Galp Energia, SGPS, S.A.

Good morning, ladies and gentlemen, and welcome to the first quarter of 2019 results conference call. Today, Carlos will start with a quick overview of Galp's strategy execution and operational update of the quarter.

Filipe will then go through the results. At the end of the presentation, we'll be available to take any questions you may have.

Thore is here with us as well. I would like to remind you that we may be making several looking-forward statements.

Actual results may differ due to factors included in the cautionary statements available at the beginning of our presentation which we advise you to read. Carlos the floor is yours.

Thank you.

Thank you, Pedro and good morning to you all. During the Q1, Galp delivered a resilient set of results in the context of lower oil prices, weaker refining margins, and refining operational issues.

Our cash flow from operations was healthy in the quarter and our downstream commercial activities performed well across all products, notably in gas and electricity. Let me briefly go through the performance of our divisions starting with the E&P on slide 5.

As you may see the working interest production was flat quarter-on-quarter as planned. The FPSO number 9 has started in February in Lula North and the FPSO number 8 is ramping up in the extreme south of Lula.

However -- and having these two units ramping up, this was offset by planned maintenance in Mangaratiba units placed in Iracema South. Again, this is consistent with the plan we presented to you back in February.

The unitization of Lula is now in place meaning that from April 1st onwards, our stake has been reduced to around 9.2% of the wider Lula reservoir including the area outside the BM-S-11 concession. Iracema as you know is a separate field and therefore our stake will remain unchanged at 10%.

This is in line with what we assumed in our planned guidance for the 2019 year. Equalization of past cost and also CapEx supported over the original 10% interest and profits received thereunder are being finalized amongst the partners.

A similar process will follow for the Iara field with Galp standing in an overall net receiver position. In Iara, works are proceeding according to plan towards the first production in the second half of this year from Berbigão and the tie-back from Sururu, both fields belonging to the Iara area.

In Carcará, we continued the appraisal work in Carcará North where we also confirmed hydrocarbon spreads in the second well drilled in the area in the east side of the Carcará North. Results are still being analyzed but we are positive on the potential of this area.

Moving to Angola and on Blocks 14 and 32, they have been contributing steadily to production. The Kaombo South FPSO started production at the beginning of this month of April and we expect to full ramp up the unit before the year end.

In Mozambique, the Coral FLNG execution is progressing according to plan. As for the first phase of the large Rovuma LNG onshore liquefaction project, the consortium is getting ready to take the FID over the next few months.

On the exploration side, we have concluded around 3,000 square kilometers of seismic acquisition in our Namibia-operated concession in PEL83. Overall, Galp Q2's production is expected to be quite stable Q-on-Q considering the impacts from Lula unitization and the ramp-up of the most recent units in Brazil and in Angola.

This unitization effects was considered in our plan and this is within our guidance for the year that I recalled to you with an increase in production between 8% and 12% comparing with 2018. Moving to our downstream activities and now on slide number 6.

Refining had a challenging quarter with a significant decrease in refining margins pressured by weaker gasoline cracks, the upset in Matosinhos refinery we have mentioned back in February to you, and the industrial action during the quarter. Galp's margins have been at around $4 per barrel during this month of April, with a healthier market environment and higher availability of the units.

For now, we are maintaining our guidance of $5 to $6 per barrel for the year. We do not expect major maintenance activities before Q3, where we expect the Sines refinery atmospheric distillation unit to stop for 40 to 50 days.

This should not compromise the operational availability of the conversion units. I would like to notice this and underline this.

The conversion unit will continue to work and the respective margins are expected to happen. On the marketing front, we continue to benefit from supportive sales to direct clients across all products, such as the diesel, gasoline jet and the bankers that are really outstanding during the year.

As for the Gas & Power business, this was a strong quarter, benefiting from the performance of the natural gas and electricity commercial activity where we are implementing a set of initiatives to be more efficient to increase our competitiveness and the value of our services to the clients. So, looking forward, we expected our network trading activity to continue having value -- volume, sorry.

And additionally, we are aiming at strengthening our commercial initiatives in Iberia and securing the competitive long-term natural gas and electricity sourcing basket. So, Filipe will now go through the financials.

Filipe?

Thank you, Carlos and good morning. I will start with the P&L on slide eight.

The Group EBITDA was €450 million excluding the positive effects from IFRS 16. Under IFRS 16, €44 million in operating lease costs are excluded from EBITDA.

If we ignore this, the uplift from IFRS on a comparable basis Group EBITDA was flat year-on-year as the higher production in E&P was offset by a lower contribution from refinery. E&P EBITDA of €341 million, again ex IFRS 16, was up year-on-year and this was mostly driven by rise in production.

Compared with Q4 last year, E&P EBITDA was flat driven on the one hand by lower oil prices, which were down almost $6 per barrel, but on the other hand you will recall Q4 had been hit by over €50 million of under-lifting effects. On Refining & Marketing, EBITDA was only €59 million ex-IFRS 16, and that's down both quarter-on-quarter and year-on-year, driven by the weak refining contribution, Carlos alluded to before.

Gas & Power had a strong quarter with EBITDA up €14 million year-on-year, reflecting a stronger performance from the natural gas and electricity commercial activity. Below the line, I would highlight the positive swing in financial results with the reversal of the mark-to-market of financial derivatives we alluded to during our last call, and this is as expected.

Also on this financial results line and considering IFRS 16, we have €35 million in operating lease interest and some IFRS 16 driven non-cash exchange rate effects. Net income under RCA was down year-on-year and marginally up quarter-on-quarter.

Under IFRS, net income was affected by a non-recurring €98 million related to the Lula unitization where we have recognized the effect of past costs and profits. These are net of tax and minority interests.

Now on cash flow on slide nine. Cash flow from operations in Q1 was a healthy €353 million and again this is ex-IFRS 16.

CapEx was only €152 million as normally Q1 is lighter in terms of investment payments. Group free cash flow reached therefore €459 million.

You'll please note that our free cash flow includes all operating lease payments, that is deemed interest and the principal repayments. We are considering IFRS 16 to be neutral at the free cash flow level reflecting the substance of the operating lease payments.

As Brazil became cash positive last year, in Q1 we distributed a dividend of €68 million to our partner Sinopec from the Brazil JV. Also the remaining €176 million of the loan to Sinopec was fully reimbursed by Sinopec against a capital reduction in the JV.

On the balance sheet on slide 10, assets increased by about €1.2 billion driven by the inclusion of the rights of use of assets which are under operating lease contracts, an equivalent amount is recognized as a liability. The other assets liabilities line includes as of March 31 an amounts payable of €133 million related to the equalization estimates under the Lula unitization process.

Now this amount does not yet include the estimate of payments to be received by Galp to compensate for the share of Lula investments borne by Tupi BG and for the unitization of the Iara fields. As we stated before, Galp expects to be in a net receiver position of about €100 million.

Net debt ex the lease liabilities was down to €1.6 billion. Net debt-to-EBITDA was 0.7 times with EBITDA here also stripped out of the IFRS 16 uplift.

Including the lease liabilities as debt our net – our EBITDA also inflated according to IFRS 16 the ratio would be 1.3 times. I will stop here and we're happy to take your questions.

Thank you.

Thank you very much. Carlos, good morning.

Yeah first question just on your confidence I guess around the refining margin for 2019 at $5 to $6 per barrel. Obviously, at $3.3 in the quarter where really you mentioned $4 so far, but you really need to step that up to I guess $5 and $6 per barrel to get to that sort of margin environment.

So could you perhaps just talk around what your expectations are here? Is it product pricing?

Is it the light/heavy differentials expanding again, or is it something operational through the rest of the year that gives you the confidence you can still hit that sort of refining rate margin level please? That's first question.

And then I guess the second question, I was just curious around some recent news flow from I think from Petrobras around a bit of a pilot FPSO on Jupiter by early 2023, seems a bit more specific than some of the indications from Galp. So I just want to clarify is that a project that's moving forward a little bit quicker than we might have expected before?

Thank you.

Good morning, Oswald, and thank you for your two questions. So effectively in refining margins, where we will expect this clearly that the spread between heavy and light, or if you prefer with sour and sweet crudes will increase all across the year once the IMO approaches, which means that the cracks of diesel sold.

The demanding of marine diesel and the middle distillates also will increase, and therefore it tend to press up the cracks and therefore, the refining margins. And you also should consider that the dollar per barrel projects that we are implementing that is midway should be completed by the second half of this year, so we tend to conclude the year in a better position.

So in respect to Jupiter, I will ask Thore to take the question. Thank you.

Thank you, Oswald. When it comes to Jupiter you will know that we have a very comprehensive R&D program going on for Jupiter with respect to maturing the development of this very interesting, but challenging field.

The first step for us now is really now then to make sure that the testing of the high set pilot on LIBRA is being conducted during the second half of 2019. And thereafter, we plan internally the JV to see whether we can pass to sell one during the course of 2019 above.

That is so far we have firm plans, and over and above that, it is too early and too premature for us to make a decision. We are very [indiscernible].

But yes, it is a very interesting field, if you [indiscernible] quite a bit.

Okay, super guys. Thank you.

Hi. Thanks for taking my question.

Two please. The first one is on the production guidance.

Carlos, could you just talk through what would it take you to be at the top or the bottom end of your production first guidance for 2019, and some of the key moving parts there? And then the second question on the downstream.

Could you just update us on the industrial action that impacted Q1, and how that impacted Q2 at all? Thank you.

So, good morning, Biraj. So concerning the production, and as we’ve mentioned to you back in February, we have considered in our guidance that the unitization process was already considered and also all the planned maintenance for the year of 2019.

So we have anticipated some maintenance during this first Q. We will have or we have already from 1 April onwards, the unitization process effective.

And therefore, the range that we have provided to you in the beginning of the year was precisely considering the in definition of all those variables. So we are confident that the guidance that we have presented to you it is still the reality.

In relation to industrial action, we have during this quarter some initiatives from the unions that were related with some benefits or pre-retirement benefits they are trying to recover from the past. I think we are having good discussions with the unions, and we hope that the situation might be stabilized in the next coming weeks.

Thank you.

Thank you very much.

Hi. Good morning, and thanks for taking questions.

So two questions, please. The first one regarding Petrogal Brasil dividend payment to the shareholders.

So we can see as you highlighted that Sinopec received €68 million. Of course, you received the remaining part.

But I would like to know if this -- what is left of the frequents of the net dividend payment. Is it a quarterly dividend?

Is it a high dividend? Is it a yearly dividend?

And could you also tell us if there is a clear policy regarding that dividend payment? Is it correlated to the free cash flow generation of Petrogal Brasil relative to their earnings?

So just for us to try to forecast it. Second question regarding the refining, so the utilization rate has been relatively low compared to Q1 last year, so I wanted to know if that was in order to preserve the refining margins or if there was some other reasons.

And if the remaining margin -- the refining margins, sorry, remain let's say, close to the current level, should we expect that the utilization rate would remain in line with the first quarter 2019, excluding maintenance impact of course. Thank you.

Hi, Mehdi. Good morning.

So concerning the dividends paid in Petrogal Brasil and as Filipe has mentioned, this is a one-off event. Of course, we are seeing that Petrogal Brasil is generation or generating free cash flow positive.

And of course, this free cash flow has to be considered for future needs or future requirements related with new projects and new investments in Brazil. Otherwise the cash generated will turn back to the shareholders.

You know that we have 70% in the JV, and Sinopec has 30%. You should not make any direct relation with the dividends paid in Q1, and the free cash flow and as well the dividends policy.

So in plan that we have present to you back in February, we have already considered that dividends could span between €100 million and €150 million in a yearly basis. So you cannot extrapolate, but you can see over time that this will originate dividends to be paid to the shareholders including to Sinopec.

So concerning to the utilization rates in refining. So they are two contributions here.

The margin, refining margins were historically low and therefore that puts some pressure in terms of refinery utilization also. What you can see is that going forward, our conversion capacity should stand at the maximum as possible, because that's where we can get more value from our throughputs and that's what we will expect.

And as I mentioned before to Oswald, it is expected that as the year goes by and IMO approaches, we will -- we may see that the differentials between sweet and sours and at the same time the cracks in the diesel and also in the very low sulfur fuel oils will increase. So that were -- and related also with dollar per barrel, we do see that we might have a second half of the year that could be really positive for refining.

The utilization rate always will take in consideration the optimization based on the economics that we provide to our refining system. Thank you.

Thanks so much.

Yes. Hello.

Very short questions. Just wondering regarding the refining outlook.

Can you just update us on the OpEx you expect for the full year? And also regarding Iara, you mentioned unitization expected.

Do you expect unitization agreement still during this year? Thank you.

Good morning, Flora. Thank you for your two questions.

So concerning the refining OpEx, so the levelized refining OpEx should be -- should stand close by to $2 to $2.1 per barrel. And -- so if you take out the maintenance effects that we are taking for the interventions in the units.

And the only intervention that we are planning for this year with relevance is -- as I mentioned before, is in the atmospheric credit unit in Sines and it is to implement one of the relevant initiatives related with the dollar per barrel. So for your consideration should be $2 and $2.1 per barrel.

Concerning Iara, what I have to say is that all the agreements that will be required between the parties are already concluded and they have been delivered to ANP so to the regulator. And therefore, we are now expecting that ANP will properly and timely answer to that.

Thank you.

Good morning. Just one quick question, please.

You have three key projects in 2019 and two of which have started up: FPSO number 9 in line with the revised guidance; Kaombo in early April slightly ahead. And then, the remaining project is Berbigão, Sururu.

So I just wanted to better understand what you assume for the ramp-up phase of FPSO 9. And where we are exactly on Berbigão, Sururu and how many wells have been pre-drilled there?

Thank you.

So Thomas, good morning. I will split the answer with -- between myself and Thore.

So in terms of ramp-up what we have considered in our plans is a 15-month ramp-up period of time. You may know that the previous experience that we have in more recent unit we stand between 11 and 12 months.

But the plan that we have presented to you has considered 15 months. So that is one of the flexibilities that we might have.

I'm speaking about Brazilian units and that refers the two that are ramping up. In relation to Kaombo, and as I mentioned to you, we expect to have the ramp-up completed and the plateau production by before the end of this year.

So -- which means between six and seven months. Concerning, Berbigão, I will pass to Thore just to pointing out that we have different perspectives in terms of which is the most likely scenario.

We are assuming that Berbigão could be on-stream in the fourth quarter of this year. But I will let Thore to elaborate on this subject.

Thank you.

Thank you, Tom. And just a few facts on Kaombo, we have actually drilled nine of the 16 wells that we are planning to drill we also expect to do Santos basin.

We will however ramp up from Brazil slightly slower than on Kaombo North, in order to make sure that we are managing the reservoir in a good way. So by the end of the year it should reach plateau, but it is slower than what was done in Kaombo North.

When it comes to Berbigão and Sururu there's six wells that is drilled already in Berbigão and Sururu, two of which is completed so are ready to be active average rate is on time. We are following this project very, very closely related to the group FBR to 1.5 weeks ago.

And the execution of this product is going to be very crucial. All the necessary equipment is at the yard.

However, it's a project that requires the utmost caution and focus in order to able complete this within the time frame. But for now we maintain before the end of the year as the first oil.

Thank you.

So quickly if I may just a follow-up. Now assuming Berbigão, Sururu slips into 2020 what does that mean to your 2019 production growth guidance of 8% to 12%?

In our production forecast for 2019, we have not factored in a huge contribution from Berbigão, Sururu anyway so this will not have any major impact on Berbigão -- on our 2019 production forecast. Thank you.

Perfect. Thank you.

Hi, there. I'm going to have another go at the production number if I can for 2019.

So I think you're guiding relatively flat Q-on-Q for second quarter. So what kind of exit rate do you think we could see in 2019 from all of your particular projects?

The second question is on the unitization at Iara and the -- I think you mentioned the €100 million net compensation this year. Can you split that €100 million versus well between the Lula factor and the Iara compensation?

And maybe just a third question if I can. Where do you see tax rates moving to in the second quarter with the refining bouncing back?

And is your normalization back towards 50%? Thanks.

Hi, Jason. Good morning.

So again the guidance that we have provided to you, I have to reinforce because there's a lot of questions in that. It continues to be 8% to 12%.

The exit production is worthwhile because what is important is the pace of growing during the year. That is the most relevant one.

We should stand about 120,000 barrels a day by the -- as an exit rate. But it is important is the pace that we reach there.

In terms of unitization and recovering one of the questions that Thomas has also addressed so unitization in Iara fields are now waiting for ANP decision that we expect to have it during 2019. What has been mentioned and Filipe has alluded to that is that Galp is a net payer – receiver, sorry in a net receiver position concerning both Lula and Iara and it is around €100 million.

So you can easily see that if Lula is negatively impacting around €100 million so the remaining part comes from Iara. Thank you.

Okay. And on the tax?

Yes, Filipe will address tax part. Thank you.

All right. Good morning, Jason.

Yes indeed in Q1, we have a higher optical tax rate on the P&L. This is a mix effect.

So we have negative results in downstream. We have results in upstream.

So the weight of upstream is higher as you know. We should expect normalization in Q2 as downstream comes back.

Thank you.

Okay. Thanks.

Thank you, gentlemen. So if we can go back to refining is the $4 margin you referenced for April meant to be indicative for 2Q, especially, given the improvement in U.S.

gasoline market? And secondly, could you update or remind us on how the remainder of 2019 looks, on how much of the refining is hedged and at what level?

Thank you.

Hi, Rob. Good morning.

Your first question the answer is, yes. The $4 per barrel is indicative.

Anyway what we are seeing is that the gasoline cracks have -- they have recovered. Just to give you an idea, we came out from Iara, Eurobob gasoline from $57 per ton to more than $145 per ton.

And if you go to the RBOB gasoline so which is the reference from the United States, it came from $95 to $190. So effectively, it's a huge difference between quarters.

So I think with gasoline season coming and with recover on the gasoline cracks, we might see the refining margins going up. But in any case, it's our reading about the market.

Concerning the hedging strategy and as mentioned before for 2019, we have hedged around 20% of our throughput at around $4 per barrel. Thank you.

Clear. Thank you very much.

Good morning. Thanks for taking the questions.

Two if I could please. Firstly, with preparations for 4Q Transfer of Rights auction appearing to move forward in Brazil.

Could you share any latest thoughts on the opportunity set there and some of the key drivers or influence how Galp looks to allocate capital towards it? And then second, going back to the questions on refining margins.

Could you give a sense of how tightened year-to-date light/heavy spreads are affecting Galp's ability to extract the margin premium? And if we relate that back to the full year plan, you presented in February, how much better you'd assume the second half of the year would be versus the first half?

I'm still just trying to understand the confidence into around hitting the $5 to $6 for the full year. Thank you.

Hi Matt. Good morning.

So in Brazil and the excess of Transfer of Rights that has been recently announced, and it's quite still some unclear, how the auction will happen. So, key points for Galp.

We are attentive. Of course, Brazil is a strategic geography and geology for Galp.

We are there for more than 20 years we know quite well the geology. I think we have good partners there, and therefore we will be attentive on that.

That said it's still unclear for us which will be the terms and condition for the access of Transfer of Rights, and therefore, we need more information to have a more informed position, which of course is something that we were waiting for some time ago and we are prepared to move if we do think there is a right value on that. Concerning the refining margins.

Everything that we can say, it's clearly speculative, because it's based on the reading of the market. But what we are observing today is that gasoline cracks are increasing.

We are also see that there are some fears in the market due to some -- the sensations that United States have now again some countries that are putting more pressure on the heavy grades. Therefore, there are concerns about capacity of who supply the market in terms of fuel oil and that is sustaining the fuel oil spreads.

And the IMO is coming so the maximum conversion capacity will also be required. So we are in a compound of different contributions that each one individually seems easy to explain and to see the impacts that might happen to the refining margin.

But globally we cannot say that all will be aligned favorably. We do see that the $5 to $6 per barrel, it's a probable case and that's the reason why we are reaffirming our guidance for the year.

You can see also in time that the yields related with the crude slate that are in the market are reducing the fuel oil and that is putting also pressure on complying with IMO in the middle distillate. So effectively, we have here a compounded unit.

It will be repeatable possibly in the coming years. But could be triggering what someone could call and let me put that under brackets a perfect storm related with this business.

Thank you.

Clear. Thanks Carlos.

Hi. Good morning team.

I just wanted to ask initially on your exploration and drilling plans for this year including the rest of Carcará, whether you're able to give a little bit more detail on that. And separately on unitization of Lula, are you still pursuing separate tax treatment for the Iracema and Lula fields?

And the third one if I may just related to refining investment outlook. Could you give a specific timing on the atmospheric upgrading plans this year?

And potentially what you're thinking on the medium term in terms of converting away from gasoline yield? Thanks.

Good morning. I will take the second and the third questions and Thore will elaborate in exploration initiatives for the year.

So the answer to the tax question related with Lula and Iracema, the answer is yes, so they are independent and separate reservoirs. And you know that from the tax purpose, we are considering and we are paying taxes based in a single one, but we still have these disputes with ANP as you know.

So we are presenting any future different considerations, but from the geological point of view, they are independent. And as the same happens with the Iara field, they are independent fields.

We have Sururu Berbigão and Atapu as independent fields and therefore with different types framework. In what relates to refining investments.

So the ones that we have undergoing are most related with regular maintenance initiatives and the dollar per barrel initiative. For the medium term and as I've previously mentioned to you, we are looking at what we can call our future refining system and taking in consideration how we can get more available solutions for our throughput, for our outcomes, considering the possibility to increase our exposure to the supplying to the feedstock for aromatic purposes and also to getting more lighter hydrocarbon yields from our system.

So I think in the short term is the maintenance and the dollar per barrel. And I've mentioned to you before that the Sines distillation crude unit will have a maintenance intervention precisely to implement one of the projects that is energy-efficient related with the dollar per barrel, but the conversion units will stay at full availability.

So Thore could you please elaborate in the exploration? Thank you.

So Alwyn, on the exploration and particularly with respect to Carcará and Carcará Northeast, the operation has gone really well from equity point of view. Today's acquisition has also been good.

We have informed the market that there is an oil discovery. That is now being evaluated as we are continuing acquiring data.

We are now at around -- a little more than 6500 meters of depth. We are considering whether this -- we should call this PD or whether we should go further.

Next step for us will then be to go into the DST. It's very important for us to also conduct a proper DST to understand better the statistical properties for the reservoir.

But so far, so good and we need to go through an evaluation phase before we can say anything. Thank you.

Okay, thanks team.

Yeah thank you very much. I think these are mainly questions to clarify a few of the things you said.

Carlos, earlier you talked about a business plan reflecting €100 million, €150 million of dividend payments. Maybe I didn't quite understand, could you put that please into context against the €68 million dividend payment that you're showing in Q1 and that you're suggesting is a one-off?

Secondly, as far as the operating lease addition onto your balance sheet is concerned, I wonder which net debt EBITDA figure you've given us 0.7 or 1.3 matters to you more these days? I appreciate you don't have a credit rating that's published, but maybe any additional color you could give us here would be helpful.

And lastly, just wanted to test again, whether you can be a bit more specific in terms of your outlook on the Gas & Power business particularly what you call the network trading activity. That seems to have gone really well in the first quarter.

Is that something we should expect at this rate going forward? Thank you.

Hi, Chris. Good morning.

So I'll take the first and the third question. Filipe, will go through the second one.

So in terms of the dividends paid by Petrogal Brasil to their shareholders and therefore to Sinopec, you should see that all the free cash flow unless it will be required for further investments will be paid to the shareholders as dividends going forward. What I've mentioned to you is that during 2019 and based on the assumption that we have taken for macro environment, we may consider that a dividend to be paid to Sinopec could stand between €100 million and €150 million.

And that will increase over time as the production goes up and depending of course on the free cash flow that will be released and again future in the reinvestment opportunities. Since, if we will find out available investment opportunities this free cash flow, it will be prioritized for reinvesting.

Otherwise, it will go back to the shareholders including of course Galp. In the Gas & Power, yes there are a set of initiatives that have been implemented and now we are seeing them flourish.

The reorganization of the Gas & Power business is a reality, so today we have a much healthier and well-managed and controlled operation, which means that we are able to take more advantage from our Iberian position. But looking at the trading activities, and therefore the one that is related with the European gas hubs as we used to say the trading – the network trading business, it's progressing.

It's progressing healthier as the time goes by and with a few or no working capital requirement, because this is based on daily transactions. And I think the team is now today in a much better position to continue to promote and develop this business.

Looking to the full year and considering the guidance that we have provided to you of having Gas & Power with an EBITDA between €100 million and €150 million, I tend to consider that we'll stay in the right side of business and the range for the full year. So Filipe, can you go in the second question please?

Hi, Chris. At least for this year, we will continue to publish numbers before and after IFRS 16.

As far as our covenant numbers we will specifically disclose the impact of IFRS 16 on our covenants. So from a lenders' perspective that is [Technical Difficulty].

Now mind you that Galp is including its free cash flow statement. The repayment of deemed capital that we pay out every month when we pay the operating leases.

So that's already net of the free cash flow, so we think it's also coherent that the net debt to EBITDA that the debt within – that the debt within the net debt-to-EBITDA ratio also before the lease obligations. Thank you.

Thank you very much. Thank you.

Thank you. First question I wanted to ask is on the BM-S-8.

The second is – sorry, the Carcará North second discovery. Can you just to the extent you can maybe give a bit more color on what this means or what it may mean in terms of how you think about the development should the results of tests that you're about to take forward be successful or towards the better end of the prognosis?

I mean, how important are these about sort of delineating and defining what the future development is going to look like? And to that point actually and related to a couple other questions that have come up, it's notable you've not actually written off or amortized any kind of exploration expense for about five or six quarters now.

So I noticed with the seismic acquisition et cetera that there's a bit more exploration going on. Should we be expecting some sort of impact on the income statement of exploration activity?

So that was one question, I'm sort of testing the limits. The second question was around gas.

And I just wanted to ask you alluded to the fact that Mozambique will likely be FID this year. You've obviously made some sort of early commitments taking volumes.

I just wondered, whether you thought that the existing Gas & Power business that you have rooted in Iberia has the critical mass that sort of support a LNG marketing business implied by the type of commitment that you likely will make around off-take around Mozambique? Thank you.

Hi, John. Good morning.

I will take the second question and the combination of the two, first. Thore will elaborate on debt.

So from the Gas & Power and specifically the LNG or the natural gas supply basket, so you should bear in mind that we are working towards the full reorganization of our gas-supplying basket. We have been done in that effort in the last one, two years.

And one of the initiatives that we have already implemented was precisely to expose ourselves to the United States supply. So we are trying to find out diversification of sources, diversification of counterparties, diversification in terms of maturities, diversification of indexes.

And therefore, Mozambique will play an important role in this reorganization. So you know that some of the existing contracts will end from 2020 onwards, namely with Algeria and with Nigeria.

We are already working with these two counterparts in order to review the contract and to review possibilities of continuing to have a relationship in the future. But precisely by having a relevant Iberian vision allow us to have long-term contract.

And by having long-term contracts, we can aspire to have a supply chain, a supply basket that could allow us to be a part -- a player in the global market precisely by using equity gas which is one of the innovations that we are bringing forth to ourself. So yes, I think approaching consistently with both on one side reorganization of our supply gas basket in Iara keeping and strengthening our position in Iberia that allow us to continue to expand.

Thore, could you please elaborate the first one?

Yes. I would like to do that Jon.

So when it comes to BM-S-8 let me phrase it like this that we are encouraged by the results, but it is too early to make any conclusions on what the Carcará North results really are. And they require much deeper analysis including a DST.

But please remember that for the first phase we are already very well advanced when it comes to sort of deciding a groundbreaking and noble piece in Brazil namely that we will go for at least 20,000 barrels per day FPSO. We have said that we believe there's a breakeven below $40 per barrel and that's indicating some of the profitability and the quality of that asset.

And now it is for us to then to continue to evaluate what the North will give us. What seems to be already the case is that with the two wells that we now have namely Carcará Northwest and now Carcará Northeast we have sufficient -- we believe we have sufficient information to also take the decision with respect to how to develop also the second phase.

So the hopes of us now together with the partners is to maximize speed to first oil number one; and number two is to shorten the distance between the first and the second FPSO as much as possible in order to maximize value for our shareholders. That's where we have our focus.

Thank you. And with respect to the exploration write-offs, yes we have not seen this because we have changed our practice.

And that's goes now directly to the cost of manual breaks where we are back on a monthly basis or quarterly basis.

Okay. Thank you.

Hello. Thanks for taking my question.

Just a couple if I could. Just going back to the medium-term plans to the refining system.

When would you look to be able to launch a more major investment into that system? And how big could you potentially see that range of investment being?

And then just secondly on the E&P business. I was just wondering whether you could elaborate a little bit more on what the final hurdles are to take FID on the Rovuma LNG project in Mozambique?

Thank you.

Good morning, Michael. Thank you.

So in terms of the refining system we are still analyzing. So it's a value question for us always.

We are looking attentively for both increasing conversion and as well looking at possible increasing in terms of feedstocks for aromatic purposes. So I think we will have to elaborate more on this in the next coming months and get back to you in our Capital Markets Day that should be happen by October.

Concerning the Rovuma onshore project, we are working towards FID during this year, so the sooner the better. There are complexities of different initiatives being taken by all the parties.

And once we will be capable to conclude them, including the approvals from the government of Mozambique, we will be in that position. But we are -- for the moment we are considering that during this year we might be in a position to take the FID.

Thank you.

Okay. Thanks, guys.

Well, ladies and gentlemen, thank you for your attention. We hope you have found this update useful.

And I remind you that you have the IR team always available for additional clarifications. Have a great day.

Goodbye.