately on the unitization of Lula, are you still pursuing separate tax treatment for the Iracema and Lula fields? A third one, if I may, just related to refining investment outlook. Could you give specific timing on the atmospheric upgrading plans for this year and potentially what you're thinking on the medium-term in terms of converting away from gasoline yield. Thanks.
Hi, Alwyn. Good morning. I will take the second and the third questions, and Thore will elaborate on exploration initiatives for the year. The answer to the tax question related with Lula and Iracema, the answer is yes. They are independent and separate reservoirs and you know that from the tax purpose, we are considering and we are paying taxes based in a single one, but we still have these disputes with ANP, as you know. We are preventing any future different considerations. From the geological point of view, they are independent and as the same happens with the other fields, they are independent fields. We have Sururu, Berbigão and Atapu as independent fields and therefore with different tax frameworks. In what relates to refining investments, the ones that we have undergoing are most related with regular maintenance initiatives and the dollar-per-barrel initiatives.
For the medium term, as I've previously mentioned to you, we are looking at, sorry, what we can call our future refining system and taking into consideration how we can get more valuable solutions for our throughput, for our outcomes. Considering the possibility to increase our exposure to the supplying, to the feedstocks for aromatics purposes, and also to getting more lighter hydrocarbon yields from our system. I think in the short term is the maintenance and the dollar-per-barrel. I've mentioned to you before that the Sines distillation crude unit will have a maintenance intervention precisely to implement one of the projects that is energy efficient related with the dollar-per-barrel. The conversion units will stay at full availability. Thore, could you please elaborate on the exploration? Thank you.
Alwyn, on the exploration and particularly with respect to Carcará and Carcará Northeast, the operations has gone really well from a technical point of view. The data acquisition has also been good. We have informed the market that there is some oil discovery that is now being evaluated as we are continuing acquiring data. We are now at around a little bit more than 6,500 m depth. We are considering whether we should call this TD or whether we should go further. Next step for us will then be to go into a DST. It's very important for us here to conduct a proper DST to understand better the physical properties for the reservoir. So far, so good, and then we need to go through an evaluation phase before we can say anything more. Thank you.
Okay, thanks team.
Thank you. Your next question comes from the line of Christopher Kuplent from Bank of America. Please go ahead. Your line is open.
Yeah, thank you very much. I think these are mainly questions to clarify a few of the things you've said. Carlos, earlier you talked about a business plan reflecting EUR 100 million and EUR 150 million of dividend payments. Maybe I didn't quite understand. Could you put that please into context against the EUR 68 million dividend payment that you're showing in Q1 and that you're suggesting is a one-off? Secondly, as far as the operating lease additional to your balance sheet is concerned, I wonder which net debt EBITDA figure you've given us, 0.7 or 1.3 matters to you more these days? I appreciate you don't have a credit rating that's published, but maybe any additional color you could give us here would be helpful.
Lastly, just wanted to test again whether you can be a bit more specific in terms of your outlook on the gas and power business, particularly what you call the network trading activity that seems to have gone really well in the first quarter. Is that something we should expect at this rate, going forward? Thank you.
Hi, Chris. Good morning. I will take the first and the third question. Filipe will go through the second one. In terms of the dividends paid by Petrogal Brasil to their shareholders and therefore to Sinopec. You should see that all the free cash flow, unless it will be required for further investments, will be paid to the shareholders as dividends going forward. What I've mentioned to you is that during 2019, based on the assumptions that we have taken for macro environment, we may consider that a dividend to be paid to Sinopec could span between EUR 100 million and EUR 150 million. That will increase over time as the production wheel goes up and depending, of course, on the free cash flow that will be released, and again, future in the reinvestment opportunities.
If we will find out valuable investment opportunities, this free cash flow, it will be prioritized for reinvesting. Otherwise, it will go back to the shareholders, including, of course, Galp. In the gas and power, yes, there are a set of initiatives that have been implemented, and now we are seeing them flourish. The reorganization of the gas and power business is a reality. Today, we have a much healthier and a well-managed and controlled operation, which means that we are able to take more advantage from our Iberian position. Looking at the trading activities and therefore, the one that is related with the European gas hubs, as we used to say, the network trading business, it is progressing healthier as the time goes by. With few or no working capital requirement, because this is based on daily transactions.
I think the team is now today in a much better position to continue to promote and develop this business. Looking to the full year and considering the guidance that we have provided to you of having gas and power with an EBITDA between EUR 100 million and EUR 150 million, I tend to consider that we will stay in the right side of this interval range for the full year. Filipe, can you go in the second question, please?
Hi, Chris. At least for this year, we will continue to publish numbers before and after IFRS 16. As far as our covenants with the lenders, they will specifically exclude the impact of IFRS 16 in our covenants. From a lender's perspective, this is not a problem. Now mind you that Galp is including in its free cash flow statement the repayment of deemed capital that we pay out every month when we pay the operating leases. That is already net of the free cash flow. We think it is also coherent that the net debt to EBITDA ratio is also before the lease obligations. Thank you.
Thank you very much.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Jon Rigby, UBS. Please go ahead. Your line is open.
Thank you. Yeah. First question I wanted to ask was on the BM-S-8, the Carcará North second discovery. Can you just, to the extent you can, maybe give a bit more color on what this means or what it may mean, in terms of how you think about the development should the results of the test that you're about to take forward be successful or towards the better end of prognosis? I mean, how important are these about sort of delineating and defining what the future development's going to look like? To that point actually, and related to a couple of other questions that have come up, it's notable you've not actually written off or amortized any kind of exploration expense for about five or six quarters now. I notice with the seismic acquisition, et cetera, there's a bit more exploration going on.
Should we be expecting some sort of impact on the income statement of exploration activity? That was one question, sort of testing the limits. The second question was around gas. I just wanted to ask, you alluded to the fact that Mozambique will likely be FID this year. You've obviously made some sort of early commitment to taking volumes. I just wondered whether you thought that the existing gas and power business that you have rooted in Iberia has the critical mass to sort of support a LNG marketing business implied by the type of commitment that you likely will make around offtake around Mozambique. Thank you.
Hi, Jon. Good morning. I will take the second question and the combination of the two first. I will elaborate on that. From the gas and power, and specifically the LNG or the natural gas supply basket.
Yeah.
You should bear in mind that we are working towards the full reorganization of our gas supplying basket. We have been done in that effort in the last one, two years. One of the initiatives that we have already implemented was precisely to expose ourselves to the U.S. Supply. We are trying to find out diversification of sources, diversification of counterparties, diversification in terms of maturities, diversifications of indexes, therefore Mozambique will play an important role in this reorganization. You know that some of the existing contracts will end from 2020 onwards, mainly with Algeria and with Nigeria. We are already working with these two counterparts in order to review the contract and to review the possibilities of continuing to have a relationship in the future. Precisely by having a relevant Iberian position allow us to have long-term contracts.
By having long-term contracts, we can aspire to have a supply chain, a supply basket that could allow us to be a player in the global market, precisely by using equity gas, which is one of the innovations that we are bringing forth to our customers. We are, I think, approaching consistently with both, on one side, reorganization of our supply gas basket, and the other, keeping and strengthening our position in Iberia that allow us to continue to expand our activities.
Sorry, could you please elaborate on that one?
Yes. I would like to do that to Jon. When it comes to BM-S-8.
Yep
Let me phrase it like this, that we are encouraged by the results, but it is too early to make any conclusions on what the Carcará North results really are. They require much deeper analysis, including a GSC. Please remember that for the first phase, we are already very well advanced when it comes to deciding a groundbreaking and a novelty for Brazil, namely that we will go for a 2 to 22,000 barrels per day FPSO. We have said that we believe there is a break even below $40 per barrel. I think that's indicating some of the profitability and the quality of that asset. Now it is for us to then continue to evaluate what the North will give us.
What seems to be already the case is that with the two wells that we now have, namely Carcará Northwest and now Carcará Northeast, we believe we have sufficient information to also take the decision with respect to how to develop also the second phase. The focus of Galp now, together with the partners, is to maximize speed to first oil, number one, and number two is to shorten the distance between the first and the second FPSO as much as possible in order to maximize value for our shareholders. That's where we have our focus. Thank you. With respect to the exploration write-offs, yes, we have not seen this because we have changed our practice, and that goes now directly to the [cost of member banks], where we are writing off on a monthly basis, or quarterly basis.
All right. Okay. Thank you. That's great.
Thank you. Your last question comes from the line of Michael Alsford from Citi. Please go ahead. Your line is open.
Hello, all. Thanks for taking my questions. I've just got a couple if I could. Just coming back to the medium-term plan for the refining system. When would you look to be able to launch a more major investment into that system? How big could you potentially see that range on investment being? Just secondly, on the E&P business, I was just wondering whether you could elaborate a little bit more on what the final hurdles are to take FID on the Rovuma LNG project in Mozambique. Thank you.
Good morning, Michael. Thank you. In terms of the refining system, we are still analyzing. It's a value question for us always. We are looking attentively for both increasing conversion and as well looking at possible increasing in terms of feedstocks for aromatics purposes. I think we will have to elaborate more on this in the next coming months and get back to you in our capital markets day that should happen by October. Concerning the Rovuma onshore project, we are working towards the FID during this year, the sooner the better. There are a complexity of different initiatives being taken by all the parties. Once we will be capable to conclude them, including the approvals from the government of Mozambique, we will be in that position.
For the moment, we are considering that during this year, we might be in a position to take the FID. Thank you.
Okay. Thanks, Carlos.
Well, ladies and gentlemen, thank you for your attention. We hope you have found this update useful, and I remind you that you have the IR team always available for additional clarifications. Have a great day. Goodbye.
That does conclude our conference for today. Thank you for participating. You may all disconnect.