Galp Energia SGPS S A : Presentation transcript - 1Q - 2021

Transcript- 1Q21 results

April 2021

Results' Presentation

Otelo Ruivo, Head of IR

Good morning to you all and welcome to Galp 1Q21 results presentation. I hope that you are all in good health.

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

Today, we will have Filipe and Thore to take us through the quarter results and Q&A.

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

I will now hand over to Filipe.

Filipe Silva, CFO

Thank you, Otelo and good morning everyone.

Strong quarter in otherwise difficult circumstances, but let me jump straight to the key drivers of that.

Q1 Ebitda was really an upstream story, as downstream in Iberia was still struggling its way out of the Covid-19 restrictions. Upstream production was marginally up QoQ to 125 kbpd. This was still impacted by the operational and logistic restrictions. Ebitda of €438 m, was up 37%. This is QoQ with the higher brand prices.

Commercial Ebitda of €69 m was actually quite resilient in the circumstances. Portugal was under full lockdown during most of the quarter, so it's no surprise that commercial volumes were down another 20% YoY, with jet alone down by three quarters. Happy to say that things are looking much better, now in April, with the end of the lockdowns.

On refining, margins improved slightly, averaging $2.0/boe in the quarter, supported by improved gasoline cracks. Still, this barely covers our cash costs and Matosinhos is considered as a discontinued operation, so this is Sines only.

Although middle distillate cracks remained under pressure, capped by weak demand, we are seeing improving market conditions with our refining margin currently above $3/boe.

On Midstream, the contribution was rather neutral, impacted by some headwinds this quarter. With the rapid increase in commodity prices, we had negative swing from the lag in pricing formulas. We also had gas sourcing restrictions from Algeria into Iberia, which forced gas

Transcript- 1Q21 results

April 2021

purchases on the expensive spot market, so this squeezed our otherwise more supportive margins in the quarter. We also had extra costs to access the regasification terminal in Portugal, which we had flagged before, impacting results this year to the tune of around €10 m per quarter.

Renewables, they're not consolidated in our financials as the operations are mostly developed through JVs, so this shows under the Associates line.

However, to enhance visibility and highlight the value of this business, we are starting to also provide a proforma Ebitda for this business as if it was consolidated through the equity method, i.e., our equity stake. So, this renewable proforma Ebitda was just €1 m in Q1. This is a seasonally weak quarter for solar, of course, and this quarter in particular, we had the restrictions with transformers we had flagged before. Happy to say this is behind us and it's all operating at full capacity.

Now on the P&L, with Ebitda RCA of €0.5 bn. That's up 22% QoQ and driven entirely by upstream.

Associates of zero reflects the sale of GGND and the phasing out of Tupi BV, as all its equipment is booked in the Brazilian entity. Other than that, the international pipelines contribution was offset by the negative net income from renewables, which is still in the early stage of development.

On the financial results, we are now booking as special items the mark-to-market swings on client driven derivative and FX hedges. This removes unhelpful volatility in our RCA net income line. These are client-related hedges with little relevance to measure the underlying performance of the business.

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

RCA net income was €26 m and IFRS net income was €161 m and the difference comes mostly from positive inventory effects from the rising commodity prices.

On the cash flow, we have now added an adjusted operating cash flow indicator. This provides a good proxy of our clean operating performance, so this excludes volatile inventory effects, working capital variations and the special items. And under this metric, we delivered €445 m in the quarter, and that's up 46% YoY.

This quarter, we had €48 m in dividends from Tupi BV as we unwind this unconsolidated vehicle. CFFO was €377 m, considering a positive inventory effect, which was more than offset by a working capital build.

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April 2021

FCF generation was resilient at €175 m, or €514 m if you consider the proceeds from the sale of GGND. The GGND sale price was €368 m. We have another €25 m to be received now in this second quarter.

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

Net debt was down by €513 m. And with the cash that we generated in Q1 we amortised a €0.5 bn Eurobond in the quarter. Our net debt to Ebitda now stands at 1.1 times with the last 12 months Ebitda capturing entirely the difficult Covid-impacted period.

Now, the Ebitda denominator is expected to start rising meaningfully from April onwards, also with commercial and refining contributions, whilst the net debt nominator should rise this quarter with the dividend payments and the last payment for the BMS-8, the Carcara acquisition, a disbursement of about €80 m. And liquidity remains very strong at €3 bn at the end of the quarter.

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

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Transcript- 1Q21 results

April 2021

Questions & Answers Session

Oswald Clint - Bernstein

Thank you, Filipe. I'll keep it just related to the quarter. First question was just on the Matosinhos refinery. I think last year you spoke about it saving €90 to 100 m of costs. Is that proving to be accurate so far after the first quarter? And I see some decommissioning costs for that refinery in the quarter. Can you tell us how big those should be ultimately?

And then secondly, we're just talking about gas and some of the sourcing restrictions you have, but I was more interested in what happens with something like Venture Global. It looks like they're looking to start that up in the second half, so I think you guys are taking 1 mtpa of that. Or are you expecting to take some of that this year? And what happens? It comes into Portugal and then you're going to be selling at some of the pretty high gas prices that we see today? Is that how that contract is going to work? Or perhaps you could add some colour please? Thank you.

Filipe Silva, CFO

Good morning, Oswald. On Matosinhos, the €90 to 100 m that we have provided you with is an historical number, and that's what it should have been under normal circumstances. So, we have about €60 m of opex and €30 m of recurring run rate capex numbers in that number.

So, we have no indication at this stage that the numbers would be different, so we are stopping some of the units. Actually, the units should be all stopped by the end of this month and we are starting the decommissioning phase. Decontamination will come much later, so from a cash outlay perspective, this will take a long time, but no difference from previous guidance.

On the Venture contract, this is first gas in 2023. We have a number of contracts, such as with Nigeria and Algeria. Those also mature over time, so the destination of the molecules will be whatever and wherever we can capture more value. So, it could come into Iberia. This is an Henry Hub indexed formula, we could divert some volumes from Nigeria to other places and bring those ones into Iberia and we can consider that for trading. So too early to tell exactly what the risk management will be around those molecules, but we will be short gas over the next few years if we don't renew the Nigerian contracts. Thank you.

Mehdi Ennebati - Bank of America

Thanks for taking my question. So, two questions, please, if I may. First question regarding your production. Can you please update us on your production at the end of April and are you confident that you will be able to grow the production from the current level in the coming month, or, on the contrary, would you say that the uncertainty remains currently quite high due to the pandemic situation in Brazil, which remains according to the news, out of control.

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Transcript- 1Q21 results

April 2021

And second question regarding your capex guidance, please. I just wanted to know if there is a portion of your capex guidance this year which is related to Mamba project in Mozambique and if yes, would you say that the amount is substantial or not? Thank you.

Thore E. Kristiansen, Upstream COO

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

Two messages. One, we are reconfirming the guidance for the year of between 125 and 135 kboepd. Production in April has been ramping up according to our expectation, so in April we were running around 130 kboepd, so that's where we are and further guidance we will not do at this stage. Thank you.

Filipe Silva, CFO

Hi, Mehdi. So, most of Mozambique's capex we have on the plan and within the guidance we've provided you €500-700 m is mostly related to Coral, so Coral is advancing very nicely and according to plan. We are expecting a low burn rate on Mamba, given the circumstances. Thank you.

Joshua Stone - Barclays

Thanks, and good afternoon. Just two questions, please. One on refining margins, if you just give us an update of how margins have been trending in April and any views there.

Secondly, the upstream operating costs to barrel were quite low and impressive in the quarter. Is there anything to note there and the sustainability of that for this year? Thank you.

Filipe Silva, CFO

Morning, Josh. We are comfortably above $3/boe, month to date in April, so it looks better. Then we see also jet coming back, so middle distillates are less pressured in Iberia. Thore will take the opex question. Thank you.

Thore E. Kristiansen, Upstream COO

Thank you, Filipe and Joshua. With respect to opex, yes, it was low in the quarter at $1.8/boe. However, this is the flipside of Covid. Due to Covid and the restrictions that it imposes on us, we have a POB on board that is on average at around 70%, so that's actually the main reason. Plus, there was some adjustments for some past costs in Block 14. We are still comfortable guiding you that it will be below $3/boe. Hope far below. Will depend very much on what Covid will let us do of activities on the installation. Thank you.

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