Galp Energia Sa

Hello, and welcome to the analyst session, where we will delve into GALB's first quarter 2024 results. Earlier today, we distributed all relevant materials pertaining to these results, accompanied by a brief video in which Maria João highlighted the key points of the quarter. Following the format of recent earnings calls, we will begin with a short introduction from Felipe, and then promptly move to Q&A, where our executive team will be available to address your questions. Please note that during this session, we will make forward-looking statements based on current estimates. Actual results may vary due to various factors, which are detailed in the cautionary statements included in our materials. Flip, over to you.

Thank you, Otelo. Good morning, everyone. Q1 was a good quarter for us. Good momentum in the operational delivery of the teams. Our upstream, our industrial, energy management activities, they all contributed very nicely to our sound financial results. So overall, we maintain a very strong financial position to support our upstream growth and for the gradual decarbonization of our downstream assets. In Namibia, of course, we have made good progress in PEL 83, where GALP and our partners in Namibia have significantly de-risked the Mopane complex. So we have identified significant light oil columns in high-quality reservoir conditions. So the wells and the test results were quite impressive, and they have exceeded our pre-drill on the potential of the area. So we are confident that Namibia will bring another exciting growth avenue to Gulf. We are already fast tracking the next steps. We are now launching a new four-wheel campaign for both exploration and appraisal. to better understand the potential of the mopane complex. And Otello, I'll stop here. Thank you.

Thank you. Operator, can you start the Q&A, please?

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 yourself to just two questions. Please stand by while we compile the Q&A roster. Thank you. We will now go to our first question. And your first question comes from the line of Giacomo Romeo from Jefferies. Please go ahead.

Yeah, thank you. And congratulations on the great results, both in terms of OneQ and the Namibia Wells. Two questions for me, both Namibia related. The first one is, there have been... some speculation around the potential farm down process. Can you confirm whether this has started yet and what sort of timing you have in mind for this? What are the sort of key moving parts for this process? Second is related to the next world program you just alluded to, Filipe. These four wells, you said exploration and appraisal. Can you confirm sort of what do you think is the likely timing for that and how many wells will be of these four will be drilled on the Maupain discovery? Thank you.

Thank you, Giacomo. As you will appreciate, we we don't want to comment on potential dilution of our stake or the process. Other than to say that the focus at Galpno is to de-risk further what we have in our hands. To your second question, yeah, the four wells will be in the Mopane complex. So we're not looking yet at the northern part of the block. So the next few wells we start with for appraisal and exploration wells and those will be keepers will be focused on the wider mopane complex only so fast tracking this this asset for us is the key priority for namibia for namcor for custos and and for galpa of course So that's where we are at this stage. Thank you.

Thank you. We will now go to the next question. And your next question comes from the line of Biraj Bakataria from RBC. Please go ahead.

Hi there. So I've just got one follow-up on Namibia and then one on Brazil. On Namibia, and again going back to the farm down process, if I look at the rest of your portfolio, you typically have owned between 10% and 20% of assets, and the press report suggested you were looking to farm down half. Is there any reason why you'd want to own more of this outside of price and value at this point? And the second question is just talking about Brazil maintenance. I think you've guided or you've noted in the past that Brazil maintenance was very H1 heavy, and I think in particular it was Q1 heavy. So could you just talk about plans for the rest of the year? Thank you.

Thank you, Biraj. So any stake dilution, clearly the CAPEX, this is going to be a multiple FPSO development, so it is beyond the means, the financial means of GALP to keep 80%. Actually, we have 100% financial exposure to this as we're carrying the local parties. So the timing of the dilution, first, it's when we really have to, when we maximize the value of de-risking further what we have in our hands. And we will prioritize at that stage a partner that is keen to develop quickly the prospects and that will fund the CAPEX. So more than a monetization, this would be a portal that would support the development as quickly as possible. Thank you. Daniel, on Brazil, please.

Viraj, thank you for the question. On Brazil maintenance, we don't guide On a quarter-on-quarter basis, we are above our yearly guidance of 115 KBOE per day. We are confident that we will successfully meet that guidance. And obviously, related to logistics, planning, constraints, and sometimes weather, it's normal that you'll see some variability on maintenance throughout the year. As it was mentioned before, We are also planning to grow upstream in 2025 with the entry of Bacalhau FPSO, which will bring us another 40,000 barrel of alcohol a day at Plateau, which is a 30% increase in our production. Thank you.

Thank you. We will now go to the next question. And your next question comes from the line of Matt Smith, Bank of America. Please go ahead.

Hi there. Good morning. Thank you for taking my questions. I have a couple, please. I guess the first one was back to the farm down process in Namibia. I guess just to clarify, if I could, if you'd be willing to comment on just to understand what you'd be prioritizing in respect of proceeds. It sounds like covering the CAPEX commitment is really the priority here. So should I take it that GALP is looking to maximize the amount of capital carry that it could achieve from the process rather than cash proceeds. I'd just be interested if you'd be willing to comment on that at all. And then my second question, and I appreciate fully interlinked, I suppose just it's a broader question whether the discoveries in Namibia might necessitate a change to the capital allocation that you've laid out previously, whether that's in relation to buybacks, whether that's in relation to investments in low carbon, or is very much the intention to remain the status quo there? Thanks.

Thank you, Matt. GALP will keep a very significant stake in Namibia post dilution. So yes, the use of proceeds will go directly into the concession. when we do have a partnership agreement. As far as the overall GALP capital allocations, Brazil free cash flow positive clearly. Namibia should not consume post of dilution or as part of dilution, capex going into Namibia post exploration appraisal should be very, very limited. So this in a way will allow GALP to accelerate profitable low-carbon ventures, what we're doing in the refineries, be it with sustainable aviation fuel, advanced biofuels, hydrogen, lithium. So this also gives the means for GALP to accelerate its downstream transformation. Thank you.

Thank you very much.

Thank you. We'll now go to the next question. And your next question comes from the line of Alessandro Pozzi from Mediobanca. Please go ahead.

Hi there. Thank you for taking my questions. And they are on Namibia, as you might have expected. The first one is on the estimate that you've given of 10 billion barrels in place. I was wondering if you can give us a bit more color on how conservative this estimate is and whether that amount of volumes is allocated to the different targets that you've announced, ABO 1, 2, 3, and the deeper target. And also, this is a very large discovery, 10 billion just with two wells. Are you concerned about heterogeneities across the field as well? And second question is on the CAPEX for the next phase and the timing of the next appraisal wells, please.

Your second question, CapEx, is we're launching the campaign now, so this is going to be a late 24, early 2025 exercise for us. On the oil in place, 10 billion or higher, is our DOE in place. It's our best assessment based on information that we have so far. So we have data collected from the the two wells and the DSD. And all this has reinforced our pre-drill geological model that we had, which itself was based on our very extensive analysis of the area over the last decades. So this is not a new asset for GELP. So the data covers only some of the structure that we had initially identified in the seismic. Some of this has been de-risked, plus some additional hydrocarbons that we found in the deeper target. So we have calibrated, or we are calibrating the model based on what we have proven so far, and this is the estimates that we get. Now, could we, is there risk associated with the estimate yes up and down so that's why we need to do more exploration and appraisal activities to better assess the full area of of the mopane complex so lots of information that we're still analyzing a lot of the cores the fluids has been sent into the labs So all this is going to be and everything is going to demonstrate what we saw in In the seismic so a lot of reservoir updating has to be done But you know, you know kelp I know We are a measured Conservative company when it comes to estimates and and external communications Thank you

On the 10 billion, I believe in your press release you mentioned that AB01 has the same price regime in the two wells. Is it fair to assume that the majority of the volumes are in the AB01?

We're not commenting on this. We have selected the location of these exploration wells to get as much information So we did not necessarily go for the sweet spots. It's really to look at the extensions. So the eastern part of Avial 1 was targeted because we knew we were going to cross other Avials. Now, if you look at the western part of Avial 1, it extends a lot to the east as well. And Avial 3 extends very significantly to the west of where we drilled.

Okay, thank you very much.

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

Hi, good morning. Thank you for taking my question. So coming back to Brazil, do you have any updates regarding the development of Bacalhau, the Phase 2 in Bacalhau Norte? And on Namibia, the estimates of $10 billion, you said oil equivalent. Do you have any early estimates, or can you provide a range of what do you think could be the percentage of gas in this discovery?

Thank you. Thank you, Pedro. Let me take your second question, and Daniel will cover Brazil. So this is not a gas discovery, guys. This is light oil weight carbonation. gas condensates, so these are fluids with associated gas. We're not guiding on GOR at this stage. And the fluids are not the same everywhere. We will drill deeper where we expect more oily fluids going forward. More importantly, associated gas, so this is not expected to be an issue for the developments for many, many years. So, reinjection will be prioritized during the initial years. Daniel?

Thank you, Pedro. On Bacalhau 2, we are happy to report that we have completed the RDA well in January and the data acquisition associated with that well in March. Now, we are incorporating all the data associated with that operation in order to review our models, specifically in the northern area, in order to make a decision going forward. Of course, this is a high-quality structure that is part also of the bacalhau and the original Cacará discovery. So what we have to do now is take into consideration this new data and look into the options that we have mapped into the bacalhau phase 2 Thank you.

Thank you. We'll now go to 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 question. I have one related to Namibia, please. I was just wondering, you confirmed the lateral extension of the Mopeng I into Mopeng II. I was just wondering if you would notice any communication between the wells as well as your flow test. I appreciate this is early days, but I was just wondering if you could comment on that.

Thanks for your question. Adriano Bastos. It's on? Okay. Thanks for your question. It's me, Adriano Bastos. I will take that. The wells are eight kilometers apart. And any pressure response to confirm continuity between them will take time. But the pressure regimes and the logs give a good indication of a potential communication between the wells. Thank you.

Thank you. If you could just one more. For the second well campaign, I was just wondering what could be the potential bottlenecks for you to get back to that next phase. especially in terms of the availability of the drilling rig. Do you think that would be any issue at all going back into this second phase of the E&A program?

At the moment, no bottlenecks. We have the time of long lead items besides that there's no foreseeable bottlenecks for our campaign. Thank you.

Thank you. Your next question comes from the line of Lydia Rainforth Barclays. Please go ahead.

Thank you, and gentlemen, good morning. Two questions, if I could. Just very quickly, I don't think you've actually given a date for first oil. I just wanted to check if you were able to just talk us through the timeframe on that. And secondly, I did want to come back to Matt's question earlier about what it does for the rest of the business. You talked about earlier that interesting part of being able to accelerate other parts of business in terms of development. Organizationally, and I know it's only a week since you've made this sales announcement, but just in terms of what you're thinking about, does it change anything organizationally in terms of is there anything actually you need to accelerate those developments or expertise you need to bring in? Thank you.

Lydia, can you please repeat your first question, please?

Sorry, yeah, I was just thinking about the timeline for a startup, so when this first FPSO might actually start producing. That was all.

Hi, Lydia. We had trouble hearing you. So if I understand correctly, yeah, first of all, it's end of the decades if there's no early production system. but too early to give guidance at this stage. Your second question?

Sorry, if I come back to it, it was more going back to Matt's question earlier on the organization structure, and he talked about the very interesting part of being able to accelerate from the downstream side. I'm just wondering, organizationally, are you set up to be able to accelerate that, or does there need to be organizational changes in terms of how you think about the business. And I appreciate it's only a week or so since you made clear the scale of it, but I'm just trying to think about the implications for the rest of the business.

Very clear now, Lydia. Thank you. No, we are fully equipped with talent. We're fully equipped with the balance sheets, so we don't expect any need for organizational changes. It's actually doing more of what we're already doing. We are building the first 100 megs of green hydrogen and the SAF HVO unit that's ongoing. We're about to launch another 200 megs of green hydrogen for once the first megawatts are significantly advanced. So we have all the capabilities in-house to do this. And yes, we can do both at the same time because, as I said before, the model that we have in mind for the partnership model that we have in mind for Namibia, the development CapEx will be funded by our new partner. Thank you.

Brilliant.

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

Thank you very much. And again, congratulations. I had two non-Namibia questions, if I may. First, unit DNA in the upstream is unusually low, surprisingly low, versus guidance and versus the the start of depreciating coral now. Is there some guidance you can provide for the rest of the year, please? And then secondly, I think you paid $45 million as energy sector extraordinary contribution. Again, what should we expect for the full year, please? Thank you.

No, we're not expecting more extraordinary taxes in 2024 beyond what you have in Q1. On units, DDNA, these are low provisions, so this is a revision of the unit of production metrics that we have internally. It's non-cash, of course. Thank you.

Thank you. Thank you. Your next question comes from the line of Matt Lofting from J.P. Morgan. Please go ahead.

Hi, thanks for taking the questions and congratulations on the updates over the last couple of weeks to everybody at GALP. Two follow ups, if I could, on Namibia. I think you said earlier, firstly, that the best estimate on the 10 billion barrels that you've provided is based on data that covers some of the structures. So could you just sort of talk a bit more about what proportion of the structure is all covered by the data that you have to this point? And perhaps if you could share your view on the sort of the probability on a sort of a 1, 2, 3P type basis or the confidence interval around that 10 billion that you have at this stage. And then secondly, perhaps linked to that to some degree, I think you indicated in the press release 10 days ago that additional analysis of the data was required in terms of ratifying commerciality. Are there any uncertainties that exist today in terms of that ratification and how are you thinking with that in mind about sort of realistic ranges on recovery factors on the $10 billion?

Thank you. Thank you, Matt. I'll ask Adriana also to jump in, but we're not clearly, it's too soon to give any guidance on recovery. So we don't have enough support at this stage to provide you with a credible estimate. And this also depends on many factors, including how much hardware we will deploy and when. So first we need to fine tune our development concept definition. We need to agree those with our partners and with the government of Nadia before we disclose this. But I would say the test results were very impressive. Yes, albeit in only one location so far. And when you have low viscosity, good porosity, high pressures, high permeabilities, you can suspect that the productivities are going to be very interesting. And we'll probably have a lot less capex for the wells than we were expecting before. It also helps that we have no CO2 and no sulfur contaminants.

Adriano? can be a barrels of equipment in place is our main case based on our knowledge of the structure of our complex. Okay, we drilled part of it. Now we launch a campaign for the exploration appraisal that you further access and confirm our model. Thank you.

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

Hi, good morning. Thank you for taking my questions. The first one is in Mozambique. I was wondering if you can provide an update on the main process status of Revuma LNG and also if the recent discovery in Namibia has changed the way you look at Revuma in the context of your overall portfolio. And then my second question is in resigning. The cash costs in the first quarter were significantly below your guidance for 2024. So if you could give us your view on what you are expecting in the coming quarters.

Thank you.

I'm not sure. No, the HOVUMA follows its own course. So there's an expectation that front-end engineering will start soon. We need to de-risk that project as well. And with a view for an FID next year, most likely. And we're also having a discussion within the consortium about Coral North, which may proceed before Hovoma LNG. Cash costs, there's no changing guidance on cash costs in the refinery for the full year. So don't reach too much into the 1.7 per barrel in Q1. It's $3 is still our guidance. There's an inter-quarter adjustment from Q4 last year and Q1 this year. So it's artificially low. 1.7 is not the run rate. Thank you. Thank you.

Thank you. Your next question comes from the line of Kate O'Sullivan from Citi. Please go ahead.

Hello. Thanks, Kate, for my question. Congratulations on achieving what looks like a best case outcome on the exploration in Namibia. Nice to see a company taking the risks again. As you evaluate the data, have you got from Mopain Wells and the DFT, is there anything that has surprised you versus pre-drill? I'm wondering what this says about exploration potential in the north of the block. Presumably, you have other multi-billion barrel prospects in the north to go after. And then just secondly, following up on what's given you confidence on the commerciality of the discovery. Further south of your block, one of your peers last week made remarks around gas content and handling in their block. Just think the market would be interested to hear anything you could say on the parameters related to oil and gas. Thanks very much.

Thanks for your questions. I'll try to summarize the answers. Any surprise versus pre-drill? Yes. we found a much more prolific profile than we expected, and the DST results corroborate our findings. There's other prospects in the block. Yes, there's several areas in the north that potentially have large world-class accumulations that are on our plans for the future. What we need to do more for the commerciality, we need to continue our appraisal and exploration campaign to confirm the total volumes we have and as such develop our concept for full development. Thank you.

Thank you. We will now take the next question. And your next question comes from the line of Alejandro Vigil from Santander. Please go ahead.

Good morning. Thank you for taking my questions. And again, congratulations for this amazing discovery in Namibia. My question is more in terms of a strategy, in terms of capital allocation. The reality is that with this discovery, with Mozambique, with Bacalao project, the scale of the company is going to increase significantly in the coming years. Is there any thoughts about the change in your strategy in terms of capital allocation, more focus on growth capex than sell buybacks, for example? Just your thoughts about the capital allocation in general.

Thank you. Thank you, Alejandro. No real chain. Again, Namibia, this is, for now, it's CapEx Lite. This is exploration appraisal. It's relatively CapEx Lite. And when the tens of billions of dollars are needed for each of the developments that are coming, this is not expected to be funded by GALP. So that's the price of going from 80% to a lower percentage. So it is critical, Mark and Sam, when you start with 80%, you have a lot of leeway to go down and be diluted over time and bring somebody else to fund the project for you. So it does not change CapEx allocations for GALP. Also do bear in mind that As we knew all along, 2024 was going to be a year of very high capex intensity for GELP. We have at the same time the SAF HBO project in Sinesh. We have the lithium project that we're working on in Portugal. We have the hydrogen projects going on. We have Namibia exploration and appraisal. And last but not least, we have peak CapEx in Bacalhau. The next year in Brazil, this changes very quickly. Not only we have production coming from Bacalhau, so EBITDA goes way up, but CapEx goes way down. So the profile post 2024 of GALP changes. We're also particularly pleased that the market starts to appreciate that this is a real high growth company. distributions should not be the driver of valuations. So this also gives us the ability to allocate capital and be remunerated in the market for the real value creation that we'll have for many, many, many decades ahead of us. So this is not a short-term business. Thank you.

Thank you. Your next question. comes from the line of Paul Redman from BNP Pro Evo. Please go ahead.

Hi, everyone, and thank you very much for your time. I just have one question, and it's just to delve down a little bit deeper in how you're getting the confidence on the 10 billion of resource. It's essentially, when we think about the seismic you took at the beginning of the project, how did the recent wells calibrate that original seismic? And what level of confidence does that give you about the estimate about the total filter? How are you getting that confidence on the 10 billion? Thank you.

Thank you for your questions. The seismic that we shot early in the project, we're still processing it. We have a quick look at it, and it's quite promising, and will help us on our future development with the project. Confidence that we have come from the past 14 years studying and also looking at the analogs of our neighboring, which helped to calibrate our model. During our exploration campaign, we confirmed and increased the confidence that we have. Therefore, we're quite confident on our mean case that there are 10 billion of oil equivalent in place. Thank you.

Thank you.

will now take our final question for today and your final question comes from the line of josh stone ubs please go ahead thanks hi and uh good morning uh yeah echo all the praise on the media yeah congratulations one final question on the media you're given the size and quality of the reservoir importance of the country as a whole just wanted to see how How are the conversations going with the government in terms of fiscal regimes, local content requirements? Have those conversations started? And secondly, on CapEx, Philippe, you highlighted some of the big projects you're spending on this year, but your guidance is on this net basis over a multi-year period. So just given the moving parts, can you maybe provide us with an outlook for this year on what the 2024 gross organic CapEx is going to be? Thank you.

Josh, we, and I think I've covered this before, we don't guide on gross capex nor on divestments. We play with both legs. We guide on net capex. If we have more capex than planned, then we need more divestments. I have to say, in Iberia, we continue to face incredible challenges with permitting in renewables. So capex, unfortunately, going into renewables this year is going to be much less than what we had in the plant. Not because we are de-emphasizing renewables. Renewables, we need as many electrons, green electrons that we need to feed our client base, B2B, B2C clients, and our own industrial units, including the electrolyzers. But we just cannot build enough of those. So that is a concern, but it makes our CapEx plan for 2024 much lighter than expected. On Namibia, an incredibly stable country, above ground risks, arguably one of the very best, stable, very collaborative authorities, different ministries, prime minister, our partners, Mr. Knowledge Cathy, the guys at NAMCOR, exceptional, exceptional professionals. So we're very, very pleased with the country as a whole. Thank you. Lovely. Thanks.

So I think this concludes our call today. Thank you all for your questions and for listening. As always, our IR team will be available for any questions that may remain. Looking forward to speaking with you.