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

Good afternoon, ladies and gentlemen. Welcome to Galp's Third Quarter 2024 Results Presentation. I will now pass the floor to Otelo Ruivo, Head of Investor Relations.

[Foreign Language], and welcome to Galp's Third Quarter 2024 analyst Q&A session. As usual, we will start with a brief introduction from Filipe before diving right into Q&A, where our executive team will be happy to tackle your questions. Now, also usual disclaimer. During today's session, we may make forward-looking statements based on our current estimates. Actual results could differ due to various factors outlined in our cautionary statement within the materials we released this morning. Over to you, Filipe.

Thank you, Otelo. Good morning, all of you. Otelo, this is going to be your last call. As some of you know, Otelo is starting a new position within Galp. He's going to be our CFO of the Renewables division working with [Georgios]. Many thanks Otelo. This was really great fun working together over the last 10 years. And you've always acted brilliantly as the external face of Galp with the capital markets. So João Pereira, some of you know well, João will lead our engagements with the markets. João will be reporting to Alex Gonçalves. And Alex is our Planning and Performance Director, and IR will be under his watch as well. Thank you again, Otelo. On the quarter, pretty straightforward, I would say, robust performance. This despite a much less supportive refining and commodities price environment. All in all, we're at the end of October now, we're quite confident that we will be beating our full year guidance. Our key projects are progressing well. On the downstream side, very strong convenience, client services delivery. In industrial, good energy efficiency initiatives, green hydrogen, SAF, sustainable aviation fuel, those projects are progressing well. And in Upstream, we have the Bacalhau sell away from Singapore to Brazil, expecting this December. In Namibia, we are drilling our third well as we speak. This will be a keeper. The fourth well is planned for the summer and then followed by wells #5 and 6. The location of those last 2 still to be decided depending on our best assessment of the reservoirs at that time. We will also be carrying out high-resolution seismic work over the entire Mopane complex during Q1. Now we remain very keen to hold on to our 80% stake in Namibia at least until we get the results from our next 2 wells. As you know, a number of other wells are going to be drilled in Namibia by other players around our block. So lots of very precious information is going to come our way over the next few months. So very, very exciting times for Galp and for Namibia. Thank you.

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

Otelo, thanks for the help over the recent years and best of luck with the new role. So the first one, just on the midstream. It's been a recurring theme this year that had a very strong contribution from that division and obviously, rising gas prices help. I was wondering how we should think about the medium term, particularly into 2025, where you should get the additional volumes from Venture Global at some point. Is that incorporated into your guidance going forward? And how should we think about that with a bigger portfolio? And then the second question is just on one of the areas where it looks like you won't maybe hit your guidance, which is on a CapEx, the less than EUR 1 billion per annum on average. Even if I was to assume a big step-up in Namibia spend in the second half of '25, it still looks quite challenging to actually get to that number with the divestment proceeds agreed. So could you just talk a bit about CapEx and the moving parts into 2025 and what we should expect there on a gross basis?

Biraj, this is Rodrigo Vilanova with Energy Management. First of all, thank you for your question. We do expect to maintain a strong contribution at this stage. We are not considering yet Venture Global volumes, which is truly disappointing. So they have produced almost 400 cargoes, and we are yet to receive the first one under the long-term contract. But we do expect to keep a strong contribution despite the fact that we haven't received any cargoes from Venture Global yet.

Biraj, this is Maria here following up on your question on CapEx. So indeed, we are well within the 3-year guidance we have given for EUR 1 billion CapEx per year. This still has in itself a number of things going on and that we expect that as they close, will reduce uncertainty. But in any case, as we've been signaling we are now not expecting to complete the full EUR 1 billion CapEx guidance per year for the 3 years. In particular, we were looking forward to the closure of the Mozambique divestment. Base case is now for the closure in early 2025. That will, of course, have a significant impact on the numbers. We will revise guidance in the aftermath of that. But for now, we're not revising the guidance and we're staying within those figures.

The next question comes from the line of Matt Smith.

I had a couple as well, please. And the first one would be on Namibia, of course, with the first appraisal well underway now and the second into summer. Could you just give us now a bit more detail, a bit more color in terms of the location of those 2 wells now that they're defined what specifically you're looking to achieve with those wells? And just whether there's any -- is it simply due to rig availability, the sort of gap between the first and the second of this upcoming campaign? Or is there any strategic reason behind that? So that would be the first around Namibia. And then my second question, I mean, to come back to CapEx, again, perhaps I could ask it a slightly different way. Perhaps you could help us bridge sort of gross CapEx expectations into next year. Perhaps you could remind us of how much expenditure there is on Bacalhau in 2024. That might be helpful to pull out once again. And then also to consider, are you able to give us any detail on the rig rates and the ultimate expenditure for these first 2 of the 4 Namibia campaign, please.

Matt, on Namibia well location. So we're now currently drilling few kilometers from the 2 first wells that we're really targeting. It is an appraisal well targeting primarily, but not exclusively, AVO-1. And as I said, this is going to be a keeper. And the reason why we're not drilling back-to-back is because we shot high-resolution seismic last year, and we're still processing some of this. So the information is being processed as we speak. And we're not going to drill the next well until we have completed the seismic analysis. So that is why you have a hiatus between now and June 2024. So no relation to rig availability. We seem to be pretty comfortable on hardware availability for Namibia.

On CapEx, to complement and thank you for the question, Matt. Bacalhau has indeed been one of the leading items in our CapEx expenditure over the last few years? I will recall that it is now at approximately 80% execution. So if we look at what has been the weighing over the horizon of '22 to '24, and that was approximately EUR 300 million to EUR 350 million per year. That should now come down as the unit starts up mid next year. We expect it to decline to a number in the vicinity of the EUR 150 million approximately. So that should give you a notion of the decline that we're expecting there. I will remind you that Bacalhau ultimately and at plateau, our expectations is for it to deliver approximately EUR 400 million per year for Galp. So meaningful investment, meaningful results.

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

Otelo, thanks for the help over the years and best of luck on your new role. Two questions, please. One, there was some news earlier this quarter about the lithium joint venture with Aurora that was previously targeting FID in 2024, late 2024, it looks like the project has been delayed. So just talk about that and the reason for the delay? Is it just regulatory in nature? Or are there some technical issues as well. And what you think the likely timeline of this project is now? And the second question, I just want to follow up on the Namibia again on the CapEx. Are you able to give sort of the associated appraisal costs for these next 2 wells? Or what CapEx you're budgeting for 2025? I think -- I don't think I heard that.

Thank you, Josh. On Aurora, we're going through the final phases of detailed engineering. We're having discussions about incentives. So a lot of work has been done and is still ongoing. Fair to say the market is very, very challenging as we speak. So we are in no rush to take an FID until we see an appropriate return for the project, we don't seem to be there as we seek. We're also concerned that this project could become orphan in case there's no mining of lithium in Portugal. That seems to be late as well. We're not going to take the risk to FID a conversion unit until we see mining and Portuguese spodumene being part of the equation. On CapEx, clearly, falling down. So our cost per well are south of EUR 75 million per well. It's coming down. We know the location better. We have a lot of new capacity has become available in Namibia, a lot more competition from service providers. So it is becoming, within our knowledge of our understanding of the geology and more competition, our unit CapEx is coming down quite quickly.

Your next question comes from the line of Alejandro Vigil from Santander.

Best of luck to Otelo in the new challenges. And the first question is about the Mozambique, the divestment process. If you can give us an update on that, considering also the recent elections there in Mozambique, the possibility of the other projects going ahead in the country? And the second question is about Brazil. We have seen some news about the project of increasing the production in Tupi in the coming years? If you can give us some color on this project.

Thank you, Alejandro. So in Mozambique, and you see that we're still accounting for significant CapEx in our numbers for Mozambique. So until we close all the CapEx that is happening, has been disbursed and then that's part of our transaction price. Some of this will come back to us as we close. But you have the Coral North FLNG that is progressing well, and FID is expected late this year. And you have the Rovuma LNG project, the onshore project for which FEED work is ongoing, that is public information to consortia are working on FEED for the onshore, the train project. So I guess that is your question. So on the completion procedures, it's all going according to plan. We've had ticked a number of boxes. Clearly, there has been no preemption by our partners. We are going through the motions with the lending banks of Coral South, the project finance, if you recall. We need a number of approvals and we will have the MIREME. So the Ministry of Natural Resources and Energy in Maputo signing off on this transaction. But to be conservative, we're booking -- expecting to book the proceeds in Q1 next year. On Tupi, I guess you're referring to the field life extension and the revised PoD that we launched with ANP a few years ago. We're still expecting feedback from ANP. That project entailed an additional FPSO so that we recover more barrels, and it would be a very significant expansion in the number of years for the concession. No more news other than we are having discussions with our consortium and with ANP.

Your next question comes from the line of Giacomo Romeo from Jefferies International Limited.

Best of luck Otelo and looking forward to continue working with Joao and the rest of the IR team. Two questions. One on Namibia. I'd like to go back to the timing of the wells. Just wanting to check if this was always your assumptions in terms of timing of that anything has changed there and where you're looking at targets and timing of wells. The other question I have and it's -- again, I'll stick to Namibia, but it's some of your peers in the area have continued to talk about gas being -- gas content being an issue on their discoveries and affecting project economics. Just wanted to check whether you're still comfortable with the gas content and the impact that might have on economics in Mopane and whether there's anything you are looking to get more details on in the upcoming wells or if the gas content is not something you will be looking to get additional information on in the coming drilling campaigns.

Thank you, Giacomo. No, if anything, in Namibia, it's going faster than what we had in mind. So availability of service providers is better than expected. So no change in plans other than marginally faster. We had indicated end of Q4 for this ongoing well, and it's -- we're still in October. In Namibia, we have no news. And effectively since we last spoke, this is a gas-rich condensate. Very, very low oil viscosity, good porosities, high permeabilities, high pressures, everything we said before stands. So we're getting confirmations of everything that we have said minimum CO2, no H2S concentrations. So it looks as if what we have is different from what we hear on some of what our neighbors are looking at. So nothing at this stage. Clearly, the next few months for us and for our neighbors, a lot more news are coming. On GOR, as we said before, we don't expect this to affect production first oil, given that we can reinject the gas at least during the initial few years.

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

I had 2, please. The first was on Namibia. Again, I was wondering, shed some light on how close you ought to take an FID for a potential development? Do you believe you could take an FID on a potential development if the first 2 wells were to meet the objectives? Or would it require the third and the fourth well to be drilled as well to take a decision there. The second was on the midstream businesses. The contribution of this segment has been solid, exceeding your own guidance consistently. In your view, what are the key factors that contributed to the beat if you could -- I was wondering if you could perhaps highlight any sensitivities that we could use to forecast the earnings better for next year.

Sasi, base case, we should be able to have a very good view on FID. Yes, with this first 2 wells. Even if this first well -- the well that we are currently drilling, call it, well #3. We have drilled 2 wells before we drilled #3. And well #4 are in very different locations. So well #3 is AVO-1, as we've discussed. Well #4 is going to the southeast of where we are. So different block. And that in itself will likely trigger a number of other wells in the region. It will be a separate development. Rodrigo?

Yes, Sasi, regarding midstream contribution, so far, I mean, it's very soon to give guidance on next year. Regarding the key factors, I mean, I'm glad to say that all the divisions are posting a positive and stable results, oil, gas, power. We were able to set up the whole trade infrastructure, have a stable portfolio now despite the fact that we are still having some challenges with some long-term gas contracts, as you are aware. But again, I mean all the divisions, oil, gas and power posting a robust and stable results so far.

Your next question comes from the line of Kate O' Sullivan from Citi.

Congrats Otelo in the new role. 2 on Namibia. So firstly, you mentioned the current well has been drilled 2 kilometers from the previous wells. It seems to be quite close by. We think normal appraisal wells tend to be a bit further out, test the flanks of the field. So wondering if you could provide some color on the decision to drill so close by. And secondly, on the farm down, I think you mentioned in your opening remarks that you're keen to hold on to the 80% stake until at least the 2 wells that are done, the next 2. and So are you able to provide just further color on the momentum in this process? Or are you in a pens down phase?

Kate, it's actually some 10 kilometers. So I'm not sure, if I mentioned 2, my mistake. It's some 10 kilometers. So it's not that close. On the farm-down process, as we said before, we have the financial ability. So we can avoid rushing into a transaction. The plan is to continue with our current 80% and derisk as much as we can what we have in our hands. True to say that we've had a number of discussions, and we do have a short list, call it that way, of super credible parties that are keen on Namibia. What is the right time to partner? Well, clearly not before we complete at least the next 2 of the 4 well campaign that we have in mind. So we will wait until most likely end of 2025 and also to learn from what other players around us are going to find. Some of the people we're talking to for our projects are also themselves drilling in the region. So again, as I said before, exciting times, lots of information. This is not the time to tie up with anyone.

Your next question comes from the line of Lydia Rainforth from Barclays.

My name is Lydia from Barclays. Two questions, if I could, and congratulations again to Otelo. But firstly, on the refining side, can you just talk us through, obviously you had a good operational performance, but can you talk us through kind of what you're thinking about the market into next year? And then secondly, if I could come back to Namibia and actually thank you for your answer to Kate's question that was really interesting. But how -- whilst you're waiting for a partner or [not for the wrong phrasing ] for it, but as you're thinking about kind of progressing Namibia, how do you think about progressing things like the FPSO that you're going to need and actually kind of sort of moving ahead with that side of it?

Thank you, Lydia. Ronald Doesburg from Industrial. If you look at refining for next year, as you have also seen this quarter, margins have come down from the levels where they have been in the first 2 quarters of this year. The general outlook for the global economy, especially in China, it brings quite a bit of uncertainty. We see now that China starts to also increase their gasoline export quota, which basically means that there will be more pressure on the gasoline cracks. And similar will be around diesel and jet cracks going forward. Having said that, we still believe that if you look at current refinery margins, which are back to the $6, $7 per barrel and our own capabilities in Sines refinery, where we actually have quite a lot of flexibility and can take advantage from the energy management capabilities. We believe that margins will not go to the levels that they have been in the third quarter for this year. Clearly, no crystal ball. So exact predictions for next year are really difficult.

Lydia, on Namibia, so we need to derisk further Mopane. The benefit to us of bringing to us to Custos to NAMCOR that we bring a partner to accelerate the development phase. So because -- we want to keep our 80% stake for now, we're doing preliminary work on FPSO design conceptual studies so that when we do have a partnership we will hit the ground running.