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.