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

Good morning, ladies and gentlemen. Welcome to Galp's Third Quarter 2020 Results Call. I'll now pass the floor to Mr. Otelo Ruivo, Head of Investor Relations.

Good morning, ladies and gentlemen, welcome to Galp's Third Quarter 2020 Results Conference Call. Today, Galp will -- Carlos will provide an overview of operations as well as cover the recent developments, and Filipe will then take us through the quarterly results. At the end, we will be available to take your questions, where Thore will join as well. I would like to remind you that we may make several forward-looking statements. Actual results may differ to the factors included on the cautionary statement available at the beginning of our presentation, which I advise you to read. Thank you. Carlos, the floor is yours.

Thank you, Otelo, and good morning to you all. I hope you and your families remain safe and healthy in these are very challenging times. So I will start by covering the quarter and then address the events announced earlier this morning. I'm on Slide 4. So after a challenging first half, we saw some signs of recovery during the third Q. And more importantly, we saw Galp's operational resilience coming into play and driving a robust performance during this quarter, which was really challenging. Besides the operational performance, we are moving forward with our strategic guidelines back to our Capital Markets Day in 2020, so in February. So during December, we have completed the transaction-related with the acquisition of the 2.9 gigawatts of solar PV portfolio in Spain. An important milestone on the path to deliver our renewal strategy. The third quarter was also much cleaner in terms of one-off impacts, which affected the sector during the very volatile first half of the year. So you see this quarter numbers that shows Galp's cash generation resilience, even during these challenging times. The third quarter provided a much more robust cash flow from operations of around EUR 390 million. Actually, it was EUR 391 million. And almost EUR 250 million of free cash flow before the payment for the solar transaction. More importantly, in one of the most difficult years ever for this industry and consider or considering the relevant solar acquisition, Galp is almost free cash flow neutral in the first 9 months of 2020. So I think it is something to retain as one of the key messages. Moving now to the Slide #5 and looking at the upstream performance. We have resumed the ramp-up of our Brazilian projects. The units allocated to Tupi, North reached plateau. This is a notable milestone, which represents the completion of the so-called first development phase of Tupi and Iracema fields. First oil for this project was just 10 years ago. And we were able to deploy 9 units to produce with channel at plateau, delivering in a 100% basis, about 1.3 million barrels of oil per day plus the associated gas, which is piped to the domestic market. Additionally, on BM-S-11A, that incorporates 3 fields, we resumed the ramp-up process of the unit, which is developing the Berbigão and Sururu fields, having connected the fourth producer well in early October. In the meantime, the planned maintenance program has resumed with some activities being performed, and other planned to happen this quarter. In terms of production guidance, we maintain at about 10% growth year-on-year. It is also important to highlight the efforts to optimize the development of Tupi and Iracema and continuously assess value-added opportunities for these giant fields. As I've mentioned, we have completed what we call the first development phase. Today, we have the experience and also the technical data which indicates further potential to optimize and extract more value through a second development phase. We maintain, and you should remember that the ambition of increasing the recovery factor to over 40%, and the JV partners are already working towards such objective. Finally, during this period, the Santos Basin pre-thought players agreed on a new integrated framework, which covered the utilization of the offshore gas pipelines and also the access to the onshore gas processing facilities. This will be supportive for our oil production and increases our gas monetization options. Now looking into our downstream operations, and I'm on Slide 6, starting by our commercial activities. So you may see that the commercial activities have delivered a robust performance, given the challenging environment although with oil and gas sales clearly down compared with last year. But if we compare with the second Q, we saw with supportive recovery trends, especially on the retail segment, where oil sales increased over 50% Q-on-Q, also, of course, supported by the summer driving season. This was also followed by the recovery of other value-added segments, leading to a strong quarter in our commercial division. Of course, under the present market circumstances, we maintain our cautious outlook for the months ahead as the outbreak is far from being under control. We will keep, of the course, the focus on the business optimization and the operational efficiency. On the refining and midstream arena, really, really tough, tough times especially for refining. We saw the first half of the year, ending with worldwide inventories at high level. After the lockdown measures in Europe, East, we saw refineries, or most of the refineries, increasing crude rents and a lot of in tank volumes returning to the market. At the other hand, the demand for oil products remained kept by concerns over COVID. This is dreadful combination which is leading to record low distillate prices and negative margins across the industry. Still, our midstream segment was supported by our trading activities, which behaved quite well, inclusively comparing with last year. Looking forward and considering the weaknesses of our refining environment, we are reducing the utilization of lower conversion units, especially the fuels plant of Matosinhos refinery, and this should last for most of the quarter. We are assessing options for the production of low to no carbon products in our refining sites to increase the resilience and the competitiveness while reducing the carbon footprint, adapting to market trends and, of course, to the future EU regulation. These projects are mostly targeting the usage or the reconversion of existing facilities or benefit from the utilities and services already available in our sites and therefore, entail only incremental investments. Moving now to Renewables and New Businesses division on Slide 7. We have now completed the solar acquisition in Spain, becoming a leader in the solar marketplace in Iberia. Currently, we have 914 megawatts of solar projects in operation through our joint venture with ACS. The capacity should reach 2.9 gigawatts by 2024, when we expect to also have our projects on stream, in Portugal, totaling around 3.3 gigawatts on a gross basis. We are fully committed to continue to identify efficient solutions to maximize the project's generation capacity and also to explore the potential of these high-quality premium located solar projects, all of which with grid permits, which I underlined. The size and quality of this portfolio will allow us to accelerate the integration across the power value chain and the development of our low carbon business. Additionally, we keep pushing, and we keep pushing forward new businesses, leveraging our strong position in Iberia, core competencies, and also the integration of innovative concepts to create new cleaner and more valuable energy solutions. This includes also the assessment of projects related with the upcoming energies like the hydrogen project in Sines that we flagged in the recent past, and advanced biofuels, such as sustainable aviation fuels, taking advantage of the circular economy potential and its alignment with the EU strategic goal. At the same time, we are also exploring consumer driving experience solutions related with sustainable mobility and also the decentralized energy generation, which solution we have just recently launched in Iberia. Moving now to the operation related with our gas infrastructure that we have announced early today, and I'm on Slide 8. As you will have seen, we have agreed to the sale of 75% of our regulated gas business. This transaction was well flagged and is part of our asset rotation strategy, crystallizing value from assets in high demand and strengthening our financial position. This also supports the company plans to develop projects more aligned with the energy transition process. Looking at the numbers of this transaction, we have a total consideration of EUR 368 million for the 75% stake, equates to an implicit enterprise value of about EUR 1.2 billion, which represents roughly 13x EBITDA. We will use the proceeds to further reinforce our balance sheet and support our investment plan. Moving now for Slide 9, and I would like to leave you with some key takeaways. First, we will keep the execution focus and also the financial strength that got us to where we are today. Secondly, delivering on our outstanding projects remains our priority. I think nothing highlights better the strength of our core portfolio then being free cash flow neutral during the most difficult period our industry has ever gone through and considering the solar acquisition during the period. With asset rotation moves that we have executed this year, we should be very much on track to meet our EUR 0.5 billion to EUR 2.7 billion annual average net CapEx guidance for the period of 2020, 2021. Ultimately, and as we approach the end of the year, we find ourselves in a supportive financial position with a net debt falling and a EUR 1.7 billion once the GGND sale completes. I'm moving now to Slide #10. And I would like here to conclude by addressing Galp's sustainability profile and the journey ahead. Our portfolio holds today, the set of world-class assets, which combine industry-leading cost competitiveness with a recognized carbon intensity performance. And we said in the past, we want to improve this further. With today's announcement, we reaffirm the ambition to reduce progressively our carbon intensity, promoting the energy transition and supporting the EU climate targets by 2050. And in that path, reduce the carbon intensity of our activities by at least 15% by 2030, considering 2017 as the base year. This is expected to be met primarily as a consequence of our existing strategic guidelines. We will continuously explore other solutions that may prove to be technically and economically feasible, and that can combine value creation with the reduction of our carbon intensity. I have mentioned a couple of them today. Until then, we have the responsibility of not establishing aggressive targets that may have failed to deliver. At the same time, work to develop new ways of sustainable technologies and business models, which may allow us to improve the environmental impact of our future activities and the usage of energy and services that we'll provide to our customers. So we will keep our long-standing commitment to disclose our emissions and impacts of our activities, using the best principles, using methodology that are clearly understood and externally verified. So I'm finished here and I hand over now to Filipe to go through to the financial. Filipe, the floor is yours.

Thank you, Carlos, and good morning, guys. I will keep it short, starting with the P&L on Slide 12. So you will have seen group EBITDA of EUR 401 million in the quarter, and that's down over 35% from last year, given the very tough environment we have been operating in, in all our businesses. Upstream EBITDA was EUR 302 million, that's 36% down from last year. With average Brent of under $43 in the quarter, and that's some $20 per barrel below last year. And we also have the weaker dollar, and this more than offset the production growth. Quarter-on-quarter, the increased EBITDA came mostly from improved oil realized prices. This was supported by higher Brent and more normalized freight costs. And these positives more than offset the even weaker dollar. Now on commercial, EBITDA was EUR 105 million, down 7% from last year, despite oil and gas volumes down 30% and 25%, respectively. Now the decline in volumes has mostly been driven by jet fuel and bunkers, which as you know are higher volume, lower-margin businesses. Refining and midstream EBITDA was impacted, of course, by the very harsh refining environment, although this was partially offset by a good midstream quarter supported by our trading activities. On the renewables and new businesses, we have completed the Spanish solar portfolio acquisition at the very end of the quarter. So hence, we have no relevant contribution to Galp yet. And such contribution will be booked under associates. So it's below the EBITDA as we are not consolidating this business. Financial results in the P&L were quite negative, with over EUR 60 million, coming from mark-to-market valuation on September 30, are financial derivatives to cover natural gas prices and related dollar-euro hedges. Now as we deliver the molecules to our clients over time, these mark-to-market valuations get compensated. P&L taxes basically reflect the upstream tax on production, and this leads to a Q3 net income of minus EUR 23 million. On Slide 13, we have our cash flow statement. Year-to-date, IFRS EBITDA plus associates was EUR 731 million, with a full EUR 380 million from the third quarter only. And the 9 months working capital released was almost EUR 400 million, mostly driven by inventory markdowns, which have also affected the IFRS EBITDA. And the cash flow from operations for the 9 months was EUR 794 million, of which EUR 381 million generated during Q3. So cash flow from operations in Q3 of EUR 391 million. And net CapEx year-to-date was EUR 387 million, EUR 387 million, before the solar acquisitions, and this leads to a pre-acquisition free cash flow of about EUR 300 million. And in the 9 months, we have distributed EUR 318 million to our shareholders. This is related to the 2019 fiscal year as well as EUR 223 million to Sinopec. Now I think this cash flow slide is an important one. So with low oil prices, terrible refining margins and a much, much lower commercial volumes, this perfect storm still brought Galp some EUR 300 million of free cash flow in 9 months and before the solar acquisition. So I would say this crisis should help to differentiate the Galp equity story even more. And in our case, we also have a high-quality, long life asset base with good free cash flow visibility over many years and with much less reinvestments risk. My third and final slide, 14, on the balance sheet. So net debt-to-EBITDA was up to 1.3x, with the combined effect of higher net debt from the solar acquisition and lower EBITDA, of course. Now this should improve as we conclude the divestment in GGND. And finally, we have maintained our strong liquidity at about EUR 3 billion, cash of EUR 1.7 billion and undrawn credit lines of EUR 1.3 billion. And that's all from my side. We're happy to take your questions.

[Operator Instructions] Your first question comes from Oswald Clint from Bernstein.

First question, yes. I think -- I mean, you've clearly executed the portfolio high grading pretty well, which came this morning. I'm -- but just as we think about that, I just want to get your thoughts on how those steps, completing of those deals and really the overall cash flow you've just been speaking about in the third quarter? And if 4Q even holds at these levels, really just give us your conviction around exiting the year with a strong balance sheet, it seems like you're a little bit more positive this time than you were back at the end of the second quarter. Certainly, with that debt number you're talking about. And you could easily be 1.1x, 1.2x net debt-to-EBITDA for the end of the year. I just want to think about whether those numbers seem fair at this point? And second question, please, was just on the gas export system here in Brazil. Obviously, the -- as we think about potential earnings contribution, we still need the gas -- the gas market bill, I think, still has to be passed in the country. So I'd love to get your thoughts on when that's -- or your expectations around that bill and your plans for signing up new customers for Galp in the country, please?

Oswald, so thank you for your questions. Yes, the range that you have mentioned for the net debt-to-EBITDA. It's within the range that we are forecasting for the end of the year. So I think there's not much details to go any further in-depth on that. In relation to the gas export system, this is, I would say, an opportunity for all the players. And we should remember that Galp is the third player in Brazil. So the liberalization of the gas market in Brazil is a unique opportunity. Of course, we have gases associated. So just you to have a global perspective, that represents about 12% of our production. And therefore, it is a beginning this good flag beginning of going into the market and start to explore the Brazilian market, that is a tremendous opportunity for all of us. We have already some opportunities developed to place part of that gas. And we are exploring additional ones. So clearly, one of the odd spots to the near future. Just Filipe will complement a little bit on the first part.

Oswald, your questions, steps to M&A completion. So the solar transaction is completed, the GGND transaction will follow the normal regulatory approvals. And the trust from minority shareholders, we don't expect any issues. We have a super credible buyer, no overlapping assets. It is not impossible that this closes this side of the new year, but the base case is Q1 next year. Your question on cash flows, I think, your numbers are broadly correct, 1.1x seems fair as we delever our balance sheet post the GGND development.

And your next question comes from Thomas Adolff from Crédit Suisse.

Just a question on refining. I'm not sure what your view is on refining margins longer term, but Matosinhos refinery, you're looking to reduce runs there in the fourth quarter. But have you also considered potentially closing that refinery, and maybe building a renewable diesel facility there? That's the first question. And my second question is on production in 2021. Obviously, in 2020, your guidance has come down to 10% year-on-year. You targeted something bigger than that. But at the start of the year, you had some outages related to COVID and then the ramp-up on Berbigão, Sururu has also been slowed down on the back of COVID. As we look at 2021, how should we think about production growth?

Thomas, so in relation to our refining systems, and globally, we are observing the low cracks for the last decade. And of course, all the refineries with low conversion capacity are even suffering more. So what I have mentioned to you is that under this persisting weakness environment for refining, of course, we have to look at the operations also in an economic approach, and that was the reason why we have look at the fuels plant, and we have shut down during this quarter. We are still evaluating and considering alternative scenarios for the future developing of our refining system. Once we will have them stabilized, we will come with news flow to all of you. In relation to the production, of course, by reducing 2020, we will have different expectations for 2021 in terms of guidelines. I will let -- Thore will elaborate a little bit on that.

Thank you, Carlos. Thomas, it is for us too early to say something about 2021. Our focus now is really to deliver on 2020 and then we really need to assess the whole situation with impact on COVID. COVID has an impact because we -- for precautionary measures have less POB on the different installations than what we normally would have in order to try to confine the issue with COVID. That is why a tie up of new wells are going so much lower than expected. So -- but with respect to 2021, let's come back to that next year when we will make an update for you. Focus now is to deliver on 2020.

And your next question comes from Mehdi Ennebati from Bank of America.

So 2 questions, please, on my side. First one regarding your organic CapEx, excluding asset purchase and asset disposal. Should we expect a decrease in your organic CapEx in 2021 versus 2020? I am asking just because operators of Bacalhau and Rovuma LNG projects are currently working quite hard to lower the CapEx for these projects. So do you see any potential CapEx saving from those projects, which might lower your guidance for next year compared to 2020? And the second question regarding your OpEx in the upstream division. I mean, OpEx per barrel has been extremely low. You are at $1.9 per barrel despite, I might have expected some extra costs due to COVID-19. So can you please tell us if there has been any kind of one-off which might explain such a low OpEx in the upstream, or if you have been able to lower the cost. And then with the ramp-up of the inorganic operating costs should remain that low in the near term?

I will take your first question. So actually, we have to look more in detail what will be the organic CapEx because that has to do also with the development -- the development projects that we have. What you know, I had mentioned to you during my initial introduction is that if you compare in average terms, '20 and '21, you should consider a CapEx between EUR 0.5 billion and EUR 0.7 billion. So that's what includes our forecast, and that's what it should considered. But we have to revisit that and come with a more clear perspective during the CMD in the beginning of next year. In what concerns to the OpEx in the upstream. So I will let and ask to Thore to go in detail.

Yes, the unit cost of $1.9 was indeed low. There's really the main reasons associated with that is that we've had somewhat lower production in Angola, and that has benefited the unit cost to somewhat lower. There is, in the second quarter, we also had a one-off effect with respect to paying a bonus to one of the FPSO performers. And thirdly, we're also actually benefiting from the foreign exchange rate. The weaker dollar has also benefited us. So that is really the key reasons for this number versus last quarter.

And sorry, you might then explain those costs to go back to kind of normal level of $2.7, $3 per barrel in the coming quarter?

So that is what we're using ourselves for the internal planning basis for the time being. We will, of course, also with respect to this, do a total review when we are done putting in place budgets for 2021 onwards, but for internal purpose at this stage, this is what we're using, yes.

And your next question comes from Alwyn Thomas from Exane.

A couple of questions from me. Carlos, if I could just ask perhaps a little bit more broadly, we're going through most of this year and the change that you've had to enact this year. How do you think about the company strategically going forward? Do you think there will be greater shift to green versus where you -- what you planned at the beginning of the year? And what do you think it means for your oil and gas business going forward, whether you have to adjust the forward outlook? And then perhaps, could I just get some commentary on guidance from where you think the dividend or perhaps will be or roughly, how are you thinking about the dividend at this point going into the CMD next year?

Alwyn, so from the strategic point of view, I think back in February, we have anchored and gave to you the key avenues that we were launching for the next decade. You have saw that the CapEx allocation that we have decided was to be above 40% related with energy transition initiatives, and we are progressing on that, including there our gas projects in Mozambique. So when you speak about being more greener, actually, that will include gas and power development as part of our strategy. You will also see during the year, increasing our exposure to the renewable spotlight. So that will also imply that we will deepening and accelerate the process of having more electrons inside of our energy mix. It's also something that is absolutely essential for the future of this company. And progressively, we have also to take into consideration that the full energy mix will require different typologies of energies. And we have, I don't know if it is the luck, but for sure, we have to take the advantage of have a such a high-quality type of assets in our upstream portfolio. And we have a lot of value to continue to extract from that. So the ambition to continue to increase the recovery factors and to extract more value from that. And cash and using that cash to finance both our CapEx and as well our dividends, it's something that is important. In the commercial front, the transformation and the adaptation to the new business models, which includes more digitalization and more electric mobility, different solutions like it is the case of the decentralized power generation. There are a set of initiatives that we have to concentrate ourself. So we cannot disperse. We have to be focused from one side. But the other, we have to accelerate because the opportunities to do this change and to do this transition, they are there today, but they might not be in the day after. In what respects to the dividend policy, as I mentioned before, we will only speak about that after the year-end results. So -- but you are seeing that as the time goes by and our cash positions are being consolidated. That gives also some signs, but still certain -- uncertainty in the system. So we have to wait by the year end and take the decision after that.

And your next question comes from Sasikanth Chilukuru from Morgan Stanley.

I had 2, please. The first was regarding the solar PV assets. I was just wondering if it was possible to provide an updated time line. In terms of in development and execution to reach the targeted capacity of 3.3 gigawatts by 2024, at least for the capacity expected by the end of 2021. ACS and so far has announced the sale of its COBRA business to Vinci. I was just wondering whether this has any implication on the development time line in your view. Also wanted to check your -- whether your expectations of around EUR 600 million of equity CapEx to develop these assets was still valid? My second question was mostly a clarification. I just wanted to check regarding the Bacalhau project, whether you would still believe that an FID was in progress -- will be taken next year? Or if there's any expectation of it being realized a little quicker as well?

Sasi, so in terms of time line, what we have is that we have already around 1 gigawatt that is under production. Actually, it's 926 megawatts because that splits between our solar PV project of 914 and a small wind farm that we have with 12 megawatts. So looking forward, we will addition, in Spain next year, 500 megawatts, the year after, around 1 gigawatt, in 2023, more or less 1/2 gigawatt. So we have also some projects in Portugal that are also being developed with a similar pace, which means by the end of 2024 we should have this 3.3, 3.4 gigawatt project fully development. From the equity CapEx point of view, we are not so far away from the figure that we have -- you have mentioned. So clearly, you can assume that as a target. In what respects to Bacalhau, I'll leave the floor for Thore to go in details on that.

Sasi, on Bacalhau, it's moving very well ahead. We are very pleased with the project, and it's moving according to plans. Also very happy now that we agreed with the operator to retender the rig services because we think there is really a market opportunity now to further improve the overall profitability of the product. So full steam ahead, this will be a very exciting addition to Galp's portfolio when it comes on stream in 2024.

And the next question comes from Biraj Borkhataria from RBC.

Just got one clarification and one question. On -- in refining, I believe you have no more hedging in place. But could you just clarify whether there is anything in place for 2021? Or are you just -- I'm assuming you haven't been able to give where mining margins are? And then the second question is on the carbon intensity target. When we think about the portfolio, from now to 2030, obviously, the biggest change is going to be Mozambique LNG added into the group volume. So can you just clarify or give some perspective on the carbon-intensive difference between the base portfolio and Mozambique LNG? I'm just trying to understand whether the reduction is just a function of that mix change plus renewables, or if there's anything in addition you're doing to sort of drive that lower?

Biraj, so in relation to the hedging, the refining hedging, you're absolutely right. We don't have nothing in place. We have monetized them back in the first half. So you are aware of that. So on climate carbon intensity targets, most of the -- so there is a set of contributions for that, that came all across the company. From the efficiency of the operations up to the new renewables business that we are integrating now and accelerating in the coming years. Clearly, one of the key contributors is the capacity of being an integrated company and selling more electrons to final -- to end users, let's say, in that way. That's what it will contribute more. So the more we sell in terms of electrons to our customers, the better for this -- for this process. Of course, the more renewable energy we will have, the better because that also will have positive implications in the mix that we contribute for the full mix. And the efficiency that is also related not with energy consumption, but also with the nature of the products that we will produce all over the next decade. So everything that is more or less carbon content and more other components content is better, including the bio fuels, including other sort of products. And with time, I think hydrogen also will -- could play an important role, even though we are not considering that contribution in this process. So it's basically an analysis that has been done in a well to the wheel and has to do with the strategy that we have released to you. And we were waiting just for the fact that we ask for external of certification. In relation to Mozambique has very small implications in this process. So it's included, but the integration of our upstream portfolio is one of the key elements and also one of the key contributions -- contributors for that. By the way, we will put in our site some details on the methodology and more information for that.

And your next question comes from Joshua Stone from Barclays.

I've got 2 more questions, please. Firstly, just on net debt. You've talked about a level below EUR 1.7 billion. Should we see that as a level you're comfortable with inside the business? Or actually next year, would you rather see that number go lower over time during the next -- over those next 12 months? And then secondly, back on CapEx. When you look to next year, can you talk about your willingness to pursue more or get inorganic opportunities in the market? Or given your transactions this year, should we see the rate of M&A slowing down?

Josh, I will take the second question, even though I think we have already mentioned to the first one. So for the next 12 months is which seems to be an immense period of time under the present circumstances. Inorganic opportunities, we have always to be attentive to them, especially in the new front or in new arena related with the renewable businesses. Even though we have to now to look ahead, and we have a sort of assets that we have to put under production. So we will keep relatively occupied on that front. We will look at the opportunities in a very disciplined financial wise and economic wise way as you recognize from our profile. So that -- those -- any of those decisions that we might take, they always have to comply with the principles that we have released to you. So yes, we will continue to observe. That doesn't mean that we will execute. But we have that obligation. So Filipe, can you please elaborate a little bit on the -- our debt position, please?

Josh, so the guidance we have consistently provided to the market is that we would go no higher than 2x net debt-to-EBITDA. And so there will be no change to that. The driver of the absolute level of net debt in euros, of course, we need to take a view on the EBITDA that we are looking at, look 5, 10 years down the road, what sort of EBITDA is this company going to generate and CapEx levels. So because of the very high longevity of our portfolio, there are no plans for inorganic acquisition nor do we need to given how big the opportunity set is already inside Galp. Plus CapEx that we do plan to deploy in taking more out of the potential in Brazil. So we see potentials in plateau times, in well productivity, Phase II Lula. So our CapEx goes into projects that you know. So it's derisked CapEx, and this is going to consume what we call organic only CapEx. So you have Bacalhau coming up and you'll have Mozambique coming up. Other than that, there should be nothing to affect our net debt levels.

And your next question comes from Anish Kapadia from Palissy.

I had a couple of questions. Just thinking strategically about Angola. It's now a fairly mature asset now that Block 32 has come online and the rest of the assets are moving into decline. It doesn't seem like there's a lot of upside potential. So I'm just wondering what's the strategic rationale for Galp holding onto the asset over the next couple of years or so. What's the future that you see for Angola upstream? And then the second question is just thinking in terms of growth ambitions and kind of Galp over the longer term. Previously, in terms of your exploration business, one of the stated policies was to explore in Portuguese speaking countries. I was wondering, could we see a similar type strategy for low-carbon investment going forward over the next few years?

John -- it's Anish. I'm sorry, Anish. Sorry. So Angola Block 32. So I think we are in a moment that we have all the optionalities to continue to optimize these assets. And I think this should be our priority. You see, if you go back to the Block 14, for instance, every time we start to say that is -- starting to decommissioning. We find always some routes and some alternatives to continue to extract additional valuable volume. So I think Block 32 is in our early-stage and plenty of incremental optimization alternatives going forward. And bear in mind that the margins that we get from our portfolio, including Block 32, it's quite far significant. So it's a good asset going forward. About the strategy of new business and renewals. If we will follow the Portuguese speaking countries strategy. The answer is, yes or no or it depends. So in the matrix that we are considering to looking across Iberia where we have an integrated operation, we have to consider the risk profile of the different opportunities and different geographies. And of course, the geographies where we are already present ranks higher than the others, which means, from that perspective, countries like Brazil, for instance, could have an important role in this process. But we have to look more broadly to other geographies. We have a well skilled, experienced, capable, mature people, team that have experience in many countries that goes beyond the ones where we are today. And we have to consider not only the fact that we have a strategic angle by being present and the relationship with Portuguese-speaking countries, but also looking at where are the opportunities in this new arena. And combining both. So it's a combination of a set of different subjects or elements that we have to consider on deciding to enter in a new geography. To conclude and to summarize, yes, we will consider the Portuguese-speaking countries. But no, we will not exclude anyone, any country that could offer a potential opportunity to Galp.

And your next question comes from Matt Lofting from JPMorgan.

First, could you just talk a bit about the strength in demand that you're seeing for the Lula Iracema crude? I thought it was noticeable apart from higher absolute prices the discount to Brent in terms of the average oil and gas realization narrowed substantially Q3 versus Q2. I wonder to what extent we can read-through from that in terms of what it tells us around demand, particularly incremental demand off the bottom from Asia? And then secondly, can I follow up on the earlier question and the points that you made on the introduction of the 15% decarbonization target to 2030. I mean, if I understand correctly, it sort of sounds like you're saying that the sort of the natural portfolio mix change through the 2020s will be the key driver of that 15% reduction. I wonder with that in mind, and if that's correct, whether you see the 15% reduction as being more of a base case output of the sort of the portfolio mix change through the period? Or a stretch target? And if it's the former, what could be the key sources of potential upside that could ultimately deepen that 15% target as we move forward, for example, dependent in part on where your evaluation comes out on the medium-term strategy around the downstream refining and potentially hydrogen?

Matt, so in terms of the realization price, I think, there are 2 components that are important to take that and to see what happened. So increasing demand from Asian market. So it is the first one. And the second contribution is the freights that had been significantly reduced during the quarter. So these 2 have clearly give us a push-in in our -- in our price -- realization price. In what considers to the carbon intensity targets that we have set up for 2013. They were based on our strategic guidelines that have been released to you or announced to you back in February. So this is nothing different from what we have said. It is what you can call our base case. There are differences in terms of portfolio? Yes. And you know them. So we have committed ourselves to invest and to allocate capital for the energy transition-related projects, as I mentioned to you. The renewables front is one of them. One that is important is also to review and to optimize and to produce cleaner products from our refining system, which is also an important milestone or contribution. Being more efficient, so from the energy efficiency point of view, is also important. And the one that is more relevant, as I mentioned before, is the elections that this company will sell to the market. So it's producing and selling electrons in our portfolio. So these are based on what you already know, and it is embedded in our strategy. So it takes a while during this period just to certify our model, to guarantee that we are launching our base case scenario related with our strategic guidelines. Over time, if we change by any means our strategy, we have to also to adjust the targets. And I think there are, of course, downsides, but there are some upsides that are relevant, depending on the pace and the speed of the development that we will be able to do in the next decade. So we are relatively comfortable with the targets that we have set up. And I think sooner or later, we will be able to accelerate these targets.

And your next question comes from Jorge Guimarães from JBC.

My 2 questions would be, first, is it possible to elaborate on the mark-to-market losses in the gas trading? Because I believe you approached this issue early in the call, but I did not quite understand your explanation. And together with this, if there are any news about the Q2 losses that you booked in Q2? And the second one would be related to the Rovuma project in Mozambique. There were some news that the consortium was looking for reductions in CapEx. Is it possible for you to comment on this? And does it mean that the FID will be delayed, let's say to 2022?

Jorge, so I will ask my colleague, Filipe, to take the first question and Thore to take the second one.

Jorge, these are mark-to-market valuations. These are not losses. What we have at Galp is a significant client base for gas molecules. That require euro and TTF indexed formulas. And most of the gas that we have in our portfolio are purchasing contracts, either from Nigeria, from Algeria or others are in dollars and they're Brent indexes. So what we do when we have a new client, typically large industrial clients, we -- before we close with the clients, we will go to the derivatives markets and offer the clients what he is seeking and that is euro-denominated TTF-linked baskets and we protect the gap, the basis risk between what we buy and what we sell. So we're hedged, and we've locked in our margin. And fortunately, in the P&L, this is P&L only. You have a lot of volatility every day. And the picture you see on September 30 could be completely different the day before or the day after, given how Brent will vary. Our client positions are not mark-to-market. Our derivatives are. So you have temporary mismatch in the P&L one. I hope this will help.

Jorge, and then regarding your question relating to Rovuma LNG. Yes, it is correct, as you have seen that the FID has been delayed. What we are really doing right now is that we are running a comprehensive value enhancement plan in order to see how we can further optimize the product both on the midstream level and on the offshore level. This is working in full progress. I expect that the -- that we sort of in the beginning of next year, we'll then sit down and look into what are the results and from then, then decide what is going to be the way forward. So we have no set a new target for FID at this stage.

And your next question comes from Michael Alsford from Citigroup.

I've just got a couple. Just to follow-up on Brazil and the potential for Phase II Tupi and Iracema. I'm just wondering if you can give us a sense as to, to where that sort of project sits in the priorities of the operator? And really how meaningful could it be in terms of reducing decline rates from that Tupi and Iracema area? And then just secondly, to follow-up on the strategy in solar. You've highlighted the opportunity in this area, particularly across Iberia, but others have also seen their potential and competition is pretty high, as you've seen with the recent low bid in Portugal, I think, it was around EUR 11 a megawatt, I think. So could you maybe just update us to what you're expecting, in terms of what you're targeting in terms of returns and how you compete, I guess, and your confidence in achieving them when competition remains pretty high?

Michael, I will take the solar question, and Thore will go through the Brazilian one. So yes, we have observed a highly competitive solar auctions in Portugal and we have also observed that Galp was completely outside of that. So we have some projects already under development in Portugal in a completely different economic framework. And we do see different approaches comparing with ones that have been visible in the auction, especially from entities that have very low financing costs and probably with other returns required other than the ones that Galp is aiming for. So clearly, we continue to have this target or this range of having a double-digit equity IRR in the projects that we involve ourselves in this marketplace, and we will continue to be very selective in the projects that we choose and we involve with -- in the -- with the same financial discipline that you know. So the competition is high. We have the advantage of having this integrated profile, which obliges the others to be more exposed to the market. And that's probably the reason why we are observing these kind of approaches. Brazil, Thore, could you please elaborate?

Michael, Lula Iracema, or Tupi Iracema, which is, of course, is the name today, is by any standard world-class offshore development. As you know, we think there are something like almost 20 billion barrels of oil in place. So there's a lot to work with. We started out in our business plan having an expected recovery factor of 28%. Galp is today around 34%. And I would say that has been really good work in alignment in the partnership over the last several months with Petrobras and with Shell. And I think we are getting very close to in an alignment of what could be a very exciting second Phase II element of this history. So very good work. It sits very high on the priority list for Petrobras. Petrobras is doing an excellent job. And I think there's a very good collaboration in the partnership. And I think we are starting to see some real resilience on this ambition that Galp has taken, and actually 5 years ago that we should target more than 40% recovery in this industry. There's a lot to come into in the years to come.

And your next question comes from Jason Kenney from Santander.

Yes. I was just looking for some insight on the moving parts for associates. And they do recall back in 2013, '14, we had quite good disclosure on associates. But it's been a bit hit and miss over recent years, averaged around EUR 140 million per year, 2017, '18, '19. Obviously, you're swapping 1 out GGND and 1 in with the solar associate. So are we still -- should we still be expecting that kind of level of associates contribution going forward over the next few years? Secondly, on minorities, again, really just more clarity. It seems to be more volatile than just simply Brazil movements would imply. Is there anything else in minorities that I might be missing?

Jason, so Filipe will elaborate in both questions.

Jason, the difference in associates from the past and going forward is as we as members of the consortium in Brazil, we had this Tupi PV in Holland, renting out equipment into Brazil. All that equipment has been nationalized, meaning it's been exported to the consortium in Brazil. So that is now captured within the EBITDAs and less within associates. So we're going to lose that, or we are losing that. GGND will also become non meaningful. We have -- the solar is going to be the big driver of that, plus some of the pipelines we have, be it the CLC pipelines in Portugal or the pipelines into Maghreb that will be few. On the minorities, no, this is purely volatility from the P&L in Brazil, and that's 30% of the consolidated P&L of Petrobras Brazil?

And the final question comes from Raphaël DuBois from Societe Generale.

Two questions, please. The first one is, you took some restructuring charges in Q3. Can you please give us some guidelines for what is left to be expensed and cashed out? And with regard to the ACS solar assets, can you please tell us how they operated compared to expectations over the month of September when you booked them at least in the associate line? Maybe in terms of load factor and it would be great to know what sort of realized price was obtained.

I will ask Filipe to go through the questions.

So the restructuring charges are the unfortunate cost optimizations that we had to instill throughout the organization given the context. Most of the people will be retired. So this is going to be a long cash out process until they reach the age of going into the source of security, typically when they're 67. So there is some people that have left voluntarily. So we've created some cash out, but most are preretirement agreement. And the entire EUR 40 million or so that you see is related to that, so what we call the [ fifth one ]. The -- your question on the solar performance, it is as expected. So the production is going according to plan. We have, of course, summer months. So it's actually 20% over the expected average for a month, and the pulp prices have recovered quite significantly in Iberia. So all going according to expectations when we altered the acquisition prices.

So this concludes today's conference call. Thank you all for participating. I hope it was a useful one for you. The IR team will be glad to follow-up on anything you might need. Have a great rest of the day and result season.

That does conclude our conference for today. Thank you for participating. You may now disconnect.