Galp Energia Sa

Good afternoon, ladies and gentlemen. Welcome to GALP's fourth quarter and full year 2023 results presentation. I will now pass the floor to Otelo Ruvu, Head of Investor Relations. Please go ahead.

Good day, everyone, and thank you for joining the analyst Q&A session related with GALP's fourth quarter and full year 2023 results. By now, most of you have read and watched the materials released this morning covering our results. and short-term outlook. Therefore, we will start with a short opening remark from Filipe and then moving on straight to Q&A. As usual, we will have in the room the executive team together with some top managers here with us to take your questions. Before I hand over to Filipe, the usual disclaimer, we make we may make forward-looking statements that refer to our estimates, and actual results may differ due to a number of different factors, as indicated in the cautionary statements, included in our materials, which we will advise you to read.

Philippe, the mic is yours. Thank you, Italo. Good afternoon, everyone, and thanks for joining. Looking back at 2023, we continued with our structural improvements, and it's great to see our strong operating performance across all divisions. Sound delivery from the teams leads inevitably to improved financial robustness. We remain highly confident with our strategic execution and with our capital allocation guidelines with our growing dividends. During 2023, we took very important steps to deploy world-class industrial projects, such as the HVO and sustainable aviation fuel units, and the 100 megawatt electrolyzer for green hydrogen. Now, these will support the transformation and the decarbonization of our downstream activities. On the other hand, our low cost and low carbon upstream portfolio continues to thrive. As we start 2024, we are progressing with our key projects and tapping high potential opportunities such as Namibia. There, after two significant oil column discoveries in the first well, We're starting the second well. You will appreciate there is very little else we can say on Namibia at this stage. Now, I do see GALP as one of the most attractive investment cases in the sector, superior growth from profitable projects, and a very credible transformation story. And this is backed by our low capital intensity plan, which is mostly allocated to growth whilst we offer a competitive yield and the creation of long-term sustainable value. I'm here with the whole team. Very happy to take your questions. Thank you.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To ensure everyone has the opportunity to ask a question today, please limit yourselves to just two questions. Please stand by while we compile the Q&A roster. Thank you. We will now go to your first question. And your first question comes from the line of Biraj Bakatoria from RBC. Please go ahead.

Hi, thanks for taking my questions. The first one's on production guidance for the year. You do have a history of putting out conservative guidance at the start of the year. But I'm thinking about production at 122 in 2023, and you're talking about greater than 115. So maybe you could talk a bit about the maintenance schedule year on year, if there's any big differences, or anything else that makes you more cautious there. And then the second question is just on slide 14 and the uncommitted capex. I'm assuming most people model the $1 billion, but you're obviously talking about the potential for more CapEx, which is then offset by asset sales. So could you just talk a little bit about your options for 2024 and 2025 on the uncommitted portion of CapEx, whether that's upstream renewables, and where should I think about where the capital could flow? Thank you.

Thank you, Biraj. We're seeing... low decline rates in Brazil and increased operating efficiencies. Is our guidance conservative? It usually is, but we're in February. This is a prudent baseline on which we would like to guide the markets to. The Brazil reservoir's performances continues outstanding. And we are, you know, every day we get more and more confident on the improved efficiencies. So look at this, you know, and we will be updating the market regularly. If we see upside materializing, we will make that clear. On capex, as we said before, we play with both legs, absolute gross capex. and divestments. The commitment of GELP throughout the years has been on a net capex basis. For example, we've seen very significant permitting issues around renewables. So the capital we're deploying in renewables is not as high as we were expecting, and we continue to see that. Hence, less requirements to divest assets. So again, look at our capital plan we have options both on gross capex and on divestments and we will activate those so that we stay within the commitment which again is a three-year commitment it could be lumpy but on average one billion net capex per year thank you we will now go to the next question

and your next question comes from the line of josh stone ubs please go ahead thanks and uh good afternoon uh two questions please firstly on the midstream guidance you gave either of 300 million euros could you maybe just talk about how much visibility you have on a number how much of that is locked in already how exposed are you to any deterioration and absolute prices or spreads from here and maybe what are you baking in for sourcing restrictions or potential sourcing restrictions during the year. And then second question on renewables and the pipeline there. You talked about 200 megawatts starting up this year. Can you just give us an insight of how that pipeline is moving in the years that follow? You've given some helpful sort of slides with renewable generation under management. How much of that is your own generation and how much is third parties? Just any insight on that would be great. Thank you.

Thank you very much, Josh. This is Rodrigo Villanova. Regarding the midstream contribution for 2024, we do expect a robust EBITDA throughout the year, but we have indeed taken a cautious approach regarding limited gas sourcing conditions, as well as a lower macro environment. I would say, I mean, we have some exposure to the spot market, but we do have a built-in some flexibility in our portfolio. So we are confident that we will meet the guidance and clearly working potentially to overcome it. But we believe at this stage, based on the information we have today, this is a prudent guidance.

Thank you. I'll take the renewables question. Indeed, we have 200 megawatts this year. earmarks for COD. As Philippe said, we have several delays in the permitting of our pipeline. We are expecting nonetheless several megawatts starting construction in 2024. It will depend on the reactivity and the effectiveness of the Spanish administration in particular in bringing our projects ready to build. So we don't have any, let's say,

set number on this obviously our developments will also and always depend on you know being disciplined and having very good returns thank you we will now take the next question and the next question comes from the line of yakumal romeo from jeffries please go ahead

Thank you. And Filippe, I will not ask about the Namibian well comment, but it's just in terms of farm out there. Can you just perhaps talk a little bit about how you see the timing for that and in terms of what size of your large share will be diluted and if we can see something already in 2024. And then I would like to go back to slide 14 where you are showing the need for some incremental divestment in order to keep the 23-25 net capex at 1 billion. Which areas we could see some incremental divestment? Is renewables an area that you're considering in terms of portfolio rotation? And in that context, will you be looking to sell single assets or will you consider selling a minority stake in the overall business as some of your peers have done recently? Yeah, thank you.

Hi, Giacomo. On Namibia, we're not in a rush. So we're now focusing on evaluating the exploration upsides. Clearly, we need to de-risk what we have in our hands. We will analyze all the options and whatever creates most value to our shareholders, we will consider this in due course. So this is, we're not expecting a short-term decision on this. So the campaign is ongoing. We're about to, you know, Mopane 2X is going to be drilled. Then we have the DST in March. What we have made public, you know, we have something that looks sizable. We have Clearly we have very encouraging pressures, very encouraging porosity, very encouraging permeability, but we've only drilled one well. So too soon at this stage to see what is going to be our next notion. Thank you. On net capex, we're not going to... We have a number of options, which we may or not activate. And whether you probably have renewables in mind, whether we bundle a few assets and sell a minority, as was leaked in the press a few months ago, or single stakes, is it outside of low carbon? Our strategy is clear. We need to decarbonize GALP. So renewables is an important element. A number of our shareholders look at GALP as a transition story, a very strong upstream clearly, but also a very strong decarbonization story. So we will consider all our options, including how much gross capex we actually need in 2024. Thank you.

Thank you. We will now take the next question. And your next question comes from the line of Michele Della Vigna from Goldman Sachs. Please go ahead.

Thank you very much. Two questions, if I may. The first one is I was wondering if you could perhaps help us a little bit with sensitivities on the European gas price for your midstream business over the next couple of years, and also an update on when you would expect the venture global volumes to come through. It looks like it's not part of your guidance, so probably you expect it from the beginning of 2025. And secondly, I was wondering, I've seen a major increase in leases under IFRS 16 in the fourth quarter from 1.4 to 1.8 billion. And I was just wondering if you could give us a little bit more detail on what's behind that. Thank you.

Thank you, Michel. This is Rodrigo again. Regarding the assumptions for the guidance in midstream, indeed, we have no venture global volumes expected. As I said, we have a conservative approach. As far as exposure to the spot market, we do have some sales throughout the year. And as I mentioned previously, we do also have some flexibility in our portfolio that give us the confidence that we are showing here a cautious guidance. Thank you.

Hi, Michele. This is Maria here. I'll take your question on the leases. Yes, indeed, in the fourth quarter, we brought our corral assets into IFRS treatment, so that is a $475 million increase in our assets.

Thank you.

Thank you. We will now take the next question. And your next question comes from the line of Sasikant Chilukuru from Morgan Stanley, please go ahead.

Hi, thanks for taking my questions. I had two, please. The first was related to the guidance on 2 billion OCF for 2024. I was just wondering if there was any extraordinary tax payments that you have or windfall taxes that you have kind of incorporated within that guidance. Arguably, it's been affecting 2023. I just wanted to understand that. The second question was related to the $175 million contingent payments related to the Angolan transaction. It was dependent on rent price and was supposed to be paid in 2024-2025. I was just wondering if that was also included or if there's any change in that figure.

Thank you for your question, Sassi. This is Maria. I will take your question on OCF. On the 2 billion OCF, yes, we are considering extraordinary taxes, but we're not guiding on that.

Sassi, yes. The contingent payments on the Angolan divestment, first, they are in all likelihood going to be triggered. The timing is expected to be in 2024, and that is within our next net capex numbers for 2024. Thank you.

Thank you. We will now take the next question. And your next question comes from the line of Irina Himona from Societies General. Please go ahead.

Thank you. Good afternoon. Could you please provide us with an update on progress and milestones at Bacalao and also the biofuels and hydrogen projects, please? And my second question, as you mentioned, coral is now being fully depreciated. Can you update the guidance for upstream unique DDNA, please, for 24? Thank you.

Thank you, Irene. On Bacalhau, this is Daniel. I'm pleased to say that Bacalhau is progressing exactly according to our guidance. I'm also very pleased to report extraordinary safety performance and we have lifted all modules in Singapore at the moment with high quality and high level of completion. So we are now advancing well towards sail away in the second half of 2024, and also towards first oil in the mid-2025, leading towards ramp-up and production increase in approximately 30% to gulp in that upcoming period. All partners and contractors are focusing on delivering, and we are happy to maintain the guidance. Thank you.

Hi, Wien, it's Ronald here. Thank you for your question. Give me an update on the HVO and the electrolyzer status. And we took FID in the previous quarter and expected startup is late 2025. After taking FID, we started the early works on both projects and that's going according to plan. And we're at the moment busy with the procurement and the detailed engineering design, which you should finalize around mid this year. But so far, and again, we just started, but so far everything is according to plan and milestones.

Thank you. On your question on the leases on corral, the corral leases are expected to be adding circa $1 to $1.50 per barrel. So you have to put that on top of what is the historical $13 to $14 leases. So overall guidance of around 14 to 15, and I guess if you want to put that into an absolute number, it should be in the 40 to 15 million euros.

Thank you very much.

Thank you. We'll now take the next question. And your next question comes from the line of Ignacio Domenech from JB Capital. Please go ahead.

Yes, good afternoon. Thank you for taking my questions. The first one on commercial, you are guiding to this year. So I was wondering how are you thinking on marketing volumes in the upcoming years in Iberia? Should we expect volumes to be covered in three pandemic levels? Or should we rather think on the volumes we are seeing in the last two years? And secondly, on renewables, I was wondering if you could provide us with an update on the strategy that you are pursuing in the Iberian portfolio, namely related to the American exposure of this portfolio. Thank you.

Hi, this is Joel from Commercial. So looking forward, we see commercial with a very stable contribution with an increased weight of non-fuel contribution. So we're looking very flat on the fuel side, but with a reinforced, let's say, leadership in retail Portugal and with a much more well-integrated gas and power downstream business. So that's how we look forward within a plan where we are transforming, increasing electric mobility we've reached 1 million charging sessions in 2023 so we are very confident that we will be building a new business delivering 30 300 million but with a different structure thank you and ignacio we will uh this is yours for renewables we will uh continue this the merchant exposure uh strategy that we have and that we have guided

We are of course leveraging, we're looking at any short-term opportunities and we are leveraging the integrated structure if there's a good opportunity to hedge internally as we have done in the past, we will do that too. Thank you.

Thank you. We'll now take the next question. And your next question. comes from the line of Matt Lufting from J.P. Morgan. Please go ahead.

Hi. Thanks for taking the questions and for doing the presentation too, please. Just in terms of timelines on Namibia, I think you mentioned scheduling the DST for March earlier. Does Gallup expect that this will provide what it needs to take a definitive conclusion on resource commerciality, or do you see a scenario whereby it doesn't and further and drilling is required thereafter. And then secondly, just on capital allocations and the distributions portion of the frame, €2.3 billion of OCF in 2023 is translated into this year's buyback, moderating year-on-year to €350 million at your one-third policy. Guess I suggest that €2 billion of guided OCF for this year takes buybacks down again mechanically in 2025. So, Could you just talk about how you think about that in any case for going above and beyond the mechanical policy to defend a competitive yield if net debt to EBITDA remains firmly below one times? Thank you.

Thank you, Matt, for your questions. On Namibia timeline, so clearly by late March, we will know about commerciality. We should have a very good view on the volumes. of the reservoirs that we've hit. So it is highly possible that we will be drilling more wells within the block, given what we're seeing so far. So it will give us a good view of the reservoirs where we are by late March. Capital allocation is, as you say, Matt, it is mechanical. Do seek out as a growth story. We have to deploy capital to grow our business into highly profitable ventures. So capital appreciation is part of our equity story. So the guidance, until the board decides otherwise, is we distribute one-third of OCF. Thank you.

Thank you.

Thank you. We'll now take the next question. And your next question comes from the line of Pedro Alves from CaixaBank. Please go ahead.

Hi, good afternoon. Thank you for taking my questions. Do we find the first one on refining? You are guiding on refining OPEX of $3 per barrel. and based on these 80 million barrels of processing that you are guiding equates to over 250 million euros of OPEX, which, if I'm not mistaken, seems a bit high, at least for your historical standards, without relevant turnarounds that impacted your cost base last year. So the question here is, if there is any one-off or transformational project embedded in these OPEX of three dollars per barrel for this year or it is kind of a new standard and we should expect on a recurring basis and second question on the slide 11 on renewables and you are flagging a still relevant increase from downstream energy needs even before electrolyzer So if you can perhaps elaborate a bit on these growing needs from downstream and why, based on this, you are not growing faster in renewables at a time that solar PV capex is breaking new historical lows. Is it just because of the permitting issues that you have mentioned, or is really also the framework of net capex that you really need to match this growth capex and divestment? Thank you.

Thank you, Pedro. Thank you for your question. If you look at refinery OPEX, I think it's a fair observation to say that OPEX is slightly higher versus historical. There are two main effects. One is inflation, and we see that coming back in catalyst and chemical spend. We also see that coming back in waste management and maintenance costs. The second one is around the merge, which is actually a positive story because we have higher the merge because we see margin opportunities in the markets. we're importing large video and jet vessels to actually capture additional margin size but yes that will have a bit of an impact overall yeah we we expect indeed to come out for 2024 around the three dollars the three dollars a barrel um but it's overall an optimization an optimization game maybe good to add in that space is if you look to our utilization um We expect the refinery to be able to run fully in 2024. Clearly, they're always small and minor pit stops, but nothing that's out of the ordinary in that space. And hence, when the margin opportunities are there, we are able to fully capture that for 2024.

Pedro, on the renewable growth, clearly, other than the permitting issues, we also need to base this based on the profitability that we see. So not all projects are equally profitable. So we need to be extremely disciplined in the returns we extract from renewables so that the capital markets looks at Galp as a decarbonization story that is actually making a competitive return. So it is not about going faster to cover all our downstream needs. But there's also a mix of third-party purchases. If somebody else can deliver us the electrons that we sell to our clients or for our own use, we will be optimizing that mix as we go forward. To keep 14% return on our capital employed in renewables requires discipline. So the pace at which we do this has to be monitored carefully. Thank you. Thank you.

Thank you. We'll now take the next question. And your next question comes from the line of Kate O'Sullivan from Citi. Please go ahead.

Hello. Thanks for taking my questions. A follow-up on Namibia, please. Was the deeper target, Mopane 1X, AVO2, was that part of the original scope? Is it likely that you would need an extension to your original 115-day campaign? And also following up to the comments you just made around potential to drill more wells, how would an extension to your rig in 2024, how would that work? Is it availability, et cetera? And could you confirm what costs you have in your investment program for Namibia this year? Thank you very much.

Thank you, Kate. Now, this was all planned all along. The scope, the extension, everything has been pre-agreed before we started. We've actually drilled through the two reservoirs and went all the way to the source rock. And as we move to Mopane 2X, we're also targeting two reservoirs as well. The total capex for 2024 should be about 150 million. Everything according to plan and availability contractually, everything is going according to the original plan. Thank you.

Thank you. Thank you. Once again, if you would like to ask a question, please press star 11 on your telephone and wait for your name to be announced. We will now go to the next question. And the next question comes from the line of Alejandro Vigil from Santander. Please go ahead.

Hello, thank you for taking my questions. One question is about Mozambique. If you can give us an update on the situation there and potential FIB this year. And the second question is related also to Mozambique and in general to the opportunities you see in terms of CAPEX. You mentioned the Namibia exploration. Mozambique could be an option. Could you anticipate a cycle of higher capex post-25, considering all the potential number of projects you have in the pipeline? Thank you.

Thank you, Alejandro. Now, on Mozambique, there has been very significant progress on the ground. If I... look at the public statements of Total. I mean, it looks as if force majeure will be lifted sometime this year. On our sides, Exxon as the operator of the onshore project is launching a front end engineering this year, and we're looking for an FID of a modular concept, 18 million tons sometime in 2025. This is where we are because it is modular, because it's likely to be a lot of this is going to be cheaper to build than the very large trains, which are stick belts. We don't expect inflation from the original concept to be a big element here. Thank you.

Thank you. We will now take our final question for today. And the final question comes from the line of Alessandro Pozzi from Mujo Banker. Please go ahead.

Hi there. I have two questions. The first one on Namibia. When I look at your equity stake, it's very high and probably, as you mentioned, it's not going to stay like this. But I guess you probably don't want to be the operator as well going into a full development of Namibia, assuming that the flow test, of course, is successful. And the process of finding potentially a new operator may slow down the development of Namibia because, I mean, if you were the operator, maybe you could have started the engineering work and maybe you can go ahead with the long-lead items. But if you're waiting for somebody else to come in that could slow down the whole process. I was wondering if you can give us your thoughts on that. And the second question on cash flow, any guidance on dividend to minorities for 2024? Thank you.

Alessandro, we are acutely aware of the value of bringing production in Namibia as soon as possible, you can rest assured. Nothing is going to get delayed. Quite the opposite. We're doing a lot of work already to make sure that in parallel with the process of a potential divestment, a lot of the de-risking, including more appraisal wells and exploration wells, will continue in parallel. Maria?

Thank you, Alessandro. On dividends to minorities, it's fair to assume they'll be slightly below 2023, but guidance is broadly in line. It's at circa 150 million.

Thank you.

So I think this concludes the call for today. Thank you all for your questions. As always, our investor relations team will be very happy to answer any follow-ups. Look forward to speaking with you.

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