Repsol Sa Sp/Adr

Hello and welcome to the Repsol Second Quarter 2023 Results Conference Call. Today's conference will be conducted by Mr. Josuyon Imaz, CEO, and a brief introduction will be given by Mr. Ramón Álvarez-Pedrosa, Head of Investor Relations. I would now like to hand the call over to Mr. Álvarez-Pedrosa. Sir, you may begin.

Thank you, operator. Good afternoon and welcome to Repsol Second Quarter 2023 Results Conference Call. Today's call will be hosted by Joseon 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 disclaimers. I will now hand over to Joseon.

Thank you. Ramon, good afternoon to everyone and thank you for joining us. Today, I'll start with a review of key messages before moving to the business performance and results. At the end, I'll update our outlook to the end of this year, 2023. As usual, after the presentation, we will be available to answer your questions. Starting with the main messages, the second quarter has evidenced the strength of Repsol's transformation, having delivered another set of solid results and cash generation in a volatile and less favorable environment. Coming from the changes triggered by the invasion of Ukraine, the energy markets are gradually adjusting to the economic context. Although the evolution of the macro is impacting results, second quarter earnings remain above previous normalized levels. The operational performance was in line with expectation, allowing us to continue progressing towards long-term objectives and the delivery of our strategic commitments. The adjusted income was 827 million euros, a 56% reduction compared to the first quarter. mostly due to softer gas prices in North America and a contraction of refining margins that nevertheless were still above previous cycles. Cash flow from operations reached 1.7 billion euros, 7% lower than in the previous quarter. The negative impact of the weaker commodity price scenario was largely compensated by a significant unwinding of the working capital buildup of the first quarter. The accumulated cash flow from operations in the first semester stood at 3.5 billion euros. Net debt closed at 0.8 billion euros, a 9% reduction compared to March, and 65% lower than December 2022. In line with other rating agencies, Fitch recognized our strong financial situation and disciplined capital approach, upgrading Repsol's credit rating by one notch to BBB+. Repsol has finalized pending litigation on two significant legal disputes affecting the company. In addition to the agreement about Maxwell's reach in the first quarter, the settlement agreed with Sinopec in April, subject to the satisfaction of conditions, ends a long-running arbitration process regarding our joint venture in the U.K. With regards to shareholder remuneration, we remain committed to distribute around 2.4 billion euros for shareholders in 2023 through a combination of dividends and capital reductions. Last quarter, we canceled the 50 million shares committed earlier in the year. After quarter end, we paid the second dividend of 2023 for a total of 70 cents per share, an 11% increase compared to 2022. In May, our AGM approved a 37.5 cents per share dividend to be paid in January 2024. Moreover, as you may have read this morning, we have announced the cancellation of another 60 million shares before year end for a total of 110 million shares redeemed in 2023. For this purpose, the Board has agreed the implementation of a new 50 million share buyback program starting today, with the remaining 10 million coming from treasury shares and shares held through derivatives. Once this second capital reduction is executed, the number of outstanding shares will stand at 1.2 million shares, billion, sorry, lower than the share count when the script was implemented in 2012. Considering the 200 million shares canceled in 2022, this would make for a total of 310 million shares redeemed since the release of our strategic plan. This figure is, roughly speaking, more or less equivalent to 20% of our share capital as of December 2021 and well over the original target for the five-year horizon of our strategic plan. Finally, having captured the favorable commodity context to accelerate our transformation and with most of the main targets to 2025 already met, we expect to provide you with a strategic update in the first quarter of 2024. Before that, I appreciate to meet many of you in another edition of our ESG Day to be held in London on the 3rd of October. Let me now briefly review the evolution of the main macroeconomic indicators in the quarter. Brent crude averaged $78 per barrel, a $3 decrease quarter on quarter, and $36 below the same period a year ago. The Henry Hub averaged $2.1 per million of BTU, 38% lower than in the previous quarter, and 71% lower than a year ago, affected by lower demand due to mild temperatures and higher production levels. Repsol's refining margin indicator averaged $6.4, around $9 lower than the first quarter, and $17 lower than a year ago, impacted by lower middle distillate spreads and also the narrowing of heavy crude differentials. Lastly, the euro continued to strengthen against the dollar, averaging $1.09 per euro during the quarter. Moving now to our business verticals, the upstream division maintained a positive momentum thanks to the contribution of new projects and the streamlining of its operations, increasing the returns and resilience of the business. Let me remind you that we maintain strict profitability requirements for the new investments aligned with the conservative $50 Brent and 2.5 Henry Hub price deck of our strategic plan, protecting our projects against potential low scenarios. The adjusted Income was 0.4 billion euros, 57% lower than in the same period of last year, 2022, and 14% lower than in the previous quarter. Year over year, the contribution of a higher production was more than offset by weaker oil and gas realizations and higher costs. Production volumes average 596,000 net barrels of oil equivalent per day, 10% above the same period in 2022. The accumulated production to June average 602,000 barrels equivalent a day in line with full year guidance. Year over year, quarterly volumes benefit from the startup of new worlds in unconventionals, the contribution of new assets in Eagle 4, and higher production in Libya, and a higher gas demand in Venezuela, which compensated the asset disposals of 2022 and the logical natural decline. The development activity remained focused on the efficiency, or the efficient, better said, delivery of our key projects. Starting in Brazil, Repsol and our partners approved the development of Campus 33 in the result, which comprised the Pau da Suca, SEAT, and GABEA discoveries. The project is expected to start production in 2028, contributing around 25,000 net barrels a day of gas, oil, and condensates. Rapsol currently produces around 40,000 net barrels a day in this country. In the Gulf of Mexico, we have consolidated our position by increasing our stake in the Black Tip project to 50%. With an estimated 200 million barrels of recoverable oil resources, the FID is expected in the next two or three years, contributing to the objective of maintaining a stable production of 30,000 to 40,000 barrels a day in the Gulf. Our exposition to unconventionals, the Gulf of Mexico and Alaska, confirms the United States as one of our key growth areas within our upstream portfolio. In unconventional hours, we continue to closely monitor the gas pricing situation with the flexibility to adjust operations subject to market conditions. We are currently running one rig in Eagle 4 and only one in DeMarcellus. In the UK, our agreement with Sinopec includes the acquisition by Rapsol of their 49% stake in the JV. becoming 100% owners of our North Sea business unit. Under the agreed terms, both companies will immediately suspend and at completion settle the long-running arbitration proceedings in relation to Sinopec's acquisition of its stake from Kalisman. On a 100% basis, we expect our UK production to reach 40,000 barrels a day. Having full control of the operations will allow Repsol to identify additional synergies, optimize the ambitious commissioning roadmap, and generate more opportunities to develop continuing resources. The transaction will have an estimated $1.1 billion net cash flow impact for Repsol, considering the cash available in the JV that will now be fully consolidated in our accounts. Settlement of the arbitration is expected to occur before the end of this year, and cash out in 2024. Repsol and Sinopec will continue our broader strategic collaboration including our joint venture in Brazil as shown by the recent approval of Campus 33. The industrial division continues to maximize value in the current scenario while progressing in the decarbonization of our sites. The adjusted income stood at 344 million euros 73% lower than the previous quarter, and 71% lower than the same period a year ago. Year over year, results were negatively impacted by lower refining margins, the ongoing weakness of chemicals, and a lower contribution of trading partially compensated by higher results in wholesale and gas trading. Refining margins have gradually decreased from the exceptional levels five years ago, largely as their uncertainty around diesel supply has diminished. Nevertheless, second quarter margins remain healthy. Diesel spreads average around $19 per barrel, which compares to the almost $50 of a year ago and $33 in the first quarter this year. So far, in July, the average spread for diesel has been around $25, and $28 for gasoline, improving in a significant way the refining margin along this July. The margin indicator averaged $6.4 per barrel, which compares to the $15.6 achieved in the first quarter and the $23 a year ago, mostly due to the narrowing of middle distillate spreads. The indicator averaged $11 in the first six months of the year, 2023. Margins reached their year lows by the end of April due to, first of all, elevated levels of diesel inventories and also the return at that time to operation of French refineries. In May, they began a gradual recovery supported on the strengthening of gasoline and lower energy costs. The premium generated in the actual margin was $0.2 over the indicator, negatively impacted by, I mean, you know, as we were in the midst of a turnaround season, so the turnaround of Cartagena, the unplanned maintenance in Coruña, and less favorable environment. The average utilization of the distillation capacity was 80%. and the utilization rate of the conversion units reached 90%. During the quarter, we complete all the remaining plant maintenance for 2023, which should allow us to maximize plant availability for the rest of the year. So we expect a normal full operation from now on to the end of the year. Our refineries continue to process Venezuelan crude accounting to around 4% of the total crude input. And during the second quarter, we received three new cargos for a total of 3 million barrels of oil. In chemicals, the margin indicator was 31% lower year over year, and 44% above the first quarter of 2023. The demand situation remained weak, as expected. Seasonal uptick in some sectors didn't materialize. Looking forward, market seems cautious about a significant demand recovery before the end of the year. And this situation may prompt the industry to focus on inventory management, limiting plant operating rates. With regard to the transformation of our industrial sites, the European Union, through its innovation funds, granted Repsol 62 million euros for 150 megawatts green hydrogen electrolyzer in Tarragona, with the startup expected in 2026. In South, in sustainable aviation fuels, aligned with our ambition to play an important role in the decarbonization of the aviation sector, we reached an agreement with Ryanair to supply 155,000 tons of sustainable aviation fuels between 2025 and 2030. Additional alliances have been closed also with yesterday and Wednesday. Finally, yesterday we took the FID for the retrofitting of one of our units in Porto Llano, which will allow us to increase our renewable diesel production by 200,000 tons per annum by the end of 2025. Repsol currently has a production capacity of 700,000 tons of low-carbon fuels. The upcoming C43 project in Cartagena and this retrofitting of Puerto Llano will produce 100% renewable net zero emission fuels. And what is important, these two projects are going to improve in a significant way the premium of our refining margins. Our service stations are already being adapted to offer this fully segregated product, providing an alternative no-emissions mobility option for internal combustion engines. In the customer vertical, the evolution of our traditional business continues. In 2023, we expect to achieve a record of EBITDA demonstrating the stability and resilience of this division. The adjusted income was 148 million euros in the quarter, 160% over the same period a year ago, with all businesses contributing to the improvement. In mobility, the higher margins as a result of lower discounts were partially compensated by lower sales in the Spanish service stations and direct sales. In April, we launched a new connected energy program for clients in Spain built around WELED. This program links discounts to a multi-energy product portfolio. The Wired Mobility app reached 6.4 million clients in June, progressing towards the objective of having 8 million digital clients in 2025. In retail, electricity and gas year over year, second quarter results benefit from cheaper energy sourcing costs. In July, we completed the acquisition of a 50% stake in CHC Energía, adding more than 300,000 new customers, delivering our strategic objective to 2025 of having already 2 million customers of electricity and gas in Spain. Moving now to low-carbon generation, the power generated by Rapsol reached 1.9 terawatt-hours, 6% lower than in the previous quarter. quarter. You have to take into account that we had a turnaround of one of our CCGTs in Algeciras. The adjusted income was €12 million, 65% lower than in the previous quarter, and 76% lower than a year ago. Year over year, the higher production in wind and solar couldn't compensate for the lower full price and lower CCGTs production. As I mentioned, one of our CCGTs was in the maintenance season over the period. The development of our renewable pipeline in Chile continued with the startup of the Elena project, our first solar farm there. Together with the Atacama and Cabo Leones wind farms, our installed capacity reaches more than 200 megawatts in the country. Globally, Repsol currently has 2 gigawatts of renewable capacity in operation and 1.2 gigawatts under construction. We remain confident on reaching or even surpass 2.7 gigawatts of installed capacity by the end of 2023. And one of the main contributors to this growth will be a FRI solar project in Texas, which is expected to start operations during this quarter. To finalize, let me add that this week, the European Investment Bank has granted Repsol a 575 million euros loan to support the development of our Renewable Generation Project in Spain, supporting our Renewables Roadmap to 2025 and to 2030. Moving now, briefly, to the financial results. In this slide, you may have a summary of the figures we have discussed when we reviewing the performance of our business for further details i encourage you to refer to the complete documents that were released this morning let me now review our update outlook to the end of the year looking forward we expect uncertainty and volatility to continue emphasizing the importance of our strong financial positions In refining, the margin recovery has consolidated in July, and our estimated full year average indicator remained unchanged at $9, supported on sustained mineral distillate spreads, strong gasoline cracks, and lower energy costs. In annual terms, we expect to generate a healthy average premium of around $2 per barrel, the annual average, I mean, driven by higher availability of heavy crude oils and the contribution of biofuels. In upstream, the good operational performance of previous quarters has continued in July. Year-to-date production has averaged around 600,000 barrels per day, aligned with our expectation to produce an average of 590,000 to 610,000 barrels in annual terms, probably in the high range of this production. The expected cash flow from operation in 2023 now sits at 7 billion euros, compared to 8 billion euros before. The reduction is mainly driven by the negative evolution of gas prices, more or less 300 million euros less than expected for the whole year. The settlement of Max's litigation another 300 million euros, comparing with our previous guidance, lower results in chemicals and a worse euro-dollar exchange rate. This revision won't impact the shareholder distributions of the year. Our sound financial position with a gearing ratio below 3% provides flexibility to maintain our commitment to distribute 2.4 billion euros in 2023 evoked 30% of the cash flow from operations. The dividend of 70 cents per share paid in January and July, together with the 50 million shares redeemed in June and the additional 60 million shares that we expect to cancel before year end comprise our total remuneration for the year. The organic investment remains at 5 billion euros with around 35 going percent going to low-carbon initiatives. To conclude, our performance in the second quarter highlights Repsol's progress towards becoming a more sustainable and profitable company, able to deliver improved results and cash generation also in less supportive macro scenarios. We aim to be a balanced company, a company that invests in the legacy assets that support cash flow generation, and also a company which invests in the transformation that will support its future. And I think we are doing all that in a sensible way, building our multi-energy offering, investing in our industrial capacity, and developing our low-carbon platforms, all while guaranteeing upstream production levels for coming years. Last quarter, all four business verticals continued to deliver according to the expectations, managing what we can control to capture the most value of this volatile scenario. The refining environment is gradually coming back from the unprecedented situation of last year. Still, we see refining margins at healthy levels, as exemplified by the diesel spreads that we still have today, and this refining margin that we have experienced over the last 10, 15 days that could be something in between $9 and $12 a barrel. Our solid financial frame built in previous quarters allow us to face uncertainty, providing flexibility to delivery on our capital allocation priorities and cope with changes in the commodity cycle. Capital discipline remains at the heart at the center of our decision-making, keeping strict profitability requirements for new projects, making them resilient and profitable in any future scenario. Despite a lower commodity price context, mainly associated with gas prices, our shareholder distribution commitment through a combination of buybacks and dividends remains unchanged. Finally, having delivered most of our strategic objectives to 2025, we will provide you, our analysts and investors, with an update of our strategy and projections in the first quarter of 2024. With this, Ramón, I hand now the call over to you. Thank you.

Thank you very much, José John. Before we move into the Q&A session, I would like the operator to remind us of the process to ask a question. Please, operator, go ahead.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please turn back when we compile the Q&A roster.

Thank you, operator. Let's move on now to the Q&A session. Our first question comes from Oswald Klein at Bernstein.

Hi, good afternoon. Thank you for the time. First question, I want to ask about Venezuela. I think you mentioned in the results higher gas demand in the quarter helping your production, but I also see the Venezuelan oil minister talking about potentially striking some new gas development deals, maybe as soon as year end to bring on more gas in the country. Is this a live discussion? Is this something you're working on? And could that start to become part of the plan for capex and volume growth within the years ahead is the first question, please. Secondly, you mentioned the upgrade from Fitch, the BBB+. I think it's been probably 20 years since you've had that type of rating with them. and the balance sheet is pretty strong. So I did want to ask around M&A and your appetite for deals. There's been a little bit of linkage with Repsol with some larger deals, let's say, in the last couple of months. But I know the strategic update's coming in early 2024, but it doesn't feel like you have any large gaps in the portfolio unless there's some strategic change coming. So perhaps you could just talk around M&A appetite here, please. Thank you.

Thank you, Oswald. I mean, first of all, let me say that in Venezuela, we are fully focused in optimizing our current gas production operation. In Cardona, we are fully focused on that. We are being paid by these oil cargoes that, I mean, three million barrels were transported to Spain the first, the second quarter, sorry, and we expect to have an additional one million barrel cargo this July, and that is now our full priority in Venezuela. Optimizing our gas production in Cardon, of course, always aware of trying to reduce the bottlenecks we could have for production. I mean, there is room for little increase of this production, the bottlenecking, the current plant, and we are going to be fully focused on that. Of course, we are following in a very accurate way what is happening in the country, any opportunity that we could see regarding the future, but let me say that financial presidency is one of our main pillars regarding our exploration and production activity all around the world, but also in Venezuela. Going to your second question that was related about the... I mean, you know that I like the financial presidency of the company. I know that I'm going to upset my communication team also today, But I'm fully focused on trying to be the most boring CEO in the world. But let me say that when I say boring, I'm trying to define boring as being prudent and being predictable. So we are, of course, open to evaluate any possibility that may support our transformation journey. But, I mean, we are trying to accelerate some businesses. We have announced the acquisition of Asterion, a development platform with 7 gigas. Some months ago, Inpex and Eagle4. We have good examples of these small acquisitions like Hecate, Asterion, Acteco, Enerchem. But let me say that if someone is expecting a big acquisition from Repsol, that is not going to happen. I mean, the only surprise is I'm going to give you, it's going to be our focus and our positive alignment in the transformation of the company, but also in the distribution of proceeds and dividends to our shareholders and preserving the balance sheet and the financial strength of the company. So, always trying to analyze opportunities to transform the company But, I mean, you can't expect big acquisitions and things like that in the current economic arena in Repsol. Thank you, Oswald.

Thank you very much. Thank you, Oswald. Our next question comes from Lydia Rainford at Barclays.

Hello there. Two questions, if I could. The first is, I'm just listening to this strategy presentation. I'm very happy to be back asking questions. But does having sold minority stakes in the upstream and on the renewable side limit what you can do strategically within that? And partly linked to that, in terms of the net debt numbers, is that why you want to keep the net debt levels where it is at this point? And then the second one was just much more long-term around the green hydrogen. Clearly, we've got plans from Repsol, but also a number of Iberian competitors. Do you actually see the construction capacity being there and being able to deliver on the margins? Thank you.

Yeah, thank you, Lydia, and welcome back. Going to your first question about the two partners we have either in the upstream business, in this case EIG, and our partners in the renewable business, I mean, I want to underline the fact that in both acquisitions, the partners both supported And we're fully aligned with the strategic plan we had previously approved for both businesses. So, I mean, we have great partners in these businesses, fully aligned with the strategy we previously defined, and we don't have any risk, let me say, of misalignment with our partners in strategic terms. Neither in the upstream, nor in the renewable business. So we are going to follow the roadmap that we presented to you in 2020 in both businesses. Saying more, I mean, in the case of the renewable business, there is a roadmap to the 2030 year that has also the support of our partners in this roadmap and in this ambition of building 20 gigawatts in operation by 2030. Green hydrogen. I mean, first of all, I mean, we are going to start with a small production in coming weeks, 2.5 megawatts in petronor. I mean, it's not material in production terms. And probably in coming months, we are going to take the two first large electrolyzers in our system. Probably Petronor and Cartagena, we are analyzing these opportunities. I mean, if the economics are there, we will take, in this case, FID. But I'm going to be very clear. I mean, we'll take these FIDs if we see that a double-digit return is there. And that could be possible because you know that this green hydrogen produce and introduce in the products of our refinery is not competing with the green hydrogen that was previously produced. It's going to be part of the molecule that is going to be included in the fuel, so it's going to be, let me say, an advanced biofuel that is going to have the regulatory support of the current European directive. So, I mean, I think the numbers are going to be there. We are going to do our best to have these returns. And in case of seeing and having these returns, we will take FID. And in this case, let me say that they are going to contribute to improve our refining margins also in a significant way. Thank you, Lidia. Thank you.

Thank you, Lidia. Our next question comes from Vida Borgataria at RBC.

Yes, Bita.

Hi there. Sorry. I hope you can hear me. A few questions, please. Firstly, on the production guidance, guiding to the top end of the annual guidance, could you just walk me through the moving parts, first half to second half, and what's driving your confidence to get to the top end? And then a couple of questions on the downstream. On your refining margin premium, obviously the premium shrunk significantly Q1 to Q2. Is this just a light heavy spread coming in, or could you just walk me through what gives you confidence on that $2 premium for the year? And then finally, on sustainable aviation fuel, for the deals that you've signed so far, can you give any color or comments on the sales margin relative to kerosene or renewable diesel? Thank you.

So, thank you, Biryak. I mean, going to your first question, I mean, the production guidance, roughly speaking, the second quarter or second half is going to be exactly the same as in the first half. I mean, it's going to be quite stable. We are going to see some increase in the unconventionals coming from the campaigns we have developed, mainly in Eagle 4 and a bit in the Marcellus. And also, we are going to see an increase in the Gulf of Mexico coming from the start of operations in the North. So, I mean, some other barriers that in some way are increasing our confidence of delivering in the right way the guidance we are giving you for the second half of the year. Going to the refining margin premium, first of all, let me say that I talk about $9 as a good forecast or guidance. I mean, I think that the probability of being slightly above that value in a whole year is greater today than the likelihood of being below $9, mainly since what is happening in the market over the last weeks. As I said before, we are seeing day after day and over the last two weeks, the refining margin for Repsol evoked $9 a barrel and some days close to $11 or even $12 a barrel. So I'm, let me say, quite confident about delivering, fulfilling the forecast we have seen in the market for the refining margin. Going to the expected average premium, I'm also very confident about the $2 a buck. I mean, you have seen that the premium this quarter was, as we expected before, quite low, $0.2 a barrel, but we have to take into account that in this period, We have the turn around of the hydro treatment hydrocracker area of Cartagena, that you know is our main refinery. We also have in the first half the hydro treatment turn around of Coruña, another of our refineries. The shoot down of one of the two distillation units in Coruña. I mean, the maintenance season in Repsol is over for the whole year. That means that we are going to capture all that. On top of that, we are, I mean, day after day working. And all that is, I mean, making room to improvements in the efficiency and digitalization plans of our refineries. We are... And we see room to have a favorable incorporation of heavy crude oil in a significant percentage to our system. I mean, all the cargoes we receive in the last two months that we are going to process, plus what we are going to receive in July and so on. So I'm quite confident about that. And let me also add the importance of the contribution of biofuel production in this premium. And that, let me say, is going to be the beginning of a new story in Repsol's refining because, I mean, at the end of the year, we are going to start operating what we call the C43, that is the on-purpose advanced biofuels plant in Cartagena. And this plant is going to add 175 million euros of EBITDA to the company next year in 2024, and it's going to add $0.7 a barrel to the premium of the refining margin. So that means that for next year, we are going to have a new 0.7 premium adding to this premium we have year after year. On top of that, yesterday we took the DFID decision of the retrofitting unit of Porto Llano, what we call the U614 unit. This retrofitting that is converting hydro, the sulfuration unit, to a new advanced biofuel unit, some others call biorefinery to do that. I mean, in our case, the difference is that we are not shooting down any refinery. I mean, we are going to operate the former refinery plus the new unit, the new biorefinery, and investing 120 million euros from 2025 on, we are going to add a new 80 billion euros of EBITDA to our system. So a new $0.32 a barrel of premium. That means that, I mean, in coming years, we are going to be able to increase in a significant way this refining margin premium thanks to this biorefinery. advanced projects that are going to add a new life, let me say, to our refining system, transform to be very competitive, but also more sustainable. So going to your question, I'm fully confident about the $2 a barrel. And in the case, I mean, your last question in some way is answered when I say that what we are seeing. In regulatory terms, there is plenty of room to see an increased market of SAF in coming years. So for instance, Cartagena is going to be prepared to have a main part of its production, the C43 unit, I mean, to do sustainable aviation fuel. In the case of Puerto Llanos retrofitting, that is going to be possible, but it's going to be more focused on HVOs So, and we are seeing significantly in production terms, clear higher margins in these kind of products that what we have today with the mineral conventional products. Thank you, Bea.

Just one quick follow-up. In the past, you've talked about kind of through cycle, I think $0.7 per barrel premium. So am I right in putting all your comments together? You're talking about a structurally...

know an extra dollar on top of that through the cycle is that fair no i mean when i i'm talking about the two dollars premium i'm talking about this year 2023 that as i said uh there are not only the addition of biofuels there are also the the structurally what uh the the percentage of of heavy crude oil and and so on and market conditions so I don't want to replicate, I prefer not replicate this $2 premium for next year because I don't know what market conditions are going to be. What I say is that if we expect next year an X premium, I mean, we'll have to add this $0.7 above to this premium coming from the contribution that the Seed 43 plant in Cartagena. So, being more clear, Viraj, Cartagena, from this quarter, last quarter on, is going to add in annual terms 175 million euros of new EBITDA to our refining system. Thank you.

Thank you, Biras. Our next question comes from Irene Imona at Societe General.

Hello, can you hear me? Irene, I'm here. Yes, hello. Thank you very much. Congratulations on these strong results. My first question is, you refer in the press release to an agreement you signed in the second quarter with Halliburton to automate and standardize your world designs and increase efficiencies. I just wanted to ask, in terms of your new 25% EMP partner now sitting on the board, is this the sort of value added that perhaps they bring to the table? And more generally, what benefits is your EMP seeing so far from that corporation? And then my second question, in mobility, you had 5% lower product sales in Spain. I presume that was a combined effect of probably the end of the discounts and weaker Spanish GDP. But I just wanted to ask, how you see the outlook for Spanish demand and your product sales in the second half of the year, please. Thank you.

Thank you, Irene. I mean, going to your first question, first of all, let me say that we are really happy of having a partner as EIG in our EMP. They are sharing with us, let me say, some kind of complementary business vision I mean, they have a broad view about the sector worldwide, the financial market. Also, I mean, they are giving us a lot of clues about the M&A market in the EMP and so on. And I mean, I'm sure that more than a check we received some months ago, we are starting to see real value in the contribution that EIG and in the board we have in the JV, they have, I mean, first class people to this business. So from this point of view, I'm really happy with the partner and the contribution. In this specific case, you were asking about the Halliburton. I mean, we were working before and in this case, this agreement is not related, let me say, to the contribution of EIG. I mean, it was worked, our people was working in this agreement that demonstrated in some way the effort we tried to do to protect activity and cash generation in the procurement process, but this case is not related to to the EIG contribution. Going to your second question, I mean, my first point is that we have to take into account that last year we had an extraordinary sales campaign in the second quarter that was fully related to the intensive discount campaign we developed over the last second quarter, last year. I mean, if we compare the market evolution, I mean, our sales in volumes have clearly evolved what we had the year before, but it's true that we are reducing in us 6% our sales, 5%, sorry, in this year, in the second quarter, because we have more focus on having a strong cash generation, and in some way, we change the the framework of the discounts we had last year. Now we have a different kind of discount, more related to a multi-energy offer. We maintain discounts with the app from 5 to 20 cents euros a liter, but that depends on the level of commitment from clients, car, electricity, heating, or solar generation at home. All in all, what we are seeing is that we are taking this lever of the position we have in the service station also to grow, as we are growing in a significant way, in the electricity and gas retail market in Spain. And what is important, I mean, the forecast of EBITDA we have in the whole commercial businesses, client businesses of Repsol for this year, 2023, is going to be 1.1%. billion euros that is a historical figure. I mean, five, six years ago, we had an EBITDA at around 750 million euros in the whole customer business. And that is more or less the proof that we are entering new businesses, adding new clients, and all that is giving us a positive growth of EBITDA. In Spanish market terms, we are more or less at the same level of consumption we had in 2022 in the whole market. Thank you, Irene. Thank you.

Thank you, Irene. Our next question comes from Pedro Alves at CaixaBank BPI. Hi, good morning.

Can you hear me?

Yes.

Hi. Thank you for taking my question. Just two weeks away. It's related to your guidance of CFFO and the downgrade to $7 billion. So it's $0.6 billion roughly explained by the natural gas prices and massive litigation addressed from chemicals and effects. So I was wondering if you can provide us a little bit more color on your assumptions for chemicals of the EBITDA for this year compared to what you were expecting previously. And also in terms of working capital, what is embedded in your cash flow guidance? Because you had quite a good release in the second quarter. So if you can provide also your expectations for the evolution of working capital for the rest of the year. Thank you.

Thank you, Pedro. I mean, as I mentioned, when we talk about the cash flow from operations, Guidance change from 8 to 7 billion euros. More or less, this reduction comes from 300 million euros from what is the gas prices change. 300 comes from the Maxus settlement. 300 from which related to the euro-dollar ratio and the rest is a main part of could be related to the chemical business. I mean, Let me say that we are seeing a weak demand in the European market and in the global market for chemical products. That's curious because we are seeing a very different environment in economic terms. In our mobility products, we are seeing a market that is... very positive in terms of growth, in terms of sales, and what we are seeing in what is the chemical products market. And the demand for commodity petrochemicals in Western Europe remains weak. low demand is is affecting nearly all chemical sectors i mean automotive electronic comfort household goods industrial and probably this low demand is related to the the inflation and the the cost of living I mean, we have seen a general drop in consumption, but it's curious, everything I'm saying about the chemical business is not happening in the mobility business, where we are seeing a different scenario. I mean, demand is there, sales are pretty good, also in aviation, in fuel for trucks. And I mean, probably that is curious, but perhaps it's related to some kind of post-pandemic behavior. I mean, when we were during the pandemic, we tended to buy house appliances, physical objects, iPhones, I don't know what. Now, the same purchase capacity that probably is lower because families are suffering the inflation, are suffering the interest rates and so on, It's applied in traveling, in going out, in visiting friends, visiting relatives. And all that is very positive in economic terms for the mobility sector. And it's also positive for an economy in comparative and relative terms, like Spanish economy, that is more focused on services than on the industrial sector. All in all, we are taking advantage of this wave in our mobility businesses. I'm going to your question about the chemical business. The best guidance I could give you today is that the EBITDA of the year could be close to zero this year. So that will be the best guidance for the chemical business of Repsol Because, clearly speaking, we have not seen any improvement now in the chemical products in this starting phase of the second half of the year. Going to your working capital question, it's embedded in our guidance and taking into account the increase we have in inventories and working capital terms in the first quarter of the year, that has been partially released this second quarter, as you could see in our balance sheet. What we expect in this second half is to release an additional amount of 600 million euros, more or less, but we're speaking in working capital terms. And these 600 million figures for the second half of the year is already embedded in this 3.5, more or less, billion euros. cash flow from operation guidance forecast I gave before for the rest of the year. So in this figure of 7 billion euros of cash flow from operation is embedded the figure of 600 million euros release of working capital for the second half we expect. I mean, when I say we expect in case of having flat commodity prices from now on to the rest of the year, of course. Thank you.

Thank you, Pedro. Next question comes from Keaton Fuster at HSBC.

Keaton, are you there?

Yeah, hi, sorry. Hopefully you can hear me now. Good afternoon and thank you for taking my question. My first one was about reports of a potential big farm down of some of your wind and solar assets in Spain worth something like 700 to 800 million euros. I mean, that would be a material cash inflow and your balance sheet is already very unlevered. So just wondering how you would look to recycle the capital. And then secondly, in the Marcellus, I think you've dropped one of your two rigs. Was that always planned or was that because of low gas prices? And then at what Henry Hub gas price would you potentially consider putting a rig back on? Thank you.

Thank you, Kim. I mean, first of all, let me say that, I mean, this asset rotation in the renewable business is part of our business model. You know that we are fully committed in having double-digit returns in this business. And we are delivering on that. To deliver on that, what we say is we take in every stage a pipeline, we develop the project, we invest, managing the engineering, the operation, the maintenance, and when the asset is operating and having a secure PPA for a significant part of this production, what we say is to divest 49% to an investor, Normally, it's a financial investor that is acquiring the risked renewable assets. So paying a higher multiple for this asset. So in the last processes, we have captured returns. I talk about double digits, but returns of 15%, 20%, more or less, after this asset rotation operation that, again, is part of our business. So now we are launching a new process, a process where 600 megawatts, more or less, roughly speaking, of Spanish assets are there. And what we are looking for is exactly the same. We are trying to rotate the risked asset to increase the return we are capturing in this business. So what we are doing with the capital is, again, going on, investing in this business that, as I said, is showing the capacity to get clear and pretty returns for the company. I mean, in the case of the Henry Hub, I mean, let me say, roughly speaking, for instance, in the Marcellus, in the three weeks we had, we could have an outbreak even. in terms of net present value, I mean, with a 10% value creation, that in all cases were below $2.7, $2.8 million BQ. In the case of the first ring, I think that was closer to 2.1, 2.2, and the most expensive, probably, depending on the contracted time, closer to 2.7, 2.8. And the second one was more or less in the middle of this range. So what we are seeing for coming months and what I think is not relevant, the most important thing is to see what the market and the futures market is showing for coming years. It could be, I mean, for instance, the American EIA is forecasting something between $3 and $4 million BTUs for next year, 2024. So, theoretically, you could see, I mean, why are not you introducing a new rig? Let me say, first of all, we have a capital application product policy related to the EMP. Secondly, I mean, our experience is telling us that we have to take the whole cycle and we have to try to have a stable production that is crucial to guarantee that the cash and the returns are going to be there. So even seeing that today we will be able to put a new rig and theoretically we have the prices sustaining the returns for this rig We prefer to be prudent in terms of capital allocation policy and reducing a bit in this arena the capital commitments we are taking in the American Unconventional.

Thank you, Kim. Thank you, Kim. Our next question comes from Alessandro Pozzi at Mediabanca.

Yep.

Alejandro.

Yep. Thank you. Yeah. Just wanted to go back to the refining side. And you mentioned the Spanish indicator to be around maybe 10, 11 the last couple of weeks. I was expecting actually a bit more given the strength in gasoline and diesel crack spreads. And I was wondering how much of a headwind is the tighter light, heavy light spreads are at the moment for the refining, let's say, for the refining operations. And the second question on refining is, you mentioned a premium of 0.7 from the new investments in biofuels. How exactly do you get to that number and what are the assumptions behind it? And final question, upstream really strong in the quarter, also thanks to a lower tax rate. I was wondering whether this is more of a one-off or should we assume a lower tax expense in the coming quarters as well?

Thank you, Alessandro. We are seeing these days, and the figure I have in mind, sorry, I can't check it, but it's around $10, $10.5 or $11 a barrel of discount of heavy oil compared with Brent. So, and we are having with these discounts, we are having these days, these $10, $11, $12 a barrel of refining margin in our refining business. So, That is what we have today in the market. And what is true and is supporting in some way the additional premium we are having this year is also the capacity we are having of processing a larger amount of heavy oil, comparing with what we expected before. being able to sustain a significant part of heavy feedstock to our refineries. Going to your, I mean, this $0.7 a barrel, the improvement in premium coming from the C43 on purpose plant of Cartagena, the assumptions that we have behind that is 175 million euros of EBITDA, that more or less fits with an expectation of having a margin equivalent to the margin of HBO or UCO at around $1,000 a ton. So that could be more or less the present assumption we are taking. I mean, if you compare this figure of 175 million euros with the 260, 165, 270, million barrels we are processing year after year, the $0.7 a barrel comes from this figure. Going to your question about the lower tax rate and so on, first of all, this is an adjustment in the upstream tax situation coming because at the end of the year, in some countries, there is an adjustment or some kind of regularization regarding the tax we paid last year. So in this case, in the upstream, it's related to some Northern African countries, Indonesia and some others. So it's one-off, of course, because it's related to these differences, but being one-off doesn't mean that it's not going to happen in coming years. I mean, that could happen because we try, of course, to... to optimize our operation and optimize everything. But being accurate is one of. And going back to the third and fourth quarter, I mean, you are going to see, let me say, rates that could be close to a 40% on the high 30s. So they are going to be, let me say, more normal. But again, it's one shot. But we try to have a lot of one shots in the road to try to improve our cash and try to improve our P&L. Thank you very much.

Thank you, Alessandro. Our next question comes from Ignacio Domenet at JV Capital.

Hello, can you hear me?

Yes, Ignacio, go ahead.

Hi, good afternoon. Just two questions from my side. The first one is On coming back to the mobility business, we've seen volumes coming down this quarter, but I believe the contribution is slightly stronger now. So I was wondering what are the dynamics here if you are seeing a higher contribution from non-oil EBITDA and maybe you could give us a sense of how this contribution would be growing throughout the year and maybe into the next years. My second question is on the total distributions of 2.4 billion that you seem to be very committed. I believe in the In one of the releases this morning, you were mentioning a maximum net investment of €850 million on the new buyback program you are launching. So I was wondering if the net investment is below this figure, if there's flexibility to increase the program probably in Q4 or later in the year. Thank you.

Gracias, Ignacio. Thank you very much. I mean, going to your first question, I think that the normal contribution margin is the current one. What happened last year in 2022 is that we applied a policy in our service station focused on having strong discounts for our clients due to the situation that market and society was experiencing last year. Remember that we applied almost 450 or 500 million euros of discounts in our service station last year, reducing in some months to zero our margins in order to be close to our clients. I mean, what we are seeing now is a normal development of our business that is going to fall in coming months. So in terms of EBITDA, 1.1 billion euros is today the guidance we have for the client business. We have to take into account that when we talk about clients, we are not talking only about mobility business. I mean, we have some other businesses that are growing in a significant way. For instance, the gas and power business, what we call the power retail business, lubricants, asphalt, specialties, LPG, and so on. So all in all, 1.1 billion euros that is going to be historical for our company, for these client businesses of our company. I mean, going to these 2.4 billion euros, our commitment is to distribute this amount uh that is higher than 30 percent of the new expected cash flow from operations so roughly speaking we talk about 2.4 billion euros and this figure is in some way fitting with what is 110 million euros of shares acquired over the the whole year 110 million shares the 50 we redeemed in June, plus the 60 we are going to redeem at the end of this year, 50 millions of them coming from the purchase program we are launching today. So all in all, these 100 million euros shares plus the 70 cents dividend of this year, I mean, we have the figure of 2.4 billion euros of distribution. That could be, at the end of the year, I don't know, 2.35, 2.38, or 2.43, but it's going to be there. I mean, in case, that is a central scenario. I mean, of course, I don't think that that is, let me say, the most likely scenario, but in case of seeing, I don't know, some kind of disruption in the price of commodities in coming months and having a cash flow from operations, of 9 billion euros at the end of the year, of course, in that case, our commitment will be to distribute a 30% of the expected cash flow from operations. But I think that today, taking into account that we are distributing a 33, 34% with what we expect as cash flow from operation at the end of the year, 7 billion, I think that that is going to be probably the figure, the total figure of distribution for this year. Thank you very much, Ignacio. Muchas gracias.

Thank you, Ignacio. That was our last question. At this point, I'll bring our second quarter conference call to an end. Have a very nice summer. We hope to see some of you on our ESD day on 3rd October. And thank you very much for your attendance.

That does conclude our conference for today. Thank you for participating. You may now disconnect.