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

Good day, ladies and gentlemen. Welcome to the Galp's Fourth Quarter 2021 and Full Year 2021 and 2022 Outlook Question-and-Answer Conference Call. [Operator Instructions] I will now pass the floor to Mr. Otelo Ruivo, Head of Investor Relations. Please go ahead.

Hello, everyone, and welcome to the analyst Q&A session related with Galp's fourth quarter and full year 2021 results. I would like to thank you for joining us today. Earlier this morning, we released all relevant materials, and this time also included a video presentation from all Galp's executive members, highlighting the key achievements during the year and covering the financial results. As such, this session is expected to be shorter, as we will go straight to Q&A, where Andy and the remaining executive team will be available to take your questions. As usual, I would like to remind you that we will be making forward-looking statements that refer to estimates and actual results may differ due to factors included on the cautionary statement presented at the beginning of the presentation we released this morning, which we advise you to read. Andy, do you want to say a few words before we start taking questions?

Thank you, Otelo. Well, it's been 1 year since I started as CEO of Galp, and it's been an exciting year. It's a year in which we have a new purpose: Let's Regenerate the Future Together. And as we look back on the year, we have a robust set of results, despite some operational difficulties, operational difficulties in those supplying us gas and LNG, some operational difficulties in our own refinery and finish, and some operational difficulties battling with COVID and our non-operated position in upstream. We also have a very large working capital build, which masks, I think, the quality of our financial framework and position today. We have a distinctive investment opportunity. 1, it is grounded on growth, growth of our core upstream business, which is extraordinarily cash generative, but also growth in our other renewable and new energy businesses. This gives us an overall decarbonization pace, which I think is distinctive, but also given the cash generation, we have a distribution framework, which I think is attractive. And we have a new distribution policy, one that now fetches buybacks for the discretion or the supplementary element of our distributions, but also a growing of the base from EUR 0.50 per share at 4% year, so EUR 0.52 for this year, with the discretionary or the supplementary element up to 1/3 of adjusted operational cash flow. So I think this is an investment opportunity that shows growth, shows decarbonization and it shows a good yield. I'm looking forward to taking your questions. We've got Filipe, Thore, Teresa, Georgios and Otelo here to receive them. Thank you.

[Operator Instructions] The first question comes from the line of Biraj Borkhataria from RBC Capital Markets.

First one on the some of the gas sourcing issues you had in 2021. Could you talk about the current position right now for 2022 and if anything, incremental costs are baked into your EBITDA guidance? And the second question is on Brazil. Andy, you mentioned previously about some maintenance catch up once you can post-pandemic. Just wondering where you are now and how much of that catch-up is left? And secondly or related to that, for some of the early FPSOs in Brazil, should we be thinking about structurally lower utilization or some underlying declines coming through or are we not there yet?

Thanks, Biraj. I'll start with talking a bit about the gas sourcing and I'll mention a few things on Brazil and pass over to Thore. But on the gas sourcing issues, yes, we have suffered particularly in Q4. We've compensated by our own use, particularly in Sines. This has offset some of those issues. We are having targets rescheduled going forwards. But I think we're getting more adapted managing the overall balance of the supplies we get and the demands we have in our own use but across Iberia. So this is still an ongoing challenge for us, but I think we're much better equipped to manage it going forward. When it comes to Brazil, clearly, it's been a difficult couple of years, particularly with COVID and activity is not going as fast as they normally would. I think we've got to remember these are declining fields. These are fields that now are more or less all fit, drilled up. We've got some infill still. So this is a matter of can you keep pace with additional hookups, higher availabilities to compensate from some of the declining production rates. So, Thore, I think this is a situation that's not unusual, but I have to remind everyone at the call, we have backlog that's going well and being built and will give us 25% production increase by 2025. So, Thore?

Yes, just confirming what you just said, the 2P and Iracema, we have to realize there is now 12 years since the first production. So this field has now reached its peak. There is a slight decline on 2P and Iracema now. All the work that is now taking place is to try to reduce the decline rates. The decline rates are not big. Actually, we are speaking of 2P and Iracema below 3% per year. So which is quite astounding for a field that has already been in production for 12 years. But that is the fact. And as Andy said, only when we get Bacalhau towards the end of 2024, we could expect to sort of a significant uptick in production. We will have a positive contribution in 2023, from Coral, but that's a lot about compensating for the decline that we see in the other fields. Maintenance is being carried out according to plan. We basically have more or less all the units now planned for maintenance this year and you have to expect that there is a utilization factor, filled round about 85% when you're factoring in the usage of the FPSO. So that's for your guidance when it comes to the availability of the units.

If I can just supplement, yes, so I mean Q4 you saw around 125,000 barrels a day, but I think there were 4 units that went into planned shutdowns through the quarter. So I think you got to realize it was quite a high maintenance activity quarter. Just to reflect back on the energy management, we can see a EUR 100 million EBITDA swing from 2021 to 2022 because of regas costs, but also the sourcing issue. So Biraj, I think we are going to get a much better year, much better set of results from our energy management team this year than we had in 2021.

The next question comes from the line of Oswald Clint from Bernstein.

So it's great to see the new competitive distribution framework. I think that's going to help a lot going forward. In that, I think you've stuck to the 1/3 of cash flow in terms of total cash return. It's interesting because some of your peers are also talking about in today's higher microenvironment that 1/3 or 30% might be sub-optimal. So I just wanted to get a sense, if it's 1/3 of adjusted CFO is a hard ceiling or it could be a soft ceiling, could be raised if the environment turns out to be higher than you're expecting or the deleveraging comes in faster? And then secondly, as it relates to some future developments, I'd would like to get a bit more flavor color here on Northvolt deal. I think Georgios was saying he is very impressed by this deal when he saw it at the end of last year. He also spoke about it being the first step in a much larger battery chain for you. So I just wanted to get a sense of what is this total expected capital outlay for you, for net to Galp, and what are the return expectations that you're currently contemplating here? I see Northvolt takes 50% of the offtake, but how do we secure the offtake for the rest, please?

All right. Look, on the distributions, yes, look, I think I'm not going to guide anything, but it's 1/3 of adjusted operating cash flow. Now I think the exciting thing about Galp is we see our operating cash flows grow. So that's I think how we're going to reward our shareholders, by growing our cash flows. And in attractive macro like today, we are fully expecting that 1/3 of adjusted OCF is going to be distributed. Northvolt, I'm going to ask Georgios to say a few words in a second. But yes, I mean I think we're very excited. It's -- Northvolt, a very dynamic company in combination with industrial experience. This is I think a very good joint venture. We talked about EUR 700 million, where 50%, we'll project finance it. You can work out some of the numbers. But we've just come off a call with Northvolt. Having the teams working really well together, we've got good momentum behind the creation of that joint venture. So Georgios, you want to say a few word of your first impressions?

Sure, thanks, Andy. Oswald, thank you for the question. Yes, as Andy said, it's on the high end of EUR 700 million investment, 50% project finance. In terms of -- we are now at the pre-feasibility study. So it's early to talk about returns. But in terms of offtake, one thing I can tell you is that as soon as we announced it in December, the phone started ringing. So it's not going to be -- and reputable companies interested in our offtake. So we don't see an issue in securing offtake for this facility, particularly with what's happening around the globe with lithium hydroxide prices and demand.

So Oswald, you probably don't track the lithium hydroxide prices like you do the oil prices and gas prices. But the raw material, spodumene has gone from about $400 a ton to $2,400 a ton, and the lithium hydroxide product from around, I think $8,000 a ton to a $40,000 a ton now. So this is a -- it's extraordinary what happened in the commodity market around lithium hydroxide, a market where European demand is going to grow 10-fold, so -- for 2030. So this is a business that really excite us and I think we're entering it exactly the right moment.

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

Maybe 3 small questions please. First one, the discount to Brent, your oil and gas realized price sale, $10 below the discount to Brent. I was wondering myself, now that you can increase your gas price, gas realization price in Brazil, what kind of discounts should we expect? Should we expect it to remain above $10 per barrel in the coming, let's say, quarter here? Or do you expect it to go back to the ones that we are previously providing gas, which was minus $6, minus $8 per barrel? Second question on the refining. So clearly, you know you are benefiting from the relatively high refining margin environment. From what I understand, and please confirm if I'm not right, you clearly take advantage of the fact that your gas supply contract is early in your refining business. So this is kind of helping you, I guess the relatively high gas price. But I also would like to understand CO2 costs are increasing quite a lot. How or where can I see that in the division? Is it impacting the cash cost overall? And finally, just on the shareholder remuneration distribution. So you've announced EUR 150 million share buyback. Should we consider that you will buy roughly 59% of those EUR 150 million in the markets, given that Parpublica and Amorim Energia, you will directly buy them some share, or should we expect Parpublica and Amorim Energia to grow their shareholding interest in Galp Energia, and then you realizing [ EUR 115 million ] share buyback that increase for the market.

Thank you, Mehdi. So look, on the first point around the discount to Brent and you asked the question, will we revise our guidance on the discount Brent, because we are now managing to market the gas in Brazil at a higher price than the regulated market with Petrobras. The answer to that is, yes, we are. So we're going to go from an $8 to $10 discount in 2021 to $6 to $8 going forward, because we are actually realizing higher gas prices as we market the gases ourself in Brazil. So that's really good news, of course. I will hand over to Thore on refining, perhaps also to reflect that actually one of the measures and I talked about how we're going to reduce our own use of gas, because of our sourcing restrictions, and one of the things we've done is we've been firing hydrocracker of naphtha, which reduces our own gas consumption. But Thore, I don't know if you want to explain anymore on that?

So Mehdi, thank you for your question. So what you can expect is that our refining margin is actually including the impact of the CO2 cost. It is actually already in the baked in. We expect that to be in the order of $2 to $3 per barrel now right now with the high prices closer to $3. As Andy have said, we had a cushion or have a cushion in the refinery with respect to gas prices. And actually in order to further optimize that, we have found that we can actually run very successfully now our hydrocracker really on naphtha, which is helping us with the utilization of -- actually seen that we can even lift production to somewhat more than 100% of capacity, so that's how we are hedged on that. I'm handing back to you on buybacks.

Yes, I think Mehdi, I think I understood the question. I mean, so we have no specific arrangements with Amorim Energia or Parpublica on the buyback arrangement. We are going to be like EUR 150 million in the market, on the open market. And we're going to do it in a very measured way, and I think less than 20% or 25% every day of the market. So very, very, very slow over the year, starting after the AGM. I have to -- we have to get approval from the AGM to cancel the shares. So we're only going to start the buyback after the AGM.

Maybe just 1 follow-up, please. Can you tell us year-to-date, what's your refining margin, please?

So we have started the year good on refining, Mehdi, and we actually are year-to-date, somewhat above 5%. But it is early days, as you know and it's too early to elaborate more. But so our guidance remains 4% to 5%. If I just may add one little thing. On the differential side, Mehdi, actually our performance on oil, last year, was actually better than the year before. So the qualities that we are delivering from Brazil is continuously being more appreciated in the market or energy management team is executing a very good job, also to optimize on the buying side, we see now a new buyer universe that is also opening up. So the big drag and the reason why it looks so when -- on unrealized basis looks so tough is because gas prices had a big impact on our 2021 results. But as of January 1, we are handling these volumes ourselves and expect for better realization also on the gas side.

On the CO2, the CO2 prices are baked into that refinery margin and operating costs are $2 a barrel. So we have a good margin in today's operating environment.

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

The new format, much appreciated. So 2 questions, please. So firstly, just on the buybacks. What was it that convinced you to go down this route rather than the variable dividend? I mean, I know there's long, long decision on that. But what was it that sort of quenched it for you? And then just some crystal clear on the practicalities of the program. So is the idea that every year at the full year results you announce the share buyback and then for the AGM and other -- in other words, we're going to get regular updates every quarter. It will be sort of always announced at the full year results? And then my second question on the renewables capacity targets you put in. They look to be a bit lower than you put in at the CMD over the sort of '23-'24 time period. So maybe you could talk about what's driving that reduction? And also why you're confident of still hitting your medium-term targets there.

Yes. Thanks, John. So in terms of the -- yes, in terms of why we moved to buybacks from cash, that was a result of actually very extensive consultation with shareholders. Since I came in, as you know, we at Capital Markets Day in June, and then I've been on the road talking to all the shareholders and the majority were keen on buybacks. And so I think we spent our time, we consulted and came back with that as a decision. And we will calculate this on an annual basis, and we won't have to wait necessarily for the AGM to agree to cancel. I think we'll get an authorization to cancel a certain proportion of the shares over a period of time. But yes, it will be based on year-end results to understand how much we'll buy back in the subsequent years or year. Renewables, I'm going to ask Georgios to talk a little bit about what's happening in the Iberian market in renewables, and particularly in solar.

Thanks, Andy. Thanks, Josh, for the question. So yes, we have seen some slowdown in capacity deployment, absolutely. In 2022, we see 400 megawatts coming online, but we also see about 800 megawatts to reach ready to build. So that will be, let's say, our -- that will fill our appetite for 2023. We have confidence in the portfolio that we have and it's executability for the interim target of 2025. But we're also going to look for other opportunities for early-stage projects in order to develop more optionality for the execution.

If I can just add, I think it's Iberian-wide, how long it's taking to get the permits from the authorities. And that's because they've got an enormous backlog. I think they're something like 330 gigawatts of proposals, and that actually is leading to a delay to get these projects going. So I think that's why we've seen this slowdown.

The next question comes from the line of Sasikanth Chilukuru from Morgan Stanley.

2, please. Just coming back to the policy, the shareholder distribution policy, I just wanted a quick clarification. Does the adjusted operational -- operating cash flow on which the distributions are tied to, include the cash flow of the renewables on a pro forma basis? Could you talk about the CapEx and the financing costs, interest payments of the renewables business on a pro forma basis as well? And given that this business is equity accounted, could you provide some guidance on the dividends from the business in the near and the medium term? The second question was on the production outlook. I just wanted to check whether the production outlook that you have laid out includes the new plan of development for 2P and Iracema within the numbers as well?

Thank you, Sasi. I'm going to ask Filipe to answer the first one and then Thore to answer the second one on production.

Sasi, the OCF that guides total distributions up to 1/3 is the consolidated OCF. So it will not catch the cash flows from renewables. It will catch the dividend stream that you'll see under the associate lines in the cash flow. So it is not the pro forma number that you have. So for '20, the guidance we have for 2022 is EUR 2 billion, and that is a consolidated number. So we have a lot more cash that is unconsolidated within that number. On the P&L, what you see, and P&L does not drive the guidance for dividends. On the P&L, what you see is the pro rata share of the net income of the solar companies.

Thank you, Sasi. And then with respect to the POD, yes, our outlook is including the expected input from the -- or effects of the POD. But remember, this is -- the POD has actually a short term, medium term and a long-term element. The short term is very much infill wells. They will be drilled in the next few years, 2 years actually. And then we have a more sort of medium term, that is then looking into what other sort of development opportunities are there of this field? And that is, of course, very much depending on the discussions that we will have with the authorities in Brazil. We see really exciting opportunity for harvesting much more out of this fantastic asset, and that is what we are going to continue to do with 2P and Iracema.

The next question comes from the line of Alessandro Pozzi from Mediobanca.

The first one is a bit more broader. I think if I look at the share price over the last year, probably Galp has not benefited from the rerating of the sector as some of your peers. And I was wondering what you think the market is missing? And would you be prepared to do something different?

Yes. Look, so I would agree with you that we have -- our share price has gone sideways. And that's -- with the macro that is and our cash generation that we're delivering at the moment, I think that's -- and that's why actually buyback is quite a good thing because we think the share price is undervalued. Look, I think the market -- I think we clearly were a company that was growing, had a very aggressive upstream production growth outlook. Clearly, with the LNG in Mozambique being delayed, we've had to moderate some of those production targets, but still for any upstream business, as you all know, a 25% increase in 3 years' time is an enormous growth for an upstream business. So I think that's still -- I think that will come as we get closer to that moment of startup. I think the market will really appreciate that. But what they I don't think have fully appreciated is the scale of our investment, the relative scale of our investment in the new energies businesses, and also the transformation of our commercial business. These are going to deliver real significant cash flows, certainly in the second half of the decade. So I think the market will appreciate that. We're not going to change track. We have a very clear plan. We clearly enjoying the macro at the moment. We have a great upstream position. Our energy management business, as I alluded to, is, I think still going to come into its own, particularly when we start receiving the LNG volumes from Venture LNG. So I think there are a number of catalysts that we have going forward. And I think once you do the numbers and you look out to 2025, you'll see that this is a growing business that is able to yield and decarbonize at the same time. So I don't think there's anything else that you really want from a business like us to have those 3 things captured.

I was thinking maybe whether it's time to make more radical choices. And as you mentioned, you have a great green energy business, whether it's the time to take opportunity of the oil price and start monetizing the upstream to accelerate the development of the green energy business?

Alessandro, I think you'll be surprised if we weren't continue to look at options where the value of our assets were. But this is not a point to give any guidance on that. We have a very experienced gentleman around the table here that can point us to all sorts of opportunities in that renewable energy space. And we will look forward to continuing to, yes, to deliver a good growth business that decarbonizes and yields. And we have quite an organic strategy today, but we continue to look at what the inorganic opportunities there may be.

Maybe a second one on the dividend. Your progressive dividend, I believe you indicated 4% growth. How do you manage to come up with that number? And what are the inputs that went into the calculation into the guidance for 4% growth in dividend?

I think this was -- we reflected on wanting to show that we've got a progressive dividend policy too, that shows that our base will grow in whatever macro environment. And recognizing if you put back shares, we'll have more capacity in order to reward or increase the base. So this is a balance between understanding how much we -- any shares we were going to take out of circulation, how much we could grow the base and what overall dividend kind of contribution that we can afford from our financial framework.

The next question comes from the line of Alejandro Demichelis from Nau Securities.

It's only one. On one of your slides of sources of uses of cash, you're showing the leveraging for 2022 of somewhere in between EUR 700 million and EUR 800 million roughly. So the question is, with all those opportunities that you were mentioning, organic, inorganic, project financing on the Northvolt deal and so on, what is the kind of optimal leverage for a company like Galp going forward?

Thank you, Alejandro. I'm going to ask Filipe to answer that one.

Alejandro, so the target is 1x net debt to EBITDA. That's where we would like to be. And distributions will be sized in such a way that we're always at close to 1x net debt to EBITDA. Now the deleverage that you see for 2022, in great part is also to make up for the increase in indebtedness that we have in 2021 with the cash margins related to derivatives. So you would expect us to compensate the miss in net debt in 2021 that should be covered in 2022. Now the business plan is based on 75 Brent. So there could be OCF would go up with a higher Brent, so distribution will go up, up to 1/3 of CF. So that is quite mechanical.

Okay. Just as a follow-up. So when you get to the end of 2022, with those numbers that you're providing, you're going to be well below that 1x net debt to EBITDA because also your EBITDA is going up, yes?

Correct. That is the expectation. In which case, it will be 1/3 of CFFO that will drive distribution of OCF that will drive distributions.

The next question comes from the line of Raphael DuBois from Societe General.

2, please. The first one is a follow-up on the FPSO utilization rate. You mentioned earlier that we should aim for 70 -- sorry, 85% utilization rate this year. What would you guide us for beyond 2022, assuming let's hope so that the COVID situation does not impact us too much anymore, that you have caught up on your backlog of maintenance. That would be my first question. And then a second one on renewable power. Assuming the EUR 150 per megawatt hour that you use in your short-term outlook, and the deployment plan that you have, can we expect GAAP to receive a dividend from this business? And if you could maybe tell us a bit more about the amount that we should be considering?

Okay. On utilization, so we talked about 85%. As you know, these are aging FPSOs in this environment. We're not the operator. So I have to say that one of the things we're working is working very closely with Petrobras on how to improve it. But Thore, we don't give any guidance on this, but I think these are clearly -- there are a number of things going on in these FPSOs. One is, we're having to maintain them and make sure that we keep the asset in good conditions. We have talked about issues with the risers. And that's an ongoing inspection and replacement program as seen fit. So all these things are multiyear things that go forward. So we're not in a position, I think, to give any guidance. But what we are doing is working very closely. Actually, we're bringing technology into Petrobras to help them with some of the inspection regimes. But I don't think we want to give any further guidance. I don't know if Thore can.

Correct. Andy, that would not be. But 85% utilization rate, what we have guided you for 2022, I think, is also fair going forward that you use that as the key assumption base. We work, as Andy said, a lot with the operator in order to find continuous opportunities to debottleneck and improve the efficiency of the unit. And we continue to see interesting infill opportunities, which is also then being pursued in order to maximize the recovery of the field.

So Filipe, are you going to talk a little bit about the -- perhaps the pro forma OCF we might see this year and then -- or EBITDA? And then do we gain any dividends?

So the mechanics are the following. So we -- our projects are project financed. If cash flows are very strong, then we have cash sweep, so we can accelerate deleveraging of those projects. And there is a dividend being upstream to the shareholders. So yes, on the associates line, in the cash flow statement, there will be a dividend income. What you don't see is how quickly we're de-levering the asset base. We also -- as we do project finance, at the time when the projects are mostly de-risked, so we actually fund 100% of the equity upfront. When project finance arrives, a lot of that money comes back to the shareholders, so a reimbursement of shareholder loans into the project companies. And that funding is used not for dividends, but to fund the next projects.

Can I ask a very quick other one?

Please.

Just maybe in the commercial business, we've seen your old products volumes. They are not yet at 2019 level. Can you maybe give us some idea of how things are evolving year-to-date in this business? And could we eventually see all product volumes back to 2019 level?

Teresa, do you want to answer this one?

Yes. Thanks for the question. We do still expect 2022 to have volumes that are not at the levels of 2019. In the last week, so end of year and January, do show encouraging growth in volumes in key B2B sectors, namely aviation, marine and ground transportation, but not yet at the levels of 2019, and 2022 will still be a year of recovery in volumes.

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

2 questions, if I may. The first one relates to the most recent auction in Brazil where other companies bid for a stake in Sepia and Atapu, and you decided effectively not to increase your stake there. And I was just wondering if you could perhaps comment on how you thought that auction went and some of your reasons behind it? And then secondly, if you could give us some ideas of how the progress is going with the Bacalhau development. I believe the operator, Equinor was talking about it being 50% complete. And what are the key milestones from here?

Thank you, Michele. So I'll answer on the Brazil bid round. It was very tempting. It was a very attractive asset. We know Sepia very well. We're the only other partner in that with Petrobras. So we understood the potential of this resource. It was a very competitive tender in the end, and I think we're well above the minimum bid rate. But I think our assessment was we have a very clear strategy. We have a strategy where half our capital over a period of time is going towards these 0 and low carbon sources of energies and products. And therefore, although attractive in our balance of our strategy, we really felt that this was not a moment to deepen our position in that asset. But obviously, to put the cash towards basically a very future-looking portfolio. And clearly, it was not an easy decision for us to make, but I think one that reflects that we are very serious about our strategy going forward. If I can ask -- because actually, we have a strategy that actually has upstream growth. So already in the funnel. We have 50 years of 2P and 2C resources at the current production rate. So we have plenty in the hopper, and one of the big bets that hopper is Bacalhau. Thore, talk about how the progress is going.

Yes. Thank you, Andy. So Bacalhau is actually progressing well. The next big milestone for this project is now just started drilling and completion campaign in the second half of this year. That's going to be an important milestone for us in order to make sure that we have sufficient production and injection capacity available at the start of the field. As you know, you might know, on Bacalhau, there will be full gas injection from day 1. That is not the field where we're exporting the gas, but actually injecting it straight back into the field. So to have the necessary injection capacity will also be important therefore. So far, the project is developing well.

If I could give a supplementary on the ToR plus. Sepia clearly has an FPSO that's now online and performing really well. The next step there is another FPSO to be built. And actually, when you look at those cash flows going forward, you don't get your money back until well into the next decade. So this is the real question, where is Galp going to be in the 2030s and 2040s, and was this strategically a good move for us to make? Or is this the moment for us to put in our capital elsewhere?

The next question comes from the line of Ignacio Domenech from JB Capital.

My first question is on Namibia. Following the discoveries of Blo, is there any [ Block-1 ], is there anything that you can do for Block PEL 83 Namibia? And maybe if you could give us some color on any potential drilling campaign? And if you prove to be successful, do you plan to develop this block, or would you be looking into potential divestments here? And my second question, and apologies to come back on gas realization prices. You mentioned before the opportunity to include the differentials in Brazil following the gas market liberalization. So perhaps if you could elaborate on what levels of gas price -- for Galp that you're achieving and what would be the tenure of these contracts? And what is the benchmark? And maybe what is the percentage of the gas you produce which is being impacted?

Ignacio, I think I got the second question and -- but let's go to Namibia first. And yes, we're very excited about what's going on around our PEL 83 block. But Thore, perhaps can give a bit of color to that.

Thank you, Andy, and thank you, Ignacio, for the question. Yes, we are really, of course, excited. This has been a position that we've been holding for a while. We have had big faith in Namibia and actually see some very interesting structures. The Graff well and the Venus well is next door neighbors. And for us, this is taking away one of the key risks that was actually a working petroleum system. This fact that these discoveries are made, makes it very good proof for that the petroleum system is working. And it's actually leading us as we speak, to upgrade our probability of success quite significantly on these 2 fields. So yes, the -- I can tell you that there's a lot of happy faces in our exploration department these days. And as you perhaps noticed from my presentation, we have also 2 other very interesting shots in the exploration magazine this year. We are drilling as we speak, in the Campos Basin in Brazil, the so-called BOB prospect. And later this year, we will also be drilling in Sao Tome and Principe and something that we actually think is quite, quite interesting, both of them with quite significant Galp positions and in Sao Tome and Principe, we actually hold 45%. And in Namibia, we actually have 80% of PEL 83. So it's an interesting position to have right now.

Ignacio, I think you were talking about the gas contracts we have in Brazil. Actually, we've done 6 different deals already and we're only 7 weeks into the year. And we're marketing our own gas. We're not committing at all. We're only committing between 1/3 and 2/3 of our gas production into those markets. But we're also marketing on behalf of others. And we're getting -- as you might imagine, we're getting really attractive -- well, much more attractive than the past gas prices. There are 7 companies marketing gas in Brazil, and we're one of them. And we're, I think, very proud that we've set up that capability. And I think you will see those numbers coming to the bottom line. So through the Upstream results, but I don't want to reveal really the length of those contracts or the price lines. But what I can say is this is a reasonable amount of cash that we're generating from these new contracts.

The next question comes from the line of Pedro Alves from CaixaBank.

My question is on renewables. Just a quick refresh on what should we expect from Galp in terms of inorganic movements. We have seen last week the news that ACS is likely seeking a buyer for Zero-E, the renewable subsidiary, where you hold a 75% stake. So could you please comment on this, on your intentions to this company? And also in terms of -- on the acquisition side, what -- I mean should we assume that your inorganic moves will be mostly early-stage portfolios like you mentioned or perhaps more aggressively to scale up your portfolio, would you perhaps consider merging, for instance, this JV with ACS with other Spanish listed player? Could this be a possibility for M&A? Or would you rather do a corporate move outside Iberia?

Thank you, Pedro. Let me start that and then I'll hand over to Georgios. I think the first thing to say, we have 4.7 gigawatts now in our funnel. And we've got a line of sight to build out that capacity. And as you know, we've added Brazil this year to that portfolio, but also deepened also in Iberia. Now these are -- we get into these projects early, so we can get the biggest return from those projects. Clearly, we will continue to look at it inorganic, but we're not giving any kind of guidance on that today. I have to say, I think we've got a strong portfolio, and we've got one that gives us certain visibility to our 2025 target. I don't know, Georgios, do you want to add to that? I mean, we do continue to look and we will look to rotate our own assets, as we've said, in order to maximize the equity value. But also perhaps mention a little bit about ACS and Zero-E and what we understand from that announcement.

Thanks, Andy. So on the organic versus inorganic, we are growing and buying early-stage portfolios. I mean, I consider that mostly organic. So this is something that we will selectively continue to do, as I was saying before, because it adds optionality to our deployment through the years. On ACS, we don't want to comment on announcements of others, but we don't see any, let's say, impact on our portfolio and our relationship with them.

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

2 follow-ups, if I could, please. First, just on capital allocation, it sort of felt to me based on the sort of the earlier answers around how Galp looked at the Brazil bid round in recent months, there was perhaps sort of some degree of constraint in terms of how that was assessed from a capital allocation perspective, given the degree of allocation that you're putting towards the low-carbon piece over the medium term. So I wonder if you could talk a bit about how you think about the company's ability to be agile or nimble around capital allocation over the medium term and particularly if oil and gas prices and the up cycle around that sustains over the medium term, the extent to which you can respond to that? And then secondly, we're obviously seeing sort of signs in some segments of cost inflation reemerging in the industry in recent months. Bacalhau is obviously a very important project for the medium term for Galp. Can you just talk about sort of post the FID, not just the sort of the drilling and completion side, but the extent to which the contracting is locked in around that project for the next couple of years?

Yes. And so, can I just -- to the point of agility, I think what we want to do is keep our powder dry. And say we've got 50 years of 2P and 2C resources at current production rates. We're growing our upstream production. We're committing quite a lot of capital towards that. We didn't see any reason to spend quite a bit of money on getting more resources in that funnel that will not even deliver cash flows or get our money back until well into the 2030s. And okay, the price is high today, but we can't predict what the prices are going to be at the end of this decade. So I think that was really us signaling that, yes, Galp is a company that is determined to decarbonate its portfolio over time. We have to make some hard choices and we made a hard choice, so that we could actually reserve, I'd say, the firepower for things that are lower carbon in due course. Now cost inflation on Bacalhau, I think -- Thore, perhaps an update on how we see costs on the Bacalhau project.

Thank you, Andy. And if I may just add to the first, it's also that we have a very, very competitive upstream portfolio. Remember, our breakeven is actually below $25 per barrel. So anything that wants to get in has to be really damn good. So there's also a lot of competition to get into the Galp portfolio. When it comes to Bacalhau, we believe that Bacalhau is actually in a very good position. We have the EPCs locked in. And therefore, we have very limited exposure versus cost inflation on Bacalhau, which is, of course, is a very important field for us. And the same goes both for the FPSO and also for the SiRF contracts. So as we see it as of today, we are in a quite good and robust situation when it comes to Bacalhau.

The next question comes from the line of Pablo Cuadrado from Kepler Cheuvreux.

Just 2 quick questions from my side. The first one is related to the production cost on upstream. It has declined by roughly $0.20 year-on-year. I was wondering whether you can tell us how you are expecting that to move in the next -- for this year, particularly, but also probably if you are able to give a little bit ambition going forward and even when Bacalhau starts, that would be great. And the second question, I'm sorry for coming back to this, is on operational cash flow. And I want to understand the guidance for this year, the EUR 2 billion, is that a reported figure, i.e. that's a figure that excludes any kind of working capital inflow to be recovered from the losses that you have had in 2021? Because I might recall that you have been highlighting that part of the working capital impact should be recovered as soon as the gas contracts has finally delivered on physical terms. So I wanted to understand that EUR 2 billion basically assumed any working capital inflow or not?

Thank you, Pablo. Can I ask Thore to talk a bit about the production cost guidance and Filipe on the OCF guidance?

Thank you, Andy, and thank you, Pablo. When it comes to production costs, actually, our production costs in the fourth quarter was unusually good that. There is a one-off effect in the fourth quarter that is related to the fact that we're transferring assets from our Dutch BV to Brazil. That helped it. So going forward, where we are guiding you is that we continue to say that you should expect it to be below $3 per barrel. That is the guidance we have and when Bacalhau comes, that will sort of clearly also sustain these levels. So continued very competitive OpEx from the side of our Brazilian business.

Pablo, the best way is to go to our Slide 29 on sources and uses of cash. You'll see the EUR 2 billion is the clean OCF. And we're guiding now for OCF because it is clean. So we're taking out every variation in one-offs working capital, inventory effects. So EUR 2 billion is a clean number. Then yes, on top of that, there will be a significant cash inflow from the 2021 fiscal year, but that will not drive. So only OCF will drive the distribution policy.

And our final question comes from line of Mehdi Ennebati from Bank of America.

A few follow-up questions. First, Andy, can you please make sure I understood well. You said earlier regarding the share buyback that you will realize whether the market, that you will do it slowly. But you also said that it will be 20% to 25% of the daily traded volume. Did I understand well, or no? First question. Second question, so you have been impacted by the EUR 605 million working capital outflow due to gas derivatives in 2021. How much are you confident, how are you confident that you will get back the EUR 605 million in 2022? Have you been approached by some of your customers telling you we can't pay it because it's -- because we can't pay for the gas. We want to renegotiate the gas deal, et cetera, because it's too expensive? Or do you consider that the demand is pretty nice and you will get back your EUR 605 million. And finally, so you commented quite a lot regarding your utilization rate of 85% for 2022, but I probably missed it. What was the average utilization rate in 2021?

So Mehdi, let me start with the first. I don't think we caught the last question. But firstly, on the buyback, let me -- yes, so we are actually looking at about EUR 1 million a day, which will be about 3% to 4%. So well below what I mentioned before. So only 3% to 4% of share acquisitions in the market on a daily basis. Filipe, can you talk a bit about the working capital outflow?

Yes, Mehdi. So we're highly confident that we're getting the money from the clients throughout the year. And if I understood your question, so -- and putting in an extreme scenario, if clients were to stop buying the gas from us, then we could place the gas in the spot market. So financially, this is not going to be a risk for Galp in 2022.

Can you ask your third question?

Yes. Just you said that your upstream or your FPSO utilization rates in Brazil should be around 85% in 2022. Can you please remind me what was your FPSO utilization rates in Brazil in 2021?

Thore, can you help us on that?

Yes. So the effective rate for last year was in that order. It was actually around 83%, Mehdi. So that's where we expect to come up somewhat, but 85% is what we are guiding you for next year.

We have some extra questions to take. The next question comes from the line of Ignacio Domenech from JB Capital.

Regarding 2P oil reserve, you mentioned these were up 11%. However, 2P plus 2C reserves are down 8% year-on-year. So I was just wondering why these reserves hopped up? And maybe if you could tell us what would be the recovery factor assumed at Iracema?

Ignacio, can you please repeat your question, please?

Yes. You mentioned 2P oil reserves were up 11%. However, 2P plus 2C hopped to 8% year-on-year. So I was wondering why reserves hopped up? And then my second question would be on the current recovery factor assumed at Iracema?

Okay. I think, Thore, the question is about the reserves and the adjustment of the reserves and the recovery factor we're expecting from 2P Iracema.

So we are not publishing in details reserves and resources and what we have been to change for the single -- the different fields. We do that on a portfolio basis. But as you correctly pointed out, the oil reserve, 2P has increased in Galp with 16% last year. There was a decline on the natural gas reserves. That is really due to the fact that there is -- we have Gwalia McNulty that is doing the auditing of our reserves. The fact that we now have gas contracts in place in Brazil requires us then to book the reserves according to what the gas sales contracts are stipulating and that led to a reduction in on the reserve side. So overall, the 2P increased in Galp for last year with 2% versus when you look on gas and oil in totality. When it comes to the recovery factor in 2P, I'm not 100% sure whether I got your question. We continue to work on improving the recovery factor on 2P, and that is a very important reason for this new plan of operation and the development that was delivered by the end of last year, which actually sort of really targets to continue to improve it, short term by more infill wells, longer term by looking into further development on the field, and even more than that also looking potentially field-life extension. That is now discussions that we have with the authorities in Brazil.

The next question comes from the line of Henri Patricot from UBS.

Just a couple of quick ones from me on the Sines HVO project, targeting FID in 2023. You're still looking at start-up in 2025? And can you comment on the progress you're making on the waste feedstock sourcing strategy?

Thore, can you help us with that one?

Thank you, Henri, for your question. Yes, we are very excited about this HVO advanced biofuels projects that we are currently doing the feasibility studies for in -- as we speak. This is going to be one of the elements in our portfolio to turn Sines from a gray refinery into a green energy park. Waste feedstock sourcing is going to be a key element. And we are actually, as we speak, in direct negotiations with partners, that we are looking to join into this product to make sure that we do the sourcing in the most optimal way. I cannot disclose more of this at this stage, but take it for granted that feedstock sourcing is an important part of this project.

And the final questions come from the line of Michael Schwartz from Jefferies.

I was wondering what are the main fields or FPSOs in Brazil that are in decline? And which ones are still at plateau? And then following on that, what is the average decline rate across your business in Brazil? And then I have a second question. In terms of your refining margin, what is included in terms of energy costs? And you have your guidance for $2 per BOE for refining cash costs in 2022. Could you break down the components of that? And do you still have a long-term target of $1.7 per BOE for refining cash costs?

So if I can first -- I'll just -- look, firstly, as you might imagine, our Brazil assets have essentially showing roughly flat production going forward because we're -- well, we're wrapping up a few fields like Sepia and Iara fields. And clearly, with 2P and Iracema, we're seeing some declines. So overall, this is a mixture of some of usual ramp-ups, some infill drilling and some decline, keeping overall flat. So I don't really want to get into the details of each individual field, but we see our Brazil assets delivering, as I say. Flat until backlog comes online when we see the 25% increase. I think anything to add on refinery margin, Thore?

No. I think we have said what we want. We are not wanting to discuss the details and how our OpEx is really -- is composed, Michael. That's not the sort of the level that we are disclosing at this level. However, what you can expect is that the $2 per barrel is a robust target. We are working, of course, to continue to optimize it. But as Andy said in his opening remarks, we did have operational challenges at the refinery last year. So it's a very important part of our recovery is to make sure that we are not doing the maintenance and the -- that it was long overdue in the refinery, and that's why we are looking for $2 to be a very robust guidance for you going forward as well.

Thank you. There are no further questions. I would like to hand the conference over to Mr. Otelo Ruivo for closing remarks.

Can I just one, because some may be a bit confused on what I said about the buybacks. And so the 20%, 25%, you have to be below that for the safe harbor regulations. So that's why I mentioned that number. But the actual number is between 3% or 4%. So well below where the regulations would stipulate. So I just wanted to make sure you all were clear about that. Otelo?

Thank you for clarifying, Andy. I think this ends the session for today. Thank you for participating. I hope to see you all soon. Bye, bye.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.