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

Good morning, ladies and gentlemen. Welcome to Galp's Second Quarter 2024 Results Presentation. I will now pass the floor to Otelo Ruivo, Sustainability and Investor Relations Director. Please go ahead, sir.

Bondi, welcome to the analyst Q&A session where we will delve into Galp's second quarter 2024 results. Earlier today, we distributed all relevant materials pertaining to these results, including a brief video in which our CFO, Maria Joao, highlighted the key points of this quarter. As such, and following the format of recent earnings calls, we will begin with a short introduction from Filipe and then probably move to Q&A, where our executive team will be available to address your questions. Please note that during this session, we will make forward-looking statements based on current estimates. Actual results may vary due to factors which are detailed in the cautionary statement included in our materials. Filipe, the floor is yours. .

Thank you, Otelo. Good morning. Q2 was another good quarter for Galp. We continue to see solid execution from the teams and of course, from our assets. Our financial position has been further reinforced by both the solid operating cash generation and our disciplined capital allocation. Now you know that asset rotation plays a key role in our strategy as we need to make choices, on which exciting projects we have in our portfolio. So in this quarter, we completed the Angolan farm down, and we announced the divestment from Area 4 in Mozambique. On Namibia, we have no news to share at this stage. Other than, we are preparing the first of our four new wells for Q4 this year. And yes, we're having preliminary discussions with potential partners, but you will understand there is nothing much we can say at this stage on this topic. All in all, Galp now has unprecedented financial muscle and the resources to keep delivering long-term growth from high-return projects. Thank you. Happy to take your questions now.

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

The first one is just on your CapEx guidance, the net EUR 1 billion, which you reiterated today. If I add up all the divestment proceeds so far in the period, and then I give you the credit for the Mozambique sale and obviously, the remainder of the Angola proceeds, I get to around EUR 2 billion of divestment proceeds, that suggests that gross CapEx needs to be around EUR 5 billion over 2023 to hit the target of the guidance. So even if you assume a bigger Namibia campaign that you've outlined and your current ownership level, it seems quite tough to get close to that. And obviously, Bacalhau spend should be rolling off in the second half of '25, and you've talked about slowing the solar growth. So just wondering if there's anything I'm missing here. I understand you want to keep some flexibility given you did and what you're doing with the farm-out, but it seems like there's a lot of buffer in there in the guidance. So just some color on that would be helpful. And then the second question is on upstream OpEx. Was lower than we had modeled this quarter. Now that just includes Brazil. Is that a sustainable number going forward? How should we think about that? And particularly, how should we think about that once Bacalhau is incorporated in the second half of next year. Is that a similar OpEx level to the rest of the portfolio?

Thank you, Biraj, and good morning. I think you have provided the answer in your own questions. Yes, it's going to be tough to get to the CapEx guidance that we have provided. Do bear in mind, there is uncertainty for how long we're going to keep Namibia as we want to derisk and carry as much exploration as possible. We have not sold Mozambique. We have announced the divestments. So let's see how the next few months pan out. We don't expect any issues, but further guidance on net CapEx numbers for the next few years will be provided over the next few months. Maria?

Yes. Thank you, Biraj, for the question. I would just maybe still on the CapEx topic, maybe just an additional note that some of the payments we're still expecting our contingents. So that plays into the fact that we're very comfortable with the guidance right now, and we feel that this is really not the adequate time for us to be revising it. We will be revisiting it's -- in the future, of course. Now on your upstream OpEx indicators, if I understood correctly, overall, we're maintaining guidance of production costs of about $3 per barrel. It's an extremely low-cost portfolio. Structurally, you know that. But for now, if we exclude Corals out from the numbers, we think that production costs are going to go down. They will go down by approximately $0.5 per barrel. So it should clearly be below the $3 per barrel. So it's a run rate of between 2 to 3 -- and also touching a bit upon the DD&A per barrel, this is also going to be lighter. So we do expect it to go down by approximately $1 per barrel. That leaves us in the $10 to $12 per barrel space.

We will now go to the next question. And your next question comes from the line of Giacomo Romeo from Jefferies.

Yes. First question is on the other bit of guidance that you changed actually this quarter is OCF and EBITDA guidance. Just we have an improvement, unchanged macro, you're taking out Mozambique. Can you just talk about what's actually going better than expected in there? And just sort of the key reasons why. And second question, sorry, just going back to Namibia. Can you give us an idea sort of what are the key -- what you're looking for in order for agreeing on a farm down before drilling the four wells, what are sort of the key parameters that you have in mind that would allow you to go this before the four-drill wells campaign? And I just want to understand sort of how you're looking at this in terms of vis-a-vis the timing.

Thank you, Giacomo. So it's indeed a good quarter in terms of earning cash flow. I think the highlight goes to the strong contribution from industrial and midstream. This is going fundamentally to the fact that all units are performing well, including upstream in Brazil. But in industrial and midstream, we were able to capture opportunities across, not just refining but also in the multiple areas where we're trading so that came up to a good overall performance. I think it's worth noting that OCF is also benefiting from the fact that the cash taxes is a phasing effect. I think the first quarter, as you know, is usually heavier, it does not translate into posterior quarters. So we're maintaining cash tax guidance for the full year. That's around EUR 1 billion, EUR 1.1 billion stops. And a couple of other things may have added to the results, namely on financial results on renewables refinancing, but that was fundamentally one-off. So all in all, we're still expecting a tax rate to be around 46%, and that will support our continued strong cash flow and earnings performance.

Giacomo, on the dilution. So we're derisking no pain, and we have the financial position now to be able not to rush into a transaction. So we can continue with the current stake for now, as we derisk what we have in our hands. Ultimately, 80% we need to derisk is disposition. The timing will be a balance between, what we really have to do and when we maximize the value of derisking further what we have. And we will -- I think I've said this before, we will prioritize at that stage, a partner that is keen to develop quickly the prospects and that will fund the CapEx. So this is more than a monetization. This is a real partnership, that would support the development of Mopane and the Namibia.

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

The first one is on the upcoming exploration and appraisal campaign, which you indicated, it will start by year-end. I was wondering if you already selected a location for the first well to be drilled? Whether it is an appraisal or you're looking to derisk additional volumes with the first and also with the following wells, and whether those wells will be tested? And I don't know whether you already have a cost estimate for the appraisal for the next phase of the appraisal campaign? And that's the first question. The second question is on the decarbonization targets. You mentioned you will reassess them, I guess, probably the 2030 target you will be reassessed. I think you were planning to reduce Scope 1 and 2 emissions by 40%. I was wondering whether you're still planning to keep the net level by 2050? And also whether maybe the reassessment of these targets will trigger maybe a reassessment of the capital location of the strategy, given that the upstream will be so big compared to the size of your renewable portfolio and given that the returns on renewables and are struggling, was wondering it still makes sense to invest for you in this business at the moment?

Thank you, Alessandro. On your first question, yes, we have selected the location. We will not comment any further on your follow-up questions. Clearly, for now, we're sticking to the Mopane complex only. So we're not yet looking at the northern parts of the block, it is only within Mopane. On the decarbonization targets, clearly, we need to -- on your own follow-up question, so the CapEx allocation is not expected to be significantly different because of Namibia, but the exposure of emissions. Well, we plan to retain a very large stake in Namibia post-dilution. So this affects our targets. We also monetized Angola and Mozambique. This releases a bit of selling for our own emissions. But the pace at which we have been able to decarbonize through renewables has been lower than expected. So it's prudent that we stop and suspend guidance, but the long-term target remains unchanged. We, in step with society, expect to be at net zero by 2050.

Okay. Sorry, on the cost of the appraisal campaign, do you have estimates potentially of what it could be?

We would not disclose this at this stage other than to say that today, we're facing a more benign environment, certainly in Namibia. So there is capacity. There is competition by the service providers in Namibia. So you should not extrapolate the cost of the two wells as the cost for the next four wells. It's going to be significantly cheaper per well.

Your next question comes from the line of Matt Smith, Bank of America.

Had a couple, please. The first one was back to Namibia and just the net CapEx guidance that you say remains unchanged, but now noting that it includes the E&A CapEx for Namibia. I'm just wondering, is that an indication that now it is your base case, your expectation that you're likely to sort of start that campaign before executing the farm-down process? Is that part of the consideration here? Or am I sort of reading too much into that? And then my second question would be on a different topic and that's refining. I'd be interested to how you'll see in the market there at the moment. I don't know if you could speak to your sort of current refining margins post the quarter, but it seemed as if the 2Q is very much about decline in diesel. I think sort of so far gasoline has now been relatively weak despite demand looking relatively robust. So I'm not sure if that speaks to some of the new refining capacity coming online. But would appreciate your thoughts there, please. Thanks.

No, as I said before, we have ample cushion now on our guidance for net CapEx and Namibia will not consume anywhere close to what we had as cushion. So we will revise net CapEx numbers in due course. The timing of dilution and time of CapEx depends. And we will see. And we will manage the two processes separately. For now, we're quite keen to de-risk the project as long as we can. Clearly, throughout the exploration phase and well into 2025, we should be fine. And when we do have a partnership, then we will see how much of past costs will be coming back to us and what is the amount of the carry that we will get from our new partner. Ronald, on refining?

Thanks for your question, Matt. I think if you look at refinery margins, you need to look at supply and demand, so let me start with demand. I think China is importing less products at the moment. The normal uptick of the driving season that you see happening normally in this month in the U.S. is also not happening, both on the fact of electrification and on the fact of less travel. We see yet still growing strong year-on-year, but that's basically not sufficient to uptick the refining margin from a demand point of view. And I think these all you mentioned to yourself, the cuts are decreasing there. And although we believe the bottom has been reached there for the time being, let's see what the market brings going forward. On the supply side, yes, additional refinery capacity is coming online. I think the Dangote refinery is the best example with an additional 650,000 barrels a day, which is clearly not helping from that perspective. We do expect going forward slightly above $6 a barrel with all cracks down. As Maria Joao mentioned before, we don't see any large maintenance towards the end of the year. So we expect our refinery to [indiscernible] study.

Your next question comes from the line of Irene Himona from Bernstein.

First, a question on renewables, please, where clearly, your previous premium power price has now fallen to the very low Iberian average. Can we expect that Q2 power price to persist going forward? Is there any reason to change that expectation? And then a second question on biofuels, where clearly, the industry is facing near-term oversupply and margin pressure. Can you talk around the economics of your under construction plant at Sines, what margin assumptions do you need for that project to yield your required returns, please?

Good morning, Irene, this is Georgios. On your first question, the second quarter traditionally is the weakest quarter, and we're expecting a weak quarter. Solar capacity, solar production goes up, demand is soft because it's spring. We've already seen now, third quarter, first month of the third quarter, we're already seeing a very substantial recovery of power prices in Iberia, close to what I'd say double the prices that we've seen in Q2, both in base load and in solar capture price. So we're expecting prices to recover in Q3 and Q4.

Thank you, Irene. Let me talk a bit about the question you're asking on HVO. First of all, I think it's important to realize that this is an add-on on our current Sines complex. We had to basically boost the profitability overall from Sines. We actually, hopefully can understand we don't give guidance on specific margins, but the project is still well above the hurdle rate that we have in mind for long-term investments that we do, which is roughly 12%.

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

The first one on Santos [indiscernible], just wanted to have an update on any exploration development and targets for those blocks? And secondly, in commercial, contribution from the nonfuel businesses continues to look strong, representing now more than 40% of your EBIT in the division. Can you give us a bit more color on the drivers and expectations going forward?

Good morning. You have Adriano Bastos from Upstream. A quick highlight on Santos [indiscernible]. We still have a lot of data to look at before we decide where to drill and when to drill. As a guideline, we are planning to drill by late 2025. And depending on the results, we will take our future campaign in country.

Thank you, Pedro. It's Ron from the commercial side. So it's clearly very resilient quarterly results. On the nonfuel, on your question specifically, we are having really good fundamentals on the ticket side, on the transaction side. So basically, at this point, 60% of our transactions are already including nonfuel. Also on the transformation side, we are keeping up our plan. So we have more than 25 stores transformed this year, into the new concept and of course, leveraging also on the contribution margin that we are taking from the cafeteria, which is clearly where the main growth is coming. So we are expecting to keep up with this plan, also optimization on our network and really strong fundamentals on the Portuguese side, though, on the Spanish side, we are still struggling a little bit. On the other levels, the levels also, let me highlight that on electric mobility, we are doubling the contribution and reaching 5,000 charges on the second quarter, which is also something very important for us to offset what can be a decline in oil markets.

Your next question comes from the line of Josh Stone from UBS.

Two questions, please. Firstly, coming back to Namibia on the farm-down proceeds. Last quarter, you indicated the proceeds of staying in countries to carry Galp's CapEx. But the previous answer, it sounds like you suggested some cash could be coming back to Galp as well. Is that a fair observation? And if that is to happen, how would you think about using that cash? Is that stuff that would be banked, or could you consider a special distribution or something along those lines, but maybe just talk about that a little bit. And then a second question for Maria Joao. On the depreciation charge, you talked about the upstream, but also in the downstream in the Industrial and ministry division, it looks like depreciation are running quite low. And I just wanted to understand, is there any one-offs in there? Or is this the new normal rate for the downstream?