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

Good morning, ladies and gentlemen. Welcome to Galp's First Quarter 2021 Results Presentation. This conference is being recorded today. I will now pass the floor to Mr. Otelo Ruivo, Head of Investor Relations. Please go ahead.

Good morning to you all, and welcome to Gap's first quarter 2021 results presentation. I hope that you are all in good health. This should be a shorter than usual call, focused on quarter results only. A broader update will be made during our upcoming Capital Markets Day to be virtually hosted by late May or June. Date and details will be circulated soon. Today, we will have Filipe and Thore to take us through the quarter results and Q&A. As usual, I would like to remind you that we'll be making forward-looking statements that refers to estimates, and actual results may differ to factors included in the cautionary statement at the beginning of our presentation, which we advise you to read. I will now hand over to Filipe.

Thank you, Otelo, and good morning, everyone. On Slide 3, the highlights of some of our key metrics, a strong quarter in an otherwise difficult circumstances, but let me jump straight to Slide 4 on the key drivers of that. Q1 EBITDA was really an Upstream story as Downstream in Iberia was still struggling its way out of the COVID-19 restrictions. Upstream production was marginally up quarter-on-quarter to 125,000 barrels. This was still impacted by the operational and logistic restrictions. EBITDA of EUR 438 million was up 37%. This is quarter-on-quarter with the higher Brent prices. Commercial EBITDA of $69 million was actually quite resilient in the circumstances. Portugal was under full lockdown during most of the quarter, so it's no surprise that Commercial volumes were down another 20% year-on-year, with jet alone down by 3 quarters. Happy to say that things are looking much better now in April with the end of the lockdowns. On Refining, margins improved slightly, averaging $2 per barrel in the quarter, supported by improved gasoline cracks. Still, this barely covers our cash costs. And Matosinhos is considered as a discontinued operation, so this is Sines only. Although middle distillate cracks remain under pressure capped by weak demand, we are seeing improving market conditions with our Refining margin currently above $3 per barrel. On Midstream, the contribution was rather neutral, impacted by some headwinds this quarter. With -- one, with the rapid increase in commodity prices, we had negative swing from the lag in pricing formulas. Two, we also had gas sourcing restrictions from Algeria into Iberia, which forced gas purchases on the expensive spot market. So this squeezed our otherwise more supportive margins in the quarter. We also had extra costs to access the regasification terminal in Portugal, which we had flagged before, impacting results this year to the tune of around EUR 10 million per quarter. Renewables, they're not consolidated in our financials as the operations are mostly developed through JVs. So this shows under the associates line. However, to enhance visibility and highlight the value of this business, we are starting to also provide a pro forma EBITDA for this business as if it was consolidated through the equity method, i.e., our equity stake. So this renewable pro forma EBITDA was just EUR 1 million in Q1. This is a seasonally weak quarter for solar, of course. And this quarter, in particular, we had the restrictions with transformers we had flagged before. This is -- happy to say this is behind us, and it's all operating at full capacity. Now on the P&L on Slide 5 with EBITDA RCA of EUR 0.5 billion, that's up 22% quarter-on-quarter and driven entirely by Upstream. Associates of 0 reflects the sale of GGND and the phasing out of Tupi BV as all this equipment is booked in the Brazilian entity. Other than that, the international pipeline's contribution was offset by the negative net income from Renewables, which is still in the early stage of development. And the financial results, we are now booking as special items the mark-to-market swings on client-driven derivative and FX hedges. This removes unhelpful volatility in our RCA net income line. These are client-related hedges with little relevance to measure the underlying performance of the business. P&L taxes were EUR 181 million in the quarter, considering the effect of the strong Upstream mix on production and income taxes. So this quarter, we had effectively no contribution on earnings before tax from the lower taxed downstream activities. RCA net income was EUR 26 million, and IFRS net income was EUR 161 million. And the difference comes mostly from positive inventory effects from the rising commodity prices. On the cash flow in Slide 6, we have now added an adjusted operating cash flow indicator. This provides a good proxy of our clean operating performance. So this excludes volatile inventory effects, working capital variations and the special items. And under this metric, we delivered EUR 445 million in the quarter, and that's up 46% year-on-year. This quarter, we had EUR 48 million in dividends from Tupi BV as we unwind this unconsolidated vehicle. CFFO was EUR 377 million, considering a positive inventory effect, which was more than offset by a working capital build. Free cash flow generation was resilient at EUR 175 million or EUR 514 million if you consider the proceeds from the sale of GGND. The GGND sale price was EUR 368 million. We have another EUR 25 million to be received now in the second quarter. You will have noticed that we are now booking the reimbursement of principal on IFRS 16 leases below the free cash flow line. So this is in line with what our peers do. So this is now considered as a reduction of debt whilst before, we had it as a free cash flow outlay. Now on Slide 7 and the balance sheet. Net debt was down by EUR 513 million, and with the cash that we generated in Q1, we amortized a EUR 0.5 billion bond in the quarter. Our net debt-to-EBITDA now stands at 1.1x, with the last 12 months EBITDA capturing entirely the difficult COVID-impacted period. Now the EBITDA denominator is expected to start rising meaningfully from April onwards, also with Commercial and Refining contributions, whilst the net debt nominator should rise this quarter with the dividend payments and the last payment for the BM-S-8, the Carcará acquisition, which is a disbursement of about EUR 80 million. And liquidity remains very strong at EUR 3 billion at the end of the quarter. So this is all from my side. Thore and I will now take your questions. Thank you.

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

Yes, I'll keep it just related to the quarter. First question was just on the Matosinhos refinery. I think, last year, you spoke about saving EUR 90 million to EUR 100 million of costs. Is that proving to be accurate so far after the first quarter? And I see some decommissioning costs for that refinery in the quarter. Can you tell us how big those should be ultimately? And then secondly, I mean, just talking about gas and some of the sourcing restrictions you have. But I was more interested in what happens with something like Venture Global. It looks like they're looking to start that up in the second half. So -- and I think you guys are taking 1 million tonnes per annum of that. Are you expecting to take some of that this year? And what happens, it comes into Portugal and then you're going to be selling at some of the pretty high gas prices that we see today? Is that how that contract is going to work? Or perhaps you could add some color, please.

On Matosinhos, so the EUR 90 million to EUR 100 million that we have provided you with is a historical number, and that's what it should have been under normal circumstances. So we have about EUR 60 million of OpEx and EUR 30 million of recurring run rate CapEx numbers in that number. So we have no indication at this stage that the numbers would be different. So we will be -- we are stopping some of the units. Actually, the units should be all stopped by the end of this month, and we are starting the decommissioning phase. Decontamination will come much later. So from a cash flow -- from a cash outlay perspective, this is going to -- this will take a long, long time, but no difference from previous guidance. On the Venture contract, this is first gas in 2023. We have a number of contracts such as with Nigeria and Algeria. Those also mature over time. So the destination of the molecules will be whatever and wherever we can capture more value. So it could come into Iberia. This is a Henry Hub indexed formula. This could come -- we could divert some volumes from Nigeria to other places and bring those down into Iberia. And we can consider that for trading. So too early to tell exactly what the risk management will be around those molecules. But we will be short gas over the next few years if we don't renew the Nigerian contracts.

Your next question comes from the line of Mehdi Ennebati of Bank of America.

So 2 questions, please, if I may. First question, regarding your production, please. Can you please update us on your production at the end of April? And are you confident that you will be able to grow the production from the current level in the coming months? Or on the contrary, would you say that the uncertainty remains currently quite high due to the pandemic situation in Brazil, which remains, according to the news, out of control? And second question, regarding your CapEx guidance, please. I just wanted to know if there is a portion of your CapEx guidance this year which is related to Mamba project in Mozambique. And if yes, would you say that the amount is substantial or not?

Thank you, Mehdi, for your question. I'll take the first, and then Filipe will take the second question regarding production. Two messages. One, we are reconfirming the guidance for the year of between 125,000 and 135,000. Production in April has been ramping up according to our expectation. So in April, we were running around 130,000 barrels per day. So that's where we are. And further guidance, we will not do at this stage. Thank you. Filipe?

So most of the Mozambique CapEx we have on the plan and within the guidance we've provided you, EUR 0.5 billion to EUR 700 million, is mostly related to Coral. So Coral is advancing very nicely and according to plan. We are expecting a low burn rate on Mamba given the circumstances.

The next question comes from the line of Joshua Stone at Barclays.

Just 2 questions, please. One on Refining margins, if you could just give us an update of how margins have been trending in April and any views there. And then secondly, the Upstream operating costs per barrel were quite low and impressive in the quarter. Is there anything to note there and the sustainability of that for this year?

We are comfortably above $3 per barrel month-to-date in April. So it looks better. And we see also jet coming back, so middle distillates with less pressure in Iberia. And Thore will take the OpEx question.

Thank you, Filipe. Joshua, with respect to Opex, yes, it was low in the quarter at $1.8 per barrel. However, this is really actually the flip side of COVID, due to COVID and the restriction that imposes on us, we actually have a POB onboard the vessel. That is, on average, around 70%. So that's actually the main reason, plus there were some adjustments for some past costs in Block 14. We are still comfortable guiding you that it will be below $3 per barrel. How far below will depend very much on what COVID will let us do of activities on the installations.

The next question comes from the line of Thomas Adolff, Crédit Suisse.

Two questions for me, please, as well. Just on the cash flow statement, the dividends paid to noncontrolling interest, essentially Sinopec, it was 0 in 1Q. It was more than EUR 100 million in 1Q last year. Can you just say kind of the timing for the payments of the dividends to Sinopec, if any, and the amount of it? And then secondly, just on the lease payments. So if you look at the IFRS 16 interests and the principal leases, the aggregate of that, I mean, if you deconstruct the EUR 54 million, I think EUR 19 million is related to IFRS 16, and then we have the reimbursement of EUR 27 million each quarter. So it's roughly EUR 150 million to EUR 200 million the annual run rate going forward.

So the dividends to our Chinese partner in Brazil is related to the fiscal year of 2020. This should be paid out in Q2. We're guiding -- and it's related to a relatively weak performance, of course, in 2020 in Brazil, so we're guiding to EUR 100 million, EUR 150 million to be paid out this quarter. The lease amounts, so we've got about a EUR 100 million to EUR 200 million of interest per -- plus principal every year. And we have deconstructed that within what is real interest and amortization of the principal as a debt reduction.

The next question comes from the line of Michele Della Vigna of Goldman Sachs.

It's Michele here. Filipe, congratulations on the strong free cash flow generation in the quarter. And 2 questions, actually, relating to cash flow. The first one is the dividend from the associates of EUR 48 million in the quarter. My understanding is that we're unlikely to see more dividends from associates in the coming quarters, but let me know if that's not correct. And secondly, on the tax, the cash tax was much lower than the P&L tax in the quarter. I believe most of it was due to delayed timing in terms of oil pricing for the taxes in Brazil. How do you expect that to evolve in the coming quarters?

So the constructs that the consortium had, the equipment was booked under the BVs and it was charging the consortium in Brazil with a cost-plus margin basis over time. As we unwind that vehicle, we are distributing the amounts that were captured over time through that margin. So it is distributed out to the Galp perimeter, which you never saw that because Tupi BV was deconsolidated. There's still more to come, not significant amounts, but there's still more to come over the next 2, 3 quarters but not -- immaterial amounts. Cash tax versus P&L tax. So we have a phasing effect in that we are -- in Q1, we paid for the SPT tax in Brazil related to Q4 last year when Brent was materially lower. So if you assume Brent prices to remain flat for the rest of the year, that will gradually be captured over the next few quarters. Remind you as well that when you look at the cash -- at the P&L tax line, this is an RCA tax calculation, whilst we are taxed effectively on a cash base based on IFRS numbers and taxed locally in every jurisdictions based on different tax incentives that we have, such as accelerated depreciation, et cetera. So over time and as per previous guidance, we should expect to see a 40% cash basis and 50% P&L basis throughout the next few years.

The next question comes from the line of Michael Alsford at Citigroup.

A couple of questions for me. On Commercial, clearly, in the 1Q, the volumes were weak given the lockdowns across Iberia. I was wondering whether you could talk a little bit more about the trends that you're seeing now as some of the lockdowns have started to ease a little bit in 2Q. And then the second question I had just was on DD&A in the Upstream. It was a bit lighter, I think, than some were expecting. I'm just wondering if you could just talk a little bit about how you see the trends there through the course of the rest of the year.

Thank you, Michael. If we look out of the window, we see for the first time in many, many quarters traffic and traffic jam. So yes, there's a very different environment since the end of the lockdowns. Jet fuel is going up, but it's still significantly below. So hopefully, we're way past the difficult period of COVID. But we remain cautious until we actually see it continuing on a sustainable basis. But it's looking much, much better now. DD&A in Upstream, we have lower production in Angola, so hence, unit of production metrics also change. So we spread out depreciation based on unit of production. So that is the driver.

Okay. Good to hear that the traffic jams are back and lessened.

Your next question comes from the line of Matt Lofting of JPMorgan.

Two brief ones. First, coming back to Thore's earlier points on production in April sort of working a bit higher. I wonder with the COVID backdrop, et cetera, in the region if you could just elaborate a bit on operating conditions offshore, Brazil currently, the extent to which you're sort of still seeing logistical restrictions relative to sort of the previous 2 or 3 quarters. And then second, Galp talked in Q4 last year about submitting with the consortium on Lula/Iracema refresh development plan this year, including a potential, I think, field life extension request. I just wondered if you could update us on the status of that.

Thank you, Matt. Let me first then address your question regarding production and COVID. As I said, as we are running right now, we are running with a POB that is, on average, around 70% of the normal population. And that is due to minimizing the level of people that are exposed to the pandemic. That has an impact on what we can do of maintenance. Of course, operational critical maintenance is not sacrificed. But when it comes to connecting new wells and doing other maintenance, preventive maintenance, we are behind schedule. That is maintained for the time being with the current situation, in particular, in Brazil. And when it comes to Tupi, Iracema, the work in the partnership goes really well. Very good meetings among the -- in the partnership we'd expect with the view and the plans to developing a new plan for operation and development. And the target remains to submit this by the end of this year, and then it will most likely also include the request for field life extension. So work so far, so good. Thank you.

Your next question comes from the line of Jorge Guimarães of JB Capital.

Two quick ones. Firstly, is it possible to elaborate on the evolution of supply margins in gas and electricity in Portugal on the Commercial division? And the second is do you have any view on today's announcement by Total that it is declaring force majeure in the Mozambique project?

Thank you, Jorge. I'll Take the first one. So on gas supply margins, it really depends on the different sources that we have, be it Algeria, Nigeria or spot purchases. So the market is more generous, I would say, in April than it was in Q1. So gas prices are going up. The issues that we have -- so despite better margins is we have higher regasification costs in Iberia. So that has depressed our 2021 numbers. So we expect this to continue until the end of this year. On -- next question is...

Thank you for the question, Jorge. So we acknowledge what Total has announced today. The situation in Cabo Delgado is really severe. So it is understandable that the situation needs to be controlled first in order to make sure that proper safety can be ensured for the people working on the activities. On our side, it doesn't directly impact us because the work for Area 4 continues to be to optimize and to improve that product in order to move it forward in the value chain.

Our final question comes from the line of Biraj Borkhataria of RBC.

Just 2 quick ones, please. The first one is what proportion of your gasoline sales went to the U.S. in the first quarter? And the second one, you might have mentioned this already, my line was cutting out, are there any Carcará payments due through the year? And if you could just outline what you're expecting there.

On Carcará, we have about EUR 80 million equivalent for payment of the acquisition of BM-S-8 -- of the additional stake in BM-S-8. And we are likely to take FID on the overall Carcará project, and so we will have CapEx. Within our guidance of CapEx, we have the FID as taken. So that's built into the EUR 0.5 billion to EUR 700 million. Gasoline sales into the U.S. is about 20% of the total volume exported. That's about 300,000 tonnes or so. Thank you.

Thank you. I will now hand the call back over to Otelo for the closing remarks.

Thank you. This concludes our call today. Thank you for all your questions. Please contact our IR team if you need any additional clarification from our side. Our next event will be our Capital Markets Day. As we said at the beginning, we will announce soon the date and details for the webcast. We will look forward to having you all there participating at the event. Have a great week, enjoy the rest of the earnings season, and keep safe.

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