GLPEF - Galp Energia SGPS S.A. (GLPEF) Q1 2023 Earnings Call Transcript
2023-05-05 14:13:13 ET
Galp Energia, SGPS, S.A. (GLPEF)
Q1 2023 Earnings Conference Call
May 5, 2023 9:00 AM ET
Company Participants
Otelo Ruivo - Head of Investor Relations
Filipe Crisostomo Silva - Chief Executive Officer
Rodrigo Vilanova - Head of Energy Management
Georgios Papadimitriou - Chief Operating Officer of Renewables and New Business
Conference Call Participants
Biraj Borkhataria - RBC Capital Markets
Oswald Clint - Bernstein
Sasikanth Chilukuru - Morgan Stanley
Jason Kenney - Santander
Alastair Syme - Citi
Henri Patricot - UBS
Raphael DuBois - Societe Generale
Giacomo Romeo - Jefferies
Matt Lofting - JPMorgan
Ignacio Domenech - JB Capital Markets
Pedro Alves - CaixaBank BPI
Alessandro Pozzi - Mediobanca
Presentation
Operator
Good afternoon, ladies and gentlemen. Welcome to Galp's First Quarter 2023 Results Presentation.
I will now pass the floor to Otelo Ruivo, Head of Investor Relations.
Otelo Ruivo
Hello, everyone, and welcome to the results analyst Q&A session to review Galp's first quarter 2023 results. Early this morning, the team released and distributed to you all these materials, all the materials related with the results together with a short video where Filipe covered high -- the key allies for the quarter. Therefore, this session will follow the formats used over our last earnings publications going straight to Q&A after just some initial words.
Today in the room, we have Filipe, our CEO; Georgios, who continues to lead renewables at the Exco; and Rodrigo, who was just appointed to our executive team as responsible for energy management activities. We’ve also have with us some of our leadership team members, namely Cristina, responsible for our Sines refinery; and Daniel, our Upstream country manager in Brazil. We are all happy to take your questions.
Now the usual disclaimer, we would like to remind you that we may make forward-looking statements that refer to our estimates, and actual results may differ due to a number of different factors as per indicated in the cautionary statement included in our materials, which we advise you to read.
Filipe, do you want to say a few words before we start the Q&A.
Filipe Crisostomo Silva
Yes. Thank you, Otelo. Hi, everyone. Yes, I'd just like to say, first how thrilled I am with this new team and how well aligned we are with our growth and decarbonization strategy. So strategy wise, we are making progress according to plan, the upstream projects, the ramping up of our renewable power generation capacity and transforming our commercial footprint.
The industrial activities, i.e., refining successfully captured the stronger international refining environment, even with -- we had very significant planned maintenance during the quarter. And mid-stream's contribution returned to positive contribution in Q1, as expected.
And as a firm, you'll see that OCF is a lot less concentrated in upstream. So we now start to see a healthier balance of OCF distribution across the business units, be it renewables, mid-stream, refining and these typically command higher multiples.
CapEx in the quarter was pretty light as first quarters often are. But cash taxes were very high. And both CapEx and cash taxes that are facing issues here. So you should not extrapolate this for the rest of the year. So the full-year guidance remains unchanged from what we have guided you to only a couple of months ago.
Okay. With that, happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] The first question comes from the line of Biraj Borkhataria from RBC. Please go ahead.
Biraj Borkhataria
Hi, there. Thanks for taking my questions. The first one is on your gas strategy. Obviously, you've had a good momentum there. But you had signed a sales and purchase agreement from Venture Global from Calcasieu in the U.S. And it looks -- it's 1 million tons per annum, so it's quite material. So could you just confirm whether you started lifting as part of that contract or whether that's in the 2023 guidance? And just some color around that would be helpful.
And secondly, on refining, obviously, we've seen refining margins fall considerably from the highs. Can you just update us on whether you have any hedges in place for ‘23, ‘24? Thank you.
Filipe Crisostomo Silva
Hi, Biraj, I'll take the first one, Rodrigo will cover the gas. On refining, we have very, very limited hedges, I think 7% or 8% of our volumes. Ironically, they're well, well in the money, but they will be maturing during the course of this year. So not expecting any. And certainly not a negative impact. It should be positive but not significant. Rodrigo?
Rodrigo Vilanova
Regarding the Venture Global contract, the plant is still under commissioning. We do expect the plant to reach commercial operation date by the end of the year. So it's too early to give any more specifics. We will update you accordingly. Thank you.
Operator
Thank you. We will now take the next question. And the next question comes from the line of Oswald Clint, Bernstein. Please go ahead.
Oswald Clint
Yes. Good afternoon. Thank you very much. Filipe, in the context of the decarbonization strategy, I wanted to talk about Mozambique. There's obviously a lot more positive commentary here, getting back to work potentially and just get your thoughts on how you feel about that asset in the portfolio at this stage. And obviously, the pretty large capital call that will becoming across the medium term if you move ahead there? That's the first one.
Secondly, good to see the strong liquids production in Brazil this quarter. I think in your video, you mentioned it's supported by better than guidance efficiency. So it'd be great if you could expand on that? And what specifically is driving that better outcome. Thank you.
Filipe Crisostomo Silva
I'll cover the first one. Daniel will cover the second one. You know how excited we are about Mozambique, as the -- I mean the resource in place, the competitiveness of the molecules, the location of Mozambique, it takes all the boxes, the quality of the molecules themselves. We've had obviously force majeure for some time. We've -- we, at Galp has been advocating with the consortium for quite some time what the concept and the development concept should be on the onshore projects, mega-train versus multiple smaller modular trains. So we have used the time of the force majeure to work with the consortium. And as you may have seen, there's a request for interest out there in the market for up to 18 million tons of much, much smaller trains, which we think are better suited for Mozambique. So this is what the consortium is working on.
We're still pretty far away from significant CapEx disbursements. So we were working on pre-FEED and FEED will come next and then FID sometimes, I would say, next year or the year after. So for now, Galp is in de-risking mode. We want to advance the project as much as possible so that we have a project that is very viable, better than what it was before, bankable and it is fully derisked. We will then assess our options at that stage. Daniel?
Unidentified Company Representative
Thank you, Filipe. Thank you, Oswald. Indeed, a very good start of the year in Brazil. We -- in this first quarter had less maintenance activities than we usually have over a regular year, also we have proven the quality that the reservoir remains intact, and this is also positive news for us going forward. Going forward, we have given guidance of above 110,000 of barrels of value equivalent per day for ‘23 and ‘24, and we remain confident on that guidance. Thank you.
Oswald Clint
Thank you very much.
Operator
Thank you. We will now go to our next question. And your next question comes from the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead.
Sasikanth Chilukuru
Hi, thanks for taking my questions. I had two, please. The first one was regarding any potential acquisitions in the renewable space. A few weeks back, there was an article that highlighted Galp was looking to buy some wind assets for around EUR650 million. I was just wondering if you could comment on that and more specifically on your approach towards inorganic expansion in the renewable space, what criteria parameters would you look for if you were to pursue that route?
Also, an acquisition of the magnitude of EUR650 million were to be performed. Would it require you to sell more assets in order to meet your EUR1 billion per annum CapEx guidance in order to maintain that.
The second one was most -- was a clarification on windfall taxes. So far, it appears that you have taken around EUR100 million charges of windfall taxes over the last couple of quarters. I was just wondering if those represented the overall windfall taxes for 2022. And also, if you could clarify on the cash payment schedule for these charges and if we had any guidance for 2023 windfall taxes? Thanks.
Filipe Crisostomo Silva
Thank you, Sasi. We don't really comment on M&A and speculation. The guidance we have given is 4 gigawatts installed by 2025, be it organic or inorganic. The guidance we have given is EUR 1 billion net CapEx over the period, the 2023, 2025 period, it's a net amount. So we can play with nominator and denominator whether we buy more and sell more or we don't buy anything else, and we don't sell anything else. So it is within the EUR1 billion overall guidance that we will remain disciplined on.
On windfall taxation, first, a comment that you will have seen that we have put this very, very visible under the RCA numbers. I guess some of the pressure in our stock price today is the taxation line on the P&L. This does not necessarily mean cash disbursement. It is a provision. If you look back, starting in 2014, we had something called the Portuguese extraordinary tax on the energy sector, which we have always challenged. And we're now in 2023, we still haven't disbursed, we're starting to get positive recognition of our claims. Hence, when we thought in 2014, it was extraordinary year after year, we -- as a management team, we kept asking, is this really a special item? Or should we put this as a recurring item?
So we're glad to see that it's deemed or it's becoming deemed us as really extraordinary. Windfall tax is a European law. It's -- we're still looking at our options, but we want to make sure it is in the P&L. This does not mean there is necessarily a full disbursement in 2023. Very likely, there will be a partial disbursement in 2023. Thank you.
Sasikanth Chilukuru
Thank you very much.
Operator
Thank you. We will now go to our next question. And your next question comes from the line of Jason Kenney, Santander. Please go ahead.
Jason Kenney
Well, thanks for the opportunity. Maybe just following up on the taxation question, what kind of risk do you place on an extension of the Brazil levy beyond June 2023. I think you still got EUR 36 million to take in the second quarter for the current amount. But have you had to think about how any extension of that might impact Galp?
And then secondly, I'm just trying to think simply about the renewables business and that you're indicating an EBITDA of EUR180 million for 1.6 gigawatts installed. If I were to double that by 2025, is it as simple as doubling the EBITDA contribution? Is that the way I should be thinking about this? Thanks very much.
Filipe Crisostomo Silva
Thank you, Jason. The Minister of Finance of Brazil has made it public that this 9% levy on exports will end at its envisaged term of end of June. So what you see in our Q1 numbers is March only, which was month number one of this four months tax. We're highly confident. And since our direct discussions with the Brazilian government that it will indeed end in June.
This levy is tax deductible in Brazil, and we have 70% of Brazil only. So the impact to Galp, however, unfortunate this taxation is for credibility issues of Brazil, which was the real damage of this tax is credibility in a country that needs to attract so much capital to develop its resources. So that for us was more important and also for the capital markets, credibility of Brazil, more than the financial impact.
On renewables, we are 100% merchant exposed. So the answer is depends on merchant power prices and solar power prices, in particular. In Q1, you will have seen that we have a very good realization price of our solar electrons, because we had partially hedged some of the volumes, short-term hedges. So energy management and Rodrigo will continue to try to lock in opportunistically some of these electrons in the market. So now, it is not double megawatt, double EBITDA. It's highly, highly dependent on power prices. Thank you.
Jason Kenney
Thanks very much.
Operator
Thank you. We will now go to our next question. And your next question comes from the line of Alastair Syme from Citi. Please go ahead.
Alastair Syme
Hello, thanks for the opportunity. I wanted to ask about renewables as well. I mean the European Unions made a lot of comments and bluster about sort of reducing planning constraints. I'm just sort of interested to see if that has translated into to anything on the ground in terms of approvals?
And then secondly, obviously, the refining margin environment is a bit tougher. Gas prices have come down as well, maybe. Just how is your refining system responding to the sort of the signals you're seeing out there today on pricing? Thank you.
Filipe Crisostomo Silva
Hi, Alastair, I'll take refining, and I'll ask Georgios to take the renewables one. Yes, so we were at about EUR14 per barrel in Q1. Earlier this week, we had a big dip. It's at around EUR6 as we speak, very volatile, hard to see. We do see significant Russian molecules in the market directly or indirectly, either coming from countries that have no sanctions, but find a way to bring the molecules into our markets. So it's very hard to have a view on longer-term refining margins.
And if you look at the futures curve, it looks much stronger than what it is today. The kit is operating exceptionally well. So we had a very, very good turnaround at the hydrocracker. So it is firing on all pistons ahead of the expected turnaround of the FCC and the distillation unit in Q4 this year. Georgios?
Georgios Papadimitriou
Thanks, Alastair. We have seen improvement in Portugal, not so much in Spain. The backlog in Spain, in particular remains huge, there's a lot of inertia in the authorization regimes. There are regional governments and the central government. And as I was saying, there's a lot of gigawatts that these authorities have to take care. So we haven't yet seen on the ground any improvement in Spain. We expect to see it, but it will take, it would take its time. I wouldn't say before a year or so. Thanks.
Alastair Syme
Great. Thank you.
Operator
Thank you. We will now go to our next question. And your next question comes from the line of Henri Patricot, UBS. Please go ahead.
Henri Patricot
Yes, hello everyone. Thank you for the update. Yes, I have two questions, please. The first one, just a follow-up on the question on refining. You mentioned what you're seeing on the supply side. I was hoping you could share some comments on what you're seeing on the demand side in the new markets, if you're still seeing robust demand or maybe a bit of softness at the moment, which could partly explain the weaker refining margins?
And then secondly, just on the upstream, which you asked about cost inflation, we're seeing unit costs a little bit lower quarter-on-quarter. What should we expect for the rest of the year? Thank you.
Filipe Crisostomo Silva
Thank you, Henri. So on the demand side, we see outside of the seasonal effect, of course. We see B2C relatively flat, but B2B quite strong. And a lot of this is driven by aviation, most aviation, a bit of marine, but aviation is really what is moving the needle from a volume point of view. The margins are not anywhere close. And aviation margins are very, very low. So it's good for volumes. It doesn't really make a huge difference into the bottom line.
On the upstream inflation, yes, we are seeing significant inflation in some areas. It is not having any material impact to Galp, and that is because our biggest project is Bacalhau, has been sanctioned a while ago, and the vast, vast majority of the CapEx is locked in. Thank you.
Henri Patricot
Thank you.
Operator
Thank you. We will now take our next question. And your next question comes from the line of Raphael DuBois, Societe Generale. Please go ahead.
Raphael DuBois
Hello, thank you for taking my questions. The first one is about the net CapEx. I was wondering if maybe you could give us a guidance range that will be -- that will help us to better understand what is at stake for the next six or seven months, we are almost half-year. So I guess you should have a better feel for how much money you're going to spend after having spent only EUR109 million net CapEx in 1Q, it seems pretty obvious you will not spend anywhere close to EUR1 billion. But I was wondering how much is that dependent on FID-ing the industrial projects in Sines, the HVO project and the hydrogen project to be great if you could update us on these projects?
And the second question is about the oil price realization in Brazil. It will seem that it has come off a little bit, and I was wondering if you could give us some guidance for the rest of the year. Thank you.
Filipe Crisostomo Silva
Thank you, Raphael. Again, I would not extrapolate Q1. Q1 is a very low CapEx realization quarter actually across the industry. I guess people scramble in Q4 and send the invoices quickly before year-end, and then they go on holidays during Q1. The guidance -- and Q1 is net of the down payment for the Angolan divestments, so it's a very, very low number. The guidance is EUR1 billion, it’s actually -- our guidance is EUR3 billion of net CapEx over the three years. So we're not even saying it's EUR1 billion per year. So you should look across the cycle between investments and divestments about, on average, net CapEx of a bill, that's the only guidance we're giving at this stage.
For the [Finnish] (ph) projects, we are ready to go. So we have the people, we have the suppliers. We have pretty much on the project all end up. But as you know, these are important projects, hundreds of millions per project that would be at stake. There are regulation issues, which have been ironed out and also the tax regimes in Portugal, which we need to clarify with the local authorities. Galp is being taxed at 64% in Portugal. Projects don't fly at anywhere close to this taxation. And as shareholders, you know what I mean. So we need to have an environment that is conducive to take such big decisions.
On Brazil realizations, you have a couple of issues that worked against us. One is a lot of Russian molecules finding their way into China. So -- and Russia has lost some of their western plants. So a lot of volumes are going East. So we are competing, we have a big competitor in China, delivered in China big competitor. So the premiums we used to have, have reduced. And we have much higher logistics costs. As you know, the sanctions have rerouted a lot of these banking capacity routes are much, much longer. Supply and demand for tankage capacity has gone up, so prices have gone up. We're also excluding the Angolan barrels from our numbers and Angola typically commanded a higher premium to Brent than Brazil. So the mix now is entirely Brazil without the benefit of the Angolan volumes. Thank you.
Raphael DuBois
Thank you.
Operator
Thank you. We will now go to our next question. And your next question comes from the line of Giacomo Romeo, Jefferies. Please go ahead.
Giacomo Romeo
Yes, thank you for taking my questions. Two for me, the first one is on the cash tax payments you made in Brazil this quarter that affected your OCF. Just wondering how we should think about that the reversal through the year of that?
And the second question is on Namibia, there have been news that you have secured the rig there. I just wanted to get an update on what's the timing and whether you are still happy to go with your 80% interest there?
Filipe Crisostomo Silva
Thank you, Giacomo. I think there's a number close to EUR200 million that is front-loaded in our Q1 numbers related to income taxes in Brazil, so there's no reversal. There's just much, much, much lower payments for the next three quarters. So that is -- it's a front loading, again, no change in guidance in OCF. So OCF post tax, of course, no change in guidance from what we provided you back in February.
Yes, Namibia, it's in the news this morning, we have secured the rig. The plan is to drill in Q4. Yes, we still have 80%, eight-zero, of this block, a bit like Mozambique. We want -- we need to derisk this project much, much further, and we will take a decision at some stage. It is clear that we will not be the owner of 80% of this block, if it is a successful discovery, because the magnitude looks very, very significant, and we need to share risk and make sure that CapEx guidance is met. Thank you.
Operator
Thank you. We will now go to our next question. And your next question comes from the line of Matt Lofting, JPM. Please go ahead.
Matt Lofting
Thanks for taking the questions. Two, if I could, please. First, just coming back on Brazil tax. I guess it was halfway through the four month duration on the temporary export duty. Could you share the nature of the engagement, the Galp and the industry has been undertaking with the Brazil state through the last few weeks? And any risk Galp sees, the export tax indeed proves temporary, but it's ultimately replaced by an alternative or water down additional tax take?
And then secondly, on the mid-stream gas and power business, good to see the inflection in profitability in Q1. Could you share how much of that is gas trading related and the extent to which that performance is seen as repeatable or specific to a trading conducive Q1? Thanks.
Unidentified Company Representative
Thank you, Matt for the question. This is Daniel here from Brazil team. So we have been very active since day one, together with other partners of the industry, other IOCs and also via IBP, where we are also a member. So we -- on the first moment that we heard about this temporary 9.2% tax levy on crude oil exports. We have expressed that this would put at risk the credibility of Brazil as an investment geography. Since then, as Filipe mentioned, we have seen positive follow-up on this lately with the Brazil Finance Minister, Fernando Haddad making public that this would not be pursued longer than the end of June, which is the validity of this temporary tax.
Rodrigo Vilanova
Thank you, Matt. This is Rodrigo on over here. Regarding the gas trading business within midstream, the results were circa EUR90 million, which is around 2/3 of the total industrial midstream number. Thank you.
Operator
Thank you. We will now go to our next question. And the next question comes from the line of Ignacio Domenech from JB Capital Markets. Please go ahead.
Ignacio Domenech
Yes, good afternoon. Thank you for taking my question. The first question is on upstream. Maybe if you could elaborate more on the increase in production costs during the quarter on the higher maintenance that you were describing. And the second question still on upstream, if you could give us some visibility or where production during the month of April? And also on the maintenance schedule in Brazil, how it is looking like in the coming months.
Filipe Crisostomo Silva
Ignacio, can you speak [Foreign Language], please.
Ignacio Domenech
Yes. So my first question on upstream. If you could elaborate on the increase in production cost during the quarter?
And then my second question, still in upstream. If you could provide us some visibility on production during the month of April? And also on the maintenance schedule in Brazil over the next month. Thank you.
Unidentified Company Representative
Ignacio, this is Daniel, again. So thank you for the question. On production costs, we are about $3 per barrel, which is a magnificent unit cost for production. We have incentives on performance in our fleet. So you will see sometimes positive news in increase the performance and potentially some increased costs associated with the rewards abandoned in those incentives.
Regarding April, and the maintenance in Q2, so the activity that we are performing in this second quarter that is already ongoing. It's aligned with our overall guidance, and we prefer not to make any specific statements in the quarter that is ongoing. As I mentioned before, we had a very good start of the year, and we are very confident that we'll meet the guidance for ‘23, ‘24. And of course, in 2025, we have that fantastic debt, which will be the entry of Bacalhau, which will generate up to 40,000 barrel of oil equivalent to Galp, which will be a fantastic milestone to us in a low carbon, low breakeven project. Thank you.
Ignacio Domenech
Thank you.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of Pedro Alves, CaixaBank BPI. Please go ahead.
Pedro Alves
Hi, thank you for taking my questions. Two, if I may. The first one, in midstream, it's basically a good sequential recovery here. I remember that you mentioned in the past call that you were expecting midstream EBITDA to be over EUR250 million. Just wanted to understand if you feel you were on track to reach this level or eventually surpass? And if you think this is something sustainable? Because on the high-end, you are benefiting from eventually volatile gas prices that may be inflating our trading results. But on the other hand, you will have more flexibility and source gas to play with?
And then secondly, related to the constitutional court partial decision to extraordinary taxes on the energy sector in Portugal, if you think this could be somehow retroactive because you could still have relevant amount of provisions related to this? Thank you very much.
Filipe Crisostomo Silva
I think one for you, Rodrigo.
Rodrigo Vilanova
Hi, Pedro, this is Rodrigo. And thank you for the question and for this statement. At this stage, we're not changing the guidance just yet for the year. It's too early for that. But indeed, our portfolio this year is much more resilient than in the previous years. And despite the recurring sourcing restrictions in the low price environment, we are very confident that we will keep a strong positive result throughout the year. So no changes in guidance at this stage. Thank you.
Operator
Thank you.
Filipe Crisostomo Silva
One second operator, one second, I have a question from Pedro, question number two was about sales taxation. The decision of the court is actually retroactive, it’s retroactive to 2018. So it stops the continuity from 2023 onwards, and it goes back to 2018. In our balance sheet, we have up to EUR0.5 billion of provisions related to this. And over time, as these processes evolve, yes, these would be unwound. Thank you.
Operator
Thank you.
Pedro Alves
Thank you.
Operator
We will now take our final question. And the final question comes from the line of Alessandro Pozzi, Mediobanca. Please go ahead.
Alessandro Pozzi
Thank you for taking my questions. And the first one is on commercial. You had a fairly strong start to the year there as well. And I was wondering if you can maybe give us some color on how do you expect the rest of the year to play out. And also, just going back to the medium to long-term guidance. And I think the latest one was pointing to a EUR450 million EBITDA in 2025, which seems to be a fairly large step-up from the EUR300 million of ‘23, and I was wondering whether that EUR450 million still valid.
And almost a mix, just to clarify, I mean, we have seen a potential news flow of second floating LNG. And I was wondering whether that might fall into the CapEx plan that you have. Thank you.
Filipe Crisostomo Silva
Thank you, Alessandro, on commercial, so the guidance for this year is EUR300 million at the EBITDA level. It looks like something that is achievable comfortably, if things can be extrapolated. So volumes are picking up in B2B. B2C is relatively flat. Longer term, we -- today is not the day to give longer-term guidance on, on commercial. But when we did give that guidance at the CMD, well, first, the world was a different one.
Two, bear in mind that we have within commercial to loss-making businesses, which in our plan will turn around. They are turning around, be it EV charging, which is on fast pace, you need to occupy the real estate quickly. So you need to launch those business very, very quickly. It's fine to be cash flow negative and EBITDA, even EBITDA negative because you're building a very long-term footprint in our key geographies.
Same with rooftop solar. So we're rolling out that business very, very quickly. And when you swing from negative to positive, it has a material impact on the commercial business, given that it's a run rate of EUR300 million, if two businesses start going from negative to positive, it makes a big difference.
I'll also highlight the phenomenal work the teams are doing on convenience. If you drive around Iberia and stop at Galp station, you'll see what a wonderful job we're doing in the offering we're giving to our clients and the convenience they can. So I'm sure you will stop by after you hearing this. It's becoming -- it's a fast growth business and the margins are okay.
Second, methodology has never been in our business plan. It's not in our budget. It is a discussion that is ongoing. But too early to tell. We're very, very focused on the key onshore development, and we really like the small train concept that Exxon is proposing. Thank you.
Alessandro Pozzi
Alright. Thank you very much.
Operator
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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Galp Energia, SGPS, S.A. (GLPEF) Q1 2023 Earnings Call Transcript