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

Good afternoon, ladies and gentlemen. Welcome to the Galp's Fourth Quarter and Full Year 2022 Results and Outlook Presentation. I will now pass the floor to Otelo Ruivo, Head of Investor Relations.

Hello, everyone. Welcome to the analyst Q&A session related with Galp's Fourth Quarter and 2022 results. Earlier this morning, we released all the results materials and a video presentation from Filipe, highlighting the key achievements during the year and covering the financial results. We also announced diversion from our Angolan upstream assets, as I'm sure you all saw. Therefore, after some initial words from Filipe will go straight to Q&A. We have Filipe, Teresa, [ Yargus] and Thore from the executive team; and Rodrigo, our Head of Energy Management here to take your questions. Before we start, I would like to remind you all that we will be making forward-looking statements that refer to our estimates. Actual results may differ due to factors included in the cautionary statement presented at the end of our presentation that we advise you to read. Filipe, the line is yours.

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

So 2 questions, please. The first one is on the EUR 1 billion net CapEx guidance. When you're building that up, do you only include the Angola divestment in there to get to the net or are you assuming you'll do further divestments over the 2023 to 2025 period? And then the second question is on low carbon growth and financing. One of your peers talked about basically reducing the use of project financing, given the way interest rates have moved and how balance sheets have improved. So could you talk about any changes in assumption there between project financing and how much you're going to take as equity financing?

So the net CapEx guidance is net. And why is Galp so focused on the net number? If you have less divestments, then we can do less investments. So we target overall net number. So it keeps the discipline to rotate assets and to high-grade the assets within an envelope that is precepts. Now as we invest more in renewables and because we have now consolidated renewals, we want to show green EBITDA as part of our overall mix of EBITDA. Could there be more divestments? There could be depending on how quickly we want to ramp up other low-carbon initiatives, and that is not just renewables it can be the pace at which we do hydrogen, for example. The pace at which we do HVO. So what is important is that we continue to invest in upstream very significantly. But the overall envelope for upstream is net 0, frankly. And even for renewables, if we see value in rotating renewable assets, we will do so as well to keep within the guidance. On low-carbon project finance, now there is -- and you will have seen this morning's publication that almost all of Galp's net debt is already green and will be completely green, very soon. So no need for Galp to issue a green bond because we are green almost by definition, given the legacy free cash flow release of the high carbon businesses. The appetite from lenders for green project is immense. Because we consolidate those, we set up structures whereby we get a bit the benefit of project finance allocated or earmarked for green projects, but they will sit on the balance sheet without necessarily having to have all the strength [indiscernible] of a typical project finance exercise, including high cash balances, high debt service coverage ratios.

And the next question comes from the line of Josh Stone from Barclays.

Two questions, please. First, if we just get to Brazil and the volume guide, it does look about 615 barrels a day, 7,000 lighter than your previous guide. So can you just better flesh out what's going on there? Are the reservoirs declining more quickly than you first thought? And if that is the case, what confidence can you give us that that's not going to be an ongoing area of disappointment. And then secondly, on the Angolan disposal, congratulations for getting that way, that’s an attractive price. You talked about using those proceeds for increased CapEx, but is there any -- or to what extent could you consider using some of those proceeds for the distribution to shareholders?

Let me try to answer you first regarding Brazilian production. What we have done over the last few years is that we have worked enormously internally in order to develop better methodology in order to be able to predict how the production is going to be. As you know, we are not standing on the well ourselves. This is really non operated assets. So we have actually developed a very good, I think, no probabilistic model in order to try to forecast production. Hence, also what happened last year, where we really were spot on our forecasting. We are doing the same this year. Factoring in that there is a significant larger downside than there is upside. On a good day, we are producing 1 percentage points better on a bad day, it goes to 0. This is then factoring in that the assets in Brazil are -- have reached peak for now on Tupi and Iracema in particular, but also in [indiscernible] it will come. And this is then a prudent way to try to forecast where we will be in the next 2 years until Bacalhau comes on stream. I think I will underline it. I think it is prudent, but that is also the way we should be guiding you. The decline rate for Tupi/Iracema is still in my 36 years of experience in this business astounding that it doesn't decline faster. We see a decline rate that is below 5% per year. So it still is a very good reservoir, but it has peaked, and there is natural decline, and that is what we're trying to factor in. It's still really, really profitable barrels that is coming out for Galp in Brazil.

Josh, on Angola divestments. We like to be in giant, low carbon intensity reservoirs even if we are a minority. So focusing on the Brazil appraisals, which includes Lula Bacalhau, of course, which are much younger fields, and they're very also long life. Our Angolan assets had -- or have CO2 emissions per barrel pretty much in line with industry average, which is reasonable. But our Brazilian barrels have an emission intensity, which is well below that. So this divestment also improves our overall intensity. You asked about use of proceeds. So our upstream is still growing. Bacalhau will bring some 40,000 new barrels per day. Angola was just 12,000 and declining. Bacalhau alone is EUR 1.6 billion of CapEx to GAAP. That's 2x the Angolan proceeds. So as I said before, we need to keep -- if we're taking net 0 seriously in 2050, we need to keep discipline in overall upstream increased exposure to upstream. So we need to rotate and we need to high-grade. Now a word of caution [indiscernible] and Namibia could change this if they are successful, given the share size of those 2 assets. The market was not attributing also the value we managed to crystallize Angola at. 830 is quite above market consensus, which, by the way, this applies to most of our assets. So the use of the proceeds is to keep the overall net CapEx number within the EUR 1 billion as we develop Bacalhau, as we invest in decarbonizing industry and build up the renewable portfolio. The market was concerned as we consolidate renewables that our CapEx numbers will be much higher than $1 billion. So keeping the $1 billion is our way of using the proceeds.

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

The first one is on the long-term production outlook. Certainly, Bacalhau coming on stream gives a bit of a boost. But I was a bit surprised to see a bit of a production coming down soon after Bacalhau. And at the same time, I see that you haven't included much upside from Mozambique. And I was wondering whether you believe Mozambique is now coming on stream before 2030? Or are you just taking a more prudent approach there? And also, I think if you can give us maybe a bit more color on DD&A in the upstream, how that will change in '23. Of course, we're going to have the addition of coal sales, but also Angola is coming out. So I was wondering maybe if you can give us an update on what DD&A going to go in '23.

Let me to start then first on your question regarding the production outlook. First and foremost, the key focus -- could you mute your line, actually, Alessandro because we get a lot of noise there. So thank you very much. So first and foremost, our key focus is now to get Bacalhau on stream. As we have said mid-2025 is now our focus. It's an extremely profitable asset for Galp. It's significant, as Filipe said, with 40,000 barrels per day, but it's also with a very high level of profitability. So that's number one. Number 2, as you correctly are alluding to, for sure, there is upside in Mozambique. It is promising and interesting to see that our colleagues in total has just recently been to Mozambique. The reports from the ground is pointing to that the security situation is improving. And that is a very positive side with respect to also the further development of Mozambique. And by the way, let me also say that we are extremely happy so far with how Carol South is ramping up. It's an astounding achievement by the teams that has been involved that an FLNG product is already producing the way it is doing. But yes, Mozambique represents an update. And then let me underline once more, which Filipe just did in his previous intervention, Galp has 2 really big diamonds in this portfolio being Namibia, where, in my view, we have the best ZIP code. We have around 2,000 meters water depth or some of our colleagues that is in neighboring blocks operates at 3,000 and deeper. So of course, if we make a discovery there, this can be extremely profitable barrels. And also São Tomé and Príncipe. We have drilled the first well. Being a Norwegian where we drilled 66 wells before we found any oil. This actually hit in the first well. We proved there's a working petroleum system in São Tomé and Príncipe. And Galp is very well positioned in 3 very interesting opportunities in São Tomé and Príncipe, Block 6, 11 and 12. And I think you should look forward to further de-risking of that in the next years to come. So yes, Galp has for sure, upside on its longer-term production outlook. And I think you can expect more profitable barrels to comment stream.

On Mozambique, is there any update on a potential second floating vessel?

So Alessandro, what is being evaluated in Mozambique is one is to look into -- is there a fast way to further develop the coal part of the reservoir but where the majority of the efforts are now is actually so what should be then the onshore development so that we really can materialize the significant resources. As you know, we think there are around 85 filling cubic feet of natural gas in place in just Area 4. And that is onshore. We're looking into smaller train, modularized train, learning from what I've successfully have been done in the U.S., and that is what is now being discussed intensively in the partnership and it's also being matured so that as soon as we feel confident on the ongrown situation that could be new products that is being launched in Mozambique.

As on DD&A, we will have less DD&A from Angola. Of course, we have a bit per barrel. We have less DD&A in Brazil. So the overall DD&A even with Core will go down meaningfully next year. So from '13, '14, if I'm not mistaken, per barrel to something around $10 per barrel overall portfolio.

And the next question comes from the line of Pablo Cuadrado from Kepler.

Just 2 quick questions on my side. The first one will be on the upstream guidance. And I was totally keen if you can drive us a little bit with the difference between the guidance you are waiting for this year and next year? I mean, as you reported EUR 3.1 billion EBITDA, now you are guiding for more than EUR 2 billion. Clearer [indiscernible] that the commodity prices for x assumptions that you are making are clearly different and you have Angolan disposal. But running through the sensitivities that you are providing, looks to me at least. But the EUR 1.1 billion drop for me, it's difficult to get. So if you can probably help us a little bit to understand what's driving the EUR 1.1 billion EBITDA drop on option. The second one will be a quick one on working capital. Clearly, last year, you were widely highlighting last year, there was like a dual effect, clearly much more negative in H1, but much more positive in H2. So to the best of your knowledge and looking the environment at the moment, what's your expectation for this year.

So the upstream EBITDA guidance. So yes, so do bear in mind the kind of is x Angola, we have assumed lower oil prices. Do bear in mind, we're using the dollar at EUR 115 to the euro. If you look at the sensitivities page on the appendix, $0.05 on the dollar is about $120 million overall gap, and that's -- a lot of this is driven by upstream. On working capital, what happened in 2022 was exactly as we had expected and as we had explained throughout the year. So we had very significant margin calls underlining our hedges to protect risk. Days have rolled off as expected throughout the year. So that money is no longer tied up. During 2022, the commodity prices went way up. So we have a lot more normal working capital tied up in inventories and client receivables. Assuming what we are assuming on macro commodity assumptions, we would not expect working capital to change much from end of 2022.

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

I had 2, please. The first, I just wanted to understand more on the production at the Tupi field. When I look at the data provided by A&P, I do calculate an annual decline rate of around 7% actually for the Tupi, which includes [indiscernible]. In fact, some of the annual decline rates in net some FPSOs, including 369 and 66 close to 20% in 2022. So just wondering if you could kind of comment on the decline rates, especially on some of these facilities there, is it fair to assume such kind of level of decline rates? And also, along with the Tupi, I just wanted to understand the progress made for the Tupi determination plan, especially the importance of this for the operator, [indiscernible], of course, other growth projects to focus on as well. So when you talk about this 30% increase in production between 2023 to 2026, have you included any contribution from the Tupi redetermination plan at all? And if yes, is it possible to highlight from when do you expect this contribution to come from? The second question was on net debt. Just wanted to understand, will net debt increase or decrease by end 2023, in your current guidance of EUR 2.2 billion OCF, EUR 500 million of buyback, dividend payments of around EUR 400 million and goal in cash proceeds as well. I was just wondering what's the trajectory of the net debt levels, including this guidance as well.

If I then try to take the first regarding the production and the redetermination. What we see based on our own in-house reservoir models, is that we see a decline rate for our Brazilian assets that is below 5%. That is what we have in our business plan and what we have factored in. I believe that is prudent. You are correct that on Iracema, there is a higher decline rate than there is on the rest of the field, just to mention that. And it has to do with the fact that, of course, it's much significantly smaller resource pool that the Iracema is producing from the from TV. But overall, what we see is a decline rate in the order that is just below 5% for our Brazilian assets. We have -- with respect to redetermination, that has just kicked off. We have just had the first initial sort of alignment meeting in the partnership, and it is way too early to factor in any results of that. This is going to be a lengthy process that will go over several years, and we have not factored in any outcome of this process at this stage.

Sasi, on net debt, so the guidance we are providing -- these are really averages 23 to 25. So it's not a year-by-year guidance. Having said this, net debt is pretty controlled. But I would also say, given the mix of our assets and the long-life nature of our assets and the weight of renewable assets in our portfolio going forward, we're actually happy conceptually to see net debt going up in euro terms. The asset is increasingly green. Our green competitors have net debt-to-EBITDA of 4x, for example, or 5x. We are at 0.4x. So it is a very low base, and there's no reason on how this new Galp’s transformation would continue to stick with such low oil and gas net debt in its balance sheet.