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 Dias, Head of Strategy and Investor Relations.
Good morning, ladies and gentlemen, welcome to the conference call of our third quarter 2018 results. As always, Carlos will start with a quick update on the operations during the quarter and on our strategy execution. Filipe will then go through the results. At the end of the presentation, we will 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 forward-looking statements. Actual results may differ due to factors including 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. I think this should be a rather quick introduction from our side today. I call your attention for slide number four, where we have the key highlights for the Q. One can see that Galp delivered a good set of operational and financial results during the third Q, underpinning our strategic development and business plan targets. The cash generation in the 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 September and will take place during October and November. The September year to date gives us a free cash flow generation of about EUR 514 million, which already covers the EUR 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 EUR 2.3 billion. Regarding CapEx, we now expect it to be around EUR one billion, which compares with our previous guidance, in the range between one and EUR 1.1 billion. 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 number six. The working interest production Q on Q has decreased, and it was driven by the concentration of planned maintenance in Brazil, including three units, three 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 Kaombo in Angola, which started operations in July and is proceeding according to plan. We now have seven units in Brazil running at plateau level, and last week brought online a new unit, the number 8, that is located at Lula extreme south. It's the P 69. This unit is currently delivering above 25,000 barrels a day from one well. 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 P 67, 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 hand of the range indicated during our capital market slide. As for exploration and appraisal activities, we have concluded the Sururu West EWT during this August, which is expected to support the optimization of the development plan for the Berbigão and Sururu area. In the Greater Carcará area, we spudded the first appraisal well in Carcará North in this west part. This occurred less than one year after the award of this block, which revealed a strong commitment with a rapid appraisal campaign for this promising asset. On other exploratory activities, we have drilled a well in Bongomfumo with an oil discovery, even though further analysis and evaluation is still needed. 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 access 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 seven. Refining had a solid performance in the quarter. A part of the start of the scheduled maintenance work in Matosinhos refinery and the preparation of the FCC maintenance in Sines during the Q4, impacting raw materials process as well as the inventory level. Matosinhos refinery has now restart, while Sines 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 cracks and higher price refinery self-consumption.
At the same time, we had less supportive contribution from gasoline exports to the U.S. due to planned inventory build ahead of the FCC unit shutdown that I referred to you, and also a lower Eurobob RBOB spread. Still, Galp's realized refining margin in the Q was $5.8 per barrel, already capturing $0.30 from our plan for an extra $1 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. The combination of maintenance and the weaker refining environment should 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 maintenance.
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 bunker fuel fully compliant with IMO cap. Let me emphasize again that we do have a feasible solution for the IMO cap rule, 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. 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. Coming back to the quarter and looking to the marketing.
Thank you, Carlos, and good morning. Just a quick overview from me on the quarterly numbers. Now move to slide nine on the P&L. E&P EBITDA was unsurprisingly up year-on-year, driven by higher oil prices. 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 had in Brazil. On refining and marketing, EBITDA of EUR 195 million was down EUR 20 million year-on-year, impacted by the weaker refining margins and the lower throughput as we started maintenance in Matosinhos late 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 power. Gas and power EBITDA was up to EUR 44 million, with supporting volumes and stronger contribution from powers.
The marketing activities 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 2015. Going forward, gas trading activity will be based on potential opportunities in the international LNG market, but also on European natural gas hubs, where we have already developed a relevant position. 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. That's it from me. Filipe will now go through the financial. Filipe?
Below the line, I will just highlight the financial results, which were mostly driven by mark-to-market adjustments, including of refining margin hedges, which were less favorable than at the end of June. RCA net income was EUR 212 million in the quarter, and EUR 235 million under IFRS, and this was helped by positive inventory effect of EUR 34 million. On cash flow, on slide 10. Cash flow from operations reached EUR 343 million 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 cargos in transit to Asian customers as of September 30th. CapEx disbursements reached EUR 246 million, including the EUR 103 million in signature bonuses for the acquisitions in the Santos and Campos Basins earlier in the year. We also have here the drilling activities in Guanxuma and Carcará North. Free cash flow was EUR 87 million in the quarter.
Net debt was flat compared with the end of last year, and this with already two dividend payments disbursed. On slide 11, the balance sheet shows the working capital built at the end of September. You also see that we have reduced significantly the loan to Sinopec, which is now down to only EUR 172 million. 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 Sinopec, 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 three years with the cost of debt continuing to decline as we keep replacing older debts with less expensive new ones. We're now happy to take your questions. Thank you.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Callers are reminded to ask a maximum of two questions. Again, please press star one to ask a question. 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, I'll be grateful 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 Uirapuru, 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.
Hi, Thomas. Good morning. Thank you for your two questions. In relation to the exit rate, as I mentioned in my previous statement, we do think that we will be at the lower end of our production guidance, 107,000 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. One well producing on the recent start FPSO. 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. We are analyzing every opportunity that is offered in the different bid rounds.
Not participating should mean that we have looked attentively and based on our technical analysis, our financial discipline, and where we can build a top-tier portfolio, we didn't see value creative based on the terms and conditions that have been offered. We will continue very attentive to Brazil, we will continue to use this approach for the future bid rounds. Thank you.
Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star 2. We will now take our next question from Laura Trindade from CaixaBank. Please go ahead. Your line is open.
Yes. Hello. Good morning. First question is on the working capital buildup you have 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, Laura, and thank you. Filipe will address the working capital, which has been already stated, but he will give you more details. In relation to CESE, we think this is an extraordinary 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. Since we have a legal dispute on this point, I would prefer not to make further comments. Filipe.
For your questions 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. We had product inventory buildup ahead of the stoppages in the two refineries. We also had significant volumes of oil in transit. If you assume that these are going to go down, the question will remain what will be the Brent price level at that price? There's a pricing effect we don't know, but the one-off 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? Is it not possible to get that figure?
These would be triple-digit numbers. EUR 100 million to EUR 200 million at, again, this is September 30 number on that date. Thank you.
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 billion EUR, you mentioned some of this is due to deferrals, which is understandable given the kind of activity you have planned in Brazil for 2019. If you could provide any more detail on that and any sense of how CapEx could be in the coming year. Thank you.
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. It was the reason why we have been able to accommodate the two new assets that we have acquired in the last bid rounds. We don't have still a final number for the next year. We will do it as we will complete our budgetary scenario. You know that we have a forecast that should be around or lower than 1 billion EUR. In the CapEx, there's also some FX effects during the year. We don't know up to the end of the year if they will maintain and depending on the evolution of the exchange rate.
You know we are a dollar-based company, therefore we have to take in consideration that. Thank you.
Thank you.
We will now take our next question from Raphael Goutard 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 EUR 1 billion for the year, you're running at about 60% of that spend as at the end of three Q. Can you just remind us of the activity set in the fourth quarter that's going to close that gap? Perhaps there's a difference here between cash CapEx guidance and accrued CapEx guidance. Yeah. Thank you.
Good morning, Raphael. It's a good question. You should bear in mind that we have still some maintenance activities that are being implemented and also some dollar-per-barrel investment 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. We do think that we will comply close by EUR 1 billion CapEx. Most of these investments were, in the end of the year, related with refining activities. You know, it's all the combination between maintenance and the dollar per barrel investments. We are speaking about approaching to the EUR 1 billion for the year 2018. Thank you.
Thank you.
We will now take our next question from Filipe Rosa, from Haitong Bank.
Hi, good morning, everyone. Two questions, if I may. The first one on the first FPSO at Lula. Okay, I think that this is the eighth 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 declining rates in terms of output at the first FPSO, and whether this has changed your views for the remaining FPSOs? That will be my first question. The second question relates to Sururu. 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 pre-salt.
Could you update us on whether this has led to any upward 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, Filipe, and good morning. In relation to the first FPSO, I have to recall all of us that it is 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 EWT on Lula West, and it has ended during the third Q in July, which means that we have less one well. The production today is limited by the availability of producing wells, which will be resumed during the fourth Q, when a new well will be connected and the unit will be at full capacity.
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 after time, coming back from the 2.5 years in the beginning of this process. We have now four years, and we continue targeting our seven years, that is happening now in this unit. Concerning the Sururu EWT that has been concluded in last August. You are right, the operator has confirmed considerable resources in place and that this test also presents ideal deliverability. We have also the confirmation one of the biggest, for not saying the biggest net oil pay column of 530 meters. This is a relevant information to optimize the drainage plan and the development plan.
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, Filipe.
Thank you.
We will now take our next question from Joshua Stone from Barclays.
Thanks. Hi, good morning. I've got two questions, please. Firstly, on gas and power, are you able to provide us with the impact of the expiry of the structured contracts there and what that means for 2019 EBITDA? Secondly, following up on the refinery maintenance, for 4Q, could you say how long will the shutdown last? I didn't quite catch on what you're doing with regards to getting ready for IMO, so maybe if you could just elaborate a little more on those solutions. Thank you.
Josh, good morning. Thank you. Gives me the opportunity to clarify. In relation to the gas and power, the termination of the contracts, the structured contracts that we have in the past is a fact, but all of us should bear in mind that in the last couple of years, we have been prepared for this. 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 structured contracts that we had in the past. 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 EUR 100 million and EUR 150 million 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 maintenance for 50 days. This will allow us to not only to recover the unit and to prepare the unit 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 power. 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 the VGO.
Which means that we will be having more flexibility from one side, 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 the IMO specs. Which by the way, we have started, we have anticipated with some tests with a few clients. Therefore we are more than prepared for that. Thank you.
Okay, thanks.
We will now take our next question from Matthew Lofting from JP Morgan.
Yeah, thanks. Morning, gentlemen, and thanks for taking the questions. Two if I could. First, just sticking with downstream, clearly, 4Q's quite a turnaround intensive quarter. I'm wondering if you could just talk about how active a turnaround year 2019 needs to be in order to execute on the dollar a barrel margin initiatives and IMO preparations that you've outlined. 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 to 5 years. We are having the opportunity now to make some tie-ins to minimize some startup of the new projects related with the extra EUR 1 per barrel projects next year. We might have the necessity to make shutdowns next year. We are making all the possible efforts in order to guarantee that we will minimize that. If so, we will flag adequately and timely to the market, but it will be less than 2 to 3 weeks maximum. 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.
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. I will now pass to Thore that will address your second question.
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 a 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. The current expectation is that the West Tellus will set in motion for going to the field by the end of this year. 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 due to higher oil prices across both, I guess, Iberia, but more broadly in the Atlantic Basin. Secondly, just on Brazil again, unitization discussions, I guess, primarily on BMS-11. 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 obviously 2020 to 2019 E&P volumes and equally, I guess from a cash flow perspective as to money that could come into you as well. Thank you.
Hi, 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. The high price effect that you have referred are not still visible. Effectually, the economic growth is pushing up demand. One of 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 diesels, they are between 1% and 3% growth. Still supportive, even though we are in a high price environment. In respect to the unitization. The unitization, all the procedures are done. We are waiting for the decision.
Result of Galp's control, I would say from the joint venture control. We believe that this might be addressed and solved by the end, this year, having the process completed. Anyway, we have to wait. Expecting that ANP has a final decision sooner than later. 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 Robert 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-salt Brazil could move to, versus, say, Brent as a benchmark, just to give an idea of the upside potential? Thank you very much.
Hi, Rob. Good morning. Effectively, we have a wide range in terms of what might be the impacts of the spreads between Sweet and Sours, which is the most relevant point. You have referred specifically the spread between Sweet and Brent. We do think that it might land between $3 and $4 per barrel. That's our reference, our base case for the IMO impact. It will tend over time to close. I would say that we are counting with two different moments. The first one, which is a so-called interim one, that could spans up to 2022, 2023. The ones that comes after that. It's sufficient far away to make projections. Our base case is between $3 and $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.
Yeah, 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 billion or so a year. It's fairly indicative from the two 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. Maybe this is like an early shot at what you might talk about in February or March. Is management confident that they can find a home for that cash? 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?
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 sort of external project financing? Thanks.
Jon, thank you for your interesting and most easy questions. In relation to the cash flow generation, we have a home for that cash rapidly. Since we have been bringing to the company assets that we truly believe that could create value, and we have to de-risk them first, that will require CapEx also. We are speeding up the de-risking of the Greater Carcará. We do think that we will be able to start sooner than later to do the same with the other assets, starting by Uirapuru. 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.
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. For the midstream, we have full financing for that, and we will go in that direction. I will terminate letting you to know that we will continue to look at the total shareholders return, which means that is a combination between value creation and of course, the dividend that we give back to our shareholders. We have to continue to be doing that in a very disciplined way. Thank you for the question, Jon.
Thank you.
The final question comes from Giacomo Romeo from Macquarie.
Hello, 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 this testing is lab testing, or if you had any sea trials for your products.
Hi, 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. Therefore, the feasible solution is there, and the slightly to positive impact, we expect also to be there. Thank you. Pedro.
I think we have concluded, ladies and gentlemen. 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.
This concludes today's call. Thank you for your participation. You may now disconnect.