Earnings Call: Q3 2018

Oct 29, 2018

Good morning, ladies and gentlemen. Welcome to Galp's Third Quarter of 2018 Results Conference Call and Strategy Execution Update. Today's conference is being recorded. I will now pass the floor to Mr. Pedro Diaz, Head of Strategy and Investor Relations. Good morning, ladies and gentlemen, and welcome to the conference call of our Q3 2018 results. As always, Carlos will start with a quick update on the operations during the quarter and on our strategy execution. Philippe will then go through the results. At the end of the presentation, we will be available to take any questions you may have. Thar is here with us as well. 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. Carlos, the floor is yours. Thank you. Thank you, Pedro, and good morning to you all. I think this should be a rather quick introduction from our side today. So I call your attention for Slide 4, where we have the key highlights for the Q. So one can see that Galp delivered a good set of operational and financial results during the 3rd Q, underpinning our strategic development and business plan targets. The cash generation in Q was supported by a solid contribution from both our upstream and downstream operations. This was achieved despite the concentration of planned maintenance activities in Brazil and the preparation of our refinery's maintenance that started in the September and will take place during October November. So the September year to date gives us free cash flow generation of about €514,000,000 which already covers the €0.55 per share dividend. This is due to a combination of a strong focus on our strategy execution that has been also helped by a favorable macro environment. Considering this supportive macro and operational performance so far, we are upgrading our full year EBITDA guidance to around €2,300,000,000 Regarding CapEx, we now expect it to be around €1,000,000,000 which compares with our previous guidance in the range between €1,000,000,000 and €1,100,000,000 and this is mainly due to some deferrals into 2019. I will now briefly go through the main drivers of our performance in the different divisions, starting with the Upstream on Slide 6. The working interest production Q on Q has decreased, and it was driven by the concentration of planned maintenance in Brazil, including 3 units, 3 FPSOs and a key gas export pipeline. Both the units and the pipeline are now fully operational. Production was, however, supported by the ramp up of Tawambo in Angola, which started operations in July and is proceeding according to plan. We now have 7 units in Brazil running at plateau levels and the last week brought online a new unit, the number 8, that is located at Lula X Stream South is the P-sixty nine. This unit is currently delivering above 25,000 barrels a day from 1.12. So all in all, we are now producing over 110,000 barrels per day. As mentioned before, the FPSO to develop the Lula North area, the P67, is in Brazil and should move to final location as soon as we perform some final workovers, which we expect to happen until the end of the year. All in all, Galp's full year production should be up to 15% in a year on year, still at our lower end of the range indicated during our Capital Markets Day. As for exploration and appraisal activities, we have concluded the Sururu West EWT during this August, which is expected to support the optimization of development plan for the Birbigao and Sururu area. In the Greater Carcara area, we further the 1st appraisal well in Carcara North in this West Park. This occurred less than 1 year after the award of this block, which reveals a strong commitment with rapid appraisal campaign for this promising asset. On other exploratory activities, we have drilled a well in Genguangchuma with an oil discovery, even though further analysis and evaluation is still needed. But the preliminary result seems to be encouraging. As for Portugal, we have now taken the decision to step out the exploration. We regret not being able to assess the potential resources in the country, but the legal and regulatory context for upstream made it objectively impossible. Moving now to the downstream on Slide number 7. Refining had a solid performance in the quarter, a part of the start of the scheduled maintenance work in Matuszyn Refinery and the preparation of the FCC maintenance in SIEM during the Q4, impacting raw materials process as well as the inventory level. Petrinx Refinery has now restarted, while finished FCC should be back by the end of November. Looking to the margins in the quarter, we see that the margins were hit by lower gasoline fracs and higher price refinery sales consumption. At the same time, we had less supportive contribution from gasoline exports to United States due to planned inventory build ahead of the FCC unit shutdown that I referred to you and also a lower Eurobob, RBOB spread. Still, Gulf's realized refining margin in the Q was $5.8 per barrel, already capturing $0.30 of dollar from our plan for an extra dollar per barrel by 2020 in energy efficiency and enhanced conversion in our refineries. Moving forward, we expect that the current weaker refining environment remains throughout the Q4 with weak gasoline cracks following the end of the driving season and lower demand on Atlantic basin. So the combination of maintenance and the weaker refining environment could lead to a lower utilization rate in Q4. We are taking the opportunity to implement some projects and making some tie ins related with these initiatives, while performing the ongoing planned mandate. Some of these projects will also help us during the IMO transition period as we are able to improve our conversion capacity, while also executing other small investments to prepare our solution to supply tanker fuel, fully compliant with IMO. And let me emphasize again that we do have a feasible solution for the IMO capital. And that we are expecting IMO to be neutral to slightly positive for our downstream operation. Middle distillates are expected to appreciate and more than offset higher sourcing costs. But more importantly, it should be clearly positive for our upstream performance, which should benefit from the widening of the sweet sour spread as we only produce sweet crude. So coming back to the quarter and looking to the marketing. The marketing activity continues to benefit from a robust sales to direct clients in Iberia and the positive economic environment, and we can see that in the results. As far Gas and Power business, this was the last quarter with the contribution from the structured LNG trading contracts that we have established back in 2016. Going forward, gas trading activity will be based on potential opportunities in the international LNG market, but also on the European natural gas hubs, where we have already developed a relevant position. So I would also highlight that our electricity sales are growing nicely in Iberia. This should be supportive of our growth in these segments in the future. And that's it for me. Filipe will now go through the financials. Filipe? Thank you, Carlos, and good morning. Just a quick overview from me on the quarterly numbers. Now move to Slide 9 on the P and L. E and P EBITDA was unsurprisingly up year on year, driven by higher oil prices. And on a quarter on quarter basis, EBITDA was actually down 4% or so with a relatively stable Brent, but lower production given the significant maintenance we have in Brazil. On Refining and Marketing, EBITDA of €195,000,000 was down €20,000,000 year on year, impacted by the weaker refining margins and the lower throughput as we started maintenance in Meto Zinger states in the quarter. On a quarter on quarter basis, Refining and Marketing EBITDA was up supported by marketing, a stable refining contribution and a stronger dollar. Gas and Power EBITDA was up to €44,000,000 with supporting volumes and on the contribution from powers. Below the line, I would just highlight the financial results, which were mostly driven by mark to market adjustments, including our refining margin hedges, which were less favorable than at the end of June. RCA net income was €212,000,000 in the quarter and €235,000,000 under IFRS. This was helped by positive inventory effect of €34,000,000 On cash flow on Slide 10, cash flow from operations reached BRL343 1,000,000 during the quarter, dragged down by working capital. We built a product inventory buffer ahead of the refining maintenances and also had a few Brazilian cargoes in transit to Asian customers as of September 30. CapEx disbursements reached €246,000,000 including the €103,000,000 in signature bonuses for the acquisitions in the Santosh and Campos basins earlier in the year. And we also have here the drilling activities in Guanchuma and Carcara North. Free cash flow was €87,000,000 in the quarter. Net debt was flat compared with the end of last year and this with already 2 dividend payments disbursed. On slide 11, the balance sheet shows the working capital built at the end of September. And you also see that we have reduced significantly the loan to Sinopec, which is now down to only £172,000,000 Our JV with Sinopec for Brazil is now free cash flow positive and capital is being returned to the partners. Before the excess cash in the JV was temporarily lent to the partners and recalled as needed to fund the Brazil CapEx. What we have done now are non cash entries with the reimbursement of loans by Sanofi booked simultaneously against a capital reduction in our JV in the same amount. Net debt to EBITDA was stable at 0.9 times and the average debt maturity is currently about 3 years with the cost of debt continuing to decline as we keep replacing all the debts with less expensive new ones. We're now happy to take your questions. Thank you. Thank I will now take our first question from Thomas Adolff from Credit Suisse. Please go ahead. Your line is now open. Good afternoon. Two questions from me, please. Firstly, it would be great if you can comment on the expected exit rate for 2018. I'm interested in getting a bit more detail on how many wells have been drilled and completed on the recently started up FPSO. Secondly, just on future opportunities, you got the license Ui Waipuru, but how would you characterize the last bidding round in Brazil where you didn't really participate? Is it harder to get new opportunities in Brazil now? Thank you. Thomas, good morning. Thank you for your two questions. So in relation to the exit rate, and as I mentioned in my previous statement, we do think that we will be at the lower end of our production guidance, 100 and 7,000 barrels a day. We are now over 110,000 barrels a day. And Kaombo is still ramping up. We have all the maintenance done in the different units. And the gas export pipeline is also working adequately. And one well producing on the recent start of FPSO. So basically, I think this is the guidance that we are doing for the year end. In relation to the recent bid round in Brazil, we have defined ourselves Brazil as one of the potential areas in terms of expansion. And we are analyzing every opportunity that is offered in the different big brands. Not participating should mean that we have looked attentively and based in our technical analysis, our financial discipline and the way we can build a top tier portfolio, we didn't see value accretive based on the terms and conditions that have been offered. We will continue very attentive to Brazil, and we will continue to use this approach for the future business. Thank you. Thank you. We will now take our next question from Laura Giandari from CaixaBank. Please go ahead. Your line is open. Yes. Hello. Good morning. First question is on the working capital buildup you had in Q3. Can you just give us an idea of what is your estimate for the full year and consequently where you see net debt at year end? My second question is on the extraordinary energy tax in Portugal. Can you make us an update on your views here following the news flow we have been having on this? Thank you. Good morning, Flora, and thank you. Philippe will address the working capital, which has been already stated, but he will give you more details. In relation to sales, we think this is an extraordinary net tax that should be temporarily applied. We disagree since the beginning with that. It seems that the budget for the next year will continue to consider it. And since we have a legal dispute on these points, I would prefer not to make further comments. Philippe? Mario, your question is on level of working capital at the end of the year. We don't expect it to be any higher, given the one offs, if I can call it, on September 30. So we had product inventory buildup ahead of the stoppages in the 2 refineries. We also had significant volumes of oil in transit. If you assume that these are going to go down, then the question will remain what would be the Brent price level at that price. So there's a pricing effect. We don't know, but the one offs should not be there by December 31. Okay. Can you just give us an idea of what could be the level of the one off just to exclude it? Or it's not possible to get that figure? These would be triple digit numbers, €100,000,000 to €200,000,000 at again, this is September 30, a number on that date. Thank you. We will now take our next question from Thomas Klein from RBC. Hi. Thank you for taking my question. When you talked about the 2018 CapEx guidance to be now around $1,000,000,000 You mentioned some of this is due to deferrals, which is understandable given the kind of activity you have planned in Brazil for 2019. I just wanted to if you could provide any more detail on that and any sense of how CapEx could be in the coming year? Thank you. [SPEAKER CARLOS GOMES DA SILVA:] Good morning, Thomas. Effectively, we have anticipated that there are some deferrals in the drilling and completion activity in Brazil. That's one of the key points. The other point that has also been considered is some deferrals in our downstream activities. And it was the reason why we have been able to accommodate the 2 new assets that we have acquired in the last bid rounds. So we don't have still a final number for the next year. We will do it as we will complete our budgetary scenario. But you know that we have a forecast that should be around or slower lower than €1,000,000,000 In the CapEx, there's also some FX effect during the year, but we don't know up to the end of the year if they will maintain and depending on the evolution of the exchange rate. Because you know we are a dollar based company, and therefore, we have to take in consideration that. Thank you. Thank you. We will now take our next question from Rafael Gutage from Bank of America Merrill Lynch. Good morning. Thank you for taking my question. Just sticking with the theme of CapEx, obviously, with your guidance now being €1,000,000,000 for the year and you're running at about 60% of that spend as at the end of 3Q. Can you just remind us of the activity set in the Q4 that's going to close that gap? Perhaps there's a difference here between cash CapEx guidance and accrued CapEx guidance. But, yeah, Thank you. Good morning, Rafael. It's and so it's a good question, but you should bear in mind that we have still some maintenance activities that are being implemented and also some dollar per barrel investments that you should bear in mind. I've anticipated that in my previous introduction. That will allow us to increase our conversion capacity and our energy efficiency. So we do think that we will comply close by the $1,000,000,000 CapEx. But most of these investments were in the end of the year related with refining activities. So you know it's all the combination between maintenance and the dollar per barrel investment. And we are speaking about of approaching to the €1,000,000,000 for the year, for the 2,007 2018. Thank you. Thank you. We will now take our next question from Felipe Rosa from Haitong Bank. Hi, good morning, everyone. Two questions, if I may. The first one on the first FPSO at Lula, Okay. So this is the I think that this is the 8th year of production. And last year, we already saw a low capacity utilization due to maintenance. And this year, again, we have some important maintenance works at the FPSO. Could you update us on how do you see the number of years of plateau? And whether you have started to see any sort of any declining rates in terms of output at the first half of the FPSO and whether this has changed your views for the remaining FPSOs? That will be my first question. The second question relates to Sururu. So you finished the extended well test. I believe that Petrobras, the operator, has said that you found the biggest oil column so far in the result. Could you update us on whether this has led to any airport revision of the resources in the area of Sururu and whether you are more positive here than you were before? Thank you very much. Thank you, Philippe, and good morning. In relation to the first FPSO, and I have to recall all of us that it's called the Lula pilot project. It was a very, very long time ago comparing with the new technologies that we have today. Effectively, we had some maintenance works in the past. But you know that this unit has been also used to perform DBT on RULO West, which means that and it has ended during the 3rd Q in July, which means that we have less than well. And the production today is limited by the availability of producing wells, which will be resumed during the 4Q when a new well will be connected and the unit will be at full capacity. So from the plateau point of view, this unit continues to be our outstanding one and is one of our key test units to guarantee that our plateau is increasing time over time or after time, coming back from the 2.5 years in the beginning of this process. And we have now 4 years, and we continue targeting our 7 years that is happening now in this unit. Concerning the Sururu EWT that has been concluded in last August, you're right, the operator has confirmed considerable balloons in place that this test also presents ideal deliverability. We have also the confirmation one of the biggest, we're not saying the biggest, net oil pay column of 5.30 meters. But this is relevant information to optimize the drainage plan and the development plan. So we will need to assess the information that has been obtained in order to work together and to see what is the best solution in terms of the development concept for this outstanding asset. Thank you, Philippe. Thank you. We will now take our next question from Josh Stone from Barclays. Thanks. Hi, good morning. Two questions, please. Firstly, on Gas and Power. Are you able to provide us with the impact of the expiry of the structure contracts there and what that means for 2019 EBITDA? And then secondly, following up on the refinery maintenance, could you just if it's for 4Q, could you say how long will the shutdown last? And I didn't quite catch on what you're doing with regards to getting ready for IMOs. So maybe if you could just elaborate a little more on those solutions. And gives me the opportunity to clarify. So in relation to Gas and Power, the termination of the contracts, the structure contracts that we have in the past is a fact. But you should all of us should bear in mind that in the last couple of years, we have been prepared for this. And the operations that we have launched and the growth in the gas pipe hubs in Europe has grew in a way that we are able to replace volume wise the LNG structure contracts that we had in the past. Of course, the margins will be lower than the ones that we had in the past, even though we will continue to explore the international arbitration that the LNG market will continue to offer. In terms of guidance, we continue to have this range between €100,000,000 €150,000,000 for the Gas and Power business, excluding the infrastructure gas regulated assets that are now out of our EBITDA and is captured by associates. In the refining maintenance, we will have the FCC unit shut down for Magnus for 50 days. And this will allow us to not only to recover the units and to prepare the units for a new cycle, for a new operational cycle, but at the same time, to implement some projects related with energy efficiency in the gas compressing system. That is a turbine that is producing energy power. And at the same time, we are also introducing some adaptations in the unit to allow us to have more atmospheric residue as a raw material to replace this to replace the VGO, which means that we will be more having more flexibility from one side and it will be a more economic solution. This is contributing for our $1 per barrel additional by 2020 in the refining system. Concerning the IMO, we are implementing minor investments just to flexibilize our blending capacity in a way that we will be completely prepared to comply with IMO specs, which, by the way, we have started and we have anticipated with some tests with a few clients. And therefore, we are more than prepared for that. We will now take our next question from Matt Lofting from JPMorgan. Yes. Thanks. Good morning, gentlemen, and thanks for taking the questions. 2, if I could. 1st, just sticking with Downstream, clearly 4Q is quite a turnaround intensive quarter. I'm wondering if you could just talk about how active turnaround year 2019 needs to be in order to execute on the dollar a barrel margin initiatives and IMO preparations that you've outlined? And then secondly, just coming back to Brazil and the FPSO outlook, if you could be more specific on Unit 9 on what works, if any, outstanding that could further impact timing on when the unit comes online once the sail away is complete? Thanks. Good morning, Matt, and thank you. Looking at the maintenance activities, we are performing most of the relevant regular maintenance activities in 2018, which means that we are preparing ourselves for the next run of 4 years, 4 to 5 years. We are having the opportunity now to make some pay ins to minimize the some start up of the new projects related with the extra $1 per barrel projects next year. We might have the necessity to make shutdowns next year, But we are making all the effort, all the possible efforts in order to guarantee that we will minimize that. And if so, we will flag adequately and timely to the market, but it will be less than 3 weeks 2, 3 weeks maximum. And I'm speaking about mainly the atmospheric distillation unit, where the heat exchangers will be installed to guarantee that we will have the energy efficiency working. And that should happen between the end of 2019 and the beginning of 2020. That's the reason why I'm not so sure if we will be doing this maintenance in 2019 or in 2020. All in all, the relevant maintenance is being performed this year. Thank you. And I will now pass to Tor that will address your second question. So with respect to Unit 9, which is also known under P67 and which will go to Lula North. The FPSO arrived in Brazil at the end of July after dry tow transportation from China. It is now in Guanabara Bay, where it is undergoing the final commissioning and ready making for finally sailing off to the field. And the current expectation is that the Westell will set in motion for going to the field by the end of this year. So that is what we can guide in this respect. Thank you. Okay, clear. Thanks a lot. We will now take our next question from Michael Alsford from Citigroup. Hello there. Thanks for taking my questions. I've got a couple. Firstly on the Downstream, I don't know if you could provide a bit more color on how you're seeing demand at the moment, whether there's been any sort of impact in terms of demand on due to higher oil prices across both, I guess, Iberia, but more broadly in the Atlantic Basin? And then secondly, just on Brazil again, unitization discussions, I guess, primarily on BMS-eleven. I just wondered if you can update as to when you think they might be complete. I'm just thinking in terms of the impact on the 2020, so 2019 E and P volumes and equally, I guess, from a cash flow perspective as to money that could come into you as well? Thank you. Michael, good morning. From the demand point of view, we are observing that the macro context in Iberia and the economic growth is also pushing our industry and the demand upwards. We see in Iberia the growth of about 3%, globally speaking, more strongly in Spain rather than in Portugal. And the high price effect that you have referred are not still visible. Effectively, the economic growth is pushing up demand. And one of the also the key drivers in the demand is also the aviation segment, where the numbers are above between 5% and 7%, 8% growth. In the mobility consumptions, meaning gasolines and diesel, they are between 1% and 3% growth. So still supportive even though we are in a high price environment. In respect to the unitization, so the unitization, all the procedures are done. We are waiting for the decision, so result of Galp's control and I would say from the joint venture control. We believe that this might be addressed and solved by the end by this year and having the process completed. Anyway, we have to wait and expecting that A and P has a final decision sooner than later and hope that could bring us news in the coming weeks. From the cash point of view, there's no material relevance so far. Thank you. Okay. Thank you. Our next question comes from Rob Pulleyn from Morgan Stanley. Hi, gentlemen. Just one question from me. Obviously, you're giving a very positive outlook regarding the IMO 2020 impact on your upstream business. Could you maybe just remind us or update us on your view of where the differentials on your crude that you're producing in pre sell Brazil could move to versus, say, Brent as a benchmark? Just to give an idea of the upside potential. Thank you very much. Effectively, we have a wide range in terms of what might be the impacts of the spreads between suites and towers, which is the most relevant point. But you have referred specifically the spread between sweets and Brent. And we do think that it might land between $3.04 per barrel. That's our reference, our base case for the IMO impact. And it will tend over time to close. I will say that we are counting with 2 different moments. The first one, which is the so called interim one that stand up to 2022, 2023 and the ones that comes after that. But it's sufficient far away to make projections. So our base case is between $3 $4 per barrel. Okay. That's interesting. Thank you. I'll hand it back. We will now take our next question from Jon Rigby from UBS. Yes, hi. I just want to go back to and pull together a few of your answers to your questions. It seems to me that you're indicating capacity, availability to spend CapEx at about EUR 1,000,000,000 euros or so a year. And it's fairly indicative from the 2 cash flow statements you've released at 2Q and 3Q that the direction of travel on cash generation is going to be very significantly positive if oil prices stay where they are. So maybe this is like an early shot at what you might talk about in February March. Is management confident that they can find a home for that cash? Or will it just effectively have to come back to shareholders because effectively the playing field that you're playing on doesn't have the capacity to take much more than the level of spending that you currently have? And also sort of related to that, does it change your attitude to how you might think about funding your participation in Mozambique? I think the first unit was done by project financing, but obviously with significant debt capacity available to you at the corporate level, would you think about just funding it organically from corporate rather than through some external project financing? Thanks. So John, thank you for your interesting and most easy questions in relation to the cash flow generation. We have a home for that cash definitely since we have been bringing to the company assets that we truly believe that could create value, and we have to derisk them first. That will require CapEx also. We are speeding up the derisking of the Greater Carcara. We do think that we will be able to start sooner than later to do the same with the other assets, starting by Uirapuru. But one thing you should count on, it's the financial discipline that this company will continue to pursue. It's not because we will be cash generators that we will start to spread our money without taking consideration the 15% return on capital employed that we aim to have. And therefore, you can count that we will be fully disciplined on that. In relation to Mozambique, it's a good question. We have fully funding for that, And we are speaking about the midstream project because in the upstream project, you should bear in mind that we will finance that with equity. And for the midstream, we have full financing for that, and we will go in that direction. And I will terminate letting you to know that we will continue to look at the total shareholders return, which means that it's a combination between value creation and of course the dividend that we give back to our shareholders. And we have to continue to be and doing that in a very, very disciplined way. And thank you for the question, John. The final question comes from Giacomo Romeo from Macquarie. Well, thanks for taking my question. I have just one last question to ask and relates to something you said earlier relating to IMO and the fuel testing you have been performing. I was just wondering if you can confirm if these testing is lab testing or if you had any sea trials for your products? Giacomo, good morning. Effectively, we have no questions on that respect. It was just to guarantee and testing that our system is plenty available and capable to answer according what our linear programming optimization and modelization models are saying. And therefore, the feasible solution is there. And the slightly to positive impact, we expect also to be there. Thank you. I think we have concluded, ladies and gentlemen. So thank you. We hope you found this update useful and I remind you that the IR team is always available for additional clarifications. Thank you. Have a great day.