Galp Energia SGPS SA

ELI:GALP

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Welcome to the Galp Second Quarter 2021 Results Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I will now pass the floor to Mr. Otelo Ruivo, Head of Investor Relations.

[Otelo Ruivo, Head of Investor Relations]

Good morning to you all, and welcome to Galp's Second Quarter and First Half 2020-'21 Results Presentation. I would like to thank you for joining us today, and we 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 on the cautionary statement at the beginning of the presentation, which we advise you to read. I now hand over to Andy.

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thank you, Otelo, and good morning, everyone. It's a pleasure to be able to present the Q2 results and the first half for Galp. These are solid results with robust cash flows and now with a refreshed leadership team. Our first half operating cash flows were EUR 0.9 billion. We've seen a recovery in the second quarter in our Brent prices but also the Iberian market demand. But this business is not yet at its full potential. COVID is still constraining us both in our Brazilian operations with other maintenance issues but also in Iberia with liquids demand still 25% below the equivalent quarter 2 in 2019. 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 EUR 0.7 billion of free cash flow in the first half. This has allowed us to decrease our net debt in the first half of the year, at the same time, improving our EBITDA, meaning that our net debt to EBITDA is now around 1. And this unlocks an opportunity with the sustained macro, which will allow us to -- should be able to deliver a variable component of dividend at the end of the year. Our Upstream business has an implicit free cash flow around EUR 0.5 billion, EUR 736 million of operating cash flow and EUR 248 million of CapEx. This is a business with a high cash margin and now relatively low CapEx, which yields these strong free cash flows. 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 quarter-on-quarter, 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 125,000 and 135,000 barrels a day. But we are working hard with our partners to continue to optimize production, but we still maintain safe operations as the top priority. That said, the growth funnel continues, with Sepia not far off its startup, 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 free cash flow. Despite the increased maintenance, we see these cash flows continuing for the coming years,with further significant growth in 2025. Moving to our Commercial business. As I said, we've seen recovery in the quarter, 20% up quarter-on-quarter. And actually, we expect H2 to be about 20% higher than H1. But in the second quarter, our volumes are still 25% below what they were in Q2 '19, 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 disappointments. We've been able to reposition this business and are starting to improve our nonfuel contributions, which H1-to-H1 versus last year are now 18% higher 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 G -- Gas & Power clients. But also, we see new opportunities in the EV charging space. We have about 700 charging units today and we'll increase this to 10,000 by 2025. So -- but despite the headwinds in this business, it has delivered EUR 136 million of operating cash flows but only about EUR 26 million of capital expenditure year-to-date. Moving to our Industrial and Energy Management business. We have seen for the first half of the year a positive EBITDA contribution from refining. The margins in the first half around $2.10 per barrel; in the second quarter, $2.40 per barrel. 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 Q2, but we maintain our $2 to $3 a barrel 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 liquefaction costs -- our LNG liquefaction costs. From Q4, we see an improving situation here as we've renegotiated our access without the premium that we've suffered this year to date. Given the GGND sale, this business is showing very strong free cash flow. Going forward, with Fit for 55, we do see increasing CO2 costs in this business. But at the same time, we see a very favorable environment for our biofuels investment, particularly HVO, but also in green hydrogen. And today, we're a co-leading consortium of a 100-megawatt electrolyzer, which has recently received EUR 30 million grant. In our Renewables business. In Q2, we saw higher radiation and very strong solar capture prices of around EUR 70 per megawatt hour. This has allowed us on a pro forma operating cash flow basis to deliver about EUR 19 million. But we also see strong growth with 200 megawatts still to be connected up this year and another 100 megawatts in our funnel so that we have 4 gigawatts 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. So in summary, Galp is delivering against its guidance. It's free cash flow in the first half of EUR 0.7 billion is 75% of the guidance for the year and is actually 10% of our current market capitalization We are maintaining our discipline. We spent around EUR 0.4 billion 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 to EBITDA is now at 1. And with the current macro, we see it coming below 1 through the rest of the year. And given our remuneration framework, we laid out in our Capital Markets Day, we should see this coming below 1, which will allow us to pay a variable component. We can't promise this. We still have 6 months to go. But assuming a favorable macro, we should be able to deliver that variable component up to a maximum of base and variable of 1/3 of our CFFO. But in the first instance, we pay half of the base of EUR 0.25 in September. And then depending on the macro, we will evaluate how much of that 1/3 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 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% decarbonization by 2030. This is also a business with a competitive yield. Our base dividend is now 6% of our market capitalization. On top of that would be any variable component that we'll be able to pay depending on macro and performance. So to finalize. 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 Business into the future. We have in Teresa, a candidate that has both consulting, but deep marketing and commercial experience that are joining the Executive Committee. We have assembled a team that I am convinced can take us into the future. I have an 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 business. 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 to now hand over to Filipe.

[Filipe Crisóstomo Silva, CFO & Executive Director]

Thank you, Andy. Good morning, guys. I will start on Slide 14. You see our EBITDA of EUR 571 million. 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 on a quarter-on-quarter basis but, of course, not as quickly as Upstream. Upstream production of 128,000 barrels per day reflects the lower restrictions. The EBITDA growth to EUR 467 million 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, the full benefit of the higher Brent during the following period. Commercial EBITDA was EUR 73 million 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 and Energy Management EBITDA was EUR 50 million. Now with Energy Management helped by derivative gains in EBITDA, some of our gas derivative hedges expired 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 EUR 30 million and should partially revert during the 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 regas terminal. On refining, the Sines refining margin was $2.4 per barrel and this was impacted by the operational constraints in the FCC, which are now fully behind us. As you know, Renewables is not consolidated. We -- the JV results are presented under associates. So the EBITDA that you see of minus EUR 6 million refers mostly to overheads and development costs related with our Renewables and New Business areas. Now Renewables pro forma EBITDA, if our assets were consolidated in proportion to our equity stakes, was EUR 17 million 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 EBITDA under the others line were EUR 13 million negative. This includes EUR 18 million in Brent price hedging costs which before we used to book under financial costs. So it's now in EBITDA. EBIT was EUR 305 million, supported by the stronger operational performance. And this already includes EUR 50 million in impairments from exploration assets, mostly in the Potiguar basin. Associates are in line year-on-year considering the contribution from the international pipelines and the solar ventures. GGND, of course, is no longer a relevant contributor to the associates line. Financial results, negative by EUR 4 million only. This includes a positive FX effect as well as the reclassification to EBITDA of the Brent price hedging costs I've just mentioned. RCA net income was EUR 140 million, and IFRS net income was EUR 71 million. Now IFRS net income was positively impacted by EUR 68 million of inventory effects. This comes from the rising commodity prices, of course, and it was impacted by negative EUR 137 million of special items. And here, we include the discontinued Matosinhos operations and the mark-to-market 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, the OCF indicator as a proxy of our clean CFFO performance. And that is excluding volatile inventory effects, working capital variations and special items. So OCF was EUR 470 million in the quarter, a strong number considering that downstream is still picking up. You can see Upstream continues to be a strong cash contributor with over EUR 200 million in cash generated after covering all CapEx in the period. And all the non-E&P units have delivered positive contribution despite the macro, in total, EUR 125 million from downstream and Renewables, Renewables pro forma. During the quarter, CapEx was EUR 186 million, with most of the investments directed to growth in Upstream projects such as Tupi/Iracema and Bacalhau and to our solar projects pipeline. The quarter also collected the final EUR 25 million 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 quarter-on-quarter differences. So the first half EUR 900 million of OCF, EUR 800 million of CFFO, and this considers a working capital build with higher commodity prices. Net CapEx close to 0 given the proceeds from GGND and EUR 35 million related to the ongoing sale of FPSO P-71 to Petrobras. With this, free cash flow was very strong at EUR 746 million during the first half, which after distributions leads to net debt reduction of EUR 354 million. 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.

[Operator]

[Operator Instructions] Your first question comes from the line of Mehdi Ennebati from Bank of America.

[Mehdi Ennebati, Research Analyst]

Can you hear me? Hello?

[Otelo Ruivo, Head of Investor Relations]

Yes, we can, Mehdi. Go ahead.

[Mehdi Ennebati, Research Analyst]

Sorry, the line was pretty bad on my side. So excuse me if I ask questions, which have already been answered during the call. But please, just one question regarding the production. So your production averaged roughly 127 kboe/d in the first half. It seems that in the second half, there might be some maintenance impact, a little bit higher than in the first half. 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 are 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?

[Thore Ernst Kristiansen, COO of Upstream & Executive Director]

Maybe I'll answer that. Thank you for the question. In our plants and the way we are guiding you, we do not dare at this stage to factor in any positive upside at this stage. 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're actually having more maintenance on the plan on 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 know are catching up with the backlog, doing the maintenance that is planned for, and that will have some impact on production in the second half. But going forward, this will be good for the life of the assets.

[Mehdi Ennebati, Research Analyst]

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 notice 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, from somewhere else?

[Thore Ernst Kristiansen, COO of Upstream & Executive Director]

Filipe, can you answer that?

[Filipe Crisóstomo Silva, CFO & Executive Director]

Mehdi, can you hear me well?

[Mehdi Ennebati, Research Analyst]

Yes, I can.

[Filipe Crisóstomo Silva, CFO & Executive Director]

Super. Yes. So 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 ] to [ 40 ] discounts, so a negative crack. So in a way, Sines was the prime offtaker 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 tuned to what the domestic market requires.

[Mehdi Ennebati, Research Analyst]

All right. 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 it is more balanced? Or do you think that most of it has already been taken into account?

[Filipe Crisóstomo Silva, CFO & Executive Director]

No, every time we can place the molecules in the hinterland, we capture the imports parity difference. So yes, we will benefit from growing demand in Iberia and in Portugal, in particular. Where we are capturing a big premium is on RBOB, which you did not see much in Q2 because of the FCC constraints. And now this is now operating fully and we are sending cargoes to the U.S. at a good premium. Thank you.

[Operator]

And your next question comes from the line of Alessandro Pozzi from Mediobanca.

[Alessandro Pozzi, Research Analyst]

I have 2 questions. And the first one is on the discount of the realized price versus Brent. I think this quarter was slightly wider. Can you give us maybe a bit more color about what's going on? And also, what would you expect that to evolve in the few -- in the next few quarters? And that's the first question. And the second one, in order to better understand the potential variable payment, can you give us any sense of the potential difference between the adjusted cash flow and the operating cash flow for 2021? I guess, probably the working capital is one element of that.

[Thore Ernst Kristiansen, COO of Upstream & Executive Director]

Thank you, Alessandro. I'll take the first part regarding the discount to Brent. Yes, you are correct. We had somewhat higher discount to Brent for the second quarter $8.9 in totality when you're combining both what we realize on oil and on gas. And this has 2 main factors. One, we have seen some softness in the Chinese market that has been one of the primary destinations for our crude cargo, so the differential have therefore increased. And secondly, we have also an impact on the fact that since this is a combined realized price, that the gas prices we are not able to fully capture the upside because we have a cap on our gas price at $55. That gives us a cap, but that means that there is in totality somewhat weaker price. Thank you. Filipe?

[Filipe Crisóstomo Silva, CFO & Executive Director]

Thank you, Thore. Alessandro, we -- so moving -- if you look at the first half, OCF, EUR 914 million; CFFO, EUR 817 million, given the magnitude of the increase in prices over the last few months, we would expect going forward, if the current macro stays, that we want to see more consumption of working capital. So the inventories are fully valued and we have more money outstanding with our clients because the molecules are more expensive. Now at current levels, this should be as high as it gets, the gap between OCF and CFFO. Thank you.

[Alessandro Pozzi, Research Analyst]

Okay. And just going back on the discount, should we expect a similar discount in the coming quarters?

[Thore Ernst Kristiansen, COO of Upstream & Executive Director]

So Alessandro, the way we see the market now, yes, I think you have to expect that it would be in that ballpark, somewhere above $8 per barrel as a discount.

[Operator]

Your next question comes from the line of Joshua Stone from Barclays.

[Joshua Eliot Dweck Stone, Analyst]

Two questions, please. Firstly, I hope you could be just a bit more specific on the maintenance in Brazil. You mentioned the backlog. Maybe how large is the backlog or how much production will be offline this year because of that? And when do you think you'll be able to get through this backlog and sort of be back to more normal conditions? And then second question on refining. You mentioned the impact of rising CO2 costs or at least you're including that in the margin now, so maybe just talk about what is that impact today and where could it get to if carbon prices continue to increase?

[Thore Ernst Kristiansen, COO of Upstream & Executive Director]

Thank you, Joshua. We have -- there is more maintenance in Brazil now, and that is needed because we actually, as we are speaking, have 14 producers -- 14 wells out of production, 11 of which are producers, the 3 others are injectors. So this is important for us in order to keep up the issues. The 50% of the wells that are out are out due to the fact that we have initiative is called stress corrosion due to CO2. This is preventive maintenance, so we are taking them out just in order to inspect them to make sure that their full well integrity still is being preserved. These inspections take some time. They're so far going quite well. But there, the wells are out of production. And it will be speculating on me to say then what would be the production impact because, as you know, there's a balance there, depending on also what sort of injection capacity you have versus what is the capacity also for gas injection. But I think it's safe to say that we are at least in the area of around 10,000 barrels that is out of production due to this.

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

If I can address the CO2 cost, Joshua. Yes, at the moment, we have high CO2 prices. So in the second quarter, the effect is about $0.30 a barrel. I think this is potential to go up to more like $0.50. Clearly, we -- at the moment, we've got 65% to 70% of our CO2 are covered by free allowances. But with the Fit for 55, those allowances will decrease over time. I mean our challenge is obviously to put in the efficiency projects and the hydrogen projects in order to reduce our CO2 footprint. But we can see those allowances -- the decrease of the allowances moving towards -- from 2026 to 2.5% a year decrease from the 1.6% we've seen. But this is already with our margin guidance. Thank you.

[Operator]

Your next question comes from the line of Sasikanth Chilukuru from Morgan Stanley.

[Sasikanth Chilukuru, Research Associate]

I had 2, please. The first was related to the dividend and the variable component for 2021. Can you provide more color on how we should be thinking about the level of the variable component assuming second half CFFO is similar to that of the first half, the base level of EUR 0.5 per share would go on to represent around 25% of the overall CFFO, so there is room for the variable component to be up to 8% of the CFFO? If this were to play out, what additional criteria would you be looking at before declaring the variable component? What would it take for this variable component to reach this 8% of CFFO? The second question was related to the production cost in the Upstream segment. It seems like there's another dip in the cost of $1.20 per boe, down from $1.80 in 1Q and $2.80 in 2Q last year. Lower personnel on the FPSOs had been highlighted as one of the key reasons for the decrease in 1Q. Just wondering what are the reasons for this further increase in production costs? What's the guidance for the remainder of 2021? And what would you highlight as the normalized cost of production for these as now?

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thank you for your questions, Sasikanth. I'll take the first one, and I'll ask Thore to take the second. So essentially, the variable component, this is not -- the consideration is just going to be a calculation. As I say, with net debt to EBITDA of 1 now, we will see the rest of the year, we can expect the current macro. Obviously, we will be generating operational cash flow similar to the ones that we had in the first half with the same macro. This should allow us to deleverage further. And then at the end of the year, we will see what our net debt to EBITDA is and will make up with a variable component up to 1/3 of CFFO as long as there's space up to the 1 net debt-to-EBITDA level. In order to obviously serve their space, if we deleverage a lot in their space, we pay the 1/3 -- full 1/3 of CFFO being the variable. And obviously, that's contingent on what that CFFO is. But at the current CFFO rate, that then obviously delivers a substantial amount of variable components. So I think it's not -- this is not contingent on our expectations of future macro or anything. This will just be a calculation at the end of the year that we will then approve through the AGM to distribute to the shareholders.

[Thore Ernst Kristiansen, COO of Upstream & Executive Director]

And Sasi, to your question regarding our OpEx, the 2 key factors driving it down is, one, less POB on board on the installations than was expected due to restrictions that COVID has put. Secondly, less number of well intervention that we had in our plans. When it comes to guidance, we will still remain in that, that you should expect it to be normalizing between $2 and $3 per barrel. That is the sort of guidance on OpEx that you should expect. Thanks.

[Operator]

Your next question is from the line of Jon Rigby, UBS.

[Jonathon Rigby]

Yes. Two questions, if I can. The first is, Andy, can you just sort of revisit what took place on Friday with the changes in the Executive Committee and the drivers behind those changes? I mean I'm struck by the fact that people have left their roles without you identifying replacements. So what was the driver behind the timing and the reasons -- you're obviously sort of 6 or 8 weeks from a big strategy event, which they all attended. So I'm just sort of struck by that. And in fact, actually, in overall terms, the sort of context or lack of context that we've seen by with any of the changes on the -- at the executive level since your predecessor left in January. So I wonder whether you could just talk a little bit more about that. The second question is I'm struck by the share price performance this year, which has been weak for any number of reasons. But you've just talked about variable dividend component. Has it -- have you thought more about whether actually using that variable element as a share buyback as opposed to a bonus dividend would make some sense at this point?

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thank you, Jon, and thanks for your question. So yes, what's behind the leadership changes? Well, if I go through this almost 6 months now, I inherited the team. They had some -- their own strength, their own weaknesses. I thought, if I looked at my task list, I had to first clarify the strategy, clarify the capital allocation, make sure we understand where we're going, what we're doing. And we leveraged the whole sort of top 50 people in order to come up with our strategy, which we then presented at the Capital Markets Day. Over this period of time, I've obviously observed the performance of the team as well as the individuals. And for me, clearly, this is a challenging agenda we have with the energy transition. I need absolutely the best team to go forward. And I talk about a team that has the right capacity, so strategic capacity very much to -- for us to work into the future; teamwork, our ability to work together as a team across all our businesses, which integrate quite a lot in a number of areas; but also the agility, the ability to make decisions quickly and to make sure we take the opportunities that we need to take. And that has then driven for me what is a much tighter, much more aligned team. And then the third thing on my task list is just execute, is then to get after this business with the team that I have absolute confidence in their ability to do it. Now you say, well, you haven't got a full team yet. You've got a blank box here. Well, I have to say what I wanted to do is be clear about that team, the ones that I have already in the company I want to take forward. But I'm not going to wait for a long time as we recruit the very best in our Renewables business to wait for that moment before I announce the changes. This does come with it not only a change of strategy, but it changes the way we lead in Galp. And so this is a big change for the company. I now have the leadership team, I believe, or the Executive Committee, I believe that can take that forward. And I have to say, the people that we discussed today will also -- the CEO that I'm going to put in that sixth slot, I think, will have a real capability to build a global, world-scale, profitable Renewable business. So it's exciting for me. I now actually look around the table, and I have absolute confidence in the people around me will be able to deliver this challenging strategy. On your second point, Jon, we've had a lot of discussions with a lot of shareholders since Capital Markets Day. And this issue of buybacks versus cash dividends has come up. And I have to say that the jury is split on this, some liking cash, some preferring us to use the buybacks. We will continue to study this. We will continue to consider whether a buyback versus cash dividend is the best way to reward shareholders on the variable components. And we will continue to talk to all of our shareholders about that. So at the moment, it's cash dividends. But we will continue to review the option of using buybacks. And you are right. The share price has gone down more than I would have hoped, but that's where we are today. But I think, and I hope that people would recognize we have got a really differentiated investment case here. And I think we've got to make sure that we get our message out clearly and we now have the team that can execute and deliver what we say we're going to do. Thanks, Jon.

[Operator]

Your next question comes from the line of Biraj Borkhataria from RBC.

[Biraj Borkhataria, Director, Co]

I've got a couple of quick ones. The first one is just on taxes. Could you -- as I'm thinking about the second half of the year, do you expect any meaningful differences between cash taxes and P&L? And then the second question is something you mentioned about underlift. Are you able to quantify the underlift position as of the second quarter?

[Filipe Crisóstomo Silva, CFO & Executive Director]

Biraj, if you look at H1 and not quarter 1 and quarter 2 this year, H1 gives you a good view of what the P&L tax looks like in an environment where it's really all about the Upstream. So we have some -- a bit over 60% taxation. We do expect as downstream and refining and Commercial starts to contribute much more meaningfully as we get into Q3, Q4, so we should expect to see the tax rate on -- the P&L tax rate to be close to 50%. On a cash basis and if you look at the cash flow statement, you'll see the numbers are below that. On the underlift position, so we -- hence, my comment on you don't see in the Upstream EBITDA all the benefit of the rising Brent prices. So for -- see, we had one full cargo of priced at about -- cost of product was $40 when Brent was in the 70s. So if you take, say, 1 million barrels times 30, say $30 difference, you have about $30 million, that will be recognized during Q3. Thank you.

[Operator]

Your next question comes from the line of Matt Lofting from JPMorgan.

[Matthew Peter Charles Lofting, Vice President]

Two quick ones. First, Andy, I still noticed during the call that you referenced several times the focus and the importance around execution from here. When we sort of take stock sort of post CMD and maybe taking a time horizon to year-end, could you be a bit more specific around what you see as the key issues and key deliverables for the rest of the year? And then secondly, just following up on the sort of the previous comments and questions around the renewed exec management structure, one of the things that struck me was the consolidation of the Industrial units alongside Upstream under Thore. So could you expand on how that signals an intent or a shift around the day-to-day running of Galp's businesses and mindful that the Upstream is largely nonoperated today, to what extent that could generate synergistic benefits?

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thanks, Matt. Thanks for those questions. So firstly, about execution, and I largely talk about execution around the strategy, but I also want to talk about execution on a day-to-day basis. So look, in the Q2, yes, I know it's a non-operated position, but we're still seeing some softness in our production numbers. I think we need to stay on top of our partners to make sure that we are getting the production that we need. We've had problems with FCC. We need to make sure that all our units are firing and going forward. So there's something in my mind still about delivery that we need to get deep in the organization. And for me, it's also about performance management. It's also about understanding where we are today as a business, what is the best business in our industry or even outside our industry? And what's our gap, what is our gap that we can close if we get the right culture through the organization. This comes with everything from how we performance manage, how do we reward people, how do we motivate people. So this is a very kind of deep delivery and execution strategy that we're going to go into today. So it's an absolutely crucial part of this is that we get a team around us that have that focus. And we create that context going forward. So it's about operational delivery, but it's also about performance management. And when I touch then on why do you bring Upstream and Industrial together? If I think about the business, if I think about what do I have as a business challenge in Galp, I think very clearly of 3 things we've got to be really good at. We've got to be good at managing oil and gas operations, investments in big projects, so project management, operational excellence. What you get in a refinery in terms of the equipment and the pumps and the compressors and the bad actors and the cost per barrel, operating performance is not so dissimilar from managing an FPSO with the units you have on top of that. So that's our first, and we'll come back to that. That's the first most important thing to do, manage operations, manage our projects, getting the most for the capital we put into those things. Secondly is how do we manage our sales to our businesses, to our customers? How do we give that whole ability to sell at a premium our products into the market? And how do we think about how we cross-sell, how we digitalize, how we exercise that interface and delight our customers? A completely different mindset from the oil and gas operations. And then thirdly, how do I build a new zero CO2 business? A Renewable business, a business that is global, growing focused on renewable energy, looking also at things at battery value chain but a completely entirely new business with different ways of thinking about how you maximize value. And that's the third big area of our business. And those are the 3 big businesses. And I have in Thore someone who has actually some downstream experience before and some marketing, trading experience, a full month to look at that whole base of Upstream and that Industrial business and optimizing that, getting the lowest cost delivery but also strategically placing that Industrial business and the green energy park going forward. So this is very much in my mind about what are the key skill sets that will unlock superior performance. And also, I know Thore, he's a great safety leader. So making sure in the way we manage our assets, we're keeping people safe day in, day out. So that's the fundamental thinking behind the new structure and between -- why we've given this additional challenge to take on.

[Operator]

Your next question comes from Raphaël DuBois from Societe Generale.

[Raphaël DuBois, Equity Analyst]

I have only one left. It's about the Renewables business and the solar generation sale price that you could obtain in Q2. As much as it must be enjoyable to see such an increase in your earnings generation, I'm a bit surprised that you could obtain such a nice increase. And I would have expected that you will transact in this division in a way that you will be immune from such volatility. So could you please remind us of your -- of the weight of your PPA contracts and how much volatility should we expect from this division going forward? For the moment, it does not matter too much because it's still quite a small division. But as you deploy further gigawatts, it will obviously have an impact on your overall earnings. It would be great if you could give us more visibility on how variable the sale price could get with your contract.

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thank you, Raphaël. So indeed, so if I just talk about the portfolio we have today, this is a legacy portfolio that actually enjoys a floor in the Spanish market that gives us a base return on the downside. But it's completely exposed to the upside. So this is as you would really like it, so protected on the downside but exposed to the merchant market on the upside. So that clearly is the position we're in today, so that's why we can enjoy the increase. Going forward, we're not going to enjoy that. So going forward, we're going to have to consider how we are managing the balance between merchant market and PPAs because obviously, in time, as we grow that portfolio, we're going to have to consider how much we risk cover and what's our view on that market? Clearly, as we go overseas, we're probably going to be -- because we expose some other risks, we'll probably be more wanting to go to more PPAs. So this is a balance of securing a base sort of return but also enjoying some of the upside. I don't know, Filipe, do you want to add anything more to that?

[Filipe Crisóstomo Silva, CFO & Executive Director]

Raphaël, the -- what you see in Iberia, as we speak, is quite a number of, I would say, almost distressed situation, people that have projects they're trying to build, trying to get financed, trying to get PPAs at very distressed price. So these -- it's not at levels that we would want to lock in our margins for 100% of our production for the next 10 or 15 years. At Galp and in Iberia, we have an integrated model, so we can manage some of those risks. Outside Iberia, yes, we would want to protect at inception or very close to inception a lot of the volatility. Thank you.

[Operator]

The final question comes from Jorge Guimarães from JB Capital.

[Jorge Guimarães, MD & Analyst]

Two questions. The first one is related to Renewables. The -- I have a feeling that the installation of the portfolio is running behind schedule. If I'm not mistaken, it should be close to 1.9 gigawatts by the end of 2021 and we'll be at 1.1. So in your view, what was the main reason behind this delay in installations which, given the current environment, is costing some loss of opportunity or opportunity costs? But anyway, what is the main reason for the delay? And can it be -- can that -- should be tackled? This would be the first one. And the second one is, is it possible to provide us with an estimate for the full closure cost of the Matosinhos refinery? And if so, how much of that is already provisioned and how much is not? And what do you plan to do with the trains where the refinery was located.

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thank you, Jorge. Yes. So look, on the Renewables, we are seeing some delays. Those delays are actually quite predictable. They're COVID related. They're supply chain related. They're also licensing issues that we have some delays. This is not -- this is really just a timing issue. This is not -- we don't believe this leads to any reduction in the volume going forward. But in our deal with ACF, because we're actually only paying at milestones as things come online, it doesn't mean we've sort of paid money upfront and are not enjoying the benefits. The cash flows go backwards as well as -- or the capital injections go backwards as well as when the projects go backwards with those sort of supply chain and licensing delays. So it's obviously a little bit disappointing that we're seeing some delay, but it doesn't actually affect the economics of what we've been doing. I think perhaps I'll ask Filipe to talk about Matosinhos. Matosinhos is obviously a difficult closure for us. It's now -- we've completely closed down operations apart from cogen. It's -- we're engaging with the local authorities there and talking about what we can do with the future of that -- for that, a great bit of real estate in the heart of a really vibrant city. Clearly, we're going to have our logistics park, which -- and we have a lubricant blending plant there as well. So we have a number of activities. But we're working quite closely with the authorities on what we can do there. But I think Filipe has some of the numbers on provisioning that he can give you an update on.

[Filipe Crisóstomo Silva, CFO & Executive Director]

Jorge, so the provisioning was -- when we announced it was close to EUR 200 million, this includes decontamination. It includes the decommission per se. So we have, of course, come through the difficult discussions with people and the redundancy package, so that is part of that. We have not considered any value of the land because that is open for discussion, what will be used and for what purpose. This may still take a while to figure out. But we have no changes. The activity is going well. It is a delicate exercise to decommission a refinery. So safety is paramount, and it's all going according to plan. Thank you.

[Operator]

We will move to the CaixaBank question from Pedro Alves.

[Pedro António Alves, Research Analyst]

Just a final one. I'm not sure probably -- and it's not easy for you to understand right now. But whether or not if you could comment or at least give any additional color on your side,on the news that the Portuguese government is proposing to introduce a cap on fuel retail margins.

[Andrew Richard Dingley Brown, Vice Chairman of the Board & CEO]

Thank you, Pedro. Yes, it's an interesting moment to be in Portugal. And clearly, it's -- for us, we don't know what this legislation is going to look like. We're waiting to see the proposal. They talk about a potential for short-term interventions and extreme margin cases. So we're going to have to see if that actually impacts us. I guess if we look at the NC report, what I think we've been disappointed is that there were actually a lot of errors in how they calculate their margin. We would actually argue about 80% of that margin increase they talk about is actually errors in their calculation. So to be honest, we haven't been very vocal on this, but it's -- that's really disappointing. And just to give you a sense, if you look at the price at the pump today in Portugal, 12% goes on that whole sort of distribution costs, that's 700 fuel stations to manage, 900 direct staff, 2,500 individuals indirect also working with our partners, so an enormous number of people but kind of haven't been addressed anywhere. And if I look at that business, so I look at that Commercial business, it's only generating about 7% of our total EBITDA in Q2. If I look at refining, 1% of EBITDA in Q2, so 8% in total and 40% of our employees in Galp. So this idea that somehow this is where we make all our money is we have to get this news into the public in Portugal because it's really sad. We have 60% tax, one of the top 5 highest tax bases in Europe. And I think this is -- I think we're barking up the wrong tree here, and I just want to make sure that everyone on the call knows that we will make sure that our position is made very clear to the Portuguese government. Any type of regulation is very negative for any kind of country. And we're really keen to get the truth out there, so people can make up their own minds. So thank you for your question, Pedro.

[Operator]

Thank you. That concludes the Q&A. I will hand the floor back to Mr. Otelo Ruivo. Please go ahead.

[Otelo Ruivo, Head of Investor Relations]

Yes, thank you. So this ends our Q&A session. We hope it was a helpful one for you. In case you may have some follow-ups, the Investor Relations team will be here for you as always, so reach out if that's the case. Thank you for participating. I wish you can enjoy some good break during the summer.