GLPEF - Galp Energia SGPS S.A. (GLPEF) Q4 2022 Earnings Call Transcript
Galp Energia, SGPS, S.A. (GLPEF)
Q4 2022 Earnings Conference Call
February 13, 2023, 09:00 AM ET
Company Participants
Otelo Ruivo - Head of IR
Filipe Crisóstomo Silva - CEO and CFO
Rodrigo Vilanova - Head of Energy Management
Thore Kristiansen - COO, Production and Operations
Conference Call Participants
Biraj Borkhataria - RBC Capital Markets
Joshua Stone - Barclays
Alessandro Pozzi - Mediobanca
Pablo Cuadrado - Kepler
Sasikanth Chilukuru - Morgan Stanley
Henri Patricot - UBS
Matt Lofting - JPMorgan
Ignacio Domenech - JB Capital Markets
Giacomo Romeo - Jefferies
Presentation
Operator
Good afternoon, ladies and gentlemen. Welcome to the Galp's Fourth Quarter and Full Year 2022 Results and Outlook Presentation.
I will now pass the floor to Otelo Ruivo, Head of Investor Relations.
Otelo Ruivo
Hello, everyone. Welcome to the analyst Q&A session related with Galp's fourth quarter and 2022 results. Earlier this morning, we released all the results materials and a video presentation from Filipe highlighting the key achievements during the year and covering the financial results. We also announced divestment from our Angolan Upstream assets, as I'm sure you all saw. Therefore, after some initial words from Filipe, we will go straight to Q&A. We have Filipe, Teresa, Georgios, and Thore from the Executive Team, and Rodrigo, our Head of Energy Management here to take your questions.
Before we start, 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 end of our presentation that we advise you to read.
Filipe, the line is yours.
Filipe Crisóstomo Silva
Thank you, Otelo. Good afternoon.
During 2022, Galp met most of its operating targets. So very, very strong performance across our physical asset base. Helped by the macro, operating cash flow was over €2.8 billion as per guidance. Now this allowed us to make very good progress with our growth and transformation investments and reinforce our financial position, while allowing for a competitive return to our shareholders. So the dividend goes up 4% and we will go ahead with €500 million in share buybacks as expected.
Going forward, so we will keep average net CapEx at €1 billion per year until 2025. And we will continue to grow this company and, at the same time drive its gradual transformation from grey to green. We will continue to grow Upstream to 2030 even with the divestment in Angola, we announced today. So this is the basis on which we will continue to expand our Renewables business, which will also help decarbonize our Industrial and Commercial footprints.
So let's go straight to Q&A, but let me just say this before. With the Galp share, you're getting growth, you're getting a competitive yield, so good returns, and you are actively participating in the energy transition with meaningful value creation. Thank you.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] We will now go to our first question. And your first question comes from the line of Biraj Borkhataria from RBC Capital Markets. Please go ahead. Your line is open.
Biraj Borkhataria
Hi there. Thanks for taking my question and I appreciate the more condensed format. Two questions please. The first one is on the €1 billion net CapEx guidance. When you're building that up, do you only include the Angola divestment in there to get to the net? Or are you assuming you'll do further divestments over the 2023 and 2025 period? And then second question is on low carbon growth and financing. One of your peers talked about basically reducing the use of project financing given the way interest rates have moved and how balance sheets have improved. So could you talk about any changes in assumption there between project financing and how much you're going to take as equity financing? Thank you.
Filipe Crisóstomo Silva
Thank you. Thank you, Biraj. We - so the net CapEx guidance is net. And why is Galp so focused on the net number, if you have less divestments then we can do less investments. So we target overall net number. It keeps discipline to rotate assets. And to high grade, the assets within an envelope that is precept.
Now as we invest more in Renewables and because we have now consolidated renewals, we want to show green EBITDA as part of our overall mix of EBITDA. Could there be more divestments, there could be depending on how quickly we want to ramp up other low carbon initiatives, and that is not just Renewables, it can be the pace at which we do hydrogen, for example, and the pace at which we do HVO.
So what is important is that we continue to invest in Upstream very significantly, but the overall envelope for Upstream is net zero, frankly. So - and even for renewables, if we see value in rotating renewable assets, we will do so as well to keep within the guidance.
On low carbon project finance, now, there is - and you will have seen this morning's publication that almost all of Galp's net debt is already green and will be completely green very soon. So no need for Galp to issue a green bond because we are green almost by definition, given the legacy free cash flow release of the high carbon businesses.
The appetite from lenders for Green Project is immense, because we consolidated those, we set up structure whereby we get a bit the benefit of Project Finance allocated or earmarked for Green Projects, but they will sit on the balance sheet without necessarily having to have all the strings attached of a typical project finance exercise, including high cash balances, high debt service coverage ratios. Thank you.
Operator
Thank you. We will now go to our next question. And the next question comes from the line of Joshua Stone from Barclays. Please go ahead. Your line is open.
Joshua Stone
Thanks and good afternoon. Two questions please. First, it's good to Brazil and the volume guide, it does look about 6,000 barrels a day, 7,000 barrels a day, lighter than your previous guide. So can you just better flesh out what's going on there? Are there reservoirs declining more quickly than you first thought? And if that is the case, what confidence can you give us that's not going to be an ongoing area of disappointment? And then secondly, on the Angolan disposal. Congratulations for getting that way at an attractive price. You talked about using those proceeds for increased CapEx, but is there any - to what extent could you consider using some of those proceeds for distributions to shareholders? Thank you.
Thore Kristiansen
Thank you, Josh, and let me try to answer your first regarding Brazilian production. What we have done over the last few years is that we've worked enormously internally in order to develop better methodology, in order to be able to predict how the production is going to be. As you know, we're not standing on the wells ourselves, this is really non-operated assets.
So we've actually developed a very good, I think, no probabilistic model in order to try to forecast production, hence also what happened last year, whereas - where we really were spot on, on our forecasting.
We're doing the same this year. Factoring in that that there is significant larger downside and there's upside on a good day. We're producing one percentage point better, on a bad day, it goes to zero. This is then factoring in that the assets in Brazil are have reached peak for now on 2P and LSM in particular, but also in Europe. It will come. And this is then a prudent way to try to forecast, where we will be in the next two years until Bacalhau comes on stream. I think, I'll underline - I think it is prudent, but that is also the way we should be guiding you.
The decline rate for Tupi/Iracema is still in my 36 years of experience in this business, astounding that it doesn't decline faster. We see a decline rate that is below 5% per year. So it is still is a very good reservoir, but it has peaked and there is natural decline and that is what we're trying to factor. It is still really, really profitable barrels that is coming out for Galp in Brazil. Thank you.
Filipe Crisóstomo Silva
Josh, on Angola divestments, we like to be in giant low carbon intensity reservoirs, even if we are a minority. So, focusing on the Brazil presold, which includes Lula Bacalhau, of course, which are much younger fields and they're wear also long life. Our Angolan assets had or have CO2 emissions per barrel, pretty much in line with industry average, which is reasonable, but our Brazilian barrels have an emission intensity, which is well below that. So this divestment also improves our overall intensity. You ask about use of proceeds.
So our Upstream is still growing. Bacalhau will bring some 40,000 new barrels per day, Angola was just 12,000 barrels, and declining. Bacalhau alone is €1.6 billion of CapEx to Galp. That's two times the Angolan proceeds. So as I said before, we need to keep - if we're taking Net Zero seriously in 2050, we need to keep discipline in overall Upstream - increased exposure to Upstream.
So we need to rotate and we need to high grade. Now, what we have caution that Santos mine and Namibia could change this, if they are successful now given the share size of those two assets. The markets was not attributing also the value we managed to crystallize Angola at. 830 is quite above market consensus, which by the way this applies to most of our assets.
So the use of the proceeds is to keep the overall net CapEx number within the €1 billion as we develop Bacalhau, as we invest in decarbonizing industry and build up the renewable portfolio. The market was concerned as we consolidate renewables that our CapEx numbers will be much higher than €1 billion. So keeping the €1 billion is a way of using the proceeds. Thank you.
Operator
Thank you. Thank you. We will now go to our next question. And the next question comes from the line of Alessandro Pozzi from Mediobanca. Please go ahead. Your line is open.
Alessandro Pozzi
Hi, there. Thank you for taking my questions. The first one is on the long-term production outlook, certainly, Bacalhau coming on-stream gives a bit of a booster. But I was bit of surprised to see a bit of a production coming down soon after Bacalhau. And at the same time, I see that you haven't included much upside from Mozambique. And I was wondering whether you believe Mozambique is not coming on stream before 2030 or you just taking a more prudent approach there. And also I think if you can give us maybe a bit more color on DD&A in the Upstream, how that will change in '23, of course, we're going to have the addition of Coral South, but also Angola is coming out. So I was wondering maybe if you can give us an update on where the DD&A going to go in '23? Thank you.
Thore Kristiansen
So - if I then start with the first. Thank you, Alessandro, and I'd like me to start first on your question regarding the production outlook. First and foremost, the key focus - could you mute your line, actually, Alessandro, because we get a lot of noise there. So thank you very much. So, first and foremost, our key focus is now to get Bacalhau on stream.
As we have said Feb mid-2025 is now our focus. It's an extremely profitable asset for Galp. It's significant as Filipe said with 40,000 barrels per day, but it's also with a very high level of profitability. So that's number one. Number two, as you correctly are alluding to, for sure, there is upside in Mozambique. It is promising and interesting to see that our colleagues in Total has just recently been to Mozambique. The reports from the ground is pointing to that the security situation is improving. And that is - it's very positive sign with respect to also the further development of Mozambique.
And by the way, let me, also say that we are extremely happy so far with how Coral South is ramping up. It's an astounding achievement by the teams that has been involved that an FLNG project is already producing the way it is doing. But yes, Mozambique represents an upside.
And then let me underline once more, which Filipe just did in his previous intervention, Galp has two really big diamonds in its portfolio being Namibia, right. In my view, we have the best Zip Code. We have around 2,000 meters water depth or some of our colleagues that is in neighboring blocks operates at 3,000 and deeper.
So, of course, if we make a discovery there, this can be extremely profitable barrels. And also Sao Tome and Principe and how we have drilled the first well and being in a region, where we drilled 66 wells before we found any oil. This actually hit for this - in the first well. We proved there is a working petroleum system in Sao Tome and Principe. And Galp is very well positioned in three very interesting opportunities in Sao Tome Blocks 6, 11 and 12.
And I think you should look forward to further derisking of that in the next years to come. So, yes, Galp has for sure upside in it's - on its longer term production outlook. And I think you can expect more profitable barrels to come in. I leave the DDA and DD&A question -
Alessandro Pozzi
Yes. On Mozambique, is there any update on the potential second floating vessel?
Thore Kristiansen
So, Alessandro what is being evaluated in Mozambique is, one, is just look into - is there a fast way to further develop the Coral part of the reservoir. And then, but where the majority of these efforts are now is actually what should be then the onshore development, so that we really can materialize the significant resources. As you know, we think there are around 85 trillion cubic feet of natural gas in place in just Area 4. And that is onshore.
We are looking into smaller tray and modularized tray and learning from what have so successfully have been done in the U.S. And that is what is now being discussed intensively in the partnership, and it's also being matured. So that as soon as we feel confident on the - on ground situation, that could be new products that is being launched in Mozambique.
Alessandro Pozzi
Thank you.
Filipe Crisóstomo Silva
Alessan, on the DD&A, we will have less DD&A from Angola. Of course, we have a bit per barrel. We have less DD&A in Brazil. So the overall DD&A even would grow - will go down meaningfully next year. So from 13, 14, if I'm not mistaken per barrel to something around $10 per barrel overall portfolio. Thank you.
Alessandro Pozzi
Thank you.
Operator
Thank you. We'll now go to our next question. And the next question comes from the line of Pablo Cuadrado from Kepler. Please go ahead. Your line is open.
Pablo Cuadrado
Hi. Good afternoon, everyone. Just two quick questions on my side. This is one would be on the Upstream guidance. And I was totally keen if you can drive us a little bit with the difference between the guidance up going for this year and next year, I mean, as you have reported €3.1 billion EBITDA, and now you're guiding for more than €2 billion. Clearly, I reckon that the commodity prices, Forex assumptions that you're making are clearly different and you have the Angola disposal. But running through the sensitivities that you are providing, it looks to me at least that the €1.1 billion drop for me difficult to get. So if you can probably help us a little bit to understand what's driving the €1.1 billion EBITDA drop on auction?
The second one will be quick, I mean, quick one on working capital. Clearly, last year - you were wildly highlighting last year there was like a dual effect clearly much more negative in H1, but much more positive in H2. So to the best of your knowledge and looking the environment at the moment, what could be your expectation for this year?
Filipe Crisóstomo Silva
Hi, Pablo. So the Upstream EBITDA guidance - so yes, so do bear in mind the casualties ex Angola, we have assumed lower oil prices, do bear in mind, we are using the $1.15 to the euro. If you look at the sensitivities page on the Appendix $0.05 on the dollar is about €120 million overall Galp, and that's a lot of this is driven by Upstream. On working capital, what happened in 2022 was exactly as we had expected, as we had explained throughout the year.
So we had very significant margin calls underlining our hedges to protect risk. These have rolled off as expected throughout the year, so that money is no longer tied up. During 2022, the commodity prices went way up. So we have a lot more normal working capital tied up in inventories and client receivables. Assuming what we are assuming on macro commodity assumptions, we would not expect working capital to change much from end of 2022. Thank you.
Operator
Thank you. We'll go to our next question. And the next question comes from the line of Sasikanth Chilukuru from Morgan Stanley. Please go ahead. Your line is open.
Sasikanth Chilukuru
Hi. Thanks for taking my questions. I had two, please. The first, I just wanted to understand more on the production at the 2P field. When I look at the data provided by A&P, I do calculate an annual decline rate of around 7% actually for the 2P, which includes Iracema. In fact, some of the annual decline rates in that some FPSOs, including P69 and P66 as close to 20% in 2022. I was just wondering, if you could kind of comment on the decline rates, especially on some of these facilities, is it fair to assume such kind of level of decline rates? And also along with the 2P, I just wanted to understand the progress made for the 2P redetermination plan, especially the importance of this for the operator Petrobras so as - because other growth projects to focus on as well. So when you talk about this 30% increase in production between 2023 to 2026, have you included any contribution from the 2P redetermination plan at all? And if yes, is it possible to highlight from when do you expect this contribution to come from? The second question was on net debt. I just wanted to understand will net debt increase or decrease by end 2023 in your current guidance of €2.2 billion OCF, €500 million of buyback, dividend payments of around €100 - €400 million, Angolan cash proceeds as well. I was just wondering what is the trajectory of the net debt levels, including these - this guidance as well? Thanks.
Thore Kristiansen
Thank you, Sasi, for your question. If I then try to take the first regarding the production and the redetermination. What we see based on our own in-house reservoir models, if that we see a decline rate for our Brazilian assets that is below 5% that is what we have in our business plan and what we have factored in. I believe that is prudent. You are correct that on Iracema, there is higher decline rate than there is on the rest of the 2P field just to mention that, and it has to do with the fact that, of course, it's a very much significantly smaller resource pool that Iracema is producing from then from 2P.
But overall, what we see is the decline rate in the order and that is just below 5% for our Brazilian assets. We have with respect to redetermination that has just kicked off. We have just had the first initial - sorry, now alignment meeting in the partnership. And it is way too early to factor in any results of that. This is going to be a lengthy process that will go over several years and we have not factored in any outcome of this process at this stage. Thank you.
Operator
Thank you.
Filipe Crisóstomo Silva
Sasi, on net debt. So the guidance we are providing are - these are really averages 23% to 25%. So it is not - it's not a year-by-year guidance. Having said this, net debt is pretty controlled. But I would also say, given the mix of our assets and the long-life nature of our assets and the weight of renewable assets in our portfolio going forward, we're actually happy conceptually to see net debt going up in euro terms. The asset is increasingly green. Our green competitors have net debt to EBITDA of four times, for example, five times. We are at 0.4 times. So it is a very low base and there's no reason on how this new Galp in transformation would continue to stick with such low Oil & Gas net debt and its balance sheet. Thank you.
Sasikanth Chilukuru
Thank very much.
Operator
Thank you. We will now go to the next question. And the next question comes from the line of Henri Patricot from UBS. Please go ahead. Your line is open.
Henri Patricot
Yes. Hello, everyone. Thank you for your update. I've two questions, please. The first one, it's just a bit of a follow-up on what we just discussed on the CapEx guidance for the three years. Can you give us a sense of what that will be paid across the period, maybe not net CapEx? But if you can give a sense of the underlying organic CapEx, whether we should expect that to be a bit more back-end loaded?
And then secondly, I wanted to ask about the HVO projects. Do you expect FID this year? Can you give us your latest thoughts around planning of startup, the feedstock strategy? And you mentioned at the beginning that you could be doing more [Agios]. So I was interesting to hear, why you would go towards what are you waiting to see before committing more materially to that business? Thank you.
Filipe Crisóstomo Silva
On CapEx, again, we're not providing gross CapEx guidance and what is organic and what is divestments because one will depend on the other. We have significant levi to base our gross CapEx commitments and we would slow them down if there are no divestments or we would speed up investments if we can monetize some assets faster. So the way where we're sitting today, it does not look as if it's going to be back-end loaded, no, it is not. But do keep in mind, the €1 billion net CapEx numbers as you drive your models. Thank you.
Thore Kristiansen
And with respect to the HVO Project, Henri, it is moving ahead very much according to plan and we do expect to take the final investment decision on this product during the course of this year, actually in the first half of 2023. This is a significant project for us when it comes also to the turning or refinery complex into a green energy hub. We have - we're really well advanced when it comes to securing the feedstock in two mentions. One, and Rodrigo might want to elaborate on this, but we are mainly sourcing this ourselves. But we also have teamed up with an international partner with a strong foothold in the far east, so that we have two major legs to stand and when it comes to sourcing. So as we see it, we're feeling quite comfortable with the sourcing, and we expect to start off this product in 2025, but would you like to elaborate a little bit on sourcing, Rodrigo.
Rodrigo Vilanova
Thank you, Thore. And as you well said, we are expanding the sourcing of feedstock with our existing suppliers. We're already active in this business. We are doing so through increasing throughput, co-processing the refinery tolling agreements and also partnering with an international provider. Thank you.
Operator
Thank you. We will go to our next question. And the next question comes from the line of Matt Lofting from JPMorgan. Please go ahead. Your line is open.
Matthew Lofting
Thanks gents for taking the questions. Two if I could, please. First, it strikes me that in parallel with the value proposition that you referenced earlier the rationalization move around Angola and the associated sort of gross to net CapEx comments that you've made in some respect signals the degree of fruition coming soon in the more agile operating model at Galp that has been talked about in recent history. And any thoughts in terms of sort of connecting those two things in terms of how you sort of thought about the model going forward? And also are there other rationalization moves that you are looking at and, in particular given the weight of renewable CapEx is showing through to mid-decade? I wonder whether there is a case for partnerships or JVs, if the right opportunity comes through over the medium term in that business.
And then secondly just on cash return. I guess the one third or up to one-third OCF policy unchanged. The threshold around that today, I think has been net debt to EBITDA are being less than one-times, given the extent to which you are showing this will be evolution of the capital employed and net CapEx through the sort of the coming years. I wonder whether that's still the right threshold for that cash return policy or whether there is a case that commensurate with that balance sheet evolution that threshold can also be eased as the capital employed mix changes. Thank you.
Filipe Crisóstomo Silva
Hi, Matt. Let me take that second question first. The distributions, so the dividend goes up 4% per year. There is no terminal data. And so it's 4% every year and it is going to be its compound. One third of OCF remains the benchmark, remains the intention. If we continue to delever very quickly, I would have thought that the Board will look at revised distribution policy. So if somehow, some of our CapEx gets delayed or the macro gets different from what we're expecting, so it's - the rule is not catching stones. And if we divest and net debt becomes so, so low, I'm sure the Board will look at distributions carefully. I think your first question was on a bit our business model and partnerships.
So the way we're thinking longer term is and we have a graph in the documents we published this morning on the color of the OCF. So as we become greener and greener, as we invest in Renewables production have access to these green electrons to decarbonize our industrial business, where we are an incumbent. We are an incumbent in Iberia. We have very significant asset base.
We have competitive advantages. Decarbonizing the existing operations, be it with biofuels, with hydrogen, is very low hanging fruit for us. And they will come a time and I guess we're all paying the multiples game here. There'll be a time when people will look at Galp and it's no longer three or four times EBITDA business. It's much, much closer to a greener business. Whether we do this alone or in partnership, clearly, we don't need the money.
So the partner would need to bring assets or would need to bring feedstocks, something that would complement our existing business, but we want to control those business ourselves. And ideally everything that is green should be consolidated, so that the balance sheet and the cash flow statement you'll see how much has become legacy and how much is going to be a high multiple businesses. Thank you.
Matthew Lofting
Thanks. Thanks Filipe.
Operator
Thank you. We will now go to the next question. And the next question comes from the line of Ignacio Domenech from JB Capital Markets. Please go ahead. Your line is open.
Ignacio Domenech
Yes. Good afternoon. Thank you for taking my question. My question is on the gas trading division. You're are now expecting contribution [technical difficulty]
Thore Kristiansen
Sorry Ignacio. We can't hear you.
Ignacio Domenech
Hi. Is this any better?
Thore Kristiansen
Yes. Bit better. Thank you.
Ignacio Domenech
Yes. Okay. Thank you. So my question is on the gas trading division. You are now expecting a growing contribution up to 2025. So I was wondering if you could give us the assumption for the rationale behind these contributions were mentioned in volumes increasing 15%, but maybe the assumptions behind this and some color on the margin on distribution? Thank you.
Thore Kristiansen
Hello, Ignacio. Regarding the outlook for gas trading business, so in this slide was provided earlier today. You have some of the big numbers on volumes and expected EBITDA. I mean the main things I would highlight is that from a supply perspective. Later this year, we'll have an additional source of supply coming from the U.S., which would be FOB and three destinations. And on top of that, also the highlights on this slide that we do not have relevant hedges and the presold volumes, which delivers a flexible portfolio for us in 2023. Thank you.
Operator
Thank you. We'll go to our next question. And the next question comes from Giacomo Romeo from Jefferies. Please go ahead. Your line is open.
Giacomo Romeo
Thank you. Two questions from me. The first is to Filipe, and you talked about the envelope for Upstream remaining net zero. And that's actually future growth will have to happen in parallel to divestments. And you talked also about the fact that you think that other assets - other than Angola, are undervalued in your portfolio. Does it mean that you will look at all potential opportunities for divestments of some of your more mature Brazilian assets at some point, or are those off the table?
The other question I have is relates to Renewables returns and quite a lot of your peers have flagged about the concerns around the lower returns, particularly as we discussed earlier as the leverage attractiveness from Project Finance is sort of - is less clear. Have you - just wondering, if you've made any sort of adjustments, changes to your Renewables investment plans on the back of these trends and sort of how - what's your thinking around returns patterns you're seeing? Thank you.
Filipe Crisóstomo Silva
Hi, Giacomo. So, the net - let's call it Net Zero CapEx in Upstream, this is guidance to 2025, and Angola clearly falls in 2023. So the Angolan transaction is already helping significantly into our guidance. But no, let me be very clear that Brazil is not going to be considered as a divestment candidate. We will pace investments and divestments in the Group, depending on net.
So, I insist on this, net CapEx numbers. So we can play with both angles with the - how much we invest and how much we divest. After 2025, today we're only spending exploration CapEx in Sao Tome and Namibia. By 2025, if not well before that, we will know a lot more about these two assets. And so everything could change depending on if these are discoveries are not. So let me caveat that as well.
Renewable returns, I'm not surprised by the question, given what we've seen some of our competitors doing over the last few years. And I hope you give us the benefit of the doubt when you look at the returns that Galp is generating in Renewables. So we are not in the megawatt gain. If we see value, we will invest, if we don't see value, we will not invest. But Renewables at Galp is to create value for the shareholders. It is not to destroy value. And it is also to integrate at least a big part of our Renewables electrons will be integrated so that we decarbonize our existing operations. Thank you.
Operator
Thank you. I will now hand the call back to Otelo Ruivo for closing remarks.
Otelo Ruivo
Okay. We have now reached the end of this Q&A session. Hope it was an useful one. As always, the team is here to help on any further clarification. You might need. I look forward to seeing you all soon. Take care.
Operator
Thank you. This does conclude today's conference call. Thank you for participating. You may now disconnect.
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Galp Energia, SGPS, S.A. (GLPEF) Q4 2022 Earnings Call Transcript