Galp Energia, SGPS, S.A. (GALP) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Galp's Capital Markets Day 2020. It's a pleasure to be again in London. Well, the world has changed since the last time we have been here, and so did Galp, as you are going to see this morning. Today, we are going to present you the strategy and financial outlook and briefly going under the 2019 numbers. You will find as well the cautionary statement in your presentation, which I advise you to read. But before we start, we must advise you on some safety procedures. So in case of emergency, please follow the instructions of the hotel staff and make your way calmly to the exits, which are duly marked. The evacuation meeting point is at the corner of Wisconsin Field just to the rear of the hotel. Carlos will begin today with the strategy update, and then Filipe will follow with the financial outlook. After the break, Thore will give us an update on the upstream operations. At the end, and usually -- as usually, we will have the Q&A session, followed by a lunch that we invite you to eat with the executive team and as well with some of our directors. I hope you enjoy this morning that we have a lot of material to cover to you guys. So Carlos, the floor is yours.

Thank you, Pedro. Ladies and gentlemen, a big welcome, and thank you for joining us today. It's a pleasure to be here in London again, and I have the chance to share with you our achievements and also our goals for the future. And ironically, in a fast-changing world, it is playing in the safe mode the most riskiest thing you can do. And today, leading in that fast-changing world, we have to embrace the opportunities that world is presenting to us. And that is one thing that is for sure that during this transition, the world will need more and more energy and cleaner solutions to embrace that new era. I will divide my presentations in 2 divisions. The first one, we will look at our achievements of 2019. And after that, let's look into the future. But starting, reviewing our goals and our achievements in 2019. That whose performance has been consistently capturing the market opportunities and growing in the last 5 years. So starting by '19. And as you can see, it was a strong and very cash-generating year both from the financial and the operational sides. And that has happened during a very macro challenging environment. The free cash flow, as you have saw, was over EUR 900 million and has increased 45% if we compare year-on-year. As we continue to execute our strategy, that was more than sufficient to cover our 15th dividend increase. We have started 3 new units production, 2 of them in Brazil and 1 in Angola. And that was the keystone for the 14% production increase in our yearly average. And that stays above the guidance that we have provided to you 1 year ago. Our natural gas activities has also played an important role during the year since they have successfully capturing market opportunities, namely in the trading activities. During the year, we have done an important reshaping in our organization. We have now split it in 4 different business units, which are more aligned with the risk/return profile and the strategic challenges that every single one will have in the coming years. And the most transformational change was introduced in all our commercial activities, where we have merged all together in a single unit in order to moving our mindset and our focus and our attitude from product, which is very traditional in our industry, to service to customer. So it's a big move. It's clearly something that -- it's disruptive when you look to what is the tradition in our industry. And while we are delivering today, we are also investing for the future to continue to address and to deliver profitable and sustainable long-term value growth. In line with our strategy, we have also allocated 10% to 15% of our equity CapEx to renewables and new business forthcoming, and we have recently made the announcement of an important move in this area by acquiring 2.9 gigawatts of high-quality solar PV project in Spain. This is completely aligned with what we have mentioned to you. And for those that are following us for many, many years, we have just started to pointing this 4 years ago with a caveat, once we became free cash flow positive, for those that still remember what we have said, and we are complying with it. So over the last 5 years, and you have the chart here, Galp posted a consistent growth path. The cash that we have generated from our operations grew steadily, reaching EUR 1.9 billion in 2019. I think this path is the result of a clear focus on execution. You may remember that we have defined for ourselves the 3 Es, where the first was precisely related with execution. It's something that we have take that in our hands in a very serious and committed way. Execution, execution, execution has been the stepping stone to deliver the results. And don't forget, because we have done that during a very volatile market conditions. We are seeing, and we are observing what is happening in the world every single day, every single month during the last couple of years. And that -- I think that demonstrates the resilience and the quality of having an integrated business model design. This growth has clearly been converted in value. Our total shareholders' return over the last years has reached 17% per year, well above our peers. So I will repeat, because it's important, 17% per year in average. I think this is outstanding by any means. So having Galp as this distinctive long-life asset base and having the possibility to share with you what brought us to 2019 with such strong performance, I think now we have to move and to see our investment case and also the strategic guidelines to continue to deliver sustainable value growth while we start embracing the energy transition opportunities that are offering to all the industry. So looking to our distinctive and long-life asset base that you know quite well. It is highly competitive and truly resilient to different macro assumptions. We look at energy transition as a new era full of opportunities. I think it's the only way that we have to look it. The speed and the scale to take advantage of those opportunities will be the difference between the laggards and the successful companies, and we will invest for growth and transition simultaneously, but we will continue to be focused on attractive returns and on keeping a strong balance sheet. Integrating the so-called energy transition into our strategy means that all our business and segments need to address the challenge. So this is not only a single responsibility for any 1 of the 4 divisions that we have now organized. Looking at the 4 divisions and starting by the upstream. So in upstream, we will continue to develop sizable and very low-cost resources and to increase the weight of natural gas in our portfolio with the Mozambican projects, as you know, which will continue to support the strong cash flow generation and also the value creation. Secondly, in refining and now the so-called midstream, energy efficiency projects will be a priority to maintain our competitiveness while we are adapting to evolving market and stringent environmental regulation in European countries or in the European zone. Thirdly, and looking at -- to our commercial division. We will leverage on a unique, cleaner and expanded integrated offer. And this is important because it's the -- I think we are one amongst very few that could provide to customers a full integrated offer in our sector that will be supported by innovation, the digital transformation and agile ways of working to provide the best-in-class customer experience. That's where we put our attention in our days. And fourth is not -- the last but not the least important division. It's, I would say, our new baby, and we have to take care about our new babies that we are committed to develop a competitive and profitable renewable business, but doing that -- by doing with innovative and differentiating solutions to capture new scalable and value pools. Let's now go over to -- in more details to every of one of these divisions. And of course, starting with our upstream business. Here, you know that we have an impressive asset base that ranks the top quartile in the industry, and we plan to keep it that way. By doing so, that means that we have to ensure that we are creating value even in a below 2-degree scenario where oil prices could be materially different from what are expecting today. And sometimes, we don't know what we are expecting in every single day. Our upstream portfolio of 2.4 billion barrels -- I'm speaking about 2P, 2C reserves and resources, allow us to have enough resources to continue to grow. The breakeven of both sanction and pre-sanctioned projects is below $25 per barrel, and that is considering an NPV10. And this is excluding potential upsides in any of these developments. I'm sure that Thore will cover that upside in a very enthusiastic way. I'm looking to Thore's face, and I have no doubt about that. By using the best technologies and practices in 2019, our portfolio has reached a low-carbon intensity of 9.4 kilos of CO2 equivalent per barrel, well below the industry average of 18 kilos. So this is another example of the high quality of our portfolio. Our future developments will continue to fit in our low-cost and low-carbon portfolio strategy. So in a very summarized way, this is what we plan to do and guide in our upstream activities. Let's now move to the production profile. Because one thing is the guidelines, other thing is, what are the results? What are you expecting to do with those assets? So production is expected to grow over the next decade at a compounded annual rate of 10%. This is more front-loaded, and this is a cycle. But all over the next decade, it is a compounded annual rate growth of 10% and mostly from projects already being developed. Upsides to this production growth will come from: first, improvement in recovery factor and additional value-extraction initiatives on the existing projects; and secondly, from exploration results in a set of promising assets, such as Uirapuru. I think we should have news on the potential of these projects in the coming weeks or months. We are working hard on that. With the development of Mozambique and our Mozambican projects, Coral FLNG and also Rovuma LNG, the gas weight is expected to increase significantly, reaching 30% after 2025, which is completely aligned with our strategic guidelines. So being covered the upstream activities, let's now move to our refining and midstream activities. We have a got a reliable refining system with technical costs -- and we are using technical costs just joining OpEx plus recurrent CapEx, which stands below $2.8 per barrel. And there's still room to improve. We have been able to fully accommodate the change in marine bunker specifications that have just entered in force in 1st July -- sorry, 1st January. And we are now producing 100% very low-sulfur fuel oil. So for the discussions that with some of us we have been held during the last couple of months, is -- so this is the proof that, clearly, we have adapt, we have a feasible and we are complying with what we have said. And we will continue to increase the competitiveness, the efficiency and also the sustainability of our refining system, primarily with incremental projects. The ongoing initiatives of $1 -- additional $1 per barrel contribution will be fully captured during this year. We are now doing some works at our Sines refinery that should be concluded during the first half of this year, which means that at least half of the year, we will have 100% of this $1 per barrel. So we have above 80% of this today, and we will complete this by the second half in a 100% basis. But we didn't stop here. We have, meanwhile, launched as what we can call a second wave of initiatives, aiming at an additional $0.5 per barrel contribution between process enhancements and at same time by using digital initiatives. And these actions should contribute to improve margins or to reduce our cash costs during the next years. And we do think that we will implement them and having this full capture after 2022. So we entered in this process a couple of years ago for $1 per barrel, and now the second wave of an additional $0.5 per barrel that will be fully captured by 2022 onwards. Taking also advantage of the circular economy potential and, of course, new technologies and our digital and transformation applies to all the divisions, we will work towards offering cleaner, more valuable energy solutions while we continue to reduce our current footprint. Now moving to commercial. The division that I mentioned to you that is being -- experiencing the most drastic and relevant, disruptive, I would say, transformation in the good and the right direction. So we made this significant transformation in our commercial activities to take advantage from our large client scale, diversified proposition and taking advantage also of a strong brand awareness in Iberia. With a more agile and customer-driven organization, I think we will enhance our client experience, and we will expand our offer through multi-product and service solutions. Having what we can say a holistic way of you, our clients, across their all needs in everyday life experience at home, at work, on the move. So we are clients, we are consumers that we have -- sometimes we don't realize different needs all over the day and in different times in our lives. And it is crucial that we will be capable to capture that value. We have also an important starting point. The capillarity of our network with around 1,500 service stations and 800 convenience stores will also be at the core of a diversified and tailored to each location, taking advantage of new mobility, commuting trends and urban space development. This is important, because the world and the way we live, the way we move, the way we behave will change. And what am I doing? Anticipating. It's not just adopting. It's anticipating the movements that the society, the human being behavior is taking. So this commercial division is set up to generate more than EUR 0.5 billion in EBITDA by 2025, increasing at least 20% its current contribution. I think, with this perspective and this visibility, you may have a more clear view of our plans, our actions and also our commitments going forward. On new energies, we advocate for technological diversity. We listen. Some people more focus in a certain technology. That could be the stepping stone to solve the human problems. We do not. We continue to advocate on technological diversity as a principle to keep options, promoting innovation and creativity. And with this in mind, we are particularly interested in what we can call the green hydrogen deployment, as we believe that it must be one of the most efficient solutions to address challenges related with the decarbonization of certain sectors, such as the industry feedstocks and high-grade hit. At Galp, we believe that this is the right way, and this is the best to keep options open. At Galp, we believe also that renewable generation will play an important role and is amongst the best opportunities to invest in the energy transition at a new at-scale business, supporting a profound transformation that will be required to achieve the targets that has been set in Paris Agreement and integrating in Galp's portfolio these businesses will allow also us to develop what we can call the natural hedge to our Iberian power market exposure. So we have a set of clients of electrical clients for which we are not having any electrons producing whatsoever. With this new approach, we will design our business in a full supply integrated, taking advantage of the existing asset client base. And we see there is a clear potential upside on top of just a pure-generation business model. So don't look at this as being just a pure-generation renewal business model. In addition to this platform, we see that we have levers to expand our activities from Iberia to other regions where we may combine power generation, storage and also supply. Building this renewable generation business will also allow Galp at least 4 different things: first, to diversify our portfolio; secondly, to reduce our carbon footprint; third, to increase the client sales; and fourth, to tap new profit pools. And this is clearly one of the ways to summarize why we are embracing this new 4 divisions and these new businesses. We have the ambition to reach 10 gigawatts of total installed capacity by 2030, we can say by the end of next decade. No, it depends on when we count the next decade. Let's say by 2030. This is, of course, depending on our ability to find and to develop projects that may fit our investment criteria. And in that case, we will be -- and we will continue to be disciplined. By 2023, we expect to have 2 -- in 2 countries. So in Iberia and Portugal and also in Spain. We intend and we plan to have -- we expect to have 3.3 gigawatts of solar projects already operating from existing portfolio in both countries. We estimate more than EUR 200 million of key -- of cash flow from operations from these projects when we look at them in a stand-alone basis. Filipe will go into details how we will plan to do it. So with our recent solar acquisition in Spain, I think we have made a significant move to accelerate the strategy I have just reaffirmed to you all. Galp has become market leader in solar power generation in Iberia, and I think this is one of the key milestones that we have reached. And we are strengthening our position as an integrated energy provider for that region. So leading in all the segments where we are present is and will continue to be one of our key ambitions. Our portfolio of 2.9 gigawatts of production benefits also from premium location, which is translating above-average solar hills of more than 1,800 hours. Over 900 megawatts are already operating, and we expect, by year-end this year, approximately 1.4 gigawatts of production. All the remaining projects, as I've mentioned to you, have already secured grid connection and will be developed over the next 3 years. So all in all, you can see the quality and the profitability and the pace of development that we are putting our focus on these developments. So finally, and to give a word, what does that mean in terms of financial contributions? So effectively, our metrics to drove this move into solar, we expect equity IRRs above 10%. Business integration with our remaining activities and other potential upsides, such as ancillary services or storage deployment, may create additional value and therefore increase the impact in our equity returns. And we will work on that in the coming years. Stepping into another lever that has to do with the commitments on the additions that we have during this energy transition and taking in consideration this move to the renewable businesses, I would say this is just part of our future. And being energy transition a reality, we have to assume our whole commitments to embrace and to address the challenges that energy transition present to the human beings. And we have defined for that 5 levers to decarbonize our portfolio. So the first one is precisely to incorporating renewable energy. The second is increasing the weight of natural gas. And I have spoken about that with our Mozambican projects. The third one is improving the efficiency of our operations all across the supply chain. The fourth one is analyzing options to production of lower- to no-carbon products. And finally, we are developing, and we are starting technologies like CCS and natural offset mechanisms as potential solutions to meet the energy challenges in an efficient way. So we came from, I think, a good starting point as we are growing our energy production well above industry average. So whatever we may decide to commit in the future, it should rely both environmentally and economically sustainable and the goals that we will set up to all of us as to address simultaneously those 2 elements. So moving now to capital allocation. You may recognize this slide. This is exactly the same that we have shared with you back in October as our capital allocation guidelines are unchanged. You can see that more than 40% of our equity CapEx intends to capture the opportunities coming from the future of the energy demand patterns, while at the same time, we continue to reduce our carbon footprint. Investments in renewables, as I've mentioned to you, and also in new businesses should account 10% to 15% of our equity CapEx in the coming years and provided that the returns are in line with our investment criteria. Project returns will vary across each different business due to size, risk profile and financing structure, as you can see in the center of the slide, but the competitiveness of our future investment will remain aligned with Galp's return on capital employed target of 15%. And we also renew our commitment to stay below 2x net debt to EBITDA, and we will rotate assets if required to sustain this level. Our shareholders' distribution, in that area, we reiterate what we have target of a dividend per share increase of 10% per year all over the 3 years. You may see '19, '21, that means the AGMs that goes from '20 to 2022. I think this underpins the confidence we have in our plan's resilience. So -- and to conclude, ladies and gentlemen, let me tell you why Galp is and will continue to be a distinctive value and growth story. I would like just you to retain 3 key messages. Firstly, we will continue to deliver profitable growth. Our upstream production will double during the next decade, supported in projects already being developed and with low breakeven. I've shared with you below $25 per barrel. And we will enhance and transform our downstream businesses. These so-called legacy business or conventional businesses will be key contributors to the next chapter to write our story. Simultaneously, during our transition journey, we will also pay relevance and impact in the next decade. Galp will be a EUR 3-billion-plus cash company by 2025 onwards. This is clearly a great statement and an ambition that we have set to all of us. Secondly, we will remain committed with our solid financial position and with also our clear capital allocation. And thirdly, we will balance between growth investments from one side and progressive shareholders' distribution. So you may know Hans Rosling, the Swedish physician that has described, as no one, the secret silent miracle of human progress, alluded to that with figures, not just with words. So to say that we are living phenomenal times today with important human challenges with unique opportunities. So in a fast-changing and very unpredictable world, embracing the energy transition is surely a lifetime opportunity for Galp and to position Galp as part of the solution in the same tenable and profitable way that brought us to this day. So I sincerely appreciate your attention today. And now I will hand over to Filipe. Filipe? Thank you.

Thank you, Carlos. Good morning, guys. Thank you for joining us today. I will start with the recap of the 2019 cash flow, and then I'll move on to the divisional cash flows going forward. So the plans are very much on track. You will see very little changes from what we have told you back in October, other than we have now factored in lower refining margins. And I'll start with my favorite slide, 2019 cash flow. This is the best slide to understand the fundamental competitiveness of the Galp asset base. It also helps understand how we will fund our capital allocations going forward. So on the left-hand side, we effectively have EBITDA plus associates. That's over EUR 2.5 billion last year. And the key drivers here were much higher production in upstream, but we have lower Brent, and we had a difficult refining year, as you know. And taking out taxes and working capital, cash flow from operations was EUR 1.9 billion. That's 7% up if you strip out the IFRS 16 adjustments. And after paying for the operating leases, interest and CapEx, we're left with EUR 922 million of free cash flow. Now this free cash flow is quite unusual for a business that is growing as quickly as Galp. As you know, we have a very high proportion of our CapEx going into new developments that are not generating any cash. And that's the new units in Brazil. That is Carcará, now Berbigão. We have Rovuma. We have Coral. None of that is generating any cash but is weighting on this cash flow. Of the EUR 922 million of free cash flow, about EUR 130 million went to Sinopec, EUR 560 million to the Galp shareholders and the rest was to delever our balance sheet. That is now at 0.7x net debt to EBITDA. So I think this slide says a lot about how strong the cash flow is from the existing asset base, i.e., if you park for a second what's going into new projects. Now a few words on how we will be reporting our segments going forward. This reflects our new org chart, our new priorities, and hopefully, it also helps value our business more appropriately. E&P, no change. So this is the entire oil and gas upstream activity, EUR 1.75 billion of EBITDA last year, major cash cow, likely to remain a very large cash cow going forward given how long life and competitive the asset base is. Refining was previously bundled with marketing. And going forward, we have refining as you know it and midstream. And within midstream, we have all the cogeneration. We have all trading of all products with gas, electricity, oil products, electricity. And we also have within midstream all the infrastructure assets, such as oil pipeline, gas pipelines, the stake in GGND. Commercial now includes all our client activities in all geographies, that's products and services. This combination went live last year, and our commercial workforce is already operating on a per-client basis as opposed to a silo-based product or service organization. In 2019, this was a EUR 400 million EBITDA activity coming from our commercial businesses in Spain and Portugal and certain African countries. And this spans service stations, LPG, [ lubes ] natural gas and electricity. This is a low-volatility, high-multiple business, which was perhaps not very well understood when it was bundled with refining. Last but not least, our fourth division is renewables and new business, which includes the recent solar acquisition in Spain. Now we've hired a senior experienced solar team last year to help us with this under the leadership of Susana, easy to spot, the women in red. And this business is also a very low cost of capital, low-risk business, so quite different from our more traditional commodity business. Now as we report our numbers during 2020, we will be laying out the numbers under this new format so that you can reconcile 2019 with 2020 numbers. Now I now have 1 slide for each of these 4 segments on our views going forward, and I'll then wrap up with the consolidated views. Starting with upstream. And for consistency, we have kept Brent unchanged from the October assumptions. So we have $65 flat this year 2020, then we have $70 flat. This is nominal. So in 2025, it's still at $70. So this is nominal $70, flat going forward. We know this looks a bit rich today, but we have stopped changing our views on Brent every time we sit here. So on this basis, the upstream cash flow from operations should be over EUR 4 billion cumulative during the 2022 period. And this is supported also by the higher cash margins of the forthcoming projects in Brazil. We've also planted here what cash flow -- the cumulative cash flow would have been assuming $60 flat nominal throughout the period. On CapEx, almost all of it is going for expansion, and we should have EUR 700 million to EUR 900 million per annum. And the bulk is going into Phase 1 of Berbigão Phase 1 of Rovuma LNG, and the remaining is going to the Iara areas and to exploration. On exploration, we have Pitu coming up shortly. We have São Tomé, Namibia, and we also have the appraisal of Sururu. And of course, we also have CapEx going into Angola and Coral, which is ongoing. And as you recall, Rovuma and Coral are project financed, so our CapEx numbers are net of that. Refining and midstream. Again, midstream, you have all the pipelines, all the supply and trading activities and cogeneration. So we have assumed realized refining margins of Galp, realized refining margins of $4 to $5 per barrel. So this is more than $1 less than we had back in October. And refining cash costs, as alluded by Carlos, $2.8 -- under $2.8 per barrel, and cash costs means OpEx and recurring CapEx in the refining system. So refining and midstream EBITDA is expected at over EUR 350 million per annum during the 2022 period, and the midstream contributes with about EUR 150 million of that, to which you need to add the stakes in the associates, which come on top. So this is GGND international pipelines come on top of the EBITDA numbers here. Cash flow from operation for refining and midstream should be over EUR 1.2 billion cumulative during the 2022 period, and this includes associates. And CapEx should be, on average, about EUR 100 million per annum, and this is mostly centered into energy efficiency measures, incremental conversion and maintenance. Commercial. We expect that this -- the integration of all of the group's products and services will put us in a much stronger position to extract much more value from our B2C and B2B clients going forward. This should be a cash flow contributor to the tune of EUR 400 million to EUR 450 million at the EBITDA level during '20 to '22. And cash flow from operations on a cumulative basis should be about EUR 1 billion. CapEx here should average EUR 150 million per year, likely to be a bit lower than that. And this is centered around retail network upgrades, forecourts and digital and loyalty. Now we're spending quite a bit of money on digital and powerful CRM tools to enhance the clients' experience and also to help us optimize our own operations. And finally, on renewables and new businesses. Now you know we had about 400 megawatts of solar PV projects in our Portuguese pipeline, but this recent acquisition in Spain is a step-change for Galp. Now we have been looking at solar projects for quite some time in Iberia, but this was the very best for Galp given its scale, given its competitiveness and given its pure-play nature in Iberia, where we also have our power commercial activity. The EUR 2.2 billion highlight figure considers the acquisition cost itself, including for the recently commissioned 900 megawatts and the development and construction of the other 2 gigawatts coming until 2023. And we have teamed up with the ACS Group in Spain for this, a very experienced player to build this sort of project. It's also great to see a new business generating cash flow from day 1. And by 2023, cash flow from operations of this business on a stand-alone basis should be generating EUR 200-million-plus of cash flow from operations, and here we are assuming EUR 50 per megawatt hour in the pull price in real terms. Now these projects will be levered, and the partnership is most likely for the equity piece. So the -- this will lead to deconsolidation and the impact, the net impact into the Galp balance sheet from the acquisition, the development of the construction, so the whole cash-out, the impact on our balance sheet should be no more than EUR 700 million or so over time. So the transaction does not change our commitment to the overall EUR 1 billion to EUR 1.2 billion of average CapEx -- net CapEx during the next 2 years. It does front-load it to 2020, no debate about this. Equity IRRs from this acquisition are expected to be over 10%, and this is aligned with our risk/return ambitions given the risk of this project and its geography. Bear in mind that this business also brings an economic hedge to our electricity commercial activity, which we plan to expand. Now on a consolidated basis, if we put it all together for this year of 2020, we're guiding towards a group EBITDA of over EUR 2.8 billion and cash flow from operations of about EUR 2.2 billion or more. For the 2022 period, cumulative cash flow should be well over EUR 6 billion. Now how are we planning to redeploy this money? CapEx, EUR 1 billion to EUR 1.2 billion on average for the next few years. To stay within that sort of range, asset rotation is likely. And bear in mind that all this CapEx is going to high-quality new projects, 40% of which fall into the energy transition buckets, LNG included. And we have 2. We have distributions to Sinopec from our Brazilian subsidiary, and we have distributions to the Galp shareholders as per the 10% compound annual growth rate, which we have announced previously. This is all in line with the messages we have been delivering that we can continue to fund our projects, move and diversify into low carbon, and we can increase distributions and keep our leverage low. That was our guidance to 2022. If we look a bit longer than that, and I'll conclude with this, what do we see? We see a very large upstream portfolio of long-life projects which are super competitive. They sit at the bottom of the global cost curve and with half the carbon intensity of the industry today. These are very sought-after assets. We see a cash-generating refining and midstream business. We see a client franchise, which we will leverage much better going forward. And this business commands higher multiples with a low cost of capital. And this includes, again, 4 courts: convenience, B2B, B2C, electricity sales, EV services and all the low-carbon offers that we have in the pipeline. And we see a very competitive renewable energy platform. This is a business model where the economics work. It's also a low risk, low cost of capital business. So overall, different businesses with different criteria for valuation. Now some of our investors will think that our pace of transition is faster than they would have liked. Some will say we're not going fast enough. And we know we'll have to manage this, and we will not be pleasing everyone. That's not just a Galp problem. It's a sector problem, but we are taking this transition very seriously. But one thing we can agree is that Galp is quite different from most of its peers. Given our very manageable size, the nature of our portfolio and our financial flexibility, we can be much more agile than -- certainly more than the big guys, and we will adapt as quickly as we want. And with cash flow from operations some 50% higher in 2025 compared to today and with a lot more going on post 2025, Galp is indeed in a very distinctive place. And I will stop with this, and we break for 20 minutes or so, and Thore comes back to give us the upstream update. Thank you. [Break]

Good morning, ladies and gentlemen, and welcome back. It's a big pleasure to be here today and to give you a little bit more insight into Galp's upstream business. I have 4 key messages for you here today. One, Galp holds an outstanding E&P portfolio that is of world-class. Two, this portfolio will deliver, on average, 10% growth over the next decade, and this will be profitable growth with an NPV at 10, which will deliver a breakeven of below $25 per barrel. And this allows Galp to be really value-focused on what we do. On upstream, our focus will be to maximize the value from our assets, and I think you see that we are delivering. Over the last 5 years, we have quadrupled the production from upstream in Galp. Last year, we delivered a production of 122,000 barrels per day on average, which were 14% higher than the year before. We're doing this from a world-class asset base that contains of nothing less than 2.4 billion barrels of 2P reserves and 2C resources, and with the reserve replacement rate that has been running over the last 3 years at 125%. And with Rovuma Phase 1 and Bacalhau Phase 1 now moving, soon to be sanctioned, we will move additional resources into reserves. Do this with a low-carbon footprint. At 9.4 kilo CO2 equivalent per BOE, we are doing and comparing quite well with the global average of 18. Characteristic for Galp's portfolio is that this is really profitable growth. To have a breakeven at NPV 10, below $25 per barrel is very competitive in the industry and clearly, first quarter. And this asset base will -- grew with 14% from '18 to '19. We believe it can grow with another 13% to 17% from '19 to '20. And as I said, over the next decade, on average, it will grow approximately 10% per year, truly a unique growth portfolio, and this allows us to focus on value. Galp do not need to take any moves on the E&P, unless we see that this is really going to enhance the value of our portfolio, enhance the value for our shareholders. Now a few words about some of the key assets in the portfolio, and I have to start with Lula/Iracema, which is really is our jewel in the crown. It now runs with 9 FPSOs with an installed capacity of around 1.3 million barrels per day. This is all done in over a period of 10 years, and this is very profitable barrels. We see that there is a breakeven at NPV 10 at around $15 per barrel, this asset. And it's been turning into becoming a fantastic cash flow generator for Petrogal. Some $750 million of free cash flow is this asset-generating for Petrogal at this stage. And as you know, we believe there is some 20 billion barrels of oil and gas in place in this reservoir. So we have a lot to work with, in order to further maximize recovery on this field. Our current development plan calls for recovery around 34%. This is still a quite conservative ambition, and we are working with our partners now to further see what are the ways to further improve this, through looking for tieback solutions, looking for further infill wells, looking for further usage of water-alternating gas injection and also possibly, looking for how we can extend the field life. Our ambition for this field remains to recover more than 40% of the oil and gas in place. And let me remind you that 1 percentage point improvement in recovery is nothing less than 200 million barrels. So this is very exciting opportunities to further improve the profitability of this field. But we have more fields that are contributing in a very, very nice way to the Galp portfolio now. In Angola, Kaombo is -- and the second unit, which reached plateau in December, is actually the asset with the highest cash margin for Galp in these days. And in Brazil, Berbigão and Sururu is ramping up ahead of plan and, actually, with only 2 wells is producing around 68,000 barrels per day, 68,000 barrels per day, which is quite remarkable. The third well is expected to come into production in March. So the ramp-up of this field is going very well. And in Mozambique, Coral is developing according to plan and is also on budget. Actually, year-end 2019, there was a completion rate of 63%, which means that we're really well on our way to have first gas in the second half of 2022. Then, these are the assets that are producing and delivering, as we now speak. Then the second wave of pre-salt fields are on its way into our portfolio. Bacalhau, which was previous called Carcará, is now moving forward to FID this year, and it will be developed with the biggest FPSO that has been used in Brazil, with an oil processing capacity of nothing less than 220,000 barrels per day. And this would be a significant asset for Galp and actually will yield us at plateau, something like 40,000 barrels of equity barrels for Galp and about $400 million in free cash flow. We believe that this field have a breakeven that is below -- significantly below $35 per barrel. So this is a very profitable additional asset to Galp's portfolio, and as you know, we own 20% of this field. First oil is targeted for end 2023, early 2024. And we're also now starting a Phase 2. We believe that we need to do some more appraisal in order to understand what would be the optimal development of Phase 2, but there are significantly additional reserves and resources that can be developed in the Bacalhau field. Then we have another really exciting opportunity in the portfolio, and that is our position in Mozambique, and more specifically in the Rovuma basin. Mozambique LNG can really be first class. Its location and position versus serving the market is really first class. We can serve customers in the Far East. We can serve customers in Europe. We can serve customers in South America. We believe that due to the size of these resources, we think there's around 85 trillion cubic feet of natural gas in place just in area 4. We have the -- fact that is very clean gas, no H2S, very little nitrogen, and actually, the relatively benign temperatures in Mozambique, makes it also cheap to develop than, for instance, in Qatar, makes us that we can develop this in a very competitive way with a breakeven that is below $4.50 per million BTU, and it will turn into a fantastic cash machine for us. We expect a plateau that this field would generate for Galp, around $400 million of free cash flow and country to an oilfield, which typically stays at plateau for 3, 4, 5 years. We expect the plateau period for the first phase of this to last for around 20 years, 20 years. And the work of maturing the subsequent phases is ongoing, and there's the real possibility that we can double this performance by developing Phase 2 and Phase 3 in Mozambique. And we have some quite exciting exploration opportunities in the Gulf portfolio. Let me highlight 2 from you today, which can yield very interesting results over the next 12 months. First, Uirapuru in Brazil. We are drilling as we speak. This is a very interesting opportunity, which -- and let me remind you that when ANP, the petroleum agency in Brazil, put this out for auction, they claim, there was something like 7.8 billion barrels of oil and gas in place in this reservoir. We believe that we understand this play concept quite well. This is on the trend line from Bacalhau. And we are, as I said, drilling as we speak. We're getting closer to the reservoir for the minute. The team is quite excited, but this is exploration and we need to drill before we know. But within a month or so, give and take, we should know whether this is an opportunity that will be working. Could be a world-class, another world-class asset, if it works. And the second opportunity, which is very interesting, I find, is our opportunity in São Tomé and Principe. This is actually a play concept that the Galp team developed. The acreage around us now is largely taken by other supermajors. But Galp, together with its partners, which is Kosmos and Shell, in this field, I expect will be the first that will drill in this frontier area. And hopefully, will be spudding during the course of this year or early 2021. This is a very interesting opportunity if the concept works, but this is truly frontier and, of course, with the associated high risk. So let me round this off by -- so to just hopefully, confirming for you that Galp has a very interesting and globally very competitive E&P portfolio, with a breakeven that is below $25 per barrel, and which can grow at least with 10% per year over the next decade. And in addition, we have some interesting exploration opportunities that really can be disruptive in the growth patterns for Galp. So with those few words, I will conclude this session and then I invite my colleagues to this podium for our Q&As. Thank you very much.

Okay. Well, we are starting now the Q&A session. So if you want to make a question, please raise your hand. Say your name and company, and on my indication, assistant will go to you. Thank you. There's a question here on the first table.

It's Sasikanth Chilukuru from Morgan Stanley. I just had a couple of questions. The first one, on your ambition on the renewable side. When you talk about the 10 gigawatts by 2030 year, is that an ambition on a net basis after your farm-down? And also, the CapEx associated with that, is the CapEx that you have laid out for your current projects, is that any indication of what the CapEx levels will look like to scale up to that 10 gigawatts capacity? The second question I had was on your upstream carbon intensity. You talk about having it at $9 per -- $9 kilogram carbon dioxide per BOE. I was just wondering what it would look like in your numbers for 2025 and beyond.

Thank you. I think I will split with -- I will share with Filipe, the answer to your first question. Clearly, the 10 gigawatts, as we had mentioned before, it's based on a fully integrated power approach starting by Iberia, effectively. And as Filipe mentioned, we have considered, in terms of net CapEx, after project financing and assuming that we will leverage these positions, we will have the intention to find a partner or partners to clearly deconsolidate this from our balance sheet, and to run this business according to multiples and according the project financing, that is typically -- is profile. So what applies to the first projects, we have the exactly same intentions to do for the forthcoming additional gigawatts. In relation to the carbon intensity. Effectively, I think our starting point is quite fantastic. So looking at the quality of our portfolio in terms of profitability and at the same time, the carbon intensity, it's quite amazing. But we have to assume and to be aware that once we will continue to grow effectively, our carbon will increase. Our current exposure will increase. We have already embedded in our operations, zero flaring and other initiatives that some of the industry players are now starting to set up as ambitions and targets. So effectively, we have been working on that many, many years ago, and that has required that we have had already invested in technologies to ensure that, that is properly addressed. But Filipe, I think, in the renewable, you can elaborate a little bit more.

So the 10 gigas, bear in mind, 3.3 are kind of done from a access to the grade point of view. So to 2030, the 10 gigas, we're talking about 6-plus of extra capacity by then. Clearly, we had to pay an entry ticket to get into this one. So if you divide 2.2 billion divided by the 2.9 megas, that 750 or so per megawatt. Going forward, and that as the cost of this technology continues to fall and we're looking into 0.5 million or so, as you roll out the next product. So there's also a dilution effect coming, on top of the financial engineering, on bringing in low cost of capital partnerships, low-risk as well. So the impact to our balance sheet, we've mentioned 700 million for the existing portfolio, but to 2030, the equity piece is very manageable for a company like Galp.

And bear in mind, if you allow me to just to complement, bear in mind that we start by solar PV, but that doesn't mean that we will not look at different technologies and sources of different -- renewable sources of technologies. So you should also take that in consideration, which my lines on my hand with a different partnership typologies.

Okay. This table please.

Oswald Clint of Bernstein. Yes, just following on, on renewables, Carlos, you said the transition strategy or success depends on speed and speed will be the difference between the leaders and the laggards. So you're obviously coming up to a period of significant free cash flow expansion, and we expect you to try and deploy that. But you also said the deal you just did was one of the very best you could find in Spanish solar. So just talk about the other ones you looked at. How much worse they were? And what happens if you can't find anything as good as the deal you've actually just done in terms of short term? And then secondly, a great chart on your upstream production. Thank you. I just wondered if you could talk about when do you start declining Lula/Iracema and not long-term exhibit out to 2030. But also, you talked about infill wells and tie-ins, but -- which we've heard about before. I just want to get a sense, is Petrobras an obstacle here in terms of expediting or executing those types of short-term opportunities? I get the sense they may be talking to your other partner. So you identify them. You want to execute them, but perhaps, there's a little bit of an obstacle there with Petrobras. Is that true?

Thank you, Oswald. So I was speaking with a geologist that is at the same time, a great analyst. It's quite difficult to answer to your questions, but I will start by the second one but letting Thore to elaborate. Our partner is not an obstacle. Clearly, we have identified projects to recover our factor. And it seems that every year, we are expanding and expanding and expanding our production, but that will require different investment profile. So I will let Thore elaborate on that. In what relates to renewables. I think the first point was to find out a sizable, economically acceptable base to set up a team to learn inclusively to incorporate energy management skills inside of our organization and build up a platform to look into other geographies. But it has to be completely different from the profile and the strategy that we are applying to Iberia. In Iberia, I should remember to all of you that we have a sizable base of clients and we have done this move, looking at a business that is fully integrated. Looking to other geographies where we don't have exactly the same profile. We have to redesign completely the approach, and effectively, it depends on partnerships. It depends on regulatory framework. It depends on the cost of capital on the risks. So -- but having that team that is handling a business and in geographies, where we might have some strategic advantage and you can think some of them in Latin America and also in Africa, could be the next move, but it's early to start to speak about that. So one step at a time. We have to digest and we have to be humble and to assume that we have done nothing. We are just starting this journey. We have a way forward to do. This is sizable. These brands who has the chance to position on Galp at delivering are not in the laggard side of the industry but building step-by-step. And I think we have a lot of work to do in the next coming years. So -- but Thore?

Yes. I will -- no, we at Galp are very impatient when it comes to sort of making sure that we are really extracting the maximum value of Lula/Iracema.

And the others.

And the others. But I think we are the most ambitious actually, Carlos. So we are pushing, but that should be the role of a partner as well. Actually, we have really -- and the Galp team has spent a lot of time showing the business cases for why utilizing the existing [ ologists ] on the units is such a profitable way to use the equipment. So would we have liked Petrobras to go even faster? Yes. Are they moving and moving in the right direction? Also, yes, there is actually already in our commitment on 10 new infill wells for the field. So we are going in the right direction and we will continue to push for that, and we will continue to push for that. We need to be also agile when it comes to buying new gas injection lines so that we can have more water-alternating gas injection capacity because it works really well in this reservoir. So it's moving. It's moving in the right direction. Would we have liked it to go even faster? Yes. But I think it will eventually go in the way we want it, which is to recover more than 40% of the oil in place in this field.

Here on the first table, first row.

It's Mike Alsford from Citi. A couple of questions for me, please. So firstly, on your newly renamed refining and midstream business. It seems like the focus is now very much on incremental investments and trying to improve the returns and margins in that business. I was just wondering whether you could talk more medium term as to whether you think the business is well-positioned for the longer-term trends of oil demand in Europe. And does that mean that you're rolling out any major investments in that area going forward? That was my first question. And then just sort of secondly, I just wanted to sort of touch on the point you make on Brazil, yes, on Bacalhau. What sort of -- is needs to be done in terms of the kind of remaining contracts for you to sanction the project?

The remaining?

The remaining contracts or anything you need to actually fully sanction the project.

FID.

Okay. So refining and midstream so. So both -- midstream means, as Filipe has simplified trading activities, supply and trading activities, everything that is related with our international pipelines and refineries. In refining, we have proved to you that during the last couple of years, we have been investing in incremental projects that allows us to increase the conversion capacity and also, the energy efficiency, and that's our plans for the near-term future. Europe is in a fast-changing moment. So the green deal is becoming. So a couple of weeks or months. And I think all the refining -- the European refining system will be under scrutiny going forward. So what we are doing today is analyzing alternatives for optimizing using different feedstocks. The example that I have provided to you looking at green hydrogen, as a platform for new usages in industry, where high heat or different feedstocks are required is -- could be a paramount for us. So effectively, we have to look at attentively because the long life cycle of the refining system is no longer as it was previously. So there is no plans to invest heavily or whatsoever in our refining system, except the ones that we have shared with you. So incremental projects to continue to position ourselves in a competitive way comparing with our European peers or competitors. In Bacalhau, the FID should be taken this year, but Thore?

But you're right. So the biggest single item to still to be decided on for Bacalhau is the costs associated with drilling and completion.

Yes.

So that is being tendered as we speak. And of course, then we are doing the FEED for the surf and the FPSO as we also speak, and we need to see that the costs are coming in line with what we had expected, so that we are maintaining this, the competitiveness of this well. As I said, for us, in Galp, the focus is all about value, and we need to see this delivering below $35 per barrel. That's the sort of focus we have for this well. So drilling a well is the key focus right now.

Thank you. Down on the first table, please.

It's Biraj Borkhataria, RBC. Just one follow-up on the Renewables business. I think you're using a EUR 50 power price within that. Could you just talk a little bit about how you expect that to evolve over time, particularly as there's so much capacity coming online in solar? And also, your views generally about taking your merchant risk over time as that portfolio builds up. And the second question is going back to the upstream, is the 3 percentage point increase in recovery rate at Lula is quite material. Could you just let us know whether that's worked its way back into your production guidance out to 2030? Is there any change in the assumptions there?

So thank you for your questions. That gives me time to observe my colleagues to respond to you. Filipe?

On power prices.

Power prices.

Over time, we -- today, you still see a premium for the solar capture hours. Over time, we are building a very significant discount to the average pull price into our models. We actually take the [ parity ] numbers. So these are not just Galp assumptions. So we take marked views. Key drivers in Iberia will be how fast the nuclear fleet will be decommissioned, and there is a deadline for that in the middle of the 30s. Coal-fired power generation is being decommissioned very, very quickly as we speak. So most likely, the price of the pull will be marked by CCGTs. That will be complementing the renewables business. So yes, we're building in a significant discount to average pull prices in the long term.

Just to complement to you, and it's important that when we speak about the fully integrated power businesses, as we do in our oil business, that doesn't mean that we will sell our own electrons. So we always find out for trading activities that you know that I love it. So we will continue to set up a trading team that will continue to see and to search from the energy management point of view, where are the best opportunities from our production and also, where and how we can get the supply electrons to feed our power commercial activities.

And then to your question regarding the recovery factor. Yes, I can confirm that in our business plan, we have factored in a 34% recovery rate for Lula/Iracema in our business plan but nothing beyond that at this stage.

[indiscernible] the production plan [indiscernible].

The impact in production guidance.

No. That is already included in the production guidance that we have given you until 20-30 years.

With the prudence that you know, Galp's profile.

It's Josh Stone here from Barclays. Two questions, please. Firstly, on -- you talked about the upstream being a very cash-generative -- highly cash-generative business. Can you talk about what you think about the CapEx profile longer-term for that business? And to what extent you're willing to sacrifice things like reserve life and reallocate some of that capital towards some of these lower carbon businesses? And then secondly, on exploration, you've talked about some pretty high-impact potential wells coming up. Again, if you think longer term in that business, what role do you think exploration has as we move towards a lower carbon world as well?

So I will start, but I would like to -- just one point that I think it is important. We were looking at the period of 2022, and we have also gave to you a flavor of what might be this company by the middle of next decade and also what could be the company by the end of decade. You should bear in mind that we have also a lot of projects developed and different phases, namely, it's the case of our Mozambiquan projects that will require a lot of CapEx for the second and the third phases. So effectively, the sacrifice that we have mentioned is not really a question. So we have to rebalance our position. Effectively, the weight of natural gas will increase at the same pace that we are opening new avenues in the renewables as long as it fits our sizable risk profile and returns. It's important that you kept that message because we will continue to have that profile and that discipline. Thore?

And as I stated in the presentation, the key driver for Galp and Galp's upstream strategy is value. Value is what is going to drive our behavior, and that also go for the exploration part. If that means that we will sacrifice on reserve life, and so be it. It has to be barrels that are -- and also said, Carlos had in his presentation, competitive also in a below 2-degree scenario world. And that is why we are so adamant about value and value and value. And those are the type of opportunities that we need to find, but we are screening opportunities. In 2018, we screened 64 different opportunities, we selected 3. Last year, we screened -- I don't actually remember the precise now, but it was more than 50. We did not do any deals because we did not see anything that was in the market that was offered to us, that could compete with what we had in our portfolio. So we will be very selective and focusing on value.

There on my right, please. Second row. Irene.

It's Irene Himona, Societe Generale. I had 2 questions, please. Firstly, Mozambique is obviously a key part of growing the portfolio in the energy transition. Can you talk a little bit about your views, your scenarios on natural gas prices going forward, given that this is a rather challenged market? Secondly, Carlos, you presented the 5 levers of decarbonizing the portfolio, but I know these do not translate into explicit targets to reduce Scope 1, 2, 3. You only communicate on a basis of reducing carbon intensity. Is that not of concern or relevance, do you think to you, given your scale?

Thank you so much. So we use not -- to have our views on going forward macro assumptions. So in gas is one of the cases but just not for quit from your question. Actually, we know that in the short, medium term, the gas market is fully supplied, I would say, oversupplied. There's a lot of new projects coming onstream. Mild winters, a lot of geopolitical questions, a lot of fightings between North Sea and the Russian gas. We are observing them. They are competing for putting their molecules in Europe. So effectively, in short, medium term, it seems to be a glut on that. But looking at a more longer-term perspective, gas has to play an important role in combination with renewables. Renewables as a main point, that has to find our technologies and solutions for the intermittency of their generation capacity. And therefore, gas to power is one of the possible alternatives. And of course, there are others like storage and there are different technologies of storage. So effectively, looking into the future, we do see gas and not only gas prices but gas as one of the key elements to ensure that we will behave as a civilization, a smooth energy transition path. The levers of the decarbonization. We do have established for ourselves and our Board and our Remuneration Committee has set up our KPI for the executive team related with carbon intensity index, so we have that. The key point is that, that suddenly, everyone starts to set targets without measuring adequately and how sustainable they will be going forward. It seems to be more a movement that came from the buzz in the entire world community rather than something that is organic and is well analyzed and adequately addressed. We are clearly working on that, and we will come to you with targets, ambitions and what we do think it's well balanced between sustainability and profitability because this is the 2 points, the 2 elements. It could be easier to us to come here and to make a brilliant statement saying that. But the good directions and the good -- the quality of the assets, I think it is the key element for all of us to analyze where we are. First, the starting point is good. We are -- of what we see in our industry in terms of emissions. We have technologies that we are investing since the last 5 to 10 years to guarantee that our operations are eco-efficient. We have introduced in our different businesses eco-efficiency initiatives to guarantee that clearly, we are in that way. The renewables will play also a new important role in that perspective. But of course, addressing what could be the net zero world by 2050 or so, it's something that we have to address seriously. It's a big topic and we will come with that after having a deep analysis with all the consequences but taking in consideration that our position is much better but with the humbleness of knowing that embracing the transition means that we have also to embrace those levers with specific targets.