Repsol Sa Sp/Adr

Hello, and welcome to the REPSOL Third Quarter 2023 Results Conference Call. Today's conference will be conducted by Mr. Josion Mas, 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 Third 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 disclaimer. I will now hand the call over to Joseon.

Thank you very much, Ramon. Good afternoon to everyone, and thank you for joining us today. As usual, I'll start with a review of the key messages of the quarter before moving to the business performance and results. At the end, I'll update our outlook to the end of the year. After the presentation, of course, we will be available to answer your questions. Starting with the main messages this quarter, Repsol continues to deliver solid results and strategic progress through the current commodity cycle. 2023 has been so far a year of great transformation for Repsol. The strong cash contribution of our businesses and the caching of asset disposals have been used to increase our organic capex, to capture inorganic growth opportunities, and to progress towards our strategic objectives. We are in a very strong financial position, and this flexibility is being used to invest in our future. And we are doing that within the clear discipline capital allocation framework defined in our strategy. At the macro level, there is still uncertainty in the market, and the recent sad geopolitical events will probably increase volatility going forward. The third quarter was characterized by higher oil and gas commodity prices together with a stronger refining environment. In our previous call, we were optimistic on the outlook for the refining business and last quarter confirmed this view. Moreover, we announced two significant transactions in upstream and renewables that evidence our continued focus on transforming the business portfolio. Firstly, in Canada, we divested our remaining oil and gas assets there as part of the ongoing reorganization of our operations to concentrate EMP activity in core regions. Secondly, in the United States, the agreement reached for the acquisition of developer ConnectGen reinforces our renewable portfolio, incorporating an important onshore wind platform in the country and underpinning our ambition to deliver 20 gigawatts in 2030. Looking at the results, the third quarter adjusted income was 1.1 billion euros, a 33% increase over the second quarter, mostly driven by the higher oil and gas realization, a tighter market for middle business. Cash flow from operations reached 1.3 billion euros, 23% lower than in the previous quarter. As anticipated, the operating cash generation was negatively impacted by the settlement of the Maxus litigation. and the payment of the second tranche of the Spanish windfall tax corresponding to 2022 activity. Additionally, the higher prices during the quarter and inventory buildup resulted in a working capital outflow of €0.9 billion. Net debt closed at €1.9 billion, roughly €1.1 billion higher compared to June, mainly due to elevated investment levels, the payment of July's dividends, and the purchase of Treasury shares. During the quarter, we acquired 24.6 million ounce shares through the buyback program in place since the end of July. In addition, we secured another 10 million shares through the settlement of derivatives. With that, we are more than halfway towards our commitment to cancel a further 60 million shares before year end, for a total 110 million shares canceled in 2023. Adding to the 70 cents dividend already paid in 2023, this means that we are on track to distribute the committed 2.4 billion euros to our shareholders, above the higher end of the cash distribution range defined at the beginning of the year. adjusting the for the operating cash flow corresponding to our minority partners naxton and low carbon generation shareholder distribution will be in the higher end of our peer group finally looking into 2024 the supportive scenario ahead of us and the solid financial position built this year has allowed us to increase the dividend to be paid next january so the the interim dividend to 0.4 euros per share, as announced earlier this morning. Let me now briefly review the evolution of the main macroeconomic indicators in the quarter. Brent crude averaged $87 per barrel, a $9 increase quarter on quarter, and $14 below the same period a year ago. The average average $2.5 per million BTU, 19% higher than in the previous quarter, and 70% lower than a year ago. The refining margin indicator averaged $13.6 per barrel, around $7 higher than in the second quarter, and $0.9 higher year over year, fundamentally due to the increase in the spreads of medium districts. Lastly, the euro remained stable, changing for an average of $1.09 during the quarter. Moving on now to the performance of our four verticals. Starting in the upstream, the solid operational performance of previous months continued to September. Aligned with our strategy, our business keeps emphasizing profitability and sustainability with a focus on the efficient delivery of growth projects and portfolio transformation. The adjusted income was 341 million euros, 17% lower quarter over quarter, mostly due to a normalization of the effective tax rate that in the second quarter included tax irregularization in several countries. Year over year, the result was 55% lower than in the same period of 2022, as the contribution of higher volumes and lower exploration costs was more than offset by lower oil and gas prices, comparing with the same quarter of the last year. Quarterly production averaged 596 net barrels of oil equivalent per day, in line with the second quarter, and 9% higher than a year ago. The accumulated production to September averaged 600,000 barrels a day, in line with our four-year guidance. A year-over-year third-quarter volumes benefit from the startup of new wells in Eagle 4 and Marcellus, and a higher gas demand in Venezuela. This effect more than compensated the disposals of the Canadian assets executed in 2022. I mean, I'm talking about Duvernay, Chauvin, Moni and so on, and natural decline. In Canada, having disposed of all production assets in 2022 in September, we divested our remaining E&P position for $468 million. This transaction helps us continue with the streamlining of our portfolio, focusing growth on core regions such as the United States and Brazil. Production in Canada has averaged around 23,000 net barrel equivalents a day in 2023, mostly gas, and the transaction has been complete by mid-October. In Venezuela, we welcome the latest developments with regard to the easing of the US sanctions affecting the oil sector. This is, let me say, good news for us, for Rapsol, as it will translate into future development opportunities, increase the availability of heavy crude oil for our refineries, and also is improving the effectivity of that collection. We reiterate, again, our commitment to Venezuela, and we reiterate that we are going to work, looking for any progress as an opportunity to create value in the country. In the Gulf of Mexico, the Shensei North project started up production in September, ahead of its targeted first oil in 2024. The project is a two-wall subsidy tieback that takes advantage of existing infrastructure in the area, The CNC field currently produces around 12,000 net barrels a day to reabsorb, and the new development is going to add or will contribute with 4,000 net additional barrels per day. In Brazil, the execution phase of Campus 33 is progressing according to expectation. After having taken the FID in May last quarter, the consortium submitted the Declaration of Commerciality and Plans of development for two of the areas in the concession, and pending approval by the AMP, the regulator organism. The proposed names are Raya Manta for Pau de Azúcar and Raya Pintada for Gávea and Seat. The project is expected to start production in 2028. In exploration and appraisal well of the blacktip deepwater discovered in the Gulf of Mexico was declared positive. This result further proves the existence of a prolific Wilcox play that is in some way in geological terms. I'm not an expert on that, but it's similar to Backskin or Leon Castile in this prospect, supporting our growth plans in the area. Let me wrap up by saying that since the release of our strategic plan back in 2020, we have made significant progress towards the strategic priorities that were defined for our upstream business and this has allowed us to make our portfolio more resilient and predictable in any potential scenario in addition to crystallizing value through the incorporation of a strategic partner we have concentrated our geographical scope of expanding in 14 countries and our focus on the development of 12 new projects with fids already all of them taken These projects contribute with low break-even barrels that support future volumes and offset decline. In parallel, we are evolving our business to develop geological low-carbon solutions in CCS, geothermal energy, and hydrogen storage. Continuing now with the industrial division, the adjusted income was 550 million euros, around 60% higher than in the second quarter and 17% lower than in the same period a year ago. Year over year, the lower results in refining chemicals and trading more than offset the better results in wholesale and gas trading. In refining, third quarter margins benefit from a strong demand, low levels of inventories, the ban on Russian exports, and expansion projects delays. The margin indicator more than doubled the $6.4 achieved in the second quarter and was above the $12.7 of a year ago. Up to September, the indicator has averaged close to $12 in the first nine months of the year. Compared to the previous quarter, margins reflected the higher middle district stress as a result of Russian sanctions lower availability of sour troops and delays in the year over year comparison the improvement was mostly driven by higher gasolines and nafta spreads partially offset by lower middle distillate differentials let me underline that despite the the favorable margin environment of the third quarter The results of the refining business were partially held back by negative pricing lag effect in kerosene sales. This compares with an analog positive effect for this reason in third quarter of 2022. But again, I mean, that is a temporary effect. The premium generated in the CCS margin reached $2.9 over the indicator, positively impacted by a higher availability of heavy truths the contribution of biofuels and higher utilization rates. The average utilization of distillation and conversion units was 87 and 102% respectively. Plant availability was maximized during the quarter after having complete all plant refinery maintenance during the first half of the year. Finally, last quarter, our refineries continued to process Venezuelan crude, which accounted to around 4% of the total crude inputs. During the quarter, we received four new cargoes, or a total 3 million barrels of oil. In chemicals, our margin indicator was 43% lower than the previous quarter and 14% lower than in the same period a year ago, reflecting an ongoing weak demand situation for petrochemical products. The adverse economic situation for this business remains mostly unchanged, as inflation and higher interest rates continue to restrain consumer spending. Low demand is affecting nearly all chemical sectors in Europe, and the market expects roughly this situation to extend into the end of 2023. With regards to the transformation of our industrial sites, the construction of the C43 biofuel project in Cartagena is reaching its final stages with the startup of operations plan in the next few weeks, months. This new unit has an annual production capacity of up to 250,000 tons of HBO, 195,000 tons of sustainable aviation fuel, SAF, depending on market conditions. Combined with the 240,000 tons a year capacity coming from the retrofitting of Porto Llano that I mean, we talked about this project in our last conference in July. We expect to generate around 350 to 650 euros of EBITDA per ton of fixed stock process from these two projects. I mean, a figure that will be close to 250 million euros of annual EBITDA. In sustainable aviation fuels, we keep working on strategic supply agreements with key airlines. Last quarter, our growth plans received further regulatory support with the approval of the Refuel Europe aviation initiative by the European Union. In renewable hydrogen, production began in the 2.5 megawatts pilot electrolyzer in Bilbao, a relevant milestone in our decarbonization route where green hydrogen will play probably a pivotal role. The hydrogen produced through the pilot will be used in the industrial processes of the Petronor refinery in Bilbao. Finally, as discussed in our recent ESG day, we have increased our target for biomethane projects in the Galicia region, so the northwest part of Spain, where we have Coruña's refinery, in several plants that will use agricultural and livestock waste as feedstock. In the customer vertical, The stability and resilience of this division keeps us on track to deliver record levels of EBITDA in 2023. The adjusted income reached 190 million euros, 28% higher than in the previous quarter, and 74% higher than in the same period a year ago. Quarter over quarter, the mobility business was the main driver of the improvement, partially offset by a lower result in LPG due to temperature and seasonality. Third quarter performance reflected the shift from generic broad market discounts to customer-specific. The new multi-energy strategy launched in April built around Waylet is helping us capture new clients, retain the previous customer base, and generate cross-selling opportunities through personalized discounts. I'm proud of saying that the Waylet app reached another milestone this month surpassing 7 million users, helping us to progress towards achieving 8 million digital clients in 2025. Moving now to low-carbon generation, the power generated by Rexol reached 2.7 terawatts-hour, 43% higher than in the previous quarter. The adjusted income was 13 million euros, 8% higher than in the previous quarter, and 78 lower than a year ago. Year over year, the higher production in wind and solar could then compensate for the lower pull price and lower production in combined cycles. The development of our pipeline continues with the startup of the first 100 megawatts of fry solar in Texas. The phase development of this project, which was acquired from Hecate Pipeline in 2022, is expected to reach 600 megawatts in 2024. The agreement reached last quarter to purchase renewable developer ConnectGen for $768 million reinforces the United States as a core region for Repsol. The transaction, which is expected to be complete this quarter, allows us to incorporate a 20 gigawatt pipeline of wind, solar, and energy storage projects. In particular, we are adding an onshore wind platform in the US that complements the solar and storage development capabilities acquired through our stake in Hecate. Repsol currently has 2.3 gigawatts of renewable capacity in operation, including Spain, the US, Chile, and Italy. We have a further 1.1 gigawatts under construction. and remain confident on surpassing the 2.7 GW of installed capacity targeted to the end of this year. If the acquisition of Asterion close at the beginning of the year allow us to basically ensure the delivery of the 6 GW targeted by 2025, the purchase of ConnectGen closes the gap to guarantee the delivery of the 20 gigawatts targeted at the end of 2030. Our team remains focused on the efficient delivery of our pipeline and generated the appropriate returns in this business. Looking ahead, our deep project portfolio across different countries, technologies and stages of development will allow us to deliver the capacity targets defined in our strategy while preserving profitability objectives. 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. 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. Starting with refinement, the consolidation of the margin recovery experienced since April is allowing us to revise our four-year margin indicator assumption. The new figure is $11 per barrel. Short and medium term, we remain positive on the outlook for this business as the resilience of demand can cope with the uncertainties coming from the supply side. In the upstream, the four-year production guidance remains unchanged at around 600,000 barrels per day on an annual basis. This figure already factors since November for the disposal of our position in Canada. The expected cash flow from operations in 2023 remains above 7 billion euros. In broad terms, the positive contribution of higher refinery margins is expected to be partially offset by the negative evolution of gas prices, lower results in chemicals, and a weaker dollar. The estimated organic capex for the year is around 5 billion euros. I mean, the guidance we had in July. With regards to shareholder remuneration, we confirm our commitment to distribute the year 2.4 billion euros to our shareholders. surpassing the higher end of our initial cash flow distribution guidance. This figure will be equivalent to 35% of the cash flow from operations of 2023. And as discussed earlier, if we adjusted for the minority stakes in abstinent low carbon generation, we will be in the higher end of our sector. In addition, the performance of our businesses and expected cash flow generation has allowed us to increase the first of the interim dividend in technical terms to be paid in 2024. In this sense, this morning we announced an increase of the dividend plan to be paid in January to 0.4 euros per share. This is equivalent to a 14% increase compared to the dividend pay in January 2023. Before moving to the conclusions, let me share some thoughts about the agreement. announced last Tuesday between two of the political parties negotiating to form the future Spanish government to extend and reinforce the extraordinary tax currently imposed on banks and energy companies. First of all, let me say that this agreement is just part of the negotiation between two parties that intend to form a coalition government after the inconclusive elections held in July. The announcement is not in any way based on any kind of law or draft to follow. The extraordinary tax currently enforced in Spain, I mean, that is unfair, is illegal, is unconstitutional, and is discriminatory, is impacting and punishing, in a negative term, energy companies that invest in industrial assets and that create industrial jobs in the country. Its extension will penalize this company even further with a clear repercussion on their investors and in their capacity to invest in the energy transition. I mean, let me explain that in a crystal clear way. Today, businesses like our chemicals unit in Spain are paying this windfall tax based on this turnover figure, when at the net level, they are incurring losses they are having difficulties to compete in the international market looking ahead repsol plans large investment in our spanish industrial complexes focus on reducing the carbon footprint but again i will be crystal clear about that the lack of stability in the regulatory and fiscal framework could condition future investments in our industrial projects in the country so before taking a new FID for any investment in Spain, we will analyze if the required conditions are stable and are attractive enough to guarantee the returns of those projects. To conclude, our third quarter performance demonstrated once again the soundness of Repsol business model. We keep managing our legacy businesses in the most reliable and safer manner, ensuring that we capture the current favorable macro to accelerate the transformation of our portfolio and improve the remuneration to our shareholders. Our decarbonization pathway remains in place as we aim for a balanced approach to the energy transition. The solid financial position built in previous quarters allow us to tackle the future with great flexibility, allocating capital according to our priorities without major constraints. In 2023, we have made significant advances towards building the multi-year portfolio that is going to help us decarbonize our operations and support future cash generation. Capital discipline will remain at the center of our decision making. We see volatility and uncertainty to persist in the current situation, increasing the importance of sanctioning new projects that can be profitable in any potential future scenario. keep committed to growing the distributions to our shareholders through a combination of dividend increases and additional share capital reductions. This year, despite a somewhat weaker commodity price scenario comparing to last year and our initial expectations, we expect to surpass our targeted distribution range. Finally, looking back to the Five-year strategic plan released in November 2020 with most of our strategic objectives already delivered. We expect to host you next time, next conference call probably, the 22nd of February to provide a strategic update along with our full year results. With this, I hand now the call over to Ramon. Thank you.