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GALP ENERGIA, SGPS, S.A.

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Galp Energia SGPS S A : Presentation transcript - 2Q - 2021

07/28/2021 | 07:24am EDT

2Q21 Results - Q&A

July 2021

Results' Presentation

Otelo Ruivo, Head of IR

Good morning to you all and welcome to Galp 2Q21 and 1H21 results presentation. I would like to thank you for joining us today and wish that you are all in good health.

Today, Andy will provide an overview of our operations, as well as cover the recent developments and the short- term outlook. Filipe will then take us through the quarterly and half year results. At the end, we will be happy to take your questions during the Q&A session, when Thore will join us as well. If you want to participate, please follow the operator's instructions at the end of the call.

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

I will now hand over to Andy.

RECENT DEVELOPMENTS

Andy Brown, CEO

Thank you Otelo and good morning everyone. It's a pleasure to be able to present the 2Q21 results and the 1H21 for Galp. These are solid results with robust cash flows, and now with a refreshed leadership team.

Our 1H21 Adjusted operating cash flow (OCF) was €0.9 bn. We've seen a recovery in 2Q21 in our Brent prices but also in the Iberian market demand. But this business is not yet at its full potential. Covid-19 is still constraining us, both in our Brazilian operations with other maintenance issues, but also in Iberia with liquid demand still 25% below the equivalent 2Q19. But we have still delivered robust cash. We have been disciplined in our investment. And with the proceeds that we've received from GGND, we've delivered €0.7 bn of Free Cash Flow (FCF) in 1H21. This allowed us to decrease net debt in 1H21, at the same time improving our Ebitda meaning the net debt to Ebitda is now c.1x and this unlocks an opportunity with a sustained macro which should be able to deliver a variable component of dividend at the end of the year.

Our Upstream business has an implicit FCF of c.€0.5 bn, €736 m of OCF and €248 m of net capex. This is a business with a high cash margin and now relatively low capex which yields these strong FCF.

We also see, even with this modest capex, a business that will grow 25% to 2025. But operational performance could have been better. We've seen lower availabilities. We've seen a slower execution pace. And also an increase in the backlog of some of our maintenance activities. So, although we've seen a 3% increase QoQ (in WI Production), we still have ongoing maintenance, but also inspection activities and, as a result, we expect 2021 to be at the lower half of our range between 125 and 135 kboepd. But we are working hard with our partners to continue to optimise production, but we still maintain safe operations as the top priority.

That said, the growth funnel continues with Sépia not far off its date. With Coral making great progress to start up next year and Bacalhau starting well after its FID in June.

So, in summary, this is a business with a strong FCF. Despite the increased maintenance, we see these cash flows continuing for the coming years with further significant growth in 2025.

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2Q21 Results - Q&A

July 2021

Moving to our Commercial business. As I said, we've seen recovery in the quarter, 20% up QoQ. And actually we expect 2H21 to be c.20% higher than 1H21. But in the 2Q21, our volumes are still 25% below what they were in 2Q19, 10% below in our B2C business and 30% below in our B2B business, with aviation being 65% below the run rate in 2019.

But this is not all just disappointment, we've been able to reposition this business and are starting to improve our non-fuel contributions, with 1H21 now 18% higher YoY in absolute terms. And we do see the return of aviation, we do see the return of bunkers and we do see growth in our gas and power clients. But also we see new opportunities in the EV charging space. We have about 700 charging units today and will increase this to 10,000 by 2025. So, despite the headwinds in this business, it has delivered €136 m of OCF, but only about €26 m capital expenditure YTD.

Moving to our Industrial & Energy Management business. We have seen for 1H21 a positive Ebitda contribution from refining. The margins in the 1H21 are c.$2.1/boe and in the 2Q21 $2.4/boe. Demand has been low and diesel cracks have suffered as a consequence. We've also had outages in our FCC that makes gasoline. This is now back up at full capacity, taking full benefit from somewhat higher margins already in July versus 2Q21, but we maintain our $2-3/boe guidance. We have included CO2 price in our margin and not anymore in our Opex.

Our Energy Management business has had headwinds because of the LNG regasification costs. From 4Q21 we see an improving situation here as we've re-negotiated our access without the premium that we've suffered this YTD. Given the GGND sale, this business is showing very strong FCF.

Going forward with Fit for 55, we do see increasing CO2 costs in this business, but at the same time we see a very favourable environment for our biofuels investment, particularly HVO, but also in green hydrogen. And today we're co-leading a consortium of 100 MW electrolyser, which has recently received a €30 m grant.

In our renewables business, in 2Q21 we saw higher radiation and very strong solar capture prices of c.€70/MWh. This allowed us, on a pro-forma OCF basis, to deliver about €19 m. But we also see strong growth with 200 MW still to be connected up this year, and another 100 MW in our funnel so that we have 4 GW of firm projects under development today. This is ahead of potential expansions that we may have outside Iberia and we've already put together a strong team for Latin America. So, this business grows from strength to strength with a very strong outlook.

In summary, Galp is delivering against its guidance, its FCF in 1H21 of €0.7 bn is 75% of the guidance for the year. It's actually 10% of our current market capitalisation.

We are maintaining our discipline, we spent c.€0.4 bn this year on capex, which is almost completely compensated by the proceeds from the GGND sale.

Going forward, we are going to maintain our guidance. This remains a volatile market but our net debt/Ebitda is now at 1x and with the current macro we see it coming below 1x through the rest of the year. Given our remuneration framework we laid out in our Capital Markets Day, we should see this coming below 1x which will allow us to pay a variable component. We can't promise this, we still have six months to go, but assuming a favourable macro, we should be able to deliver that variable component up to a maximum of base and variable of a third of our CFFO.

But in the first instance, we pay half of the base of €0.25/share in September. And then, depending on the macro, will calculate how much of that third of CFFO we would be able to contribute towards a variable component.

So, in summary, this is a distinctive investment opportunity, it has growth, growth and yield. Growth from existing businesses, an Upstream that will grow 25% to 2025. Growing our commercial sales in electricity and EVs. But

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2Q21 Results - Q&A

July 2021

also growing exciting new renewable businesses. Our renewable capacity will increase fourfold to 2025. At the same time, building hydrogen and biofuels businesses and through the agility of Galp able to offer 40% decarbonisation by 2030.

This is also a business with a competitive yield. Our base dividend is now 6% of our market capitalisation. On top of that would be any variable component that we'll be able to pay depending on macro and performance.

So to finalise, on Friday, we announced some management changes. I have now assembled a team that I believe has the capacity, the teamwork and agility to take Galp forward. This is a smaller team, tight knit. Galp aims to regenerate its future and to thrive through the energy transition.

We have in Thore, who will be now running our Production & Operations unit, someone with a broad base of Upstream and downstream experience that will be able to take that business into the future.

We are discussing with some exciting candidates with global experience, the opportunity to take our Renewables & New Businesses into the future.

We have in Teresa, a candidate that has both consulting but deep marketing and commercial experience that is joining the Executive Committee.

We have assembled a team that I am convinced can take us into the future. I have in Energy Management reporting to me now, a reinforced team that touches all of our business oil products, gas, LNG, renewable electricity, taking full value from that businesses.

So we have a new strategy, we have a refreshed team, we have a distinctive investment opportunity. It is now about delivery.

I'm going now to hand over to Filipe.

2Q21 AND 1H21 RESULTS

Filipe Silva, CFO

Thank you, Andy. Good morning guys.

I will start on slide 14. You see our Ebitda of €571 m, this is coming predominantly from Upstream, as you would expect, given the current macro and more so as the mobility restrictions were still impacting our Iberian businesses during Q2. The downstream segments are gradually recovering QoQ but of course not as quickly as Upstream.

Upstream production of 128 kboepd reflects the lower restrictions. The Ebitda growth to €467 m was really driven by rising Brent prices. Do bear in mind that what we produced but have not yet sold is booked at cost of production, not at market prices. So, in a fast-rising price environment, you only capture the Ebitda's full benefit of the higher Brent during the following period.

Commercial Ebitda was €73 m in the quarter, this reflects the higher demand in Iberia, even if we're still way below 2019 volumes, but it's picking up.

Industrial & Energy Management Ebitda was €50 m. Now, with Energy Management helped by derivative gains in Ebitda, some of our gas derivative hedges expire during Q2, so we needed to book the gains in Ebitda even if some are related to H2 deliveries to clients. This gain was about €30 m and should partially revert during the

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2Q21 Results - Q&A

July 2021

second half of this year. Having said this, the fundamentals of the gas trading business are improving, even if we are still paying until Q3 this year the premium prices for access to the Sines regasification terminal.

On refining, the Sines refining margin was $2.4 /boe and this was impacted by the operational constraints in the FCC which are now fully behind us.

As you know, renewables are not consolidated, the JV results are presented under associates, so the Ebitda that you see of -€6 m refers mostly to overheads and development costs related with our renewables and new businesses areas.

Now renewables pro-forma Ebitda, if our assets were consolidated in proportion to our equity stakes, was €17 m in Q2. This is a very strong number and it has benefited from the good capture prices during the quarter.

You also see that still in Ebitda under the "Others" line with €13 m negative, this includes €18 m in Brent price hedging costs which before we used to book under financial costs, so it's now in Ebitda.

Ebit was €305 m supported by the stronger operational performance and this already includes €50 m in impairments from exploration assets mostly in the Potiguar basin.

Associates are in line YoY considering the contribution from the international pipelines and the solar ventures. GGND, of course, is no longer a relevant contributor to the associate's line.

Financial results negative by €4 m only, this includes a positive FX effect as well as the re-classification to Ebitda of the Brent price hedging costs I just mentioned.

Our RCA net income was €140 m and IFRS net income was €71 m. IFRS net income was positively impacted by €68 m of inventory FX effect, this comes from the rising commodity prices, of course, and it was impacted by negative €137 m of special items and here it includes the discontinued Matosinhos operations and the market-to- market (MTM) swings on the gas derivatives to hedge client exposures.

On slide 15, just a reminder that we started last quarter to provide an adjusted operating cash flow indicator as a proxy of our clean CFFO performance and that is excluding volatile inventory effects, working capital variations and special items. OCF was €470 m in the quarter, a strong number considering the downstream is still picking up. You can see that Upstream continues to be a strong cash contributor with over €200 m in cash generated after covering all capex in the period. And old non-E&P units have delivered positive contribution, despite the macro. In total, €125 m from downstream and renewables pro-forma.

During the quarter, capex was €186 m with most of the investment directed to growth in Upstream projects such as Tupi-Iracema and Bacalhau and to our solar projects pipeline.

The quarter also collected the final €25 m from the GGND stake sale and it's captured here under the Industrial line.

Slide 16 shows our cash generation during the first half, so this removes a bit the QoQ differences. In the first half, €900 m of OCF, €800 m of CFFO and this considers a working capital build with a higher commodity prices.

Net capex close to 0 given the proceeds from GGND and €35 m related to the ongoing sale of FPSO P-71 to Petrobras.

With this, FCF was very strong at €746 m during the 1H21 which, after distributions, leads to net debt reduction of €354 m. Net debt to Ebitda at around 1x, which effectively has reached our target leverage ratio and will support our capital allocation framework. So that's all from me. I will now pass on to Q&A, thank you.

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2Q21 Results - Q&A

July 2021

Questions & Answers Session

Mehdi Ennebati - Bank of America

Hi everyone, the line was pretty bad on my side so excuse me if I ask questions which have already been answered during the call.

I have just one question regarding the production. So, your production averaged roughly 127 kboepd in the 1H21. It seems that in the second half there might be some maintenance impact, a little bit higher than in the 1H21. However, we can see that the Covid-19 situation is improving in Brazil. So, in that kind of context, should we expect that the operator Petrobras might decide to ease a little bit the constraints on the FPSOs? Or do you think we're still at a very early stage of the Covid-19 situation improvement and it will take much more time for the situation to improve on the FPSOs? Thank you.

Thore E. Kristiansen, Production & Operations COO

Thank you for the question. You know, in our plans and in the way we are guiding you, we do not dare at this stage to factor in any positive offsets. I would like to see that that could happen, but in our guiding, we still try to continue with prudence. What we like is that we see that we are having more maintenance on the plan than what was originally expected. That's good for the longer term, it will hurt us a little bit in the shorter term but for the longevity of the assets, this is good. So, our encouragement to Petrobras is that we now are catching up with the backlog, doing the maintenance that is planned and that will have some impact on production in the 2H21, but going forward, this will be good for the life of the assets. Thank you.

Mehdi Ennebati - Bank of America

Thanks very much Thore, and I have a question now on the refining side please. With the closure of Matosinhos, you are lowering your jet fuel production, also your middle distillate production and it seems, according to me, that the Portuguese market will be much more balanced thanks to that. Should we expect, or did you noticed that you are now benefiting from an increasing premium on your petroleum products in Portugal due to a better- balanced market? Or no, because imports remain high from Iberia or from somewhere else?

Filipe Silva, CFO

Hi. Yes, so you know we exported close to 50% of what we were refining, so the premium is captured within the Sines refinery only. Also, a reminder that Matosinhos' main product was VGO which is now trading at, I think, $37/ton to $40/ton discount, so negative crack. So, in a way, Sines was the prime off taker of the Matosinhos VGO, it is now buying from the outside market at a hefty discount. So yes, it's a much more balanced market and the mix is a lot more attuned to what the domestic market requires.

Mehdi Ennebati - Bank of America

Alright, thank you. But you don't expect with the demand on petroleum products, which is now picking up, you don't expect any kind of positive impact on the local petroleum product market now that it is more balanced? Or do you think that most of it has already been taken into account?

5

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Disclaimer

Galp Energia SGPS SA published this content on 28 July 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 28 July 2021 11:23:03 UTC.


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