Galp Energia, SGPS, S.A (OTCPK:GLPEF) Q2 2022 Earnings Conference Call October 24, 2022 9:00 AM ET
Company Participants
Otelo Ruivo – Head of Investor Relations
Andy Brown – Vice Chairman of the Board & Chief Executive Officer
Thore Ernst Kristiansen – Chief Operating Officer of Production and Operations & Executive Director
Georgios Papadimitriou – Chief Operating Officer of Renewables and New Business
Filipe Crisóstomo Silva – Chief Financial Officer & Executive Director
Conference Call Participants
Oswald Clint – Bernstein
Biraj Borkhataria – RBC Capital Markets
Mehdi Ennebati – Bank of America
Joshua Stone – Barclays
Henri Patricot – UBS
Raphael Dubois – Société Générale
Operator
Good afternoon, ladies and gentlemen. Welcome to the Galp’s Second Quarter 2022 Results Presentation. I will now pass the floor to Otello Ruvi, Head of Investor Relations.
Otelo Ruivo
Thank you, Sharon. Hello, everyone, and thank you for joining us today on the analyst Q&A session related to Galp’s third quarter and nine months 2022 results. As usual, we released the results materials early this morning, including a management presentation video highlighting the key achievements during the quarter and covering the financial results. Therefore, we will start with some words from Andy, our CEO, and then go straight to Q&A. As in previous occasions, we will have Andy, Filipe, Teresa, Yargus and Tore had the call. So the full executive team here available to take your questions. If you want to participate, please follow the operator’s instructions at the end of the call.
Also, as usual, I would like to remind you all that we will be making forward-looking statements that refer to our estimates. Actual results may differ due to factors included in the cautionary statement presented at the beginning of the presentation that we released this morning, which we advise you to read.
Andrew, do you want to say a few words before we start the Q&A?
Andy Brown
Yes, please, tell. And so before we start, I’d just like to say a few words about my decision to step down at the end of my mandate at the end of this year. Two years ago, I received a challenge, a challenge to transform Gulf to change its portfolio to embrace the energy transition, to professionalize the operations, to improve an external image and to adapt the internal leadership style. I was asked to complete the 2 years of Calsonilver’s mandate to end 2022. I came out of retirement resigning my Board and advisory roles in order to avoid conflict. Over these 2 years, we have expanded our renewables position doubling our portfolio and our equity generation capacity.
We’ve launched a whole new hydrogen biofuels business on the verge of world-scale FIDs — withered a joint venture with Nortel to enter the battery value chain. We’ve launched the project to transform Matersina’s refinery to an innovation district. In commercial, we have new businesses, e-mobility distributed solar, and we’re building our convenience retail contribution. In Upstream, we’ve cemented 25% growth with the Coral start-up and the progression of the Bakala project through FID into construction. Meanwhile, we have transformed the focus on operational excellence and safety and are now are delivering in line with our plan. What is not so visible is that we’ve reorganized and recruited the talent needed to take the businesses forward. Many new recruits are taken from the international world. And perhaps most importantly, we’ve changed the internal leadership culture, empowering staff and holding them accountable in a much more open and dynamic gulp. And whereas for many of you, 2 years appears very short and there’s still a lot of work to do. The changes are deep rooted and hardwired.
And going forward in 2023, without the gastric hedges committed in 2020, Galp can go forward from strength to strength and reap the benefits of this transformation. Galp has extraordinary people and world-class assets. It’s been a pleasure to lead Gulf, and I will continue to the end of the year. I wish the new CEO, every success in taking the company forward next year. Thank you.
Otelo Ruivo
Thank you, Andy. Sharon, can we start the Q&A session, please?
Question-and-Answer Session
Operator
[Operator Instructions] And now we will take off that question — your first question comes from the line of Oswald Clint from Bernstein.
Oswald Clint
Yes, thank you very much. Thanks, Andy, for the reminder of everything you’ve executed over the last 2 years and obviously, good luck with what’s next. Perhaps a question just on CapEx, please. And really in the content, I mean, you’ve taken up a little bit. I understand the FX, I understand the TTN acquisition, but there’s a lot of discussion around cost inflation more internationally now going into next year. So I wondered if you could perhaps speak around what you’re seeing there with rigs and vessels, subsea, even exploration and perhaps even across into the renewable side of the market? And perhaps how protected you feel you are or GAP will be to those potential inflationary pressures?
And then secondly, I wanted to ask about Brazil. I see good, stable oil volumes in the last 9 months relative to last year. So that’s good. I was curious around the natural gas realizations now given the increased marketing in Brazilian gas. The realization of $55 per barrel in the quarter. I had in my head that there was some sort of cap there for that gas. I thought it was sub-$50. So perhaps you could talk — remind us perhaps of the pricing formula as it relates to Brazilian natural gas.
Andy Brown
Thank you, Oswald. So firstly, I think on CapEx, I think the change in guidance on the CapEx is as much about the exchange rate actually between the dollar and the euro. And obviously, and now we’re paying 100% of the Titan portfolio. So that has increased our CapEx guidance. But I’m going to pass the floor to Tore and then to Jorge to talk a little bit about how in Upstream and renewables, what we see in the market and how much have actually affected us, how much is already locked in at a lower price. Thore?
Thore Ernst Kristiansen
Thank you, Andy. So when it comes to the major project that Galp has underway right now and in particular, I’m thinking then about Baqala, — we are largely well protected to the contracts that we already have in place and where we have locked in for a large part, the costs associated with it. So Pacala should be overall quite well protected. There are some exposure in — when the unit comes to Brazil and the scope of work in Brazil. But overall, that product is well protected. What we do, however, see is that the rig market is firming up, new rig contracts will detain higher rig rates. So we see a pressure in that market, which, over time, of course, also will have an exposure for Gulf and our operation. And we also see that in the other part of the value chain. But in particular, the rig market is now firming up a bit I’ll pass to Georgios on renewal.
Georgios Papadimitriou
Thanks, Thore. Thanks, Oswald. On renewables, we are obviously seeing an increase in CapEx as in many other activities. We have had in the Titan negotiation and the acquisition we have made an arrangement so that there is a certain part of the civil cost is secured. We are seeing in Brazil, we are seeing an increase in CapEx as we put as our projects mature, — but we’re also seeing in Iberia, in particular, we’re seeing a very high, very strong price environment that is more than reflecting these CapEx increases. So we are very comfortable with those levels today.
Andy Brown
So, can I — so just on one point, we are above the guidance of €1 billion net CapEx on a 5-year basis. I think you need to reflect that we haven’t had any divestments this year. So in the round, over the years to come, we’re expecting divestments that will balance this net CapEx number over. So this isn’t a one-off increase in guidance. This is just a reflection, this is a year without divestments. Now on the natural gas realizations, we have actually some like 30 contracts in Brazil. We’re selling our gas. We’re selling third-party other people’s gas, and we have a number of deals in — that we’re negotiating where we will increase that amount of third-party gas we’re selling into the Brazilian market. The prices are based on Henry Hub and Brent and different indexes for different contracts at different forms. So there was no hard ceiling at $50 a barrel. So 55%, I think, was the realization for this quarter, it was a little bit up from previously. But what is it, 5x more than we had last year. So clearly, this is a significant cash flow for us.
Oswald Clint
Very good. Thank you.
Operator
Thank you. We will now go to our next question. And your question comes from the line of Biraj Borkhataria from RBC Capital Markets.
Biraj Borkhataria
The first one is on Nigeria LNG. I mean, looking through your slides, it looks like you’re assuming one missed cargo there. I was wondering if you had any commentary from the operator and the basis of what goes into that assumption? And secondly, as it relates to securing the LNG, I know there’s a lot of LNG weighting off the coast of Spain. But have you had any initial conversations on the availability of cargoes for October and November? And then the second question is on Brazil, looking into 2023. I know ’22 was a heavy maintenance year. Could you just talk about the 2023 schedule relative to 2022? And so how we can compare and contrast and help us with our modeling?
Andy Brown
Thanks, Biraj. And to you and Oswald, I know I was with you both quite recently. And obviously, I couldn’t give you indications of my impending departure so you might apologies for that. Now on Nigeria, so clearly, we — I think the first thing to say is simply goes to the people that are suffering the floods of Nigeria. Many hundreds have lost their lives and I think have 1 million, 1.5 million displaced people. So this is a real tragedy. Clearly, for us, clearly, this is a concern in terms of our own deliveries. — force majeure has been called, and we’ve heard that the cargo scheduled for the end of October has some impact on it, whether it’s a delay or cancellation, we’re not quite sure. But I have actually invited to this call also Rodrigo Villanova, who’s our Head of Energy Management, and he is quite busily buying up some alternative supplies, I think at very reasonable prices. So give us a bit of update about what you’re buying, how you’re buying it and the thing about the LNG tankers waiting to dock in Iberia. Raj?
Thore Ernst Kristiansen
Thank you very much, Andy, and thanks for the question. So as Andy mentioned, I mean, we received a notification of force majeure from Nigeria a week ago, which is a sun effect. The latest update from Nigeria is that one LNG cargo might be impacted at the end of October, and they are currently not expecting a further impact in November. For the volumes potentially impacted in October, our gas trading team has already succeeded in acquiring most of the value — of the volumes, sorry, under natural gas pipeline purchases. And we are seeing currently a limited impact, especially because pipeline gas prices are reduced due to the full inventories that you mentioned. So far, we are expecting one LNG cargo impacted late October. And most of the replacement gas has already been procured.
Biraj Borkhataria
Thank you.
Andy Brown
Yes. And I think it’s — we’re in lower actually than we indicated in the presentation. So I think the impact at this stage, and we don’t know what the spot prices will do, but the spot prices have moderated significantly, obviously, which is put to us for this man. In Brazil next year, this is always a balance between maintenance and natural declines and infill drilling. Sorry, any — no guidance at this stage, I guess, but any indications of how 2023 will pan out.
So what we can say is that we have to expect that maintenance will be kept basically at the same level as it is in — where in 2022. We have a backlog to catch up from the time of COVID. So this is well invested time and money in order to make sure that we secure the integrity and the long activity of these facilities. So basically expect maintenance activity to be in line with 2022. The final programs aren’t still not firm. So I take a little bit of reservation that it could happen something in the end towards the end of the year, but it’s basically the same.
Let me just reflect on — clearly, having Brazil is declining, obviously, maintenance activity, some infill. But also, we now have Coral as we say in our presentation, we’ll be contributing. It’s already contributing some volumes, but contributing increasingly through Q4 into next year. So that would — that’s one of the areas where we hope to compensate for some of the natural declines on the field for the fields that are producing today. So thank you, Biraj.
Biraj Borkhataria
Thank you very much.
Operator
We’ll go to our next question. And your next question comes from the line of Mehdi Ennebati from Bank of America
Mehdi Ennebati
So I will limit to 2 questions, please. First one regarding the Rovuma project. So it clearly became a very strategic project, but it also remains super challenging due to the political situation in Mozambique. And I read on the specialized press that there was some news about developing part of Rovuma project with FLNG units. So maybe can you tell us, please, the pause and comps between onshore energy trains and FLNG units, especially regarding the CapEx we’re talking about much, much higher CapEx, if the consortium decides to develop FLNG units, Arno? And what could also be, let’s say, the positive and negative regarding that project? The second question is for you, Andy. So you’ve announced that you are leaving the company at the end of your mandate. And I wanted to ask you during those years as Head of — CEO of Galp Energia, what has been the most challenging for you as a CEO? Was it running the operations? — or more the setup of a new strategy for the group. Anything that you would have considered as particularly changing just for us to better understand the challenges at Gap…
Andy Brown
Thank you, Mehdi. Let me say a few words on Rovuma I might ask Tore, if he wants to add. Clearly, well, the partners are discussing the options for Rovuma because clearly, what we’ve seen is floating LNG is working. It’s working well. It’s cost effective, on time and on budget. So there is an opportunity, clearly. If you wanted to stay well offshore would be to build another or you can get nearer to the coast, you can go modular, you can go small scale or the big scale scheme that we had before. And the partners are looking at all these schemes, and I have to say that there’s no decision at this stage. But what I think Corlas done, it creates optionality. And — even in a deteriorated onshore security position, it does clearly show that the asset has significant value even on offshore solutions. That’s not to say that’s the way we’re going, but it creates the optionality for that. Thore, do you want to add anything to that? Because I think it’s — so just underlining, first of all, Carlo seems to be really, really well done. It’s on time and it’s below budget. And we got first LNG drop in October. We do see that by doing a second one, you can actually optimize and make it even more efficient. So that is a natural that we study.
Thore Ernst Kristiansen
But as Andy said, we have not taken the decision in my mind, the likely case for you will be that you will do in both you will both — because the resources are so enormous in Rauma. We’re talking 85 trillion cubic feet. So a dual development offshore, onshore is most likely the way it will go forward. But the partnership is now starting the solutions and also learning from the very successful modular development that has been achieved in the U.S., which might be applicable also for a situation in Mozambique. Now the other one, obviously, I’ve got my team listening to me here. So I think one of the issues has been tackling the legacy issues that the company has faced. And of course, as you all know, we’ve had problems with the gas derivative hedges. It has meant that every single quarter without some kind of bad news, which hasn’t been very easy clearly as CEO. So getting through that and seeing ourselves and I think 2023 looks like it’s — we’re going to have a much clearer path going forward, particularly in our gas positions. I think the second thing is within the company, driving operational excellence and safety and really getting everyone to understand their role in delivering to the bottom line.
And lastly, would be getting our message across to the people of Portugal and to society and that Galp is transitioning. I’ve seen as a company, I think, in many ways, that is an oil and gas company that is a bit rigid, but getting us across, we’re much more open. We’re much more dynamic and we’re much more embracing the energy transition is a story we’re still trying to tell and still trying to make sure that everyone understands that we are wanting to be on the right side of history as we go forward as a company.
Andy Brown
We’ll go to our next question.
Operator
And your next question comes from the line of Joshua Stone from Barclays Capital.
Joshua Stone
Two questions, please. First, to about the gas business and the restrictions there. Can you just talk about when you’re looking to 2023, the additional flexibility you expect to have in, does it come at you from January? Is it like the contracts expire in January and so how much volume do you still expect to presell any gas? And when do you expect to get the venture global U.S. LNG in the business as well? I’m just trying to work how protected is this business going to be in 2023, if there are any further restrictions on sourcing? And then secondly, just looking at the — kind of back to the inflation point in Brazil, just looking at the upstream operating costs, they have ticked higher for a few quarters in a row now on a unit basis. Can you maybe just talk about what’s driving that? I caster’s some decline on the older fields in there and where you think sort of through cycle steady-state unit costs should be now?
Andy Brown
Thanks, Josh. So I think the first thing to say is one thing that we’ve managed to do is to reposition us so we don’t have any hedges for 2023, which means the contracts we have from Algeria and Nigeria will be exposed to hopefully some upside to the gas prices are still solid. We haven’t committed too much within the overall energy management and commercial areas for sales for next year. So we retain a buffer because clearly, we’ve been a little bit bitten by having no flexibility when Nigeria volumes don’t appear as they should. So I think one message is we will have flexibility to cover all our commitments. And secondly, we are retaining at this stage what we believe should be a reasonably strong margin for the volumes we have from our legacy contracts. So we go from what is significantly negative. Let’s be clear, we’re probably €150 million loss in Q3 as a result of the PBB to TTF spread and due to the restrictions in supply. So that’s a negative number that will flip in — from January onwards to a positive contribution.
And then, the — the Venture Global is — we’re hoping to receive it as early as possible next year. There’s a long stop date in Q3, but it is now running. So we’re looking forward to those supplies, which are clearly destination and flexible fixed price contracts, which will be extraordinarily accretive once we have those online. So both of those items, I think, will put Galp in a very different position next year when it comes to making money from the gas business rather than losing money in the gas business. So — and I’m just disappointed I won’t be here to enjoy that. Now when it comes to production costs, these are very small numbers, around $3 a barrel. I think we went from slightly below — slightly above 3 years, sorry, anything sinister in those numbers?
Thore Ernst Kristiansen
Actually, that’s — for one, it’s actually a good cost. It’s good cost because actually, they were largely due to the fact that we paid some performance-related bonuses to the operating companies due to better-than-anticipated performance. So that’s the main driver of the increased production costs in the year for the quarter. Going forward, we still remain that you can expect that to be below $3 per barrel. It’s the sort of the guidance that we can give you at this stage.
Joshua Stone
Very clear.
Operator
Thank you. We’ll go to our next question. And your next question comes from the line of Henri Patricot from UBS.
Henri Patricot
Yes, everyone, thank you for the presentation and the old best for the future from my side as well. I have 2 questions on the outlook, please. The first one on the Upstream side. If you look at your guidance for the full year, I mean, it seems like to the fourth quarter kind of taking account the absence of the initiation and the lower oil price, but not much for kind of the reversal of the lower sales volumes because of the larger number of cargoes in transit in the third quarter. So is that fair that there is no reversal in the guidance for the full year? Or is there like another negative that we should have in mind when you think about the fourth quarter upstream? And then secondly, I just want to get a bit of an update on your thinking on the hedging policy for next year. So we like to see more of the refining open volumes due to be hedged over the next few months?
Andy Brown
Thanks, Henry. On the upstream guidance, as I say, we’re sticking to our guidance of 127,000 barrels a day. We’re slightly shy of that at the moment, but we’re actually — we’re doing well in Q4, and we’re maintaining the guidance for the full year. Clearly, we have 3 targets in transit. It’s more than normal. So some of that money will be coming back to us in the fourth quarter. But those are the only 2 things. I think we talked about $3 billion EBITDA guidance for the full year. I think that seems something like an $85 going forward or 90% for the second half of the year. Now when it comes to hedging, we — I said the gas ride hedges, I say won’t be there. Also, the oil price hedges won’t be there. But we will have some legacy refinery hedges. I don’t know if Thore want to discuss a little bit about that. Not significant volumes, but there will still be some refinery hedges for 2023.
Thore Ernst Kristiansen
Yes, that’s correct. And that was put on back in 2021 early. So there’s around 7 million barrels that has been hedged on the refinery margin, partly directly refining margin and partly cracks, but it’s limited to 7 million barrels, and we have no further plans of any further hedge at this stage.
Andy Brown
So €7 million — about £90 million is what that was the run rate that…
Thore Ernst Kristiansen
Correct.
Andy Brown
Yes, so relatively minor.
Operator
Thank you. We’ll now go to the next question. And your next question comes from the line of Raphael Dubois from Société Générale.
Raphael Dubois
Can you hear me?
Andy Brown
We can.
Raphael Dubois
Great. The first one is about shareholder distribution. I guess there are always pros and counts on doing more buybacks at a certain point of time, there is certainly some pressure at the moment on all oil and gas companies to maybe refrain from being too generous with shareholders. But in the meantime, at current low share price, very strong balance sheet and strong cash flow generation. I would like to understand why do not you decide to increase the buyback program now and still talked about a €500 million potential buyback for next year. It will look like the best economic decision will be to accelerate it instead of adding opposed. That would be my first question. And the second one is about your pipeline in renewables. It would be great if you could give us an update on those 0.3 gigawatts of projects that are in construction, when will they be in production? And when I look at what’s under development, how quickly do you think some of it will be put into the construction phase is not the 4G-plus target in 2025 at risk, considering we’re already at the end of 2022. Thank you very much.
Andy Brown
Thanks, Raphael. I’m going to hand over in a second to Filipe. — but I could just say that we clearly have this distribution policy with a dividend growing at 4% and then up to 1/3 of our operational cash flows. — then the balance distributed in a buyback, if our net debt to EBITDA is below 1, it’s now, as you know, 0.6, so we have some scope. The scheme is designed to be flexible based on our OCF, and we do live in very volatile times. So Philippe, any news or any update on distribution frameworks.
Filipe Crisóstomo Silva
Yes, Rafe. So whilst it is true that our balance sheet is very strong, and we are generating OCF. The formula already provides for that. So 1/3 of OCF is OCS is higher than distributions will be higher through share buybacks. And this comes on top of the 4% increase on the cash dividend. So for now, we’re in October. The plan is to — we stick with about $500 million of share buybacks related to fiscal year 2022 until further notice. And we’ll see early next year how 2022 will close and how 2023 will look like. But for now, this is unchanged.
Operator
Thank you. This does conclude our conference for today. Conference disconnect.
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