Galp Energia Sa

Good afternoon, ladies and gentlemen. Welcome to GALP's second quarter 2023 results presentation. I will now pass the floor to Othello Reaview, Head of Investor Relations. Please go ahead, sir.

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

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

Thanks. Thank you. We'll then go to Q&A.

Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. To ensure everyone has the opportunity to ask questions today, please limit yourself to just two questions. Please stand by while we compile the Q&A roster. We will now go to your first question. And your first question comes from the line of Oswald Clint from AB Bernstein. Please go ahead.

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

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

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

Understood. Thank you both.

Thank you. Your next question comes from the line of Viraj Bakataria from RBC. Please go ahead.

Hi there. Thanks for taking my questions. The first one's on refining. I've noticed a drop in medium and heavy crews in your sourcing and a commensurate drop in the middle distal yields. I was wondering if that's intentional and you're shifting towards gasoline due to better pricing or if if that was around the availability of heavy and medium crudes in the market post the Saudi cuts. So any color there would be helpful. And then the second question is on the U.S. LNG offtake. Venture Global recently announced a delay to calculus we passed to the end of 24. Obviously, you're in arbitration. It looks like Shell and BP are involved there also. But could you just remind us what was baked into your 2024 earnings guidance for energy management and what's at risk there? Thank you.

Ronald, you'll take the refining question?

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

Rodrigo, Venture.

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

Thank you. Your next question comes from the line of Alessandro Pozzi from Mediobanca. Please go ahead.

Hi there. A couple of questions from me as well. You raised the guidance for the industrial and midstream clearly q2 was a big beat i was wondering if you can give us a bit more color on the driver of that in q2 and whether um the increase in the guidance was mainly driven by the q2 there's more to go maybe in the second half of the um of the year also um a few weeks ago i believe you um put out a press release suggesting that you're looking for offshore wind opportunities with total energies. And again, I was wondering if you can give us maybe your thoughts on how you can structure the business model there in terms of exposure, in terms of potential capital employee that you're looking to deploy in that particular opportunities and the type of returns that you would be comfortable with. Thank you.

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

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

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

All right. Thank you very much.

Thank you very much. Thank you. Thank you. We will now take your next question, and it comes from the line of Pedro Alves from CaixaBank. Please go ahead.

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

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

Thank you. We will now go to the next question. And the next question comes from the line of Sasi Kant Chilukuru from Morgan Stanley. Please go ahead.

Hi. Thanks for taking my questions. I had two, please. The first was related to Mozambique. Last quarter, you had indicated that a second FLNG unit in Mozambique was not necessarily in your budget and you were more focused on the onshore development. But But in recent weeks, there appears to be more traction for the Coral North FLNG unit with reportedly consultation meetings on the environmental impact assessment already having taken place. Just wondering if you could provide more details on where we are related to this on this project and on Ravuma LNG and if the Coral North FLNG were to go ahead, how that would impact the CAPEX plans for Cal. The second question was related to CAPEX. You've highlighted the slower pace of investments in in renewables and industrial low carbon projects leading to a lighter capex in 2Q. I was just wondering what the 0.4 to 0.6 billion euro 2023 net capex guidance was incorporating with regards to the investments in renewables. If the previously mentioned issues in Iberia and Brazil, what process should be included in this guidance?

Thank you. Thank you, Sasi. On Mozambique, yes, we are having discussions within the consortium on the second FLNG, but no decisions have been taken. So we don't expect this to be an imminent decision to go ahead with the project. And it clearly would increase our capex allocation to Mozambique if the projects were to go ahead. The focus of GALP has always been the main project in Mozambique, the onshore trains, and we're quite pleased with the pre-fit work that is ongoing into this new modular concept that looks increasingly attractive. So GALP is very committed to the Mozambique project, but most of the focus at GALP is on the onshore project. On the capex numbers, first a reminder, these are net of divestments. We have guided the market to an average for the three years, 23, 4, and 5, of about a billion net capex. This is the first time we're giving a bit more granularity on 2023 only. And based on delays in sanctioning our industrial, the new projects on the industrial front, And on the challenging economics we see in renewals in Brazil, plus permitting delays in Iberia, we see capex in 2023 of about half a billion or so. Thank you.

Thank you. Your next question comes from the line of Henry Patrick from UBS. Please go ahead.

Yes, everyone, thank you for the update. Two questions, please, from my side. The first one, just following up on this topic, can you give us an update on the timeline for the green projects, HVO and the green H2? And then secondly, on refining, you haven't changed the margin guidance for the nine-palette ball, but it looks like it's quite a healthy environment at the moment. So I'd like to check what sort of margin you're seeing quarter to eight and how is performance this quarter. Thank you.

On the low-carbon projects on the industrial front, work is actively in progress. These are very important projects to gulp, but you also know these are expensive projects. There's technology risk. There's regulatory risk. We need to tick all boxes before announcing the FID. So the strategic importance to GALP is critical. We're highly confident these projects will go ahead, but we haven't ticked all boxes for now. Ronald?

Henry, thank you for your question. If you look at the refinery margin, indeed, in the last few weeks, there's current strength and the margins are leading up. There are relatively low inventory levels for diesel in the U.S. and for gasoline in Europe. And if you look in the overall Atlantic Basin, there's insufficient capacity at the moment to meet the demand there is. At the same moment in time, we also see a slow recovery of the Chinese economy, slower than expected at least, and inflation remains high, which leads to potentially future interest rate hikes. And hence, in balance, we believe that the guidance we're giving for the second half of the year is actually the one which is plausible, given there's ups and there's downs, but in balance, we keep it our guidance.

Thank you. We will now go to your next question, and the question comes from the line of Giacomo Romeo from Jefferies. Please go ahead.

Yes, thank you. Two questions. One, I'd like to go back to midstream. I appreciate the color on what's driving the increase in the overall refining and midstream guidance for this year. Just wondering if the level of EBITDA you just discussed of 400 million for midstream, is that you think a good run rate going forward or is there any sort of one-off or any particular reasons why this year should be particularly higher or lower than what could be your medium-term guidance there. The second question is going back to the good upgrade in your volumes guidance for 2023. I appreciate you said that your longer-term guidance remains unchanged at 110. thousand barrels, but just wondering whether there's any change with regards to the decline rates that you're seeing in Brazil. I think you talked about decline rates of less than five. Is that still a valid guidance in your view? Just interesting to see if anything has changed there.

Thank you, Giacomo. So our guidance is prudent, as you know, and the guidance you have in mind is the guidance pre-Baccalaureate coming on stream sometime in June 2025. But on the decline, Daniel, do you want to comment?

Yes, thank you very much, Giacomo. So The performance that we are observing is mainly driven by good topside availability and also good reservoir management practices. Our decline guidance today remains the same. We will continue to monitor how the production performance goes going forward to see if, based on these good reservoir management practices, there is room for improvement. But for now, we maintain the decline guidance we provided before. Thank you.

Thank you. Thank you. Once again, if you'd like to ask a question, please press star 1 and 1 on your telephone keypad. That is star 1 and 1 if you would like to ask a question. Your next question comes from the line of Matt Lofting from J.P. Morgan. Please go ahead.

Great. Thanks, everybody, for taking the questions. Two follow-ups, if I could please, related to the last two points. First, just coming back on upstream production, accepting that you just indicated that the guidance around decline rates or expectation on decline rates has not changed. I just wondered if you could zoom in on what perhaps has sort of changed in terms of the underlying performance and expectation for 2023 versus the outlook that you gave in February just sort of seems like relative to the sort of the greater than 110 sort of baseline through the back of our sort of 5% roughly sort of uplift for this year seems relatively significant in terms of the sort of the base level of the change and then secondly On the gas midstream contributions, sort of 400 million EBITDA, if I understood correctly, for the full year. On my numbers, it looks like you've done sort of roughly 300 million for the first half of the year. So I wondered if you could just disaggregate what components were exceptional within the first half performance, particularly perhaps in the second quarter by looks of it, and which bits therefore you're not expecting to sort of sustain from the third quarter onwards. Thank you.

Upstream, Daniel.

Matt, the key driver is production efficiency. We are seeing the consequences of the good maintenance and turnaround that were performed So this has a positive impact on production efficiency that we are observing throughout the year and guiding our revision until the end of this year. Thank you.

Okay. Thank you, Matt. This is Rodrigo here. Regarding the midstream contribution, and just to be clear, the midstream contribution encompasses natural gas, but also oil products, biofuels, and power. So there's a a whole suite of products here. We do not provide granularity specifically, but indeed a big part of the contribution came from the natural gas operations. And we do have, as mentioned in the last quarter's call, a more resilient portfolio overall, right, with different counterparties, different terms, indexations, additional flexibilities. And more than that, although we are still in the beginning of a journey, we are quickly improving our portfolio optimization, risk management, trading capabilities, and being able to apply that beyond oil and gas. And I would just highlight power and biofuels here as key examples, and this is indeed helping us develop in an integrated fashion our energy transition project and indeed achieve better results. Thank you.

Thank you. Thank you. Your next question comes from the line of Irina Himona from Societe Generale. Please go ahead.

Thank you very much. Just one question of clarification on capital expenditure. You guide today to net capex this year of around 500 million. So do you retain the 3 billion three-year cumulative capital Net capex guidance, please.

Yes, Irene, we do. We do. Unchanged guidance for the three-year period. Thank you. Thank you very much.

Thank you. Your next question comes from the line of Biraj Bakatoria from RBC. Please go ahead.

Hi there. Thanks for giving me a second chance. Just one follow-up on Bacalao. This is obviously the key deliverable of the next couple of years for you. So could you just remind us where we are now, what are the key risks here, and how much continuity you have in the budget? Thank you.

Hi, Biraj. It's all going relatively well. So after the Delays we announced in Q1, it's all going pretty well, I would say. So the unit is in Singapore. The top sides have been lifted. So this should take us to, I would say, January, February 2024. So we're confident that both on the costs and the timings will be as announced in Q1. This is a key project for GALP, as you would expect. So more than 40,000 barrels per day our share in not only a large but very competitive and low-carbon barrels coming our way. Thank you.

Thank you. I will now hand the call back to Othello for closing remarks.

Thank you. I think this concludes our call. I hope it was a useful one for you. Do get in touch with our team if you have any follow-ups. Until then, we wish you all a great summer break. Hope to see you all in September. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.