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

Good afternoon, ladies and gentlemen. Welcome to Galp's Second Quarter 2023 Results Presentation. I will now pass the floor to Otelo Ruivo, Head of Investor Relations. Please go ahead, sir.

Hello, everyone, and welcome to the Analyst Q&A session to review Galp's Second Quarter 2023 results. As usual, earlier this morning, the team released all the materials related with the results together with a short video where Maria Joao covered the key quarter highlights. We will, therefore, follow the format used over the last earnings publications. This means going straight to Q&A. So today in the room, we have Filipe, which will be the main host together with the full executive team and some leadership team members as well. All here, happy to take your questions. Now the usual disclaimer. We would like to remind you that we may make forward-looking statements that refer to our estimates and actual results may differ due to a number of different factors as per indicated in the cautionary statements included on our materials, which we advise you to read. Filipe, do you want to say a few words before we start the Q&A?

All right. Thanks, Otelo. Good afternoon, everyone. Well, you have seen the robust underlying business performance after a few quarters of -- with some noise. It is important that we all focus on the fundamentals of what Galp really is. So we -- when you buy a Galp share, you're buying growth. Now this is a growing company. You get yield, of course. You know we have longevity. In our upstream portfolio, we have some of the lowest carbon and the most competitive barrels out there. We're doing very significant progress in decarbonizing the traditional businesses. We have a profitable renewable footprint, which we want to integrate increasingly into our core businesses. Our core business is and remains liquids and biofuels are part of this. We have a fast-transforming commercial footprint with a very attractive network and a convenience offering. More recently, we have restructured the energy management organization under Rodrigo's leadership, results start to show. So we are creating long-term value creation. And then you get all the upstream exploration upside. So what we try to do here is to build a portfolio with a real terminal value, so that we try to get to a higher multiple of EBITDA, which reflects the fundamental values of Galp beyond the short-term distributions. Thanks.

Thank you. We will then go to Q&A.

[Operator Instructions] We will now go to your first question. And your first question comes from the line of Oswald Clint from AB Bernstein.

Thanks for the stock pitch there, Filipe. You're almost doing our job for us. But first question just on Brazil oil volumes. It looks like you're talking about improved efficiencies again in the second quarter. I think you talked about that in the first quarter. I think you replied to us back then, it was understanding the reservoir and just making sure the reservoir is intact. Still below 100,000 barrels a day of oil in the second quarter. So the question is, how much of the volume upgrade is Brazil oil? And could we ever see this getting back to 115,000 barrels per day of oil in terms of that side of the portfolio. And then secondly, just sticking with oil and Namibia, 2 exploration wells planned I see. Any chance you could share some indicative pre-drill estimates for these targets? And any update on farming down this acreage pre spudding those wells?

Thank you, Oswald. I'll start with Namibia. Daniel Elias in Brazil will take the first question. It is too early to share information Namibia from our side. It looks like it's large and high quality. But I'll stop there. We do have 80% of the Block, 8-0, and Galp is actually carrying the other 20%. So it's clearly too high of an exposure. So at some stage, once we derisk this, yes, we will be inviting a credible party to the table. Daniel?

Oswald, thank you for the question. Yes, we confirm that in the first half of this year, we are observing in Brazil production performance that as a consequence of us providing an update on guidance for year-end. We have to highlight that the guidance that we have shared previously was a multiyear guidance. So what we are going to do as the year closes, we are going to review the performance and the consequences of the maintenance program. And then if reasonable, we will provide new guidance. But for the time being, this is the guidance we are maintaining, the multiyear guidance, and we are upgrading this year's guidance based on Brazil.

Your next question comes from the line of Biraj Borkhataria from RBC.

The first one is on refining. I've noticed a drop in medium and heavy crudes in your sourcing and a commencing drop in the middle distillates yield. I was wondering if that's intentional and you're shifting towards gasoline due to better pricing or if that was around the availability of heavy and medium crudes in the market post the Saudi cut, so any color there would be helpful. And then the second question is on the U.S. LNG offtake. Venture Global recently announced a delayed to Calcasieu Pass to the end of '24. Obviously, you're in arbitration, it looks like Shell and BP are involved there also. But could you just remind us what was baked into your 2024 earnings guidance for energy management and what's that risk there?

Ronald, you'll take the refining question.

Yes. Thank you for the question. Clearly, this plays to our advantage of actually having a relatively flexible system in Sines that due to crude flexibility we can adapt to the market. And if you look at the developments in the quarter on diesel and gasoline cracks, the crude optimization basically has been driven by using the right crudes for the market that's at play at that moment in time. Yes. So this has nothing to do with the availability, but purely an optimization game around Sines. Thank you.

Rodrigo, Venture.

Yes. Thank you very much, Biraj. On Venture Global, so let me start with 2023 quickly. So we are clearly very disappointed, right? So according to publicly available information, they have already produced and sold well over 170 LNG cargoes so far, but they claim to be under commissioning still. And we understand all those cargoes over 170 have been sold in the short-term market to whoever pays more as opposed to delivering under the long-term contracts signed by foundational customers such as Galp who helped underpin the project. And Galp is actively engaged with the counterparty and is assessing all options to pursue the effectiveness of our contractual rights. Regarding the updated guidance provided earlier today, for clarity, Galp is not considering now any Venture Global volumes in 2023 period, right? So we are not giving guidance for 2024 yet. Thank you.

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

A couple of questions from me as well. The -- you raised the guidance for the industrial and midstream. Clearly, Q2 was a big beat. I was wondering if you can give us a bit more color on the driver of that in Q2 and whether the increase in the guidance was mainly driven by the Q2. There's more to go maybe in the second half of the year. Also, a few weeks ago, I believe you put out a press release suggesting that you're looking for offshore wind opportunities with TotalEnergies. And again, I was wondering if you can give us maybe your thoughts on how you can structure the business model there in terms of exposure, in terms of potential capital employed that you're looking to deploy in that particular opportunities and the type of returns that you'd be comfortable with?

Thank you, Alessandro. Maria Joao will take the first question on drivers of the guidance, industrial and midstream and Georgios, the offshore wind. Thanks.

Thank you, Alessandro, for your questions. So indeed, for the second quarter, what we're seeing in terms of guidance is an uptick. So we're bringing it from the initial guidance of EUR 550 million to EUR 700 million. This is indeed leveraging on the performance of the first quarter, but it's also very much acknowledging that midstream has had a good performance. So even though industrial is remaining at circa EUR 300 million. Midstream is now expected deliver a little bit above EUR 400 million. So that overall is driving our performance and our uptick in guidance. Thank you.

Thank you, Alessandro, for the question. Yes, we are jointly exploring with Total, the opportunity of offshore wind in Portugal. This is an opportunity that is clearly a long, long-term one. We have partnered with Total to explore this because of the expertise that Total clearly has in the area, and of course, because of who we are here in Portugal. This is a pure Portugal play, but it's really, really early stage. Our involvement and any eventual commitment will critically depend on how this regulatory framework for offshore auctions in Portugal will develop. And all the details are still remain to be seen. So it's very, very early to talk about business model and other commitments. Our focus remains on what we're doing. Our focus remains on what we are doing here in Iberia, on the renewable space to mature our current portfolio and that would be it. We'll maintain a very disciplined approach when it comes to offshore wind. Thank you.

We will now take your next question, and it comes from the line of Pedro Alves from CaixaBank.

The first one on renewables in Brazil, if you can give us more details on the specific constraints that you are facing in the country to reach our return thresholds and that led to delay some of the FIDs? And secondly, and this is a follow-up from this question in renewables, and this is more in terms of capital allocation because you have projects under construction of just 0.3 gigawatts and most of the 7 gigawatts in pipeline is said to be under development in early stage of development. So I think it is not illogical to say that you need to acquire a portfolio in the market to meet your target by 2025. So my question is if you think that you have enough time to buy a pipeline or is natural to think that Galp could be a buyer of operating portfolios as well? And in any of those options, what will be the priority in terms of markets? Do you think there is still a relevant long position in your supply and industrial operations in Iberia that could be covered by the pipeline of the 2 gigawatts in Iberia? Or would you prefer to expand into other markets?

Thank you, Pedro. On Brazil renewables, it is purely a consequence of what we're seeing in the market now. So you have seen inflation, CapEx inflation over the last few months, sharply rising interest rate, cost of capital going up and power prices actually under pressure. So the decision is not a strategic decision of Galp. It's purely based on economics and returns. On the wider portfolio, we will not be pushed into meeting hard criterias on dates or gigawatts. We are very keen to keep the discipline and to continue to want the trust of the market that whatever we do in renewables is going to be economic. It has to comfortably cover our cost of capital. And the logic is also one of making sure that we find integration opportunities. So we're not necessarily doing green electrons in isolation. In Iberia, it's pretty obvious. We have a huge business case to integrate green electrons, be it in our commercial footprint, be it in electrolyzers. And in Brazil, we also see logic on building a business case around green electrons and convert those into something else that is close to our business model. Thank you, Pedro.

We will now go to the next question. And the next question comes from the line of Sasikanth Chilukuru from Morgan Stanley.

I had 2, please. The first was related to Mozambique. Last quarter, you had indicated that a second FLNG unit in Mozambique was not necessarily in your budget and you were more focused on the onshore development. But in recent weeks, there appears to be more traction for the Coral North FLNG unit with reportedly consultation meetings on the Environmental Impact Assessment already having taking place. Just wondering if you could provide more details on where we are related to this on this project and on Rovuma LNG. And if the Coral North FLNG were to go ahead, how that would impact the CapEx plans for Galp? The second question was related to CapEx. You've highlighted a slower pace of investments in renewables and industrial low carbon projects leading to a lighter CapEx in 2Q. I was just wondering what the EUR 0.4 billion to EUR 0.6 billion 2023 net CapEx guidance was incorporating with regards to investments in renewables. If the previously mentioned issues in Iberia and Brazil were to persist should be any further or it's already included in this guidance?