Galp Energia, SGPS, S.A.

Good morning to you all and welcome to Galp's first quarter 2021 results presentation. I hope that you are all in good health.

This should be a shorter than usual call, quarter-on-quarter results only. A broader update will be made during our upcoming Capital Markets Day to be virtually hosted by late May or June.

Dates and details will be circulated soon. Today we will have Filipe and Thore to take us through the quarter results and Q&A.

As usual, I would like to remind you that we'll be making forward-looking statements that refer to estimates and actual results may differ due to factors included in the cautionary statement at the beginning of our presentation, which we advise you to read. I will now hand over to Filipe.

Thank you, Otelo, and good morning everyone. On Slide 3 the highlight of some of our key metrics; a strong quarter in an otherwise difficult circumstances, but let me jump straight to Slide 4 on the key drivers of that.

Q1 EBITDA was really an upstream story as downstream in Iberia was still struggling its way out of the COVID-19 restrictions. Upstream production was marginally up quarter-on-quarter to 125,000 barrels.

This was still impacted by the operational and logistic restrictions. EBITDA of €438 million was up 37%.

This is quarter-on-quarter with the higher brand prices. Commercial EBITDA of €69 million was actually quite resilient in the circumstances.

Portugal was under full lockdown during most of the quarter, so it's no surprise that commercial volumes were down another 20% year-on-year with jet alone down by three quarters. Happy to say that things are looking much better now in April with the end of the lockdowns.

On refining, margins improved slightly averaging $2 per barrel in the quarter, supported by improved gasoline cracks. Still this fairly covers our cash costs and Matosinhos is considered as a discontinued operation, so this is finished only.

Although middle distillates cracks remained under pressure, capped by weak demand, we are seeing improving market conditions with our refining margin currently above $3 per barrel. On Midstream, the contribution was rather neutral impacted by some headwinds this quarter.

With one with rapid increase in commodity prices we had negative swing from the lag in pricing formulas. Two, we also had cash sourcing restrictions from Algeria into Iberia, which forced gas purchases on the expensive spot market.

So this squeezed our otherwise more supportive margins in the quarter. We also had extra costs to access the regasification terminal in Portugal, which we had flagged before, impacting results this year to the tune of around €10 million per quarter.

Renewals, they are not consolidated in our financials as the operations are mostly developed through JVs. So this shows under the Associates line.

However, to enhance visibility and highlights the value of this business, we are starting to also provide a pro forma EBITDA for this business as if it was consolidated through the equity method or equity stake. So this renewable pro forma EBITDA was just €1 million in Q1.

This is a seasonally weak quarter for solar of course and this quarter in particular, we had the restrictions with transformers, we had flagged before. This is -- happy to say this is behind us and it is all operating at full capacity.

Now on the P&L on Slide 5, with EBITDA RCA of €0.5 billion, that is up 22% quarter-on-quarter and driven entirely by Upstream. Associates of zero reflects the sale of GGND and the phasing out of Tupi-BV as all this equipment is booked in the Brazilian entity.

Other than that, the International pipelines contribution was offset by the negative net income from renewables, which is still in the early stage of development. The financial results, we have no booking as special items the mark-to-market swings on client driven derivative and FX hedges.

This removes unhelpful volatility in our RCA net income line. These are client related hedges with little relevance to measure the underlying performance of the business.

P&L taxes were €181 million in the quarter, considering the effect of the strong upstream mix on production and income taxes. So this quarter we had effectively no contribution on earnings before tax from the lower taxed Downstream activities.

RCA net income was €26 million and IFRS net income was €161 million and the difference comes mostly from positive inventory effects from the rising commodity prices. On the cash flow in Slide 6, we have now added an adjusted operating cash flow indicator.

This provides a good proxy of our clean operating performance. So this excludes volatile inventory effects, working capital variations, and the special items.

And under this metric, we delivered €445 million in the quarter and that's up 46% year-on-year. This quarter we had €48 million in dividends from Tupi-BV as we unwind this unconsolidated vehicle.

CFFO was €377 million considering a positive inventory effect which was more than offset by a working capital build. Free cash flow generation was resilient at €175 million or €514 million if you consider the proceeds from the sale of GGND.

The GGND sale price was €368 million. We have another €25 million to be received now in this second quarter.

You will have noticed that we are now booking the reimbursement of principal on IFRS 16 leases below the free cash flow line. So this is in line with what our peers do, so this is now considered as a reduction of debt whilst before we had it as a free cash flow outlay.

Now on Slide 7 and the balance sheet. Net debt was down by €513 million and with the cash that we generated in Q1, we amortize a €0.05 billion euro bonds in the quarter.

Our net debt will be down outstanding up to 1.1 times with the last 12 months EBITDA capturing entirely the difficult COVID impacted periods. Now, the EBITDA denominator is expected to start rising meaningfully from April onwards, also with commercial and refining contributions, whilst the net debt nominator should rise this quarter with the dividend payments and the last payment for the BMS-8, the Carcara acquisition which is a disbursement of about €80 million, and liquidity remains very strong at €3 billion at the end of the quarter.

So, this is all from my side. Thore and I will now take your questions.

Thank you.

Oh, thank you, Filipe, yes, I'll keep it just related to the quarter. First question was just on the Matosinhos refinery.

I think last year you spoke about it saving €90 million to €100 million of costs, is that proving to be accurate so far after the first quarter? And I see some decommissioning costs for that refinery in the quarter, can you tell us how big those should be ultimately?

And then secondly, I mean just talking about gas and some of the sourcing restrictions you have, but I was more interested in what happens with, you know, something like Venture Global, it looks like they're looking to start that up in the second half, so and I think you guys are taking a million tons per annum of that. Are you expecting to take some of that this year?

And what happens? It comes into Portugal and then you going to be selling at some of the pretty high gas prices that we see today, is that how that contract is going to work or perhaps you could add some color please?

Thank you.

Good morning Oswald. On Matosinhos, so the €90 million to €100 million that we have provided you with is a historical number and that's what it should have been under normal circumstances.

So we are about €60 million of OpEx and €30 million of recurring run rates CapEx numbers in that number. So, we have no indication at this stage that the numbers would be different.

So we will be -- we are stopping some of the units, actually the units should be all stopped by the end of this month and we are starting the decommissioning phase. Decontamination will come much later, so from a cash flow -- from a cash outlay perspective, this is going to -- this will take a long, long time, but no difference from previous guidance.

On the Venture contracts, this is first gas in 2023. We have a number of contracts such as with Nigeria and Algeria.

Those also mature over time, so the destination of the molecules will be whatever and wherever we can capture more value. So, it could come into Iberia.

This is an Henry Hub indexed formula. This could come -- we could divert some volumes from Nigeria to other places and bring those down here to Iberia and we can consider that for trading.

So too early to tell exactly what the risk management will be around those molecules, but we will be short cash over the next few years if we don't renew the Nigerian contracts. Thank you.

Okay, got it. Thank you.

Hi, can you hear me?

Very well, hello.

Okay, hi. Hi perfect.

Filipe, thanks for taking my question. So, two questions please if I may.

First question, regarding your production fees, can you please update us on your production at the end of April and are you confident that you will be able to go [ph] the production from the [indiscernible] in the coming months or on the contrary would you say that the [indiscernible] remains currently quite high due to the pandemic situation in Brazil, which remains according to the news, you know, out of control? And second question regarding your CapEx guidance please, I just wanted to know if there is a portion of your CapEx guidance this year which is related to Mamba project in Mozambique, and if yes, would you say that the amount of this extension or not?

Thank you.

Thank you, Mehdi for your question. I’ll take the first and then Filipe will take the second question regarding production.

Two messages, one, we are reconfirming the guidance for the year of between 125 and 135. Production in April has been ramping up according to our expectation, so in April we were running around 130,000 barrels per day.

So that's where we are and further guidance we will not do at this stage. Thank you.

Filipe?

Hi Mehdi. So most of the Mozambique CapEx we have on the plan and on within the guidance we've provided you €0.5 billion to 700 million, is mostly related to Coral, so Coral is advancing very nicely and according to plan.

We are expecting a low burn rate on Mamba given the circumstances. Thank you.

Thank you.

Thanks and good afternoon. Just three questions Filipe, one on refining margins if you could just give us now that of how margins have been trending in April and then any views there?

And then secondly, associated with the upstream operating cost of barrel was quite low and impressive in the quarter. Is there anything to note there and the sustainability part for this year?

Thank you.

Good morning, Josh. We are comfortably above $3 per barrel months to date in April, so it looks better.

And we see also jet coming back, so middle distillates with less pressure in Iberia. And Thore will take the OpEx question.

Thank you.

Thank you, Filipe. Joshua with respect to OpEx, yes it was low in the quarter at $1.8 per barrel.

However, this is really actually the flip side of COVID, due to COVID-19 and the restriction that imposes on us, we actually have a POB on board the vessel that is on average is around 70%. So that's actually the main reason, plus there were some adjustments for some past costs in Block 14.

We are still comfortable guiding you that it will be below $3 per barrel. How far below will depend very much on what COVID will let us do of activities on the installation.

Thank you.

Thank you.

Two questions from me please as well, just on the cash flow statement. The dividends paid to non-controlling interest, essentially Sinopec it was zero in 1Q was more than 100 million in 1Q last year.

Can you just say, kind of the timing for the payments of the dividend to Sinopec if any, and then the amount of it? Then secondly just on the lease payments, so if you look at the IFRS 16 interests and the principal leases, the aggregate of that, I mean, if you deconstruct the 54, I think 19 is related to IFRS 16 and then you have the reimbursement of 27 each quarter, so is roughly 150 to 200 the annual run rate going forward?

Good morning, Thomas. So the dividends to our Chinese partner in Brazil is related to the fiscal year of 2020.

This should be paid out in Q2. We're getting and is related to a relatively weak performance, of course in 2020 in Brazil, so we're getting to 100 million to 150 million to be paid out this quarter.

The lease amounts, so we've got about 100 million to 200 million of interest per plus principal every year and we have deconstructed that within what is real interest and amortization of the principal as a depth reduction.

Okay, that's great. Thank you.

Thank you. It's Michele here and Filipe congratulations on the strong free cash flow generation in the quarter.

And the two questions actually relating to cash flow, the first one is the dividend from the associates of 48 million in the quarter. My understanding is that we're unlikely to see more dividends from associates in the coming quarters, but let me know if that's not correct?

And secondly, on the tax, the cash tax was much lower than the P&L tax in the quarter. I believe most of it was due to delayed timing in terms of oil pricing for the taxes in Brazil.

How do you expect that to evolve in the coming quarter? Thank you.

Good morning, Michele. So the cost structure that the consortium had, the equipment was booked under the BVs and it was charging the consortium in Brazil with a cost plus margin basis over time.

As we unwind that vehicle, we are distributing the amounts that were captured over time through that margin. So it is distributed out to the Galp perimeter, which you never thought that because Tupi-BV was deconsolidated.

There's still more to come, not significant amounts, but there's still more to come over the next two to three quarters, but not immaterial amounts. Cash tax versus P&L tax, so we have a phasing effect in that we are in Q1, we paid for the SPT tax in Brazil related to Q4 last year, when Brent was materially lower.

So, if you assume Brent prices to remain flat for the rest of the year, that will gradually be captured over the next few quarters. Mind you as well that when you look at the cash -- at the P&L tax line, this is an RCA tax calculation, whilst we are taxed effectively on a cash basis based on IFRS numbers, and tax locally in every jurisdiction is based on different tax incentives that we have, such as accelerated depreciations, et cetera.

So over time, and as per previous guidance, we should expect to see a 40% cash basis and 50% P&L basis throughout the next few years. Thank you.

Thank you.

Thanks. Good morning all.

Couple of questions from me, on commercial clearly in 1Q the volumes are weak given the lockdowns across Iberia. I was wondering whether you could talk a little bit more about the trends that you're seeing now as some of the lockdowns have started to ease a little bit in 2Q.

And then the second question I had just was on DD&A in the Upstream, it was a bit lighter I think then some were expecting, and I just wondered if you could talk a little bit about how you see the trends there through the course of the rest of the year? Thank you.

Thank you, Michael. If we look out of the window, we see for the first time in many, many quarters, traffic and traffic jams.

So yes, there's a very different environment since the end of the lockdowns. Jet fuel is going up, but it's still significantly below.

So hopefully, we're way past the difficult period of COVID, but we remain cautious until we actually see it continuing on a sustainable basis, but it's looking much, much better now. DD&A in Upstream, now we have lower production in Angola, so hence, unit of production metrics also change, so we spread out depreciation based on unit of production.

So that is the driver.

Okay, thanks. Good to hear the traffic jams are back in Lisbon.

Thank you.

Hi, gents, thanks for taking the questions. Two brief ones first, coming back to Thore’s earlier points on production in April sort of working a bit higher.

I wonder with the COVID backdrop et cetera, in the region, if you could just elaborate a bit on operating conditions offshore Brazil currently the extent to which you are sort of still seeing logistical restrictions relative to some of the previous two or three quarters? And then second, Galp talked in Q4 last year about submitting with the Consortium on Lula/Iracema first development plan this year, including a potential I think, field life extension request.

I just wondered if you could update us on the status of that? Thank you.

Thank you, Matt. Let me first then address your question regarding production and COVID.

As I said, as we are running right now, we are running with a POB that has on average is around 70% of the normal population and that is due to minimizing the level of people that are exposed to the pandemic. That has an impact on what we can do of maintenance.

Of course, operationally critical maintenance is not sacrificed. But, of course, operationally critical maintenance is not sacrificed.

But when it comes to connecting new wells and doing other maintenance, preventive maintenance, we are behind schedule. That is maintained for the time being with the current situation in particular in Brazil.

And when it comes to Tupi and Iracema, the work in the partnership goes really well. Very good meetings among the -- in the partnership with the view and the plans to developing a new plan for operation and development and the target remains to submit this by the end of this year.

And then it will most likely also include a request for a few life extensions. So we worked so far, so good.

Thank you.

Great, very clear.

Hi good morning two quick ones. Firstly, is it possible to elaborate on the evolution of supply margins in gas and electricity in Portugal, on the commercial division?

And the second is, do you have any view on today's announcement by Total that it is declaring foreclosure in the Mozambique project? Thank you very much.

Thank you, Jorge. I'll take the first one.

So on gas supply margins, it’s really depends on the different sources that we have, be it Algeria, Nigeria or spot purchases. So, the market is more generous I would say in April than it was in Q1, so gas prices are going up.

The issues that we have, so despite better margins, is we have higher regasification costs in Iberia. So that has depressed our 2021 numbers, so we expect this to continue until the end of this year.

On next question…

Now yes, I think you can hear me. Thank you for the question Jorge.

So, we acknowledge what Total has announced today. The situation in Cabo Delgado is really severe.

So, it is understandable that this situation needs to be controlled first in order to make sure that the proper safety can be ensured for the people working on the activities. On our side, it doesn't directly impact us because the work for Area 4 continues to be to optimize and to improve that product in order to move it forward in the value chain.

Thank you.

Hi, just two quick ones, please. The first one is, what proportion of your gasoline sales went to U.S.

in the first quarter? And the second one, you might have mentioned this already, but my line was cutting out, are there any Carcara payments through the unit, if you can you just outline what you're expecting there?

Thank you.

Good morning, Biraj. On Carcara, we have about €80 million equivalent for payment of the acquisition of TMSA, of the additional stake in BM-S-8, and we are likely to take FID on the overall Carcara project and so we will have CapEx.

Within our guidance of CapEx, we have the FID as taken. So that's built in into the 0.5 billion to 700 million.

Gasoline sales into the U.S. is about 20% of the total volume exported.

That's about 300,000 tons or so. Thank you.

Great, thank you very much.

Thank you. This concludes our call today.

Thank you for all your questions. Please contact our IR team if you need any additional clarification from our side.

Our next event will be our Capital Markets Day. As we said at the beginning, we will announce soon the date and details for the webcast.

We look forward to having you all there participating at the events. Have a great week.

Enjoy the rest of the earnings season and keep safe.