Repsol Sa Sp/Adr

Hello and welcome to the Repsol first quarter 2023 results conference call. Today's conference will be conducted by Mr. Josue John Imath, CEO, and a brief introduction will be given by Mr. Ramon Alvarez-Pedrosa, head of investor relations. I would now like to hand the call over to Mr. Alvarez-Pedrosa. Sir, you may begin.

Thank you, operator. Good afternoon and welcome to Repsol's first quarter results conference call. Today's call will be hosted by Josuyon Imath, our chief executive officer, with other members of the executive team joining us as well. Before we start, let me draw your attention to our disclaimer. During this presentation, we may make forward-looking statements based on estimates. Actual results may differ materially depending on a number of factors, as indicated in the disclaimer. I will now hand the call over to Josuyon.

Thank you, Ramon. Good afternoon to everyone joining us in this conference call. Today, I will start with the key messages before moving to the business performance and financial results. At the end, I'll provide you with our update outlook for 2023. After the presentation, we'll be available to answer your questions. Starting with the main messages, the complex and volatile environment that we experienced last year, continued during the first quarter of 2023. The turbulences in the financial sector intensified the concerns of the possibility of a recession, adding further instability to the commodity market. Oil price fundamentals remain largely unchanged, but market sentiments seem to pay more attention to the uncertainties about the measures to tackle inflation. Furthermore, the threat of an economic slowdown aggravated the situation of the gas markets, with most price preferences decreasing significantly quarter over quarter, as temperatures and demand both turned out below expectations. In the industrial side, the refining environment remained robust, as the pressure on middle distillate spread was largely offset by stronger NAFTA and gasoline differentials. The petrochemical business continued to be affected by low demand, with margins impacted by increasing imports and high energy costs. In this scenario, Repsol delivered a solid first quarter across all its four business verticals, supported by a sound operational performance aligned with expectations shared with you in our February call. In addition, we closed the disposal of the minority state in the upstream business to EIG, cashing in the 1.9 million euros initial payment. And in renewables, we finalized the acquisition of Asterion and acquired another 250 megawatts of renewable development projects in Spain to ABOWIN. Looking at the results, the adjusted income was 1.9 billion euros, 7% lower quarter on quarter and 78% higher than in the same period a year ago. The cash flow from operations stood at 1.8 billion euros, 35% below the previous quarter, and 68% higher than a year ago. Cash generation was negatively impacted by a 0.6 billion euros working capital build-up, mostly related to higher stocks in preparation of maintenance activity and an increase in trading positions. Looking ahead, we expect that for the most part, this impact will be reversed in coming quarters. Net debt, including leases, closed the quarter at €0.9 billion, leaving our billion ratio at 3%, which compares to the 8% ratio as of December of 2022. Capital allocation remains aligned with our strategic framework, with a focus on resilience, capex flexibility, and value creation for our shareholders. Our strong financial position, which has been further reinforced with the cash-in of the EIG transaction, allows us to navigate the volatility of this part of the cycle, investing in profitable growth opportunities in our portfolio, and delivering on our shareholder remuneration commitments. In this sense, we are proposing to the next and our general meeting to be held on May 25th, and 11% dividend increase in 2023 to 0.70 cents per share. Of these, 0.35 cents were already paid in January, and a reminder, 0.35 would be paid later in the year. Dividends will be complemented with share by BACs aligned with our objective to distribute a 30% of the cash flow from operations to our shareholders. In March, we started the 35 million shares buyback program announced in February with the intention of canceling a total of 50 million shares before the end of July. Additional buybacks are expected later in the year, reaching the upper part of our distribution range. And let me say that being more specific, we launched a second buyback program in the conference call of July. This buyback program will have the aim of redeeming an additional amount of 50 million shares. That means we are going to reduce this year our number of shares in a minimum of 100 billion shares. That combined with the cash dividend of 70 cents per share represents a total distribution around 2.4 billion euros in 2023. That is going to be the distribution framework for this year. Let me now briefly review the evolution of the main macroeconomic indicators in the quarter. Brent crude averaged $81 per barrel and $8 decreased quarter on quarter and $21 below the same period a year ago. The Henry Hub averaged $3.4 per million BTU 46% lower than the previous quarter and 32% lower than a year ago. Gas prices in Europe follow a similar trend impacted by the softer temperatures and high storage levels. Repsol's refining margin indicator averaged $15.6 a barrel, around $3.3 lower than the fourth quarter and $9 higher than a year ago. Lastly, the exchange rate averaged $1.07 per euro, recovering much of the ground lost in the last part of 2022. Moving now to the upstream performance. The adjusted income was €0.5 billion in the quarter, 35% lower in the same period of 2022 and 21% lower quarter over quarter. The contribution of a higher production was more than offset by weaker oil and gas price realizations and higher costs. Production averages 608,000 net barrels of oil equivalent per day, a 10% increase quarter over quarter, and 9% above the same period in 2022. Year over year, first quarter volumes benefit from the startup of new wells in unconventionals. The incorporation of the recently acquired possession in Eagle 4, lower unplanned down times, and unstable production in Libya. This effect more than compensated the country exits executed in 2022 and the natural decline of the fields. As discussed in February, the development activity focused on the efficient delivery of projects with FID taken and production growth was on track. In the US, we are closely monitoring gas prices and costs in the region to adequate activity in unconventionals, if necessary, in response to changing market conditions. Moving forward in Alaska, drilling activity for the first development phase of PICA will start this quarter, and the project progresses as planned towards achieving first oil at the beginning of 2026. In the Gulf of Mexico, the drilling campaign in Leon Castile starts in February, and the development of Sensi North is expected to reach first oil by the end of the year. Continuing now with industrial division, the healthy refining margins we saw in the first quarter and the solid results in wholesale gas and trading more than compensated for the ongoing weakness in petrochemicals. The adjusted income stood at 1.3 billion euros, 11% higher over the last quarter of 2022 and around 1 billion higher than in the same period a year ago. Year over year, the first quarter benefits from a higher contribution of refining, higher also in Peru, trading, and wholesale and gas trading, partially offset by lower results in chemicals. In refining, the margin indicator averaged $15.6 per barrel, which compares to the $18.9 achieved in the last quarter of 2022. The narrowing of middle distillate spreads pressure by higher diesel inventories and elevated levels of Russian imports ahead of the sanctions was largely offset by wider NAFTA and gasoline differentials. The premium generated in the unit CCS margin was $4 over the indicator. The average utilization of the distillation capacity was 83%. Slightly evolved previous quarter. Utilization rate of the conversion units reached 100% in line with the fourth quarter of 2022. Maintenance activity included the planned turnaround of Bilbao as part of its multi-annual maintenance schedule. During the first quarter, we continued to process Venezuelan crude that was received in the last months of 2022. In addition, we have received new cargoes for a total of total of 1.6 million barrels of oil that will be processed through the second quarter. In chemicals, the margin indicator was 10 percent below the fourth quarter of 2022 and 15 percent lower year over year. The demand situation remained depressed in overall terms. A combination of high energy prices, production adjustments, and weak demand continues to affect nearly all chemical sectors in Europe. In Portugal, construction of the expansion of the Sines petrochemical complex starts in March after getting all the environmental permits and completion of engineering and main procurement works. We expect to invest 650 million euros in the project. That is part of our strategy to transform our legacy industrial sites into multi-energy hubs. The project includes building two new polyolefin plants with a production capacity of 600,000 tons a year of high value added and fully recyclable materials. Let me also highlight that the 300 million euros loan that the Spanish official credit institute that is called the ICO grant to Repsol last week, which backs our commitment to the transformation of our sites, innovation and maintenance of our industrial activity in Spain and Portugal. Finally, in Bilbao, in partnership with Saudi Aramco, we took another important step in our industrial transformation with the final investment decision for an e-fuels demo plant that will produce synthetic fuels using green hydrogen and CO2 as raw materials. Turning now to the customer division, the adjusted income was 174 million euros, 9% higher quarter over quarter, and 83% above the same period a year ago. All businesses in this division contribute to the year-over-year improvement. In mobility, sales in our service stations in Spain, sales were 12% higher than in the same period of 2022. The impact of the discounts applied to our customers was more than compensated by a higher market share gained thanks to the successful loyalty initiatives implemented last year. Our wireless mobility app surpassed 6 million clients in March, reaching another milestone towards the objective of having 8 million digital clients in 2025. Moreover, The accelerated growth of our digital client base allows us to take another step in the development of our multi-energy commercial offering. Starting in April, a new ambitious energy proposition that has been built around Violet will link discounts to our clients in Spain to a multi-energy portfolio of products. With this program, we aim to retain most of the market share gained since 2022, and at the same time, we aim to increase the integrated margin capture in the whole commercial chain. In retail electricity and gas, compared to the same period in 2022, first quarter results benefit from the sharp decline of the electricity pool price in Spain and a cheaper gas, which has a positive impact in the energy sourcing cost of our business. Moving now to low carbon generation, the power generated by Repsol reached 2 terawatt hour in the quarter, 5% higher than in the same period last year. The adjusted income was 34 million euros, 21% higher than a year ago, and 27 million higher than in the previous quarter. Year over year, the higher results in renewable division reflect the higher generation and the entry of new projects under operation. The development of our renewable project pipeline continues in the first quarter. In Spain, we commissioned the first turbines in the P wind project, that's in the Castilla area, in Valladolid, Valencia, and we have two new wind farms under operation to Delta II in Aragon. In addition, we took the FID of our first fully greenfield projects in the country, the Villena and Trello solar plants, 320 megawatts all in all, demonstrating how Repsol can also develop projects that are designed from the ground up, I mean, greenfield projects. In Chile, the Atacama Wind Farm became, in January, our second joint project under operation there. By the end of February, we closed the acquisition of Asterion Energies for 570 million euros, incorporating a portfolio of 7.7 gigawatts, mainly in Spain and Italy, of which 2.5 are at an advanced stage of deployment. The acquired assets reinforce our ambition to reach 2025 and 2030 generation capacity targets. And finally, during the quarter, we incorporated another 250 megawatts to our portfolio, 150 wind and 100 solar, These projects are in advanced development phase through the acquisition of three wind farms and two solar plants from developer AWO Wind. These recent inorganic transactions are aligned. We are focused in low risk efficient markets. We currently have 1.9 gigawatts of renewable capacity in operation and 1.3 gigawatts under construction. So we are confident on reaching 2.75 gigawatts of installed capacity by the end of 2023, being the United States the main contributor to this data, to this growth. Moving now briefly to the financial results. In this slide, you may have a summary of the figures that we have discussed when reviewing the performance of our businesses. Let me highlight that following the sale of the 25% stakes of our upstream and renewable businesses, We have reviewed the measures used to report the performance of our operating segments. To facilitate that our financial information adequately reflects the company decision-making and to ensure comparability with previous years, the newly defined adjusted income represents the total income managed by REPSOL before non-controlling interest. Of course, in our financials, you may find the detailed breakdown of the adjusted income corresponding to minority interests in each segment. In addition, the former commercial and renewable operating segment has been split into divisions. Customer comprising all the commercial businesses and low-carbon generation, which includes power generation for renewable sources and CCGTs. The rest of the divisions remain unchanged. This way, our operating segments better reflect the company model providing more visibility on the performance of our main growth vectors for further details of course i encourage you to refer to the complete documents that were released this morning and let me now review our update outlook today to the end of the year going forward we continue seeing volatility in the commodity prices but we are confident that our strong financial position will allow us to face the ongoing uncertainty in the markets. Refining margins have experienced a significant decline since the beginning of April, and the margin indicator has hovered in the $6 per barrel range. The relative strengthening of gasoline has not upset the weakening of middle distillate differentials that were mostly affected by the elevated levels of diesel inventories that were built some months before. in the eve of the sanctions of Russian products, and the return of French refineries from the strike. Despite this decline, we keep foreseeing healthy refining margins for the rest of the year, and this view is underpinned by the recovery of demand in China, supported by the solid first quarter GDP figure released last week, and by a higher level of compliance of the sanctions to Russia that we rely on European authorities to enforce in a serious way these sanctions in this war environment we are suffering and experiencing, and gradual recovery of the aviation sector. Year-to-date, our refining margin indicator has averaged around $14 per barrel, which at this point prompts us to maintain and change our $9 average margin indicator guidance for the year. In the upstream, the good production performance of the first quarter has extended into April. Year-to-day volumes have averaged around 605 barrels per day, and our full-year guidance remains unchanged. On a yearly basis, we expect to average between 590 and 610,000 barrels per day of production. supported by the contribution of the new wealth in unconventionals, higher volumes in Trinidad and Tobago, and lower downtimes compared to 2022. With regards to gas prices in the US, we foresee price to remain constrained in 2023, as high inventory levels should be enough to cover LNG exports and domestic demand. The organic investment executed during the first quarter of the year was 1 billion euros, a bit below the average we had for the whole year. Looking forward, we maintain the flexibility of our capex budget, considering the weight of unconventional activity on it. Shareholder remuneration is expected to remain in the higher part of our cash flow of operations distribution range, as I mentioned before. 30% with this commitment I mentioned before of a new shareholder buyback of 50 million shares that will launch in July in the conference call of the second quarter with room if there is room for that in October to add an additional buyback in case of not achieving this 30% of cash flow from operations, but always in this range of 2.4 billion euros of total distribution over the whole year. Let me say that the figure we are using to calculate this 30% is going to be the consolidated operating cash flow of the group before subtracting the dividends corresponding to our minority partners in upstream and renewables. And we are also excluding from these figures one of cash impacts, not recurrent, like the payment made, that is going to be made, better said, to settle the Maxus litigation agreed last quarter. In addition to the 11% dividend increase and this share capital reduction of $50 million that is going to be proposed to the next AGM, New buybacks will be approved later in the year, as I mentioned, in July, to reach our cash distribution target. In the second quarter, we expect to provide and to announce this new buyback I mentioned before. To conclude, we have started 2023 in a very positive tone. delivering a very solid quarter of operational performance and financial results. The first months of the year have demonstrated the strength of Repsol's integrated model and our commitment with growing value in our asset base. We maintain a disciplined capital approach, investing in the best energy projects with a focus on shareholder value. The recent refining, margin contraction, and weaker gas prices in the U.S. could indicate a change or some shift, let me use the term, in the recent macro trends. But I'm confident that our strong financial position will allow us to withstand comfortably the ongoing volatility that we anticipated in coming quarters. It's still soon to know if this trend will consolidate, but in our view, The recovery of Chinese economy and the increased difficulties for Russia to continue sending diesel into Europe will contribute positively until the end of the year. In the meantime, the current market environment is more than sufficient to sustain our transformation and the delivery of our long-term goals. Last year, we took advantage of a favorable commodity price context to progress in our strategic objectives. And any change in the commodity cycle will not alter our ambitions, neither the path we have defined, to deliver the transformation of Repsol and to deliver our solid distribution policy for our shareholders. We are looking into a transition, not a revolution. So even if things are beginning to change, our approach remains intact. With that, I now have over. To Ramon. Thank you, Ramon.