Galp Energia Oil & Gas

Transcription

1 BPI EQUITY RESEARCH Galp Energia Oil & Gas Oil price carrousel PT increased from to 12.0; Recom. downgraded from Buy to Neutral) 4 4Q CF hit by lower oil prices: Better than expected volumes in LNG trading and Marketing results were the most relevant drivers behind the earnings beat with the latter surprisingly strong margins driven by operations optimization and cost cutting. 4Q performance was however a reflection RCA basis) of production ramp-up, ref margin recovery and a strong lag price effect in refining, partly offset by weaker realization prices. CF was 2mn negative in 4Q with almost nil EBITDA IFRS) and 35mn capex partly offset by 31mn WK recovery th March CMD to align expectations under new oil price scenario: Production targets will be viewed as a good sum up of the situation in Brazil and the industry. Galp s previous guidance of 20Kboed w/ pre/sanctioned projects by 2020 compares with BPI s 245K estimate. The refining industry outlook remains muted, but Galp s previous benchmark ref margin assumption of $2.9/bbl in 14-1 compares well with our $3.0 estimate for F. The previous EBITDA CAGR >25 may be at risk BPI F ). Capex will be trimmed from previous bn/yr in 14-1 F expectedly resulting from changes in projects investment decisions and schedule as well as capex/opex flexibilization and lower contracting prices. Galp s financing plan is another hot point. A Plan B to compensate for lower realized prices could encompass a minority stake sale in Portuguese gas distribution and E&P asset rotation. 4 Downgrading to Neutral: The stock lost LTM vs -1 EStoxx O&G and -4 brent, but recovered 31 since the.9 trough in January vs Brent 20 and 19 EStoxx O&G. We have recognized nearly 0.3bn/yr capex reduction through 2019 and better margins in the Marketing unit along with the M2M of O&G prices through 2019 and USD/ leading to a 5 uplift to our YE15 PT, now at 12.. The now narrower fundamental upside, combined with a still uncertain oil price ST outlook and with risks related with the company s financing plan and ramifications of the Petrobras conundrum lead us to downgrade the stock to Neutral. Galp Energia vs. PSI20 vs. DJ Stoxx Oil Neutral High-Risk 10th February 2015 Portugal Source: Bloomberg. Stock data Price 9 th Feb.) Price Target 12.0 Nr. of shares mn) 29.3 Mkt cap mn)/f. float 2 / 4 Reuters/Bloomberg GALP.LS/GALP PL Avg. Daily Turnover th) Major Shareholders: Parpublica.0); Amorim Energia 3.34); ENI,0) Estimates F 2015 F 201 F 201 F 201 F P/E adj DY FCFE Yield FCFF Yield PBV EV/EBITDA 1) EV/Sales 1) ) EV is fixed with current market cap and MV of remaining items. Historical Recommendation Date Recommendation 30-May-13 CoRe Buy 13-Jan-14 Buy Analysts Bruno Silva, CFA bruno.miguel.silva@bpi.pt Phone Flora Trindade, CFA flora.mericia.trindade@bpi.pt Phone Gonzalo Sánchez-Bordona gonzalo.sanchez.bordona@bpi.pt Phone Available on our website: BPI Online, and Bloomberg at NH BPD

2 Consensus and Stock Momentum BPI Estimates/Consensus EBITDA Consensus mn) EPS Consensus ) EBITDA EBIT Net Profit Net Debt Capex &- &- &- * +,! &' &- &- &- * +,! &' Market Price Rating Fair Value Comparison ) Market Recommendations )# $/. $#..! "# $ &' Source: FactSet and BPI Equity Research. Main assumptions Modelling assumptions F 201 F 201 F 201 F 2019 F 2020 F /USD E&P Brent prices $/bbl) WI Production kbbl/d) Angola Brazil Tupi Jupiter Iara Caramba Bem-te-vi Mozambique R&M Refining mg $/bbl) Benchmark ref mg $/bbl) Spread $/bbl) Crude processed bbl mn) G&P EBITDA mn) Distribution Supply Electricity Capex E&P Exploration Rest R&M G&P Source: FactSet and BPI Equity Research. 2

3 Galp at a Glance EBITDA breakdown by business EBITDA evolution bn) " #"$!"!" #"$ " &' Capex vs. EBITDA mn) Company guidance - CMD 2014 bn) Galp BPI EBITDA CAGR >25 20 Capex /yr bn) Oil price avg $/bbl) 94 3 Benchmark refining mg avg $/bbl) Galp: Debt Snapshot!)* F 201 F Net Debt mn) 1) Net Debt/EBITDA Capex mn) Souce: Galp, BPI Equity Research F). Galp's resource base mn boe) R&M Refining mg ',- '',.'.'/'.,0 '1 Source: Galp Souce: Galp, BPI Equity Research F) 3

4 STRONG 4Q14 EARNINGS PRECEDE A ROUGHER FY15 DESPITE EASIER 1H COMPARABLES IN DOWNSTREAM 4Q CF hit by lower oil prices: The 4Q earnings beat reflected RCA basis) the strong lag price effect in refining, delivery of operation optimization and cost cutting 21mn employees restructuring charges) in Marketing and surprisingly strong LNG activity, only partly offset by weaker realization prices in upstream. Production 33.4Kboed vs. 2.1K in FY) stood in line with healthy forecasts for the quarter. The development of the Brazilian pre-salt project is fairly aligned with expectations 2nd well of FPSO #3 already producing and FPSO#4 expected for 4Q15 vs 3Q15 before) despite the already known delays in the first replicant units planned for 2H1). CF was 2mn negative in 4Q with almost nil EBITDA IFRS) and 35mn capex partly offset by 31mn WK recovery lower inventory volumes and prices). ND reached 1.bn inc. 90mn loan to Sinopec as cash) or 1.2x ND/EBITDA. We expect 1Q15 earnings to reflect soft comparables last year -$0./bbl benchmark ref margin and $1. spread in 1Q14) and a stronger margin in Marketing, while E&P should combine significant uplift in production 2Kboed in 1Q14 vs over 40K in 1Q15) and the current low oil prices $10 avg in 1Q14). Taxation of gas supply as advanced by the press should dent c 50mn/yr to bottom line and CF) to which adds c 30mn of the "one-off" energy tax. 10 TH MARCH CMD TO ALIGN EXPECTATIONS? Capex already known to be cut below previous bn/yr The most relevant drivers for Galp's investment case are non-controllable variables: Hydrocarbon prices, refining margins, economic growth and capex decisions by the projects operator, namely Petrobras. In the case of the Brazilian projects, hydrocarbons prices are a key element of the equation but not the only driver as Petrobras capacity to fund some projects has been eroded after the allegations of corruption that led to a credit downgrade, replacement of the executive board and nation-wide repercussions affecting also the network of suppliers. We maintain our view that the ongoing key upstream projects BMS11 as an obvious one) should be less affected by both Petrobras' issues and crude prices, as these projects are either already in production and contributing to CF or have lower breakeven prices. The BMS-11 consortium decided to start an international tender of some of the contracts previously at the hands of local suppliers in Brazil, in order to avoid delays on the replicants deployment schedule 2H1). This risk is more difficult to anticipate but Galp's communication suggests that related risks are not material. BMS24 Jupiter) and BMS 21 Caramba) are projects where doubts are cast on the economics at current oil/gas prices. Galp just announced that in face of the information provided by the operators of its key assets that a capex schedule curtailment will be announced in its CMD. Expectedly, the cut should be mostly coming from Brazil likely combining postponement of the investment schedule in certain projects, lower contracting prices from oil services companies) as well as a conversion of capex into Opex possibly resorting again to leasing of equipment as opposed to acquisition) which would increase financing and timing flexibility. We also expect further tightening 4

5 of the capex budget in Exploration and in Downstream. As a result, we adjusted our capex estimates cutting an average 2mn in now standing at 1.bn/yr. E&P: Production targets for 2020 on a pre-sanctioned project basis should not be materially revised Production should remain a key point of the CMD. The last guidance of 20Kboed w/ pre/sanctioned projects by 2020 compares with BPI 245K estimate that assumes delays caused by lower hydrocarbon prices. Brazil mostly BMS11) is the main production growth driver, while Mozambique should only become relevant in the turn of the decade. Galp had assumed in its CMD 2014 a $94/bbl oil price in vs current $59 spot level and our current estimate of $ ) and EIA's $5 for FY1 brent). Working interest production kboepd) BMS-11 FPSOs capacity kbpd) 1/"/ 1// 0# 0 #' 1/2+3 1/$ 1/+/ 1/4. ' $90 : * ' )0- Source: Galp, BPI Equity Research F).Source: Galp. R&M: Improved sentiment with operational efficiency delivery and Iberian economic recovery The refining industry outlook remains muted with fierce competition from Middle East's newer and more efficient systems and a slow progress in European capacity adjustments, despite some signs of economic recovery and the expected effects from the QE. Galp had a benchmark ref margin assumption of $2.9/bbl in 14-1 vs our $3.0 estimate for F. EBITDA guidance to be cut accordingly Galp message to focus on CF resilience The previous EBITDA CAGR ">25" guidance should be cut in face of the underlying hydrocarbon price context BPI F ). As a mitigating factor, refining margins improved and a reduced cost from refining conversion loss rates c of crude processed) must be put into perspective considering the c25kboed of crude processed or cx current O&G production exit rate of c40kboed at YE14). Galp is also benefiting from a weaker Euro translation effect), which together with resilience of LNG should not materially endanger CF in Galp said last year it expected CF breakeven during 201 vs BPI est of 2020) which would only be now feasible in a scenario of a relevant cut in capex in the period. 5

6 Capex vs EBITDA-Capex mn) Lula: Opex vs. DD&A vs FCF * +1/:' +, + ='> )*", ' "#/;0/,<?3 &&>! +2&5 4 "4 Source: Galp, BPI Equity Research F). Financing and a "Plan B" to overcome lower CF under a sustained scenario of lower realized prices would be perceived as a desirable risk mitigation factor. Galp had already advanced the potential, in case of necessity, for a minority stake sale in Portuguese gas distribution c 1.2bn RAB 100) and asset rotation in upstream. Anyway, 4Q14 earnings conference call, the company's CFO reiterated that ND/ EBITDA should remain below 2x Sinopec adj.) in , even under a more conservative oil price scenario than the current one. We estimate 1.9x in FY15 and a peak of 2.4x in FY1 that could be eased depending on the new capex schedule to be announced on the 10 th March. Leverage ratios ND/EBITDA ex-sinopec loan ;4!)*., 4;2'&5 34., 34 < 34 < Source: Galp, BPI Equity Research F).Source: Galp, BPI Equity Research F).

7 GALP PRICING A MORE REASONABLE $/BBL LT PRICE REAL TERMS) We estimate that Galp's current stock price discounts a LT real Brent price of $/ bbl, well above the current spot price. However, the stance on LT oil price continues to be a risky take and although these implicit levels suggest a more reasonable scenario, the fact is that the gap to current spot price is significant. In our estimates, all else constant, assuming the current spot price $59.4) as a LT estimate would erode our fair value down to./share, very close to January's trough levels rerated c31 since then). Oil price scenario Sensitivity to oil price )'.',2.0.5 After the recent re-rating, GALP is again pricing an important premium to the sector at PE15 of 35x 22x integrated peer group) and EV/EBITDA 15 F of 10.4x.5x). Production volume growth on pre-sanctioned projects mostly BMS-11) should yield a CAGR of over 40 departing from 30.5Kboed WI in FY14), well above the peer group. This advantage has been mitigated by the lower crude prices, but should still allow for over 20 EBITDA CAGR in the same period assuming the recovery of the Iberian refining economics and the convergence of oil price to our LT $90/bbl assumption by DOWNGRADING TO NEUTRAL ON PRICE PERFORMANCE The upcoming CMD will align expectations with an awaited downsizing of the capex program that in essence will be interpreted by the market as a financial relief for Galp considering its higher than peer group leverage. We contend that Galp's management has to strive under a context where most relevant variables affecting its ST outlook are non-controllable, such as hydrocarbon prices and decisions by the operators of its key assets. Still, the potential for monetizing some of its assets gas distribution in Portugal) could contain potential financing gaps ahead, should capex trimming not be enough. Downstream and in particular refining margins and the imbalances in the European industry represent another source of volatility, although the recent performance

8 and the QE should be substantial factors improving market's sentiment. Taxation in Portugal refining and in particular on gas supply profits) are more recent set backs but we do not expect the value at risk to be substantial. We assume the energy tax c 30mn/yr) to be paid in 2015 and 50mn/yr in gas supply to be implemented from FY15 3 years only?) as advanced in the Portuguese press. After the recent stock price recovery, the implicit LT oil price embedded seems more reasonable, closing the risky but tempting buying opportunity opened during the month of January. As such, and despite having increased our YE15 Price Target by 5 to 12.0, we are downgrading the stance to Neutral, waiting for CMD visibility on key areas of the investment case and acknowledging material risks ahead related in particular with the hydrocarbon prices evolution and Petrobras soap opera consequences on Galp s key assets in Brazil. Sum of the Parts mn) Now Previous Change EV Methodology E&P Angola Developed resources&reserves NPV 13.2 $/boe wacc=10) Undeveloped resources NPV $5/boe NPV 3. $/boe BM-S-11 Lula&Cernambi) NPV. $/boe wacc=10) BM-S-11 Iara) NPV 3.5 $/boe wacc=10) BM-S-24 Jupiter) NPV 0. $/boe wacc=10) BM-S-21 Caramba) NPV 1. $/boe wacc=10) BM-S- Bem-te-vi) NPV 1. $/boe wacc=10) Mozambique Rovuma area 4) NPV $1.4/boe Holding&other exploration costs x EBITDA15 R&M DCF wacc=10) G&P EV/EBITDA RAB NPV/MW Gas Supply x EBITDA15 Gas Distribution RAB wacc=.2) Power Asset value Others BV Total EV Net debt adj for minority stakes YE15) Minorities Pension Fund & provisions Equity # shares mn) YE15 Price Target )

9 P&L CAGR mn) ) ) ) 2015 F 201 F 201 F 201 F 14-1 F Revenues EBITDA EBITDA adj EBITDA adj. mg Depreciation&others EBIT EBIT adj Net Financials Income tax Extraordinaries Minority Interests Net Profit reported n.s. Net Profit adj Balance Sheet CAGR bn) ) ) ) 2015 F 201 F 201 F 201 F 14-1 F Net Intangibles Net Fixed Assets Net Financials Inventories ST Receivables Other assets Cash & Equivalents Net Assets Equity and Minorities MLT Liabilities o.w. Debt ST Liabilities o.w. Debt o.w. Payables Equity+Minorities+Liabilities Change in estimates '15 F '1 F '1 F EBITDA EBIT Net income DCF Assumptions-R&M Re 10. Rf 3.25 CRP 0.99 Be 1.09 Mkt premium.0 Tax rate 2.5 D/EV 10. Rd 4.4 WACC 10.0 Cashflow mn) ) ) ) 2015 F 201 F 201 F 201 F EBITDA Chg in Net W.C Income Taxes = Operating Cash Flow Expansion Capex Recurrent Capex Chg Net Fin. Inv = C.F. after Investments Net Fin. Expenses Dividends Paid /- Equity increase Other = Changes net debt Net debt +) / Net Cash -) Growth per share data and ratios ) ) ) 2015 F 201 F 201 F 201 F Sales growth EBITDA Adj. growth EPS Adj. growth Avg. # sh mn) Basic EPS EPS Adj. Fully diluted DPS Payout ROCE after tax) ROE Gearing ND/EV) Net Debt/EBITDA ) IFRS figures. Source: Company data ); BPI Equity Research F). 9

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Oporto Office Madrid Office Paris Office Cape Town Office Rua Tenente Valadim, 24 Pº de la Castellana, 40-bis-3ª 31, Avenue de L'Opéra 20th Floor, Metropolitan Life Centre, Porto 204 Madrid 5001 Paris Walter Sisulu Avenue, Foreshore, Cape Town, South Africa Phone: 351) Phone: 34) Phone: 33) Phone: 2) Telefax: 351) Telefax: 34)