Edited Transcript of GALP.LS earnings conference call or presentation 27-Jul-20 10:30am GMT

In the downstream operations, however, we have tough times, especially during April and May. The resilience of our overall portfolio and the immediate actions put in place have allowed us to mitigate the effects of the pandemic and the crude oil price war. Free cash flow remained positive year-to-date. We have reinforced our liquidity and remain with a solid financial position.

But first, let’s look to the market environment evolution so far, and I’m on Slide 5. The worldwide lockdown led to unforeseeable demand reduction and the massive environment inventory buildup. We have observed Brent prices hit $13 per barrel in April and gradually recovering to just above $40 as we have provided.

On the product side, refining margins were at first supported by ship crude and fracs were helped by opportunistic trading demand. But this quickly faded, and the low consumption resulted for the inventory or inventory build up as pressure declined of all the products.

In April and also in May, we saw gasoline and diesel demand declining over 50% year-on-year. As lockdown measures in Iberia were gradually lifted (technical difficulty) picked up better than expected. However, uncertainty remains high. Given the recent developments, we are now adjusting our macro assumptions. We are now using Brent at $40 in 2020 and increasing by $5 per barrel over each of the following years. Long-term Brent price has been lowered to $60 per barrel in real terms in 2019. Of course, that we naturally test our balance sheet according to these revised assumptions and no impairments were registered given the quality, and I would say also the resilience of our customers.

Now looking into our operations in the quarter and I’m in Slide 6. As mentioned, our upstream operations so far were only marginally impacted by this pandemic. In May, 2 FPSO stoppages in Brazil resulted from the identification of COVID-19 cases. All in all, just around 3,000 equivalent barrels per day impacts in the second quarter. We have also the new units that we’ll develop south of Atapu that has started in June, ahead of plan. After the unitization agreements, I would like to recall you that Galp has only 1.7% stake here, so not that material.

On refining, tough times. The significant demand decline and the high level of inventories led us to stop Sines refinery and several units in our Matosinhos system. The midstream operations were also impacted by harsh environment with demand destruction and strong supply levels into Iberia, putting high-pressure on also natural gas prices.

With the lockdowns, April and May were very difficult months for our commercial business, which shows in oil and natural gas volumes sold this last quarter. June was already a more supportive month and keeps improving in July to-date. On the renewables front, we have set up a joint venture under which Galp acquired 75.01% of the Spanish solar portfolio of 2.9 gigawatts. And the ACS Group remains as our partner, with just under 25% with a joint control structure.

I would say that this agreement follows the strategy we had set for our renewable business, which is to develop a competitive portfolio through our partnerships while maintaining a relevant role and integration with Galp’s activities. The transaction value remains unchanged. Means that on an enterprise value of around EUR 2.2 billion, which includes all acquisition, development and construction costs associated with the existing and future portfolio on a 100% basis pre-project financing.

Galp is to pay an amount that should range between EUR 300 million and EUR 350 million at the closing for the stake acquisition and previous development costs with the final value dependent on the development status of some of the projects at the deal completion date. And this includes already 1 — or around 1 gigawatt already under operation fully project financed. This agreement maintains the development and construction of the portfolio with Cobra, which is an affiliate of ACS group.

We are happy to have partnered with ACS Group as this JV combines Galp’s integrated energy position in Iberian market with ACS’ renewables engineering and development expertise. So this is a good combination. The transaction is expected to be completed before year-end and likely still during the third Q after the EU competition approval.

Moving now to Slide #7. Let’s look at the short-term call to action programs. So in this front, Galp responded quickly to the challenging environment resulting from the COVID-19 lockdown and also the oil prices fall. Words like resilience, flexibility and adaptation capacity were and will continue to be critical.

Zooming in on what we are doing actively and with visible results already in the quarter. On the upstream, operations continue to be optimized, allowing us to keep production costs consistently below $3 per barrel. The cost saving initiatives helped our upstream CapEx plan with almost all those initiatives being implemented. And the team is successfully reducing services and other overhead costs.

On refining and midstream, we adjusted the level of our operations to deal with a very low demand, and as I mentioned before, high level of inventories. This allowed us to increase our gross margin, mitigating the effect of the more depressed environment and reduce our operational costs. Additionally, this slowdown time was used to bring forward some scheduled maintenance works.

On the commercial side, several (technical difficulty) put in place to enhance the robustness of the business and also to adapt to a unique market conditions environment. The company also took this opportunity to reinvent the business and to reach clients in a more digital and contactless way, innovating the — especially in the non-fuel offer. We established agreements with several partners like Uber and (inaudible) are examples, which allowed us to reinforce and explore different sales channels that are linked with last mile logistics. But we kept also a very special focus on optimizing our operations and, of course, our cost structure that will remain.

On the renewables and new businesses, we are adjusting our short-term plan, keeping strategic development on these new divisions. Our efforts go beyond improving the efficiency of our operations and also includes the adjustment of Galp’s corporate and business units organizational structure. The efforts are paying off, and Galp remains very much on track to deliver its over EUR 0.5 billion CapEx and OpEx reduction target, having over 90% of the identified initiatives behind and that ambition already being implemented.

Looking ahead, and I’m now in slide 8. So starting my short-term outlook, which although limited considering the still reduced visibility and also high level of uncertainty. Galp and its partners expect to resume the connection of wells and therefore, the ramp-up in production. In fact, by the end of June, we connect the third producer well in Berbigão-Sururu FPSO. And of course, we remain cautious on how COVID-19 may impact our operations in the future. However, we should be able to grow our production at about 10% year-on-year basis, which is slightly below our initial guidance that was ranged between 13% and 17%.

As mentioned before, refining environment remains depressed and under pressure and the economic incentives to push our system seems not to be there. Utilization of our refineries as well as supply and trading volumes will depend on how the market evolves from this point onwards.

On commercial, although we are seeing positive supportive signs, we prefer to maintain a cautious approach as the full economic fallout from these prices has yet to be understood. We should see an improvement of this segment’s contribution, especially during the summer, but uncertainty remains.

So on the right side of this slide, we want to flag that despite the challenging 2020 and the attention we need to put on the short term, we are continuing to position Galp for the future of energy. We keep focus on value protection and enhancement of our key strategic projects, as you already know well, and that will play a major role for our future. And of course, we are well aligned with our partners conducting relevant value improvement programs around these key assets.

At the same time, we continue to evaluate opportunities to adapt to market trends and also to regulation, increasing our competitiveness and reduce our current footprint as part of our strategy to address the energy transition challenges. We are analyzing the production of lower products carbon content in our industrial facilities, anticipating market trends and reducing the carbon intensity of our portfolio, namely through coprocessing or reconfiguration of some existing units. These are potential options to increase Galp’s competitiveness on refining and midstream with marginal investments over our existing industrial base, and that may also benefit from the alignment with EU guidelines.

Longer term, we are also analyzing new energy sources and technologies such as hydrogen. In this case, Galp sponsors with other companies a feasibility study for a pan-European project leveraging on a cluster that could be implemented in Sines to develop a green hydrogen supply chain project. These kind of projects may have a natural integration (technical difficulty) given the current circumstances, while actively preparing future alternatives that may fit our strategy and also our investment criteria.

So to finish, on Slide 9, just a couple of words. Clearly, we were significantly impacted by the commodities price crash. And this obviously impacts cash generation. Still, at the — cash spending reduction initiatives are being implemented, we are increasing the resilience of the company, leading to a going-forward free cash flow neutrality at $20 per barrel. And this assumes a net CapEx that range between EUR 0.5 billion and EUR 0.7 billion that should support our free cash flow on average during this year and next year. However, we need to be prepared to navigate through the uncertainty and volatility expected over the next few quarters, ensuring Galp’s financial position to be as strong as possible to protect and support our transformational and growth strategy.

With this in mind, and as part of the mitigation measures undertaken to preserve the strength of Galp’s financial position under unprecedented market circumstances, no interim distribution will be made during the second half of this year in relation with 2020 fiscal year dividend. This considers the prudency and the short-term flexibility we want to maintain, as mentioned to you back in April.

The proposal for the 2020 dividend shall be made considering the full year results expected to be announced in the first Q of 2021. Ultimately, our commitment for the rest of this year is to keep our financial discipline, employing efforts to control the net debt and therefore, to protect company’s balance sheet.

So 3 key messages that I want to leave with you from today. We have a highly resilient portfolio, and we are successfully implementing value protecting measures that are increasing this resilience even further. Our free cash flow line already tells everyone that. The second point is that we have a unique transformational and growth investment gain, well supported on clearly identified projects. And on top of that, several potential options to explore. Thirdly, we are keeping the same discipline that brought us today.

So I will now hand over to Filipe to go through the financials. Filipe?

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [4]

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Thanks, Carlos. Good morning, guys. I am on Slide 11. Group EBITDA of EUR 291 million in the quarter, this is down more than 50% year-on-year. And this is from the very harsh environment on most of the businesses we are operating in. Upstream EBITDA was EUR 204 million, that’s 50% down year-on-year. This with an average Brent of under $30 in the quarter and more than offsetting production growth. Bear in mind here, we have about EUR 50 million in positive underlifting effects during Q2.

Refining and midstream EBITDA was impacted by the significant slowdown of the refining activity and a lower contribution from supply and trading. Commercial EBITDA of EUR 59 million, that’s down over 40% from last year, impacted by very, very weak demand in Iberia. Group EBIT of minus EUR 57 million already includes the impairments of EUR 92 million related to small exploration assets. Now this is a reflection of a conservative assessment of the discoveries potential. This is not from our lower Brent price assumptions going forward. So we have no impairments coming from the revised long-term price assumptions.

Financial results of minus EUR 10 million in the quarter, with a negative FX exchange variations on our Brazil currency cash positions and losses on CO2 derivatives compensated by positive mark-to-market valuation of derivatives to cover natural gas price risk. And net income was a negative EUR 52 million, whilst under IFRS, net income was a negative EUR 154 million with a negative inventory effect of EUR 84 million.

On Slide 12 and cash flow. So we start with IFRS EBITDA which includes the negative inventory effects. Working capital release was only EUR 11 million in the quarter with lower capital tied up in inventories but with elevated payments to suppliers for some cargoes priced during Q1.

Taxes paid were EUR 83 million. This is significantly higher than what you see on the P&L taxes. And this mainly reflects the timing mismatch of SPT payments, so the special participation tax in Brazil, which was affected by the more elevated Q1 Brent prices.

And all this leads to a CFFO of only EUR 160 million during Q2. CapEx payments were EUR 149 million in the quarter. And we also have the net cash-in of EUR 83 million from the equalizations related with the Lula, Sépia and Atapu unitizations. Please note that our net CapEx guidances always consider these equalization proceeds. And we are expecting further equalization proceeds from the Berbigão/Sururu unitization likely next year.

The derivative outflow number of EUR 43 million you see here is basically driven by the CO2 licenses impact as per our announcement recently and this is partially offset by the unwind of the outstanding 2020 refining margin hedges. Now given the current market circumstances and the volatility, we opted to crystallize this value.

Free cash flow was minus EUR 10 million in the quarter and positive EUR 52 million during a most challenging first semester. Again, some payment phasing impacts on these numbers. And also bear in mind that we include within free cash flow, all operating lease payments under IFRS 16, and that is the interest component and the principal amortization component that is within our free cash flow numbers.

During the quarter, we have also paid to the Galp shareholders EUR 318 million in dividends related to 2019 as well as EUR 86 million to Sinopec, our partner in Brazil. And with this, net debt increased EUR 436 million in the quarter.

Moving to the balance sheet. On my final slide, Slide 13. The net fixed assets decline results from the accounting effects of the unitization and the exploration impairments of EUR 93 million. Net debt-to-EBITDA was up to 1.1x, with a combined effect of both higher net debts and lower EBITDA.

And to conclude, during the quarter, we have increased our liquidity to EUR 3 billion with cash of EUR 1.7 billion and undrawn credit lines of EUR 1.3 billion.

We’re now happy to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Biraj Borkhataria from Royal Bank of Canada.

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Biraj Borkhataria, RBC Capital Markets, Research Division – Director, Co-Head of European Energy Research Team & Lead Analyst [2]

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It’s Biraj, RBC. A couple of questions, if that’s okay. The first one is on your new production guidance. I know Galp typically puts some contingency in there. So could you just outline how much contingency you’ve put in for either slower well connections or any other potential delays due to COVID related incidents? And then the second one is on the dividend. With the big CapEx cut this year and then obviously, the new structure of the renewable deal, at 1x net debt-to-EBITDA, your balance sheet looks actually quite healthy. So I was wondering, can you just comment on your intention for the dividend going into 2021. Is it just a pause and then the intention is to get back up to the prior run rate? Or is there anything else within that?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [3]

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Biraj, I will address the dividend question and Thore will address the production guidance. So in relation to the dividend, so we are living in uncertain times, and therefore, a decision that we are taking now is to guarantee that we are protecting and preserving our balance sheet and further decisions would be based on full year cash availability, also our financial position. And of course, the outlook that we will have at that moment in time. So I think we have to wait for the second half of the year to see how things will evolve and based on this principle, we will take a call on that.

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [4]

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Thank you, Carlos, and thank you, Biraj, for your question, which is actually a difficult question because the big challenge for us here is actually to estimate the COVID impact, but I think you pointed to it very correctly. And as Carlos said in his opening remarks, we have had direct impact on production on 2 units during the first half. And we have also had somewhat slower well ramp up due to COVID, and actually, the restrictions that we’re putting on operation in order to preserve the health and well-being to the people. So we have made a guesstimate for the second half, what that would be, I believe that what we have given you as guidance, namely that we are able to increase year-on-year with 10%, should, under normal circumstances, be conservative, but the big unknown and which we really don’t know is, what will happen with COVID during the second half of this year. That is the big unknown, and we have put in some cushion for that.

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Operator [5]

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And your next question comes from the line of Oswald Clint from Bernstein. There is no response from that line, sir. I’ll move to the next question. And your next question comes from the line of Mehdi Ennebati of Bank of America.

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Mehdi Ennebati, BofA Merrill Lynch, Research Division – Research Analyst [6]

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Two questions, please. The first one regarding with the working capital. So during the first quarter conference call, I think it was Filipe who guided on the working capital release during the second quarter. And this obviously did not happen. So can you explain us why? So is it related to the maintenance that you have made? And should we still consider working capital release will happen in the second half of this year or no? And maybe one question as well regarding the refining costs which were pretty low in the second quarter. So I wanted to know if this is all related to the savings made from the maintenance? Or if this is also partly due to cost reduction program that we recently announced, meaning that we should take lower refining cash costs in the near term?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [7]

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Mehdi, (foreign language), thank you for your questions. So Filipe will address the working capital. So in relation to refining, clearly, the decisions that we have taken has — allows us to reduce relevant cost structure. And therefore, based on the environment that we have lived during the Q, it was the ones that has perfect cash and cost for the company. So clearly, I think it was the right decision we have taken. Filipe, working capital?

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [8]

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Mehdi, so in Q1, under IFRS balance sheet, we have a release of working capital just because we marked down the inventories, mostly accounting. In Q2, what you see on a cash basis, is that we’re still paying suppliers. So significant cash outs more than the run rate cash out that you would expect for cargoes you would be acquiring during Q2. Going forward and the 3 moving pieces within working capital, clients, suppliers and inventories, of course, it depends to a very significant extent on your views on what the commodity prices are going to be. From this month onwards, we would not expect working capital to change massively if the commodity prices stay within what we’re observing today.

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Operator [9]

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And your next question comes from the line of Joshua Stone from Barclays.

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Joshua Eliot Dweck Stone, Barclays Bank PLC, Research Division – Analyst [10]

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I’ve got 2 questions, please. First, just going back on the cash flow. Certainly, it was particularly weak during the first half of the year. You’ve highlighted a number of factors, you had timing effects on working capital. Is there a number we should be adding back to get to an underlying cash flow, if I look at that EUR 404 million on the Slide 12 of CFFO? Are you thinking about adding something back to help us with those moving parts? And then secondly, on the commercial business, it does look like margins have been pretty resilient there despite the lockdown. The fall in earnings has pretty much matched the fall in volumes. So can you talk about what’s driving this and how you managed to perform so well?

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [11]

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Josh, on working capital, cash flow from operations was EUR 404 million in H1. Clearly, as I’ve alluded to, this has a number of phasing impacts. If the commodity prices stay where they are, you would expect, for example, to have lower SPT payments going forward than what we expect. We would expect to be paying for CapEx at much more — lower levels and same with suppliers. So without giving you any hints on what the year-end will look like on a CFFO basis, it’s hard to imagine that it will be along what we’ve seen in H1.

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [12]

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Josh, so on commercial front and the resilience of our business, we have shown that we have been hit by (technical difficulty) demand decrease. Even in those circumstances, we’ve been able to adapt our cost structure first. And secondly, the sales that we have made, it was — they were mostly in higher-margin segments. So that contributed for sustained even in a specific and complex environment. But these are the 2 key effects that I would say that mostly contributed for that.

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Operator [13]

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And your next question comes from the line of Thomas Adolff from Crédit Suisse.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division – Head of European Oil & Gas Equity Research and Director [14]

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I couldn’t hear you very well, Filipe. So I wanted to ask you a question on the SPT as well. You said it’s a lagged payment. So — but there’s a difference between P&L and cash flow. Can you perhaps say how big of a difference it was in the second quarter? Was it something like a EUR 50 million or EUR 100 million? That’s the first question. And the second question, just on the ACS — the solar deal, essentially. I was a bit surprised that you ended up partnering with the seller. I was wondering if it — whether it was at all competitive, the process? Were there other interested parties you were talking to?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [15]

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Thank you, Thomas. Good to listen you. Filipe will address the SPT. Let me just handle the solar process. Clearly, this was an evolution during the negotiation process that we realized that we will be able to combine Galp’s integrated energy position in Iberian market with actually what ACF’s renewables engineering and portfolio development expense — expertise combined with Galp. So clearly, this is a kind of an industrial partner that will fasten, that will speed up power developments and clearly achieve the targets that we have established for this process. So we are happy with that. And I think this will contribute significantly for accelerating our renewable project.

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Thomas Yoichi Adolff, Crédit Suisse AG, Research Division – Head of European Oil & Gas Equity Research and Director [16]

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So there were no interested party that were willing to pay a better valuation than you did? That was kind of my question, essentially.

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [17]

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If you ask me, if you have open competitive, open tender towards this, the answer is no. If you ask, if you have had signs of interest to partnering with Galp, the answer is yes. So for the time being, that has been the decision that we have taken, Thomas, and we are happy.

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [18]

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Thomas, on the SPT, so we pay SPT the month after the end of each quarter. So we pay in January related to Q4 ’19. Brent in Q4 ’19 was $63 on average. And so come January, we’re paying SPT based on Brent at $63. In Q1, Brent was $50. And so from April of this year, we paid SPT related to Brent on $50. So the drag on the cash outs of SPT based on the quarter before is very significant. Now the flip side of that is when Brent goes back up, we’re still paying low Brent and low — we’re paying low taxation when we’re cashing in higher crude sales.

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Operator [19]

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And your next question comes from the line of Jon Rigby from UBS.

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Jonathon Rigby, UBS Investment Bank, Research Division – MD, Head of Oil Research and Lead Analyst [20]

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The first question, just going back to the dividend a moment. I just couldn’t sort of understand what the thought process is going to be on — you seem to be sort of indicating sort of hybrid between a progressive dividend and a payout. And I just wondered what sort of thought process you have about what the relationship should be between dividend and earnings or dividend and cash flow? And at what point do you consider the balance sheet sort of intervene into that point? So put another way is, can we expect dividend policy, which seems to have now been changed to be addressed come February, and where do you think that might be headed? The second question, just a small one, is just intrigued on you cashing out your hedging structures around the refining. I mean, I think you’ve indicated 2 or 3 times through the speech about the absence of visibility going into 2H, et cetera. So just wondered what the thought process was behind sort of removing an element of sort of protection against exactly that volatility?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [21]

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So how the process is going to be in terms of dividends. So let’s recall a little again. First, we have to look at our free cash flow position for the year-end. I think it is the first point. And there are still some uncertainty in the market. The second one has to do with cash position and our debt position. So our net debt-to-EBITDA is relevant. So we know that we are looking at our net debt-to-EBITDA in a rolling tier. And we know that we are considering the first half of this year and the second half of ’19. So let’s see how the second half of 2020 will evolve and how that will impact the net debt-to-EBITDA. And thirdly, it is also important to have not only the outlook in the cash evolution, but also to analyze how the global sector remuneration will evolve. And that is also something that is important for us. There’s one point that I would like to emphasize this time. We are not considering non-dilutive cash distribution whatsoever. So I think that is also important for your considerations. Filipe, the second point?

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [22]

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John, so the way we think through our risk modeling on hedges, whilst a few years back, Galp was very exposed to refining margins, now we are a lot more exposed to the Brent price variations. What we have seen this quarter is something we have never seen is that at the same time, simultaneously, we have our 3 key businesses going south. So the risk models went berserk effectively so with no inverted correlation on each of these. And when we saw our refining margin hedges very, very deeply in the money, we just took the money and left. In fact, there is no other explanation. Practically, it was a financial call. Again, the biggest risk we need to protect long-term given the upstream increase going forward is the Brent prices not so much (technical difficulty).

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Jonathon Rigby, UBS Investment Bank, Research Division – MD, Head of Oil Research and Lead Analyst [23]

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I understand. If I could just come back to Carlos for a second on the dividend. When you come to consider the dividend in February, will you be thinking about the full year 2020 dividend? Or are you going to be just effectively saying 1H ’20 the write-off we’re thinking only about what the final dividend is going to be? Would you be thinking about the full year and around or just the sort of second half?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [24]

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John, it will have to be the full year for sure.

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Operator [25]

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And your next question comes from the line of Jason Gammel from Jefferies.

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Jason Gammel, Jefferies LLC, Research Division – MD & Senior Equity Research Analyst [26]

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I’m trying to understand how to think about organic capital spending this year. Given the guidance on net investment, but also the payment for the solar JV and the inflow from the unitization, I guess, the other piece that’s out there is unitization at Berbigão/Sururu. So can you perhaps discuss whether you expect to be in a net receivable position there? And maybe give an idea of the order of magnitude? And then the second question relates to the comments you made about April and May being particularly bad for the downstream business. Can you talk about how maybe utilization rate is on the refineries currently and how refined product demand has recovered in your markets?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [27]

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Jason, thank you for your questions. So I will address the second one, and Filipe will take the first. Utilization rates. This is highly correlated with the demand evolution. So clearly, in the second quarter, we were, I would say, at about 50% of utilization rates because we take the decision to shut down or slow down some units because the margins were not there. And that was the right decision from the economic point of view. That was additionally affected by the high level of inventories. So looking into the second half, the inventories are still high. We are also looking at the cracks that are still depressed and the decision of utilization rate, which includes not only atmospheric, which says distillation as always is impacted but the conversion units will much depend on what it will be, the economics and the environment. It always will be an economic decision and not a physical one. So we will keep the — going forward, as we do always, we will keep that decision based on pure economics. Filipe?

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [28]

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Jason, on your question on CapEx. So the guidance I also given to EUR 700 million this year. This is all inclusive. So this guidance includes the solar acquisition, so the equity piece of the solar acquisition. We’re still considering asset rotation in that guideline. More importantly, and if you look structurally longer-term for Galp, we are a low CapEx company on a run rate basis. So a lot of what you see in our guidance for the future, these are incremental new projects like Mozambique, Bacalhau, et cetera, but if you take that out from the equation, then we have (technical difficulty) very long life assets with very limited CapEx. This is planned production for the coming years.

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Jason Gammel, Jefferies LLC, Research Division – MD & Senior Equity Research Analyst [29]

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Understood. And would you expect to be in a receivable position on the unitization compared to Galp’s (inaudible)?

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Filipe Crisóstomo Silva, Galp Energia, SGPS, S.A. – CFO & Executive Director [30]

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Yes, we do. Double-digit number, but this is going to be received only — most likely only next year.

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Operator [31]

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And your next question comes from the line of Alwyn Thomas from an Exane BNP Paribas.

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Alwyn Thomas, Exane BNP Paribas, Research Division – Analyst of Oil and Gas [32]

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Could I — just a couple for me. Can I just ask for an update on the potential asset sale processes you’re considering and whether you would expect any of them to potentially close this year? Or is it now more likely in 2021 is a more likely realistic impact? And secondly, on the 2 big projects, Mozambique and Bacalhau. Could you just give us an update, firstly, on COVID impact to the projects and whether they are likely to be pushed further? And in Mozambique, in particular, what the security situation is there and the likelihood of achieving any material progress in the next 12 months on the project?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [33]

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I will take — I will handle the first question, and Thore will go through Mamba and Bacalhau. So the 2 projects that we have under development. So actually, we are considering several assets for potential rotation. And you know that out of them, I’ve said — we have said in the past that there are some candidates that are quite well known. So we will consider all the options open, and we will continue with that and execute on any of those optionalities only if we will consider that they are adequate for the company from one side, and they are at the right and fair value from the other side. So with respect to Mamba and Bacalhau, Thore?

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [34]

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Thank you, Carlos. Thank you, Alwyn, for the question. So as it is known in the market, the partnership on Rovuma LNG has decided to delay the FID. We have not given an update to the market yet with respect to — for how long. What has been happening right now is that there is intensive value engineering that is being done in order to then to utilize the opportunities in the market. And the same actually happens now with Bacalhau. Bacalhau, we see that there is an opportunity in the market to fine-tune, to optimize, to lower cost and that is what is happening also on Bacalhau. None of these projects are at this stage impacted by COVID. And actually, as a matter of fact, the same also goes for Coral. Coral South is the floating LNG project that we have developing in Mozambique. It is developing very much according to schedule, and we are still on track for first gas in 2022 and no impact of COVID so far on that project either.

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Alwyn Thomas, Exane BNP Paribas, Research Division – Analyst of Oil and Gas [35]

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Okay. Any estimate on how much cost saving you might be able to see on percentage terms or are you trying to achieve?

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [36]

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We have internal targets and goals for that, Alwyn, but it would be incorrect of me to communicate that to the market at this stage. But yes, we do see there is opportunity now to further improve the projects.

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Operator [37]

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

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Alessandro Pozzi, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [38]

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I just wanted to go back to the ACS assets. And I was wondering whether the target of the 2.9 gigawatts still holds for 2023? And if you can maybe just give us a bit more color on how you’re planning to go there, whether you’re already planning to add capacity starting from 2021 and whether we should see a quick ramp-up in terms of power capacity? And also given now that we have probably a bit better visibility on what the structure is going to be, can you give us a sense of the earnings potential of the current assets from ACS? I believe we’re not going to see any EBITDA, but probably income from our associates. So any color on that would be great.

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [39]

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Alessandro, thank you. So I would say that at the completion of this deal, we will have to reschedule and to review the projects that were in the pipeline, so the ones that are for developing, and based on also the existing environment because it is useless to say that some of the COVID impacts also will have to be taken in consideration for the setting up the scheduling for the projects 2020 onwards. What I’ve mentioned to you before is that they are already under production, about 1 gigawatt. And the plan for 2020 onwards is being reviewed in a way that we will be able to address this. Clearly, the structure that is being set up is an independent JV that will be self financed, and that will impact Galp throughout the (technical difficulty) non-recursive project solution. And clearly, it’s equity investments from Galp side and where you see that is coming from dividends from associates. Thank you.

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Alessandro Pozzi, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [40]

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And any guidance of what the earnings could be based on the existing assets that are producing at the moment?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [41]

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I would say it’s still too soon to release that to the market. We intend to do that later on in this process once we have the rescheduling completely in the projects that are in a way that I have mentioned to you.

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Alessandro Pozzi, Mediobanca – Banca di credito finanziario S.p.A., Research Division – Research Analyst [42]

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Okay. Perfect. I have a second one on brownfield. Your — you had a bit of an issue with the COVID in the FPSOs, but not much in terms of volumes. I believe you mentioned just 3,000 barrels of oil a day. I was wondering, can you give us a bit more color on what your protocol or precautious measure you are taking to avoid any repeat of that in the second half of this year?

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [43]

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Thank you, Alessandro. The measures that has really been taken, there’s 2 sort of key measures. One, a mandatory quarantine period for the offshore personnel before they are now bordering the shift. Typically, that is between 1 and 2 weeks. Secondly, of course, temperature is being measured on a frequent basis during both before entering the ship and while on the ship. And thirdly, the number of weeks that the people stay on the FPSO before they are changed is also being no longer — it used to be 2 weeks, now the typical rotation scheme is 3 weeks so that you have fewer rotations for the ship. So that’s the sort of the key measures that has been implemented. But as we all know, COVID is no small issue in Brazil. So I think we need all to be cautious on it. And — but so far, it has been rather limited impact on our production.

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Operator [44]

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

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Sasikanth Chilukuru, Morgan Stanley, Research Division – Research Associate [45]

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I had quite a few you answered already. But I had one for the upstream. It appears that the oil and gas price realizations in 2Q came in at a significant higher discount to Brent prices, more than 25% in 2Q compared to around 12% in 1Q. Can you talk about the reasons behind this, whether this was related to with the timing of the cargoes? Also, can you let us know what kind of differentials are you seeing right now after the recovery in the oil price and the Brent prices? And if — and if we should expect the differentials to revert from the 2 kilos to a more normalized level in the future?

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [46]

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Let me try to address this. So the key effect that we saw during the second quarter is really mainly relating to increased shipping costs. That have had a direct impact on the realized oil prices. We have seen in June that is starting to recover already. And — but we do see that there is a bigger discount this year than what we initially had expected. So year-to-date, we’re running around $4 per barrel in discounts versus Brent.

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Operator [47]

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And your next question today comes from the line of Michael Alsford from Citi.

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Michael J Alsford, Citigroup Inc., Research Division – Director [48]

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A question on refining. You’ve updated your medium-term outlook on oil prices. And I just wondered if you could maybe talk a little bit about how you’re seeing the medium-term outlook for refining margins. I think from the previous plan in February, you were thinking of $4 to $5. I know — I don’t know, clearly, we’re in an uncertain environment, but I just wondered if you can give a sense as to where you think refining margins might recover towards over the next couple of years? And then just secondly, on the exploration write-off, I just wanted to confirm whether the write-offs included or didn’t include any value for the Uirapuru well that was recently drilled?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [49]

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Michael, so actually, comparing with the world that we have been observing in — back in February, we are in a completely the opposite side. So nowadays, if you look at where they are, the refining margins, we are barely covering our refining costs, which means that if the demand will not goes up and the inventories will not be reducing, it could stand in the market for a couple of months ahead with some refining pressure and I would say that for the full year, refining might have, I would say, a marginal contribution for Galp.

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [50]

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And when it comes to your second question, what I can say to you is that the majority of our impairments in an exploration asset is related to our assets in Potiguar where we have done a review of the portfolio and decided that there are a few of the licenses where we wanted to step out and then it’s natural that we did also the impair. And what is related to Uirapuru is very, very marginal in what we have impaired in this quarter. Thank you.

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Michael J Alsford, Citigroup Inc., Research Division – Director [51]

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And just following up on Carlos’ point, do you think that the refining margins or the refining business has a meaningful contribution in 2021? Or do you think that still refining margins are under pressure as we see the oversupply in the markets maintaining?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [52]

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Michael, that will depend very much on how the markets will evolve and how these uncertainty will evolve. So I think it’s highly difficult to have a view on that. We can only play with scenarios. If the more recent times will continue to evolve as positive as they were, we might see a more positive world. If we will have ups and downs and with — even with partial lockdowns, this could take more time. So clearly, I think we have hit the floor and step after step, we will recover, but the speed of recovery, it will depend highly on how the demand will grow.

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Operator [53]

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And your next question comes from the line of Matt Lofting from JPMorgan.

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Matthew Peter Charles Lofting, JPMorgan Chase & Co, Research Division – VP [54]

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Two, if I could, please. First, just coming back on dividends and Galp’s dividend policy. Clearly, 2020 is an exceptional year in a number of different ways. But when we look forward, can you characterize a bit more specifically the nature of the dividend policy that you’re looking to structure Galp around? Is this ultimately a through-cycle, absolute focused dividend policy, where you’re looking to grow the distributions commensurate with earnings and cash flow? Or while Galp remains in growth mode, does this need to be more of a backward-looking process on an annual basis where you’re pivoting the annual payouts, primarily around the macro environment and cash distribution combined with net debt on an annual basis? Secondly, could I just ask on the long-term oil price assumptions and carrying values of Galp’s assets. So we saw you reduce from long-term $70 to $60 per barrel. Understand clearly that Galp’s assets are differentiated by being low on the cost curve, equally taking $10 off a long-term price must have a negative connotation for long-term value and cash flow potential. So surprised that there’s no relevant asset impairments. If you could just elaborate on that?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [55]

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Matt, so I will take the dividends, and I will coordinate with Thore the second answer or the answer to the second question. So clearly, this is an exceptional year and from not only for dividend purpose, but also for the global business and environment. So once we will be able to back to certain normal, we intend to recover our dividend policy as it was pre COVID, let’s say. That said, we have, of course, certain caveats or restrictions or elements that should be taken in consideration, which is our cash position, which is our net debt-to-EBITDA that we will continue to follow as a kind of a self covenant below 2x. And of course, and I have said that before, we have also to look at what is the competitiveness of the remaining markets. But clearly, setting back or backing to the normality. Hopefully, we will continue to evolve as it was reviewed in a pre COVID context.

In what relates to the long-term oil prices that we have now reduced not only in the case of oil, but also in the remaining variables that are also impacting our different business units, clearly, we are benefiting and has been said already on the fact that we have very low-cost producing assets, which means that we can leave a couple of years without or with a minimum CapEx in this context. What we can see is that for the assets that are under development, and as Thore already mentioned, this has no impairment impact whatsoever which reviews the competitiveness of those projects also. That’s from my side. I would like Thore to complement me.

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Thore Ernst Kristiansen, Galp Energia, SGPS, S.A. – COO & Executive Director [56]

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Matt, on the — if you look at our balance sheet, you see that we have virtually no goodwill. So the assets that we have on the balance sheet and mostly the big ones are all discoveries, and we do have a history of accelerated depreciation in most of the assets that we have. So the carrying value of our assets is very, very low. And if you look at our share price, our market cap as a multiple of book value, that kind of gives you a hint. The market is giving us like 2x book value, which is call it double the sector, that gives you an indication of how low the carrying value in the balance sheet we have.

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Operator [57]

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And your next question comes from the line of Jorge Guimarães from JB Capital Markets.

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Jorge Guimarães, JB Capital Markets, Sociedad de Valores, S.A., Research Division – Analyst [58]

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I have 3. Firstly, is it possible to give us some visibility about how volumes are evolving in July in Portugal and in Spain, mainly in the context of concerns about tourists? The second one would be related on your CapEx comments, CapEx and OpEx reduction. Should I assume that on the — over 90% reduction in CapEx and OpEx is already included the reduction in CapEx from the change in the structure of the ACS still? This would be the second one. And the third one, it’s also related to this change in renewables. I thought to understand that you mentioned in the question that you expect the JV to be self-funded after the initial acquisition. Is this so? And if not, what are the equity CapEx needs of the JV with the new capital structure?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [59]

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Jorge, straight and forward to your questions. First, volumes. I would say that July to date, we are observing year-on-year mid-10s reductions in Iberia. In CapEx, yes, you should consider that we have already incurred it a bit. In renewables acquisition. So I’ll let Otelo go through on that. Thank you.

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Otelo Ruivo, Galp Energia, SGPS, S.A. – Head of IR [60]

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Yes. The ACS transaction on our guidance was already around — only the equity piece component was over and going forward, self-funded means that it might be, say, 70% project financed, and the Galp STPs would have to be 70% of the equity piece will be our contributions for each of the next few years as we develop the portfolio.

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Operator [61]

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

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Alejandro Demichelis, Nau Securities Limited – Investment Analyst [62]

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Coming back to the renewables deal. Obviously, you changed your planning assumptions on the oil price, you were talking about downstream also being challenging. But you have also seen electricity prices in Iberia coming down a lot. So the question is, have you changed your planning assumptions on electricity prices? And if so, how is this impacting the value of the deal? So just trying to make sure that we are unlikely to see an impairment of these deals that you just kind of renegotiated.

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [63]

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Alejandro, clearly, we have also been reviewing our solar prices, our power prices and solar capture prices going forward. And there was no relevant impact in the transaction that we have designed with ACS. And if we look at the returns, they are pretty aligned with what it was our initial decision. So nothing to allude it on this front.

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Alejandro Demichelis, Nau Securities Limited – Investment Analyst [64]

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Okay. And just as a follow-up, is this because you’re compensating part of that lower oil price — sorry, lower electricity price with better financing conditions on these renewable project?

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Carlos Nuno Gomes da Silva, Galp Energia, SGPS, S.A. – Vice Chairman & CEO [65]

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So it’s all in all. So when looking at the project in a global perspective, it’s all in all. So it’s completely, let’s say, a single package analysis in combination with the 2 elements that you have mentioned, with also the — what I have already referred, that we have related with the scheduling of the development of this project. Thank you.

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Operator [66]

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There are no further questions on the phone line, sir. I’ll hand the call back to yourself. Thank you.

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Otelo Ruivo, Galp Energia, SGPS, S.A. – Head of IR [67]

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I think we’ll conclude the call. Thank you so much. Bye-bye.

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Operator [68]

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Thank you, sir. Ladies and gentlemen, this conclude our conference for today. Thank you all for participating. You may now disconnect.