GALP ENERGIA COMPANY REPORT · 2021. 2. 18. · GALP ENERGIA COMPANY REPORT PAGE 5/37 Shareholder...
Transcript of GALP ENERGIA COMPANY REPORT · 2021. 2. 18. · GALP ENERGIA COMPANY REPORT PAGE 5/37 Shareholder...
THIS REPORT WAS PREPARED BY “STUDENT’S NAME”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND
ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE
VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)
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MASTERS IN FINANCE
EQUITY RESEARCH
Maximizing opportunities in the upstream We recommend buying Galp Energia given our target price
of €14,82 per share, corresponding to an overall return of 25%
given current price levels.
The expected increase from 87,4 mb/d in 2012 to 101,4
mb/d in 2035 in world demand of oil and natural gas, strengthens
Galp Energia’s growing opportunities. We identified great potential
value in upstream activities where the main projects in Brazil,
particularly Lula´s field, to have a crucial role in this segment
development. Also Angola fields and the NG reserve in
Mozambique contribute for an optimistic situation.
The European and national crisis suggest a slowdown in
demand, lower refining margins and expected negative conditions
for the following years implies a lower value in this segment. The
current refining margins are 2 $/bbl and it´s expected a growth
reaching the 3,5 - 4,0 $/bbl. We expect that the full operation of the
hydrocracker and consequently improved refining margins will
reverse the undesirable situation in the long term.
Despite suffering slightly due to the lower growth
expectations in the Iberian market, the G&P segment remains fairly
stable with forecasted net profits increasing between 1% and 2%
per year until 2020. The window of opportunities for exploitation of
arbitrage in the Asian market, especially Japan, leads to an
expectation of good results in the Gas & Power sector.
Company description
Galp Energia is a Portugal based company engaged in the oil and gas industry and it was established in 1999. In the year of 2006, the company was floated on Euronext Lisbon (NYSEEuronext), and it is a constituent of the PSI 20 index. Company´s activities are divided into three different segments with a diversified portfolio of assets divided across 10 different countries, with the development and production of oil and gas mainly in Brazil, Angola and Mozambique. Galp has a market capitalization of € 9,752 million and in 2012 was rewarded with the insertion in Dow Jones sustainability indexes.
GALP ENERGIA COMPANY REPORT
OIL&GAS 6 JANEIRO 2013
STUDENT: AFONSO FREITAS [email protected]
Growing up in Brazil leads to…
Recommendation: BUY
Vs Previous Recommendation BUY
Price Target FY14: 14,82 €
Vs Previous Price Target 14,82 €
Price (as of 6-Jan-14) 11,89 €
Reuters: GALP .LS
52-week range (€) 10.76-13.40
Market Cap (€m) 9.752
Outstanding Shares (m) 829.251
Source: Bloomberg
Source: CMVM and Galp Energia
(Values in € millions) 2012 2013E 2014F
Revenues 18.644 20.077 20.791
EBITDA 1.038 1.278 1.460
EBIT 542 731 906
Net Profit 343 410 686
Net Debt 1.696 2.256 2.801
Net Debt / Equity 25,3% 40,1% 38,7%
ROE 5,12% 5,98% 9,48%
ROIC 4,30% 4,25% 7,25%
Debt/Assets 52% 61% 65%
Current ratio 99% 70% 75%
Source: Galp Energia, Analyst Estimates
GALP ENERGIA COMPANY REPORT
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Table of Contents
EXECUTIVE SUMMARY .......................................................................... 3
COMPANY OVERVIEW ........................................................................... 4
COMPANY DESCRIPTION ........................................................................................ 4 SHAREHOLDER STRUCTURE ................................................................................... 5
EXPLORATION & PRODUCTION (E&P) ................................................. 5
MARKET ENVIRONMENT ........................................................................................ 5 BRAZIL .................................................................................................................. 7 ANGOLA ................................................................................................................ 9 MOZAMBIQUE ...................................................................................................... 10 VALUATION E&P ................................................................................................ 11 SENSITIVE ANALYSIS ........................................................................................... 13
REFINING & MARKETING (R&M) ..........................................................14
MARKET ENVIRONMENT ...................................................................................... 14 REFINING ............................................................................................................. 17 MARKETING ........................................................................................................ 18 VALUATION R&M ............................................................................................... 19 SENSITIVE ANALYSIS ........................................................................................... 20
GAS & POWER (G&P) ............................................................................20
MARKET ENVIRONMENT ...................................................................................... 20 GAS ..................................................................................................................... 23 POWER ................................................................................................................. 25 VALUATION G&P ................................................................................................ 26 SENSITIVE ANALYSIS ........................................................................................... 26
SOTP .......................................................................................................27
SENSITIVE ANALYSIS ........................................................................................... 29
FINANCIALS ...........................................................................................30
MULTIPLES.............................................................................................32
FINANCIAL STATEMENTS .....................................................................33
APPENDIX ..............................................................................................35
DISCLOSURES AND DISCLAIMER .......................................................37
GALP ENERGIA COMPANY REPORT
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Executive summary
This Report has the main objectives of developing a comprehensive analysis of
the Company Galp Energia and providing an investment recommendation based
on the actual price and the possible return in the period of 12 month. Our
valuation implies an upside potential of 25%. We followed the sum of the parts
approach, using DCF for the sectors in which Galp operates: E&P, R&M and
G&P. We have followed the company´s strategy as well as the industry dynamics
in which Galp is inserted. In addition, we strongly believe that there is
considerable growth potential.
Through our analysis we have identified the E&P segment as the main source of
value, even tough is not representing yet the major source of income. This belief
is consolidated mainly with the projects in Brazil. However, Angola and
Mozambique also transmit respectable prospects. Taking into account all the
political, commercial and regulatory challenges we expect that high returns will
be achieved in the next years, coming from this segment.
Regarding the R&M segment, which has been historically the main source of
income, we expect a slowdown on its operations mainly due to the economic
crisis and a change in the pattern of oil &gas supply and demand. We foresee
that the adverse European R&M market will remain in the following years where
non-developed countries seem to gain competitive advantages. The upgrade
project concluded in 2012 helped the company to be aligned with international
demand and we trust that this will be crucial for this segment recovery in the
long-term.
Thirdly, the G&P segment looks to be more stable and it is intensely conditioned
by remuneration rates and tariffs imposed by the regulator ERSE. In this
business, we predict the Company to take advantage from trading in the Asian
market, which its importance has been increasing over the last years.
Finally and to conclude we have set a price for Galp Energia for FY2014 of
€14,82/share.
Overall return of 25%
Upstream activities as
the main source of value
Some risks to be faced
Hostile conditions in the R&M industry
G&P trading to be
exploited
GALP ENERGIA COMPANY REPORT
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Company overview
Company description
Galp Energia is a Portugal based company engaged in the oil and gas industry
and it was established in 1999 to incorporate the operations of Petrogal (Oil&Gas
Company) and Gas de Portugal (Utility Company). In the year of 2006, the
company was floated on Euronext Lisbon (NYSEEuronext), and it is a constituent
of the PSI 20 index, the main index in Portugal.
Galp’s activities are divided into three different segments: Refining and Marketing
(R&M), Gas and Power (G&P) and Exploration and Production (E&P).
Historically, Galp Energia generated the majority of its EBIT from its downstream
segments (R&M and G&P). The first segment (R&M) has the majority of sales on
the Iberian Peninsula, where the company is one of the most important players
and it is expanding its sales to clients in Africa. In the Gas and Power business
sector, the company is not only a supplier of natural gas and energy in the
Iberian Peninsula but has been also concentrating on its trading of liquefied
natural gas (LNG) among international markets. However, Galp Energia has
turned now its strategy to the upstream business (E&P) with a diversified portfolio
of assets and activities divided across 10 different countries, with the
development and production of oil and gas mainly in Brazil, Angola and most
recently in Mozambique.
The company has a market capitalization of € 9,752 million and is expected to
increase in the coming years since the main concern of its shareholders is to
strength the E&P sector which if the expected unique growth is achieved it will
lead to a likely increase in the company value. The company has been also
aware of the sustainability issues and in 2012 it was rewarded with the insertion
in the Dow Jones sustainability indexes (DJSI), JDSI World and DJSI Europe.
Source: Galp, Analyst Estimates
Figure 1 – Segment waight in the EV
Source: City Group, Analyst Estimates
Figure 2 –EBITDA evolution per segment
Source:Bloomberg, Analyst Estimates
Figure 3 –Peers Market Capitalization
Figure 4 – Peers Estimed Net Income 2013
Source: Galp, Analyst Estimates
GALP ENERGIA COMPANY REPORT
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Shareholder structure
The company has three main different shareholders Amorim Energia1 38,34%,
Eni with 16,34% and Parpública 7%, controlled by the Portuguese State. The
remaining stake of 38,32% is free-float and traded in the Euronext index. Amorim
Energia is owned 55% by Galp´s Energia Chairman Américo Amorim and the
remaining 45% stake is held by Esperaza Holding BV. Parpública is a vehicle for
the Portuguese state equity holdings in a different number of companies
During the last year, Galp Energia has suffered from changes on its shareholder
structure. In May 2013 it was announced the successful of the placement by Eni
of 55 452 341 shares, corresponding to approximately 6,7% of Galp Energia,
after the settlement of the sale, Eni holds 16.34% of Galp's outstanding share
capital of which 8%2 are convertible bonds and therefore it is expected Eni to
reduce its participation to 8,34% in 2015. Another important aspect, was an
adjustment in Galp Energia’s dividend distribution policy which was revised in
2012, estimating a rising dividend and an expected smooth increase in the
following years until 2016.
Additionally, Galp Energia's shareholder structure has a growing representation
of international shareholders, close to 80% of total institutional investors, which
shows the geographic variety of the Company's investors.
Exploration & Production (E&P)
Market Environment
This sector has become one of the most valuable sectors among the different
continents and this role is expected to remain in the next years. In 2013, the
consumption of oil in the world had an increase of 1.1% when compared to the
previous year. The reasons behind this issue are consequence of an increase of
demand for this product by the countries outside the Organisation for Economic
Cooperation and Development (OECD). Oppositely, countries from OECD have
shown a slowdown on its economic growth during the last 4 years. This was a
consequence of the economic crisis in the USA and in Europe but also due to
1 Amorim Energia shareholders are Power, Oil & Gas Investments BV (35%), Amorim Investimentos Energéticos SGPS
S.A. (20%) and Esperaza Holding BV (45%). Esperaza Holding is owned by Sonangol, E.P., Angola’s state owned oil
company and Isabel dos Santos 2 Bonds issued on 30 November 2012 and due on 30 November 2015, and the remaining 8.34% subject to certain rights
exercisable by Amorim Energia. If Amorim Energia don’t buy or don´t not indicate a third party, ENI is free to sell
8.34% in the market, meaning that there is risk of overhang on Galp’s shares
ENI participation expected to be reduced
Figure 5 – Share Structure
Source: Galp, Analyst Estimates
Figure 6 –Brent price evolution
Source: Galp, Analyst Estimates
GALP ENERGIA COMPANY REPORT
PAGE 6/37
more efficient markets in developing countries. Conversely, China and India have
been contributing to a rise in oil and gas demand during the years of sovereign
crisis with an increase in consumption of 7%. According to OPEC estimates, the
OPEC member countries3 will continue to expand its upstream businesses and
around 132 projects are expected to come on-stream. The development of the
awaited projects is translated in a net increase of 7 mb/d4 when compared with
2010.
We predict that in a near future some importers will become exporters (the U.S.
is changing its role in the Natural Gas market), large exporters are becoming
large consumers (Middle East countries regarding oil consumption) and earlier
small consumers are becoming the main font of global demand (India and
China). Once again, these changes emerge as the energy sector is reacting to
global trends, alterations in both demography and economic growth and the
faster advance of energy sector followed by an unusual unlocking oil and gas
supplies.
The dated Brent price is also an important driver for the E&P market
environment. This indicator has shown a huge volatility, directly related with Geo-
political events, supply, demand and so on and the last years the data Brent price
ranged between $90/bbl5 and $111.5/bbl. The price instability was mainly driven
by the hostile environment in Syria, southern Sudan and Yemen, but also due to
the USA and European Union (EU) restraint on crude oil from Iran.
Another important issue that can strongly affect the market for natural gas is the
development of shale gas which is a natural gas that is found trapped within
shale formations and has becoming an increasingly important source of natural
gas in the United States since the start of this century. The theory that the USA
might change from importer to exporter of natural gas is increasing the risks for
the players in energy markets since the threat of this new product will have
repercussions on the profitability of different projects for the development of
natural gas. In fact, the huge impact of production of shale resources, especially
in North America, would strongly affect crude oil and gas production and
consequently the economies of countries which heavily depend on crude oil as
their main source of revenue. Also, according to International Association of Oil &
Gas Producers (OGP) the development of shale gas in Europe could add 1
million jobs and consequently make the industry more competitive and less
3 Organization of the Petroleum Exporting Countries 4 Millions of barrels per day 5 Barrels – Oil barrel = 42 US Gallon – 158,9 liters
Changes in the energy
sector
Progress of shale gas as a challenge
Galp E&P projects
among 10 countries
Figure 7 – Growth in world oil demand
Source: IEA, Outlook 2013
Figure 8 –Oil demand evolution by region
Source: IEA, Outlook 2013 – Analyst Estimates
Figure 9 – Unconventional gas evolution
Source: IEA, Outlook 2013 – Analyst Estimates
Figure 10 – Regions where Galp is production
Source: Galp Energia
GALP ENERGIA COMPANY REPORT
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dependent on energy imports. On the other hand, there are several risks
associated with this unconventional gas with the environmental ones being in the
top of them.
Galp Energia is directing its upstream operations among 10 different countries
with 50 projects but with particularly emphasis on the discoveries in the pre-salt
area of the Santos basin in Brazil, in the Rovuma basin in Mozambique and in
blocks in Angola. The other projects are only in the initial phases of exploration or
appraisal which are recognized as technical reserves and are placed on the
following countries: Venezuela, Uruguay, Portugal, Equatorial Guinea, East
Timor, Namibia and Morocco. The company is preparing to increase its
production. Its goal is to produce 300 kboe/d6 (actual galp’s refineries
consumption) in 2020 which represents more than 10 times of the actual
production. Therefore, our analysis will be focused on the countries where there
is already a development plan or where the company is already producing
Brazil
The discoveries in Brazil and its adjacent participation of Galp Energia have
increased the company´s value, being the projects in Santos basin the main
source of value and leading to perspectives of future development in oil and gas
production. In all these projects, Galp Energia controls its operations through
Petrogal Brazil where Galp has a 70% holding.
In fact, Galp Energia is involved in two great oil & gas discoveries during this
century: Lula in Brazil and Mamba in Mozambique. Over the last ten years, more
oil fields have been discovered in Brazil than in any other country in the world.
Secondly, we believe that there are several technical and commercial challenges
associated with the pre-salt projects where Petrobras is the operator in most
fields and where this company is dedicating significant efforts to research and
advance of proper technologies. The targets for levels of production are a
stimulating opportunity for Galp Energia and it is critical to evaluate properly the
significant level of risk. That is why each project has to experience the four
different phases: exploration, appraisal, development and production. In each
field, EWT7 and Pilot tests are made, in the initial phase where the goal is to
gather the most reservoir and production data possible. The phase of full
development (here is important Petrobras desire to fast-track the pre-salt
6 Thousands of barrels of oil equivalents per day 7 Extended Well tests
Figure 12: Petrogal Brazil Project
Figure 11: Production Curve (Carcará field)
Source: Galp Energia, Analyst Estimates
Great increase in production is expected for 2020
Source: Galp Energia, Analyst Estimates
Figure 13: Brazil Reserves and Start-up date
Source: Galp Energia, Analyst Estimates
GALP ENERGIA COMPANY REPORT
PAGE 8/37
developments), is when the tested technologies, FPSOs8 and subsea wells are
used (with the contraction of more units in the production phase if needed).
Together, these investments represent the major part of the capital expenditures
on this kind of projects.
Galp´s exploration calendar in Brazil for the next years includes several high
impact wells with very high risk but also the de-risking operations if successful
could be vital for the company´s future growth. The risks that arise with well
constructions are mainly related with the uncertainty about the existence or not of
hydrocarbons which can lead to abandonment of the field and waste of capital
expenditures. Also, high environmental hazards are associated, where the
process of wells drilling may produce a concentration of surface disturbance and
trash generation. The de-risking operations are the tasks that have to be
performed in order to convert the uncertain reserves into proved and recoverable
reserves. Plus, the development and production stages carry a high level of risks
respecting their critical variables (infrastructure costs, production schedule, and
quality of resources extracted, operational costs and geological reservoir
characteristics). Again, since many of the projects are in the exploratory or
appraisal phase we will only focus our valuation on the projects where there is
already a development plan or which are already in the production phase. These
fields are commonly named commercial reserves.
Regarding the projects that we have evaluated: BM –S 8 Carcará; BM-S 11 Iara
field; BM- S 24 Júpiter and the BM-S 11 Lula and Cernambi fields (we have
modelled the two fields together due to the ANP9 consideration of both fields to
be a single accumulation,) in each one Galp has different participations. Several
issues addressed (date for start-ups, capital expenditures, operating costs and
expected peak of production) appear to be determinant on its value for the
company. Moreover, all these projects are regulated under concession contracts
where there is a special tax applicable depending on the level of production per
year.
Carcará pre-salt oil and gas field lies within the BM-S-8 exploration where
Petrogal Brazil holds a 14% stake and includes other discoveries such as Bem-
Te-Vi and Bigua. The company operator is currently planning to start the Carcará
field production in 2018. In block BM-S-24, also located in Santos basin, Petrogal
Brazil has a 20% holding. Here, the second well, Jupiter was drilled and it was
8 Floating Production Storage and Off-loading facilities 9 Agência Nacional do Petróleo
Source: IEA, Outlook 2013
Figure 15: Global discoveries Oil fields
Wells construction represents high risks
Valuation focused only in upstream projects in
the last phases
Brazil projects controlled under concession contracts
Figure 14: Average E&P Projects duration
Source: Galp Energia, Analyst Estimates
Brazil assets transmitting virtuous prospects
GALP ENERGIA COMPANY REPORT
PAGE 9/37
evidenced the existence of continuous reservoir and the confirmation of the
presence of commercial oil, and that is why we have considered this field as a
commercial reserve. In the consortium in charge of the BM-S11, Petrogal Brazil
has a stake of 10%. In this area, Iara was one of the largest deep-water
discoveries ever made. Despite being an extended well test planned for 2014,
there is also a full-scale plan of development to follow. The Lula project is already
producing since 2010 while the Cernambi field will start in 2014, therefore we
believe that Lula and Cernambi together will reach its peak of production in 2025.
We have made our investment plan for each project based on Petrobras BMP
2012-201610, since the company is the operator in each block, but also in past
experiences for the Lula field.
Finally, it is important to refer that in the beginning of 2012, Galp has sold to
Sinopec an equivalent stake of 30% in Petrogal Brazil. In this deal, Sinopec has
subscribed the $4,8 billion capital increase in Petrogal Brazil plus a shareholder
loan to the company in the amount of $390million which was used to reimburse
30% of the loans to Galp Energia of $1,3 billion. In fact, when compared to
similar deals in this industry, such as the purchase of Sinopec in Repsol, we
observe a difference in Galp´s deal between 1,7$/bbl and 1,9$/bbl below.
However, we believe that the deal also decreased operations risk, allowed for
liquidity for upstream activities and improved confidence for other shareholders
and possible future investors or partners.
Angola
Galp Energia has currently its main source of production activities in this country,
even though in the medium and long term this will rapidly be replaced by projects
in Brazil. In fact, while Galp has some development prospects in blocks 14/14k
and block 32, we believe that these opportunities are on a much smaller scale
than those in Brazil and Mozambique.
In block 14 Galp holds a participation of 9% and the operator is Chevron, where
the fields of Kuito, Tombua-Landana and BBLT11 are allocated. Here, the
company is already producing and has even reached its peak production in the
year of 2010 with 71 905 kboe. In this block an FPSO facility has been leased
and installed in the late 2000. It was designed to operate for about 10 years and
has to be recertified for continue the production on this block; thus we assume
10 “Petrobrás Business and Management Plan” 11 Benguela / Belize / Lobito e Tomboco
Operation benefit for Galp Energia
Sinopec deal in 2012 appear to be undervalued
Lula field as a reference for the other field’s valuation
No more investments expected in block 14
Figure 16: Angola Projects
Source: Galp Energia, Analyst Estimates
GALP ENERGIA COMPANY REPORT
PAGE 10/37
that there will not occur more investments in FPSOs in these three fields. The
Tombua- Landana filed is crucial for the company performance on the block 14
since it’s the only field where production is not in a declining phase and has not
reached its peak and therefore we expect that its production phase will offset
block 14 declining production rather than increase production. Galp is also
involved in block 14 in the development of Malange & Lucapa field which was the
first discovered in the Cretaceous Pinda Formation. This field is relatively small
and recoverable reserves are unlikely to be sufficient to support a standalone
development. The two other projects that Galp is operating are Block 14K-Lianzi
and Block 32, in which the company has a participation of 4,5% and 5%
respectively. The block 32 is situated in water depths ranging from 1 400 to 2000
metres and the fields are spread over a large area, which contributes to a larger
amount of capital expenditures on FPSOs facilities and wells. All these questions
show the numerous hazards that projects like these in Angola are associated to,
being the uncertainty about the field geology the main risk. In addition, less
transparent practices, delays in suppliers ‘schedules and the fact that oil
companies operating in Angola must use local banks to make all payments,
constitute a threat for the operations in this country.
The company is also taking part in the first integrated natural gas project in the
country, Angola LNG II but it is still in the initial phase of exploration. In block 33,
the activities in 2012 were dedicated on drilling of Sumatê-1, and in the year of
2013 a new exploration plan was submitted and so we do not consider as a
commercial reserve yet, not taking into account for the valuation purpose.
Mozambique
In Mozambique, Galp Energia has a 10% participation in the consortium for the
exploration of area 4 in the Rovuma basin. The consortium is operated by Eni but
has also ENH12 and Kogas as participants. Here, and particularly in the year of
2012 there were numerous natural gas findings through the execution of six wells
drilled in the area. After the appraisal phase there was an estimate of 27 Tcf13
equivalents to 4.656.284 Kboe exclusively for area 4. Galp Energia and the other
partners should also continue the exploration and appraisal of Area 4. We share
the same opinion of Galp Energia that there is extra value in Rovuma gas prone
structures where the company intends to test liquids prospects in the end of
2013.
12 The National Oil and Gas Company of Mozambique 13 Trillion cubic feet
Area 4 exploration
should continue
Galp investing in the first NG project in Angola
Projects in Angola with
some threats associated
Malange & Lucapa size inadequate for a long-term development
GALP ENERGIA COMPANY REPORT
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The discoveries in Mozambique are likely to provide exceptional returns in the
medium and long term for the companies involved, and offer access to high LNG
volumes for export essentially to international markets and more precisely to
Asian Markets. The presence of Eni who has LNG experience constitutes a
competitive advantage. On the other hand, the dependence on sales agreements
with LNG buyers might be a threat for the profitability of the development plan.
In December 2012, Eni together with Anadarko (operator of the Area 1 of
Rovuma Basin) awarded a number of FEED (Front End Engineering and Design)
contracts and announced a HD (Heads of Agreement) to track a co-ordinated
development and a common LNG facility. The partners have scheduled a
delivering of the first LNG train in 2018, although we had a more conservative
approach and have forecasted the first LNG train to be implemented in 2019
which will be built near the town of Palma in the north of Mozambique.
Furthermore, we think that the initial capital expenditures might be too high for
some of the participants of the consortium, such as ENH, and therefore there
might be a change in the partnership before the final investment decision, with
the possibility of the major players in the Asian market to acquire the available
stakes and thus improving operations due to their advanced experience. It is also
of the upper importance to refer that we have assumed that if eventual future
domestic sales occur it will be done at market values and hence not affecting
future cash flows14.
Valuation E&P
The method that we have used in the valuation of the E&P segment was the
Adjusted Present Value (APV) which allows us to value each project separately
not taking into account the capital structure. With this method we are able to
evaluate each project and its operations as if the company were all-equity
financed and the value of tax shields that arise from debt financing. First of all it is
important to reiterate that we have only valued the projects that are already
nominated commercial reserves and where that is already a plan of development
or production phase. For each field/project we have discounted the Free Cash
Flow to the firm (FCF) at an unlevered cost of equity (calculating different values
for each country) and then we have added the value of tax shields. In the end,
after computing the total value for each project we had to attribute the percentage
of participation that Petrogal Brazil keeps in each field and then also apply the
14 Appendixes 2 and 3 provide E&P projects information, however it is only related to the first 10 years.
Different participations of Petrogal Brazil have to be addressed
Future domestic sales at
market values
Findings in Mozambique predictable to provide extraordinary returns
Valuation of projects using the APV approach
Figure 17: Area 4, Mozambique partners and financial capacity
Source: Galp Energia, Analyst Estimates
GALP ENERGIA COMPANY REPORT
PAGE 12/37
stake that Galp Energia has in Petrogal Brazil (70%). Moreover, we have done
our analysis based on the perspective of the operator (Petrobrás, Chevron, etc)
as we thought that it would facilitate our valuation instead of trying to estimate
costs, risks and revenues exclusively for Galp´s Company. The assumptions that
Galp will be prepared to follow the project investments and that each project will
complete its estimated duration are essential for our approach. We have taken
into account the different types of contracts in each country: Concession
contracts (Brazil and Mozambique) and Product Sharing Agreement (Angola). In
the first group the participants have to share a percentage of production with the
State plus the taxable income, while in the PSA there is the possibility of
recovering part of the project costs and the remaining production is shared
between the contractor and the concessionaire.
For each field we have forecasted the expected peak of production based on the
operators and Galp´s reports. Lifting costs, other operational costs and royalties
(10%) were forecasted depending on each year production. Also Brent prices
affect strongly the profitability of the project. In our estimates we have used a
$108 price for 2013 decreasing until $98 in 2022 and after that showing a rising
trend since is expected a recovery of this commodity prices. We have also used
a discount over brent of 4% in Brazil and 3% in Angola mainly due to variances in
API gravity15.
Regarding capital expenditures, for the three countries we estimated the number
of wells required, and having in mind that its number is a big uncertainty and a
critical factor in determining the whole cost of the project, we used an average of
22 wells per FPSO (12 producers and 10 injectors) in Brazil. In Angola we used a
number of 14 wells per FPSO (10 producers and 4 injectors) attributing the
discrepancy between both countries to different levels of production, FPSOs
capacity, distance of each field and percentage of recoverable reserves.
In what respects the Rovuma project, the capital expenditures have a different
nature since it is a Natural Gas Project. Here, we estimated an installation of a
Pipeline with a cost of $500M in the year of 2017 (production starting only in
2019) and 4 LNG trains to be acquired during the project. Also in this project, we
have used a NG/Oil parity to calculate revenues as the reserves of this project
were translated in boe. Although we expect a slighter relation between gas and
oil prices in the future, we made our assumptions based on recent studies16 that
15 American Petroleum Institute´s scale for denoting the “heaviness” or “lightness” of crude oils 16 “ The weak tie between natural gas and oil prices”, David J. Ramberg & John E. Parsons
Variance in discount over brent in Brazil and Angola
Brent prices disturb the
success of the projects
Different types of contracts in the 3
countries
Different levels of production and capacity
in the 3 companies
In Mozambique capital costs and infrastructures vary from Brazil and Angola
GALP ENERGIA COMPANY REPORT
PAGE 13/37
establish that crude oil and natural gas prices are co-integrated. We adopt a
constant natural gas – oil parity (boe/mmbtu)17 of 17% and a conversion factor of
a boe to mmbtu of 5,55 approximately.
Therefore, we reached Galp´s E&P operations at a €13,10/share.
Sensitive analysis
In each section we have anticipated the impact in the actual outcome, the equity
value of Galp Energia, by a variation from the base case of the key value drivers.
This analysis is particularly useful since the estimates have always an inherent
uncertainty and therefore it can attenuate the risk of an unfair valuation.
Regarding the E&P segment, we have predicted the impact of a variation in the
data Brent price and in the exchange rate (€/USD). In fact, Galp Energia activities
and its value creation are extremely dependent on these two indicators. This
dependence will increase in the future, as a result of a stronger importance of the
E&P segment. Besides, as the products extracted from the reserves of the main
projects, in this sector, have the data Brent price as a reference, price
movements in the next years will affect Galp price per share. Also, since the
production extracted from the fields and the major parts of cash flow in this
segment are traded in dollars, a depreciation/appreciation of the dollar will also
impact in the E&P performance in the next years. As we can observe, a
depreciation of the dollar has a negative impact in the Company´s value due to
the importance of upstream businesses.
It is important to refer that these two variables also affect the R&M segment but
have a deeper impact in upstream activities, where they yield higher variations.
Also, it is crucial to have in mind that variations in both drivers have opposite
effects on E&P and R&M sectors. In fact, an increase in Brent price has positive
effects in upstream operations while the same variation would impact negatively
in refining margins, since it represents a huge part of the operating expenses. In
what concerns the exchange rate (€/USD) while an appreciation of the dollar may
increase E&P margins, the refining cash costs would also increase.
Concluding, even though these two key value drivers have contraries effects on
different segments, the large importance of the E&P segment points that the data
Brent price is positively correlated with Galp´s value, while a depreciation of the
USD will have an undesirable effect on Galp´s price per share.
17 Ratio between barrels of oil equivalents to millions of British Thermal unit
Brent price and exchange rate affect both R&M and E&P segments
Brent prices moves
affect Galp value
Both variables have a higher impact in
upstream activities
GALP ENERGIA COMPANY REPORT
PAGE 14/37
Refining & Marketing (R&M)
Market Environment
The global refining and marketing has been facing a deep transformation over
the last years as a result of several changes in regional demand trends for oil
products but also due to variations in regional energy costs. In this industry,
crude oil and natural gas liquids are mainly used as inputs to provide fuel for the
transformation process. Thus, the importance of low energy prices has increased
and the cost of energy inputs affects strongly the price of fuel. The profitability of
refining margins is affected by the inability of the refiners to reflect the higher
input costs in the final prices. Therefore, the main problem is related with rivalry
between refining companies and with elasticity demand/price (when price
increases, the demand falls) strongly influencing competition for installed
capacity. Commonly the costs are lower for refining companies that are located
close to the market than for companies who have to ship refined products over
long distances. Energy costs are the main cause for the shrinkage of refining
margins in some regions, especially Europe, where several refineries have
already closed and further exits are likely. Since the beginning of the century,
stricter oil-product standards and an upward shift in the demand for middle
distillates (such as diesel) are imposing refining companies to increase
conversion processes. We have predicted an important pattern in company’s
investments in energy-saving equipment. Also, the fall in gas prices in the United
States has given to its companies a competitive advantage with negative
consequences in European refiners with high imported gas costs.
Competition between refineries as the main problem
Conversion processes
are gaining importance
Figure 18: Deviations in price target due to changes in Crude Brent price and €/$ exchange rate
Source: Analyst Estimates
GALP ENERGIA COMPANY REPORT
PAGE 15/37
Europe and USA have always been the main refining centres in the world,
together accounting for 46% of total global refining capacity in 2012. Moreover,
while demand in both of these regions tracks a downward trend, Asia and
emerging countries are expected to increase demand and its refinery capacity.
Over the 4 mb/d of refining capacity that has been permanently shut down
worldwide over the last 5 years, half was in Europe mainly due to the sovereign
crisis. The extremely problematic access to crude oil and the difficult to export its
products is a pattern that will persist over the next years. The difficult to access to
crude oil is explained by the inequalities in allocation of crude around the planet
and also by the improvement and construction of refining centres in the countries
producers (as they benefit from cheaper feedstock and lower energy costs, they
can easily compete against Europe's refiners). Besides, the challenges in
exportations are related with the fact that many Europe refineries were
constructed after the Second World War and were heavily geared towards
gasoline production which is being reflected on a surplus of gasoline due to a
change in products demand (with diesel being favoured). At the same time,
massive refineries in the United States, Asia and the Middle East are sending
ever-growing volumes of diesel to Europe which deteriorates even more the
situation. Since the end of the 1990s, European gasoline consumption has
decreased by 1,2 mb/d with diesel consumption playing a significant role and
turning this continent into the biggest importer of diesel, due to government
policies and fuel taxation. The process of “dieselization” started in the beginning
of the 80s where a more favourable tax policy and the creation of a “diesel motor”
were the main causes. In the 90s, the technology improvement in these type of
motors that were perceived to be more environmental friendly, faster and quitter
than “gasoline motors” accentuated the growth importance of diesel. Also, we
believe that this trend is to continue as diesel represents by far the largest
increase in volume terms, rising by more than 5 mb/d to 31 mb/d between 2012
and 2035. All of the net increase in diesel demand comes from the road-transport
sector in non-OECD countries. In Europe, we have two different markets for
trading of oil products: MED18 market and NWE19 market, while in the distribution
sector we have local markets mainly due to logistic and fiscal issues.
Consequently we do not have a European single market in this sector.
We predict that total European oil product demand will decline by 2,4 mb/d to
2035 while distillates increase their share of total product demand. Another trend
18 Mediterranean – Genoa, Lavera 19 Northwest – Amsterdam, Rotterdam and Antwerp
Diesel has been enhancing its position
over the last years
Difficult in access to
crude oil and exports
More European refineries will bankrupt in the near future
Europe´s dependence on imports of middle distillates
Figure 19: Refining Capacity evolution by region
Figure 20: Gasoline and Diesel Quotations evolution
Source: PIRA Energy Group- World Refining Data Portal, Analysts Estimates
Source: Galp Analysts Estimates
Source: Wood Mackenzie- JEC Fleet & Fuels Model, Analysts Estimates
Figure 21: Gasoline and Diesel demand evolution
GALP ENERGIA COMPANY REPORT
PAGE 16/37
that we could observe is the intensification of Europe´s dependence on imports of
diesel and jet fuel. In addition, we strongly believe that the capacity for European
refining companies’ exports excess gasoline to USA and to West Africa will be
limited in the future. Both the slowdown of USA demand for gasoline and
increasing production from US Gulf Coast refineries should be a warning for
European refining and marketing managers. Also the fact that US Gulf Coast
R&M companies are already selling to West Africa may be a denunciation for
some European refining companies whose margins cannot persist at this low
levels and which make us believe that more companies will close in the near
future. According to a Bloomberg survey of six European refinery executives, 10
will shut permanently by 2020 from France to Italy to the Czech Republic.
Another reason for apprehension in European refining companies is the
increasing dependence on imported crude which we trust that will raise even
more in the coming years. In an intensive and competitive environment and
where refining margins are constantly under pressure, the fact that Russia has
been reducing exports of crude oil and turning its trade path to China20,
deteriorates the situation.
In conclusion, the European refining and marketing market has been facing an
adverse atmosphere in the last years and is expected to remain the declining
pattern. The combination of lower amounts of product outputs, more competition,
low share in gasoline exports and the expectation of more refining companies to
close take us to a prediction of European refinery runs will decline in 2035 by 2,6
mb/d more than the 2,4 mb/d fall in European demand.
Before Galp´s refinery investments and upgrades21, refining activities were not in
accordance with its retail and marketing sales. The company have been with
extra production mainly in fuel oil and gasoline, and with the necessity of
acquiring middle distillates for resale on its marketing business, aligned with the
competition. One of the goals of the upgrades in the refineries were to increase
the yield rates of the middle distillates from 43% to 49% and at the same time
decrease the output of the excess oil products in order to equilibrate the overall
balance. After the upgrade project we believe that Galp will be more aligned with
European trends in the medium and long term.
20 After a 25 year agreement, through the direct ESPO pipeline link 21 More detailed in the next section
Refining margins persistently under
pressure
Decreasing trend to
persist
Excess of oil products in
refining centres
GALP ENERGIA COMPANY REPORT
PAGE 17/37
Refining
Regarding the refining sector, Galp Energia owns two refineries in Portugal. The
first is located in Sines, a deep conversion refinery, and is one of the largest in
Western Europe with a capacity of 220 kboe/d, and the second in Matosinhos, a
hydro skimming refinery with a full capacity of 110 kboe/d.
The main event was the restructuring and upgrading project of the two refineries
which started in the beginning of 2012 and was associated to an investment of
€1,4 bn. This process was crucial for the productivity and profitability of the
company since it was the only way for the company to compete in the current
and future strong environment and to adapt to market dynamics. In fact, the
refineries are now more able to process heavier crudes as well as larger
quantities of diesel (middle distillates) making the operations and output more
adjusted to European and international demand. Therefore we believe that
Galp´s refining margins could increase in the long-term and recover from the
narrow margins we have observed last years. Among the upgrade project, the
first phase was the contracting of new units at Sines refinery which affected the
utilization rate to an average of only 68% during this period. The company also
implemented advanced engineering methods and RCM22, aiming to decrease the
number of stoppages during the refining process and consequently increase
utilization rate. Better integration between the two refineries and a greater
flexibility in its choice of end-product were two important objectives of the project.
When the new units started its operations the process of transforming heavier
crudes (the cost is lower than lighter crudes, even though nowadays the
difference is minimum) was facilitated and from Galp´s accounts report we can
predict that the company wants to continue to take advantage from it in the next
years. In 2013, diesel and gasoline sustained to be the main products processed
in the refining structures.
Galp Energia imports crude oil from 15 different countries and the company aims
to guarantee a great diversification of its suppliers given the impact on the
company profits, as was proven in Europe when the EU embargo on crude from
Iran occurred in the year of 2012. The company represents 100% and 20% of the
Portuguese and Iberian refining capacity respectively.
The third quarter profits for 2013 found even worse expectations especially due
to narrower refining margins and a huge increase in amortization costs which
22 Reliability centered maintenance
Diesel and gasoline as the main products
treated
Upgrade project crucial
to compete
Figure 22: European Refineries
Source: EIA, Repsol, Cepsa and Galp, Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 18/37
increased 47% and amounted to 145 €M. It is important to refer that although
amortization costs affect company´s margins, it has no influence on Cash Flows.
However, as we have already mentioned we believe that in the long-term it will
improve to the targets set by the company.
Knowing that historically downstream businesses have been the main source of
company´s earnings, slowdown in refining led top managers to introduce new
methods and systems in order to optimize this downstream segment. Moreover,
together with the investment project in the refineries, the company constructed
cogeneration facilities at the Sines and Matosinhos infrastructures with the start
of fully operations in 2012 and 2013 respectively.
Marketing
The activities of Galp Energia in this segment have its core development in the
Iberian Peninsula and with the other procedures positioned in Africa. The
company owns a total storage capacity of near to 7mm3 in Portugal and Spain
and also holds participations in logistics companies and pipelines of around 4000
Km in both countries which allow the company to have a wider marketing
network. In this segment, Galp Energia aims to market its products under Galp
Energia brand where the vast chain of service stations and its efficiency play an
important role. During the last years there have been a slump in Iberian demand
for oil products mainly due to the crisis and we had taken this into account in our
assumptions for valuation of this segment. To fight this issue, Galp has increased
its actions on a number of new events related to costumer care but also has been
simplifying the organizational structure. In Africa, more precisely in Mozambique
where the company is one of the main operators, the firm controls its operations
through Petrogal Mozambique (100% owned) where distributes lubricants and
liquid fuels but also the supply and marketing of LPG23 in the wholesale and
direct client channels. Over the last 5 years, volumes sold in the retail segment
remained with its fallen trend which reflected a drop of 11% in sales in Portugal.
However, Galp remains as the retail market leader in Portugal with 30% and only
6% in Spain. The company aimed to reduce its service stations networks and in
2012 there were closed 27 stations accordingly to Galp´s Investor Presentation.
In the late 2008 Galp acquired Agip´s and ExxonMobil´s operations in the Iberian
market for oil products as which was a key factor for the company to place is
products originated from refineries. Knowing the adverse margins and the current
23 Liquefied Petroleum gas
Galp remains as the
market leader in Portugal
Top managers
introduced new methods
Galp´s third quarter refining results worse
than expected
Drop in demand for oil products in the Iberian
Market
GALP ENERGIA COMPANY REPORT
PAGE 19/37
economic condition, Galp is not planning to follow investments like these in the
next years.
Valuation R&M
In the R&M segment of Galp Energia we have preferred an approach of valuing
both sectors Refining and Marketing independently. We have used this criterion
as each sector has different perspectives of growing and their key value drivers
are not the same. After all, we have used a DCF method using the same wacc for
discounting the FCF of each activity. The wacc24 was computed based on R&M
comparable companies, mainly used to compute Average Beta unlevered (0,73)
and after levered it, we used a terminal growth of 2% and an equity premium of
6%. In the refining sector the EBITDA was a function of Galp´s refining margins
which we expect to stay at slight values until 2018 (ranging from 2 to 3,5 $/bbl)
such as it was confirmed in the disclosure of Galp´s third quarter results where
adverse refining margins were observed. Also the data Brent price and refining
cash costs affected negatively the results for this segment and finally the crude
which is not expected to have great variations in the next years since the
refineries are almost reaching its full capacity of utilization and achieving the
operational levels target for the upgrade.
In the Marketing sector the forecasted EBITDAs were mainly driven by sales
which depend greatly on data Brent price but also on perspectives of growth in
the Iberian Peninsula. Regarding the Brent price we have predicted a growth
pattern starting in 2023 which will have implications in price of refined products
and consequently decreasing marketing sales due to the elasticity demand/price
of refined products. Here we forecasted for the next years an almost flat growth
in sales and consequently in Marketing´s net profit. This was mainly driven due to
an increase in competition, consumer preferences and the uncertainty about
when both Portugal and Spain will recover from the harmful economic trend.
In both sub segments large capital expenditures are not anticipated since an
unprecedented investment was made in R&M in the last years and therefore the
investments will be mainly due to maintenance and to cover amortization and
depreciation of facilities.
Hence, we computed a Galp´s R&M processes at a €2,26/share.
24 WACC= (D/D+E) x Rd x (1-tc) + (E/D+E) x Re
Refineries almost achieving its full capacity of utilization
Galp´s refining margins will remain at short values
Refining and Marketing segments valued independently
Uncertainty about Iberian Market situation
GALP ENERGIA COMPANY REPORT
PAGE 20/37
Sensitive analysis
Concerning the Refining and Marketing segment, we have analysed the impact of
the refining margin as well as the utilization rate. In what regards the refining
margin, the main driver of the Refining segment, it is strongly affected by
seasonality, international conflicts, oil prices, turnarounds and several other
factors. Firstly, we have decided to perform a variation depending 50% on Brent
price variations and adding a variation of 5%,10%, 20% and 30% to refining
margins base case, having in mind that is much volatile than the utilization rate
as have been perceived in the last years.
Secondly, for the utilization rate we have only varied 1 %, 2%, 4% and 6% since,
as we have already explained, the refineries are both reaching its full operational
capacity and the utilization rate it is an indicator that is easier to predict in the
future.
These two variables only affect the Refining sector, and we have decided not to
perform a sensitive analysis for the Marketing sector as this segment is mostly
affected by customer’s preferences and economic cycles on the countries where
the Company is placed. Finally, we can observe that R&M value driver’s
variations produce lower deviations in the Company´s value, which can be
explained by a lower weight of this sector in Galp´s equity value.
Gas & Power (G&P)
Market Environment
This industry plays a central role in the world´s energy evolution in the decades
to come. In fact, the importance of natural gas has been growing during the last
R&M value drivers with lower impact than other sectors in Company´s value
Refining margins more volatile than utilization
rates
Figure 23: Deviations in price target due to changes in Refining utilization rate and Galp’s Refining margin
Source: Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 21/37
years not only due to various discoveries made in this field but also due to its
safe and flexible use which is environment-friendly. This makes this resource the
perfect partner for renewable sources of energy which we believe that companies
will attribute even more meaning in the long term. Also the reserve life of natural
gas has longer time frames than other resources which make projects on this
industry very attractive and profitable for expanding companies.
In this business sector, we strongly believe that the general prospects for natural
gas are very optimistic. The values for consumption in 2035 are expected to
reached almost 5 tcm25 with an average year growth of 1,6%. We estimate that
82% of this increase will be in non-OECD countries where demand for this
resource will growth by around 1,3 tcm.
The main reasons for this increase in demand will be supported by Middle East,
North America and China motivated by the introduction of energy policies to
diversify the energy uses and with environment issues associated. Regarding the
European Union, we do not forecast a so favourable scenario since it will be
affected by an increase in the prices of natural gas. In the supply side, we expect
that Iraq, East Africa Brazil and the eastern Mediterranean will be the main
players in the coming years. New sources of gas are expected to appear which
brings variety to global supply. Also LNG supplier’s changes can create new
connections between regional gas markets more precisely between those of
North America and Asia contributing to shrinkage of the regional gas prices that
exist nowadays. In fact, regional gas prices are a subject that has been debated
over the last years, more precisely in the World Gas Conference where gas
prices formation models and its mechanisms have been studied. In wholly
liberalised traded markets, the price would be a reference price, as what happens
in the USA, where in many other countries, where gas is imported, it could be
normally a border price. The more difficult cases are when the gas consumed is
provided through local production with no international trade and therefore the
concept of wholesale price is not recognised. Here the price variation depends on
the nature of the market (monopoly, etc.) and on competition. The main types of
gas price formation mechanisms are the following: oil price escalation (where the
gas price is set based on competition of fuels); gas-on-gas competition; bilateral
monopoly (the price is formed based on agreements between large sellers and
buyers) and regulation (where the price is approved by a regulatory authority).
25 Trillion cubic meters
Significance of natural gas has been growing over the last years
Introduction of energy policies in some countries
Natural gas prices is a subject that generates
discussion
Figure 24: Sources of Gas supply by region
Source: IEA, Outlook 2013
GALP ENERGIA COMPANY REPORT
PAGE 22/37
Since the turn of the century, the world natural gas consumption has expanded
on average by 2, 7% per year, which showed a quicker growth than oil and power
but slower than coal and renewables and the tendency is to continue. However,
and as we have already referred, this pattern varies among different regions and
with Europe reaching a more difficult future. The main drivers for this disparity in
different areas are the following: the dynamics of inter-fuel competition (mainly
due to co-integration between natural gas and oil prices), economic growth and
policy strategies (e.g. the revision in China´s policy in 2013 where they expanded
the policy´s attention to include new types of gas and coal and with the aim on
price rationalization and inclusive support for gas consumption. Accordingly to
International Energy Agency, in 2035 the share of natural gas in the global
energy industry will correspond to 24% against the 21% observed in 2011 but
with the averages of 1,6% per year declining progressively until 2035. Also, in
OECD view, the production in North America and Australia will increase rapidly
with both regions becoming major gas exporters and production declines in
Europe.
Another trend that we have identified is the existence of new sources of gas
production: for example, NGLs26 which are liquids produced within a natural gas
stream. Even though this is not a new phenomenon (since NGLs production has
been already occurred in Qatar in the last years) we anticipate that Russia will
soon enter in this market attracted by a favourable tax environment and the
possibility to export. This will eventually force natural gas prices to persist lower
until the countries rich in liquids start to reduce its output. This also takes us to a
prediction that NGLs will be in the front of the future upstream investments. After
analysing the movements in the global gas market, we can also assure that this
will not indicate a single world gas price contrary to what happens for example in
the oil market. The main reasons for this are the huge cost of carrying and storing
gas, when compared with a much inferior energy density as happens with oil.
The LNG might be a solution for this density issue but have other threats
associated as an example of the construction of LNG facilities and liquefaction
infrastructures. Consequently we believe that in the coming years there will
remain substantial differences prices between the US Henry Hub27 and the
respective import prices in Europe and Japan. In our valuation we have used the
NG/oil parity to evaluate NG resources.
26 Natural Gas liquids 27 The Henry Hub is the price point for natural gas futures on the New York Mercantile Exchange and the prices set in
Henry Hub are used as benchmarks in the US natural gas market
Huge costs of carrying
and storing gas
Inexistence of a single world gas price
Different types of natural gas price formation
Europe faces a more pessimistic scenario in this sector
NGLs in the top
upstream investments
GALP ENERGIA COMPANY REPORT
PAGE 23/37
Regarding the power segment, the demand for electricity is growing more than
other final form of energy. Accordingly to the International Energy Agency it is
estimated that global electricity demand will climb by more than 2/3s over the
period between 2011 and 2035 and growing at an average of 2,2% a year. This
pattern is mainly driven by an increase of population with access to electricity
supply and by an evolution in efficient energy equipment’s. Also global installed
generating capacity is expected to grow by over 70% reaching values of 9760
GW in 2035 when compared with a 5649 GW in 2012. It was also estimate that
considerable investments in the power sector will be required to satisfy the rising
in electricity demand and the global investment in the power sector is expected to
be of $740 billion per year between 2013 and 2035. Finally, electricity prices will
rise in most regions and in 2035 US industrial electricity prices will be half of
those in European Union and 40% lower than those in China, when we think that
markets will be less competitive.
The G&P business segment of Galp Energia includes the supply and marketing
of natural gas mainly in the Iberian Peninsula; LNG trading on international
markets more precisely to Asian Markets and also power generation and supply
of electricity in the domestic market.
Gas
The Galp Energia segment of Natural Gas is divided into liberalized and
regulated activities. The first group is segmented in liberalized procurement and
liberalized distribution to consumers, while the second is divided in regulated
operation of infrastructure and regulated supply. Galp Energia regulated supply is
made over 6 distributions companies and operates under concessions contracts
of 40 years but also through local companies (partially owned by Galp). In 2012
companies distributed an amount of 1,5 bcm28 of natural gas. The regulated
infrastructure profitability is highly dependent on ERSE29 as well as all regulated
activities in the energy sector in Portugal. Here, the returns are based on ERSE´s
revenues formula and are mainly affected by the remuneration rate (9%30), which
we do not expect to change in the next years and would only change if the
regulator perceived a change in the cost of capital, and by operating and
amortization costs which are a percentage of the Regulated Asset Base.
Regarding the remuneration rate, the concession contract with the natural gas
28 Billion of cubic meters 29 Entidade Reguladora dos Serviços Energéticos, Portugal 30 Source: “Tarifas e Preços de Gás Natural para o ano Gas 2013/2014”- ERSE
NG/oil parity to evaluate
NG resources
Electricity demand is increasing more than
other form of energy
Considerable capital expenditures are expected in this sector
Electricity prices will rise
Galp Energia regulated supply of gas is operated under concession
contracts
GALP ENERGIA COMPANY REPORT
PAGE 24/37
suppliers ensures the concession financial stability. The regulator establishes the
remuneration rate (based on information provided by Galp Energia and sets the
profits allowed31) and it should be at least equal to the cost of capital for these
activities, otherwise the companies would start to disinvest. Also the regulated
storage of NG in Portugal is operated by Galp Energia and has a current storage
capacity of 40 mm3 with the development of a cavern equivalent to 752 000m3
and with high importance for Portugal energy security, the reason why it is
operated under a public service concession.
In this sector, the company´s strategy is the creation of long term supply
contracts with an average of 20 years for natural gas in Algeria and for LNG with
Nigeria, accounting for 6 bcm per year. This strategy was implemented to reduce
risks and volatility of costs and we expect that the contracts will be renewed on
its maturity date. In the year of 2012, the company acquired a total of 6,3 bcm of
natural gas which represented an increase of 12% from the previous year, of
which 2 bcm came from Algeria (through three different pipelines) and 3,5 bcm of
LNG were bought from Nigeria. The company is also acting in the spot market
where in the same year were acquired 0,8 bcm of natural gas. Although the
incidents in Egypt could lead to some apprehension on the contracts fulfilment,
we do not expect a similar situation in Algeria since it political situation seems to
be stable.
Regarding the liberalized distribution market, the activities are mainly divided in
residential, industrial, electrical and trading segment, Galp Energia is a key
operator with an estimated number of 1,3millions clients in 2012 and the second
place in the Iberian Peninsula market sales transmits the significance of the
operations of the company in this industry. However, there was observed a
contraction in electricity generation via natural gas mainly due to a more
competitive price of coal translated in a higher importance of coal in electricity
production in Portugal. Also the enlarged imports of electricity produced in Spain
influenced this decline in consumption in the electrical segment. Oppositely, in
the industrial sector, the amounts of gas sold increased from 161mm3 in 2011 to
2 113mm3 in 2012, a great variation explained by the upgrade project in both
refineries in Portugal. In fact, refineries play an important role in natural gas
consumption since some unit refineries such as steam reformer32 and
cogeneration plants need natural gas on its industrial processes. In the
residential sector which is much volatile, there was a decrease in 2013 in
31 Document in Appendix section: profits allowed by ERSE and remuneration rate 32 These units use natural gas as input to produce hydrogen necessary for the catalytic units
Contraction in electricity generation via natural gas
Remuneration rate is not
expected to change
Remuneration rate should be at least equal to the cost of capital for
these operations
Galp´s creation of long-term supply contracts
GALP ENERGIA COMPANY REPORT
PAGE 25/37
consumption mostly due to higher temperatures in the beginning of the year and
also explained by a loss of clients in Spain. The extension of deregulation in the
Portuguese natural gas industry forced Galp Energia to launch a combined
natural gas and electricity pack, Galp On (around 170000 clients in November
2013).
Finally, in the natural Gas sector the company is increasing its efforts in the
trading segment where the Asian market, more precisely Japan has gained great
meaning in the last years. Sales in this segment reached 2 242mm3 in 2012
which was a significant increase from 2011 and what we expect to gain even
more status in the subsequent years due to Asian Market energy strategies,
government policies and natural gas importance for countries in. Besides, long
term contracts have been signed, in order to stand LNG trading sector, and in
2012 the company signed three contracts for the sale of LNG and 1,4 bcm of
LNG were directed to East market.
Power
Galp Energia´s Power sector consists on power generation and the distribution of
electricity. The first activities are done mainly through its infrastructures of
cogeneration plants in Portugal. In 2013 the company had an installed capacity of
245 MW and there are no investments expected on this field in the next years,
which we had taken into account in our valuation for this sector. In power
generation the natural gas is an important source, but also is crucial for the
processes occurred in the refineries. The two cogeneration plants of Sines and
Matosinhos represented together a consumption of about 500 mm3 in 2012. The
second group of activities are extremely conditioned by a defined tariff set by
ERSE. The cogeneration tariffs set by the regulator are much higher than those
verified in the Iberian market with the differential ranging values around 50
€/MW33. This differential is explained by a subsidy by the Government mainly
related with environmental issues.34
Regarding the electricity market, Galp acquires energy in the MIBEL (Iberian
Electricity Market) and then retails it to customers. Also, the company strategy is
to sell electricity to clients that are already customers for natural gas. In 2012
there was an increase in the residential customer’s network with more than 50
33 According to OMIP - Operador do Mercado Ibérico de Energia (Pólo Português) S.A 34 The electricity produced together with vapor in the cogenerations plants has benefits not only in energetic efficiency,
but also to avoid that electricity would be produced from other pollutants raw materials, such as coal or fuel.
ERSE condition Galp´s
power sector
Refineries play an important role in natural
gas consumption
Trading segment is gaining importance in Galp´s strategy
Long term contracts
have been signed
Differential between cogeneration tariffs and
tariffs for electricity
GALP ENERGIA COMPANY REPORT
PAGE 26/37
000 in this business. Moreover, in the same year 614 Gwh35 were sold which
represented an increase of 218% from 2011. Although the Cash flows are stable
in this business and large investments are not expected to occur, the company’s
strategy is to improve its weight in the energy sector of Portugal
Valuation G&P
We have valued the G&P segment using the same approach as in the R&M, the
DCF method. Here we have also divided the Gas Regulated, Gas Liberalized and
Power activities for the valuation determination. However, we have used two
different waccs, hence using different comparable companies for Gas and Power.
Regarding Gas Regulated processes, they are mostly affected by the Regulated
Asset base which corresponds to €1,2bn. Here investments of maintenance will
be the only allowed and therefore we used a capex of €30Mn per year as it was
reported in the investors presentation of the company; and for the rate of return
set by the regulator which accordingly to ERSE reports are not likely to vary in
the medium term. The liberalized activities are more subject to economic trends
and we expect its growth to start in the year of 2014 with LNG trading sales
having significant influence and naming this as the main source of value in G&P
activities. Finally and regarding Power sector, we have used the installed
capacity (245 MW) and the utilization rate and we predict these indicators will
remain constant since the cogeneration infrastructures will not reach higher
levels; but also the tariff set by the regulator ERSE which is currently at a 100
€/MW36 and is addressed to brent price variations and inflation in Portugal,
remaining in values between 98 €/MW and 100 €/MW in the medium term.
Therefore, the Power activities will be positively affected in 2013 and 2014 due to
the improvement in cogenerations but after that we expect stable cash flows in
this sector.
Finally we price the G&P segment at €4,85/share.
Sensitive analysis
In what respects the Gas and Power sector, we have studied the impact of
variations of two key value drivers: remuneration rate, for the Gas regulated
segment, and tariff for the Power segment, both imposed by ERSE and
representing a regulation risk which influence Galp´s value per share. Once
35 Gigawatt per hour 36 According to “Portaria n.º 140/2012” from May 14th
Only investments of maintenance are
predictable
Tariff set by ERSE and installed capacity has
the main drivers
Regulation risk is adressed
GALP ENERGIA COMPANY REPORT
PAGE 27/37
more, we do not expect great variations in these two variables as it was
confirmed in regulator´s reports. However, as it represents a risk for the company
we decided to incur in this analysis and the results were the anticipated: slight
changes arises to the value of Galp Energia.
SOTP
The approach that we have used for the evaluation of Galp Energia, relative to
the period of December 2014, was the Sum-Of-The-Parts (STOP). We decided to
incur in this “break-up” analysis since it allows us to identify the main sources of
value for the company in the medium and long term. It also permits us to attribute
different risks, challenges and value drivers for the several segment businesses
which are inserted in different market environments. After reaching the enterprise
value, the equity value of Galp was then calculated by deducting net debt and
non-operating/financial adjustments, in our case, minority interests and pension
liabilities (Retirement benefits).
In the G&P and R&M sectors we have used the DCF approach and therefore
discount its FCF to the firm by each corresponding wacc. In the E&P sector, the
method chosen was the APV in order to value the operations and debt separately
as if each field was an investment project. Whereas in the downstream segments
(R&M and G&P) we have used an explicit period of 7 years (from 2014 to 2020),
in the E&P segment we have used different averages for the maturities of the
projects in each country depending on the nature of the projects and also on the
reserves estimated. Again, oppositely to what we did in downstream operations,
in the E&P we did not use a terminal value which is explained by the fact that oil
and natural gas reserves are not infinite. Therefore each FCF was discounted at
the unlevered cost of equity for each country and the interest tax shields were
discounted at the estimated cost of debt.
“Break-up” analysis
Explicit period for
downstream segments
Figure 25: Deviations in price target due to changes in Tariff set by ERSE
Figure 26: Deviations in price target due to changes in Remuneration rate set by ERSE
Source: Analysts Estimates
Source: Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 28/37
Regarding the discount rates, we have used nominal values, we started by
computing each cost of equity by applying the capital asset pricing model CAPM
formula37. Concerning the unlevered betas we have reached it by an average of
unlevered betas of used comparable companies for each sector, and the criterion
was researching companies that faced a similar level of risk and that its core
business was the same of Galp´s segments. Next, we relevered each beta using
an average of each industry of the debt-to- equity ratio target. The risk free rates
that we used were the 10 year German bond for downstream segments since is
the best proxy for risk free assets and the 10 year US Treasury Bond for the
upstream operations as they are translated and traded in US $. The market risk
premium used was 6% which was what was read among financial literature
review. We have also added a country Beta, instead of the common Market Beta,
to each cost of equity for all the segments which we thought that would attribute
better the risks associated to the operations depending on the country that each
sector is most related. For the country Beta of the downstream segments we
have used a correlation between PSI 20 index and Euro Stoxx 50, while in Brazil
we reached it by using a regression between the main stock index in Brazil
Bovespa38 and the MSCI World Index39 as we believe the fields are correlated
with the Brazilian market. For Angola and Mozambique we have not associated a
country Beta risk since we did not find these activities to be correlated with the
country Economy40 and we did not include the unsystematic risks in the Cash
Flows as we believe it probability and occurrence has no significant impact on the
Cash Flows of this business. Finally, the cost of debt that we used was achieved
through an average of the yields for comparable companies with credit rankings
near to Baa1; then estimated the probability of default of 2,5%41, and a recovery
rate of 90% according to Moody´s Rating Agency assessment.
It is important to state that all Cash Flows were estimated at current prices.
In the end, after calculating the Entreprise value of Galp Energia in December
2014 by summing up the value of each segment, we subtracted the value of net
debt, pension liabilities and minority interests of December 2013 and we valued
Galp at €14,82/share.
37 Capital Asset Pricing Model – Re=Rf + (β x Mrk Premium x Country β) 38 IBOVESPA BRAZIL STOCK EXCHANGE INDEZX 39 Captures large and mid-cap representation across 23 developed market 40 According to the OECD document “http://www.oecd.org/dev/emea/35350793.pdf” the oil sector was not affected by
the war period, in fact it even had duplicated its production during this period between 1990 and 2003 41 According to “Moody´s Investor Service” - Corporate Default and Recovery Rates,
1920-2010
Country Beta used in Dowstream activies and
for Brazil
Comparable companies
for each sector
Angola and Mozambique operations are not correlated with the Economy
GALP ENERGIA COMPANY REPORT
PAGE 29/37
Sensitive analysis
In this section we have predicted the impact of discount rates and terminal
growth rates which play a crucial role in determining Company´s value and where
misleading estimations may occur. This analysis is particularly important since
equity holders may change its perception of risk in the coming years, which will
make the cost of equity and waccs to change and having implied variations in our
Company´s valuation. The terminal growth rates only affect downstream
Source: Analyst Estimates
Equity holders may change its perception of
risk
Figure 28: SOTP valuation summary
Figure 27: Valuation assumptions
Source: Analyst Estimates
GALP ENERGIA COMPANY REPORT
PAGE 30/37
businesses and therefore company´s value is not so sensitive to this variable as
a result of a slighter magnitude of R&M and G&P sectors in Galp´s future
operations. Regarding discount rates, we can observe that a small deviation from
the base case produces a significant alteration in Galp´s price per share that we
have reached. We concluded that if both variables follow opposite patterns it
would lead to extreme Galp´s values per share.
Financials
After Galp Energia faced a contraction on its EBITDAs in the periods of 2011 and
2012 of 3, 5% and 1, 2% respectively, due to the sovereign crisis epicentre, we
expect the company to recover from this declining trend in 2014. This will be
mainly generated by more mature stages of the upstream operations in Brazil,
more precisely in Lula´s field, and by a more optimistic scenario in the other
sectors of the company. Even after 2014, Galp´s EBITDA are expected to grow
at unprecedented rates, reaching an average growth per year of 22%. However,
2015 is an isolated year in the pattern that we have identified. We expect an
EBITDA contraction of approximately 2%, due to high capital costs needed in the
Lula project followed by the start of Block 14K in Angola. Although the E&P
segment will be the main motive for this growth, a smoother growth in the G&P
segment will also give its contribute. Also, the big slump in 2019 in EBITDA is
relative to the start-up of the project in Rovuma Basin in Mozambique. Moreover,
both the increase in capital expenditures necessary to the E&P projects and the
upgrade project occurred in 2012 leads to a huge increase in amortization costs
which will reach unparalleled €943Mn in 2020. In terms of other non-operating
results (which include financial results, interests expenses and exchange gains),
we expect them to be positive after 2017 coming from the E&P segments as a
Figure 29: Deviations in price target due to changes in Discount rate and terminal Growth rates
Source: Analysts Estimates
Figure 30: Galp EBITDA and EBIT evolution
Source: Galp, Analysts Estimates
Figure 31: Solvency ratios
Source: Galp, Analysts Estimates
Figure 32: Estimated future Capex
Mn €
Mn €
Source: Galp, Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 31/37
consequence extraordinary earnings coming from this segment and continuing
the trend of 2012 and 2013 which totalized positive results of €100Mn and €96Mn
respectively in the E&P
Regarding Balance Sheet items, the company´s concern of maintaining its
financial discipline leads to a healthy financial position with the net debt-to-
EBITDA ratio rising until 2016 and falling quickly from 2016 onwards. However,
the net debt-to-equity ratio does not show a stable capital structure with its values
ranging from 25% to 63%. This increase during the forecasted years is caused by
the need of the company to increase its levels of debt to finance its upstream
projects and a low dividends policy of Galp Energia. The company will eventually
have to sell some of its assets in the future, in order to not deteriorate even more
its capital structure when investments with FPSOs, LNG and pipelines facilities
occur, at the same time that projects like Júpiter, Iara in Brazil and Area 4 in
Mozambique initiate their production phase. Lastly, we forecast Galp´s capital
expenditures from the periods between 2014 and 2020 to €12,2Bn with a leap
verified in 2019 with the start of Rovuma Project and Jupiter Field.
We have also incurred in a ratio analysis of the company’s financial and
operational position which is of the upmost importance to track performance and
identify potential improvements. Regarding liquidity ratios, which measure the
company´s ability to meet its short term obligations, we have calculated the
current ratio and cash ratio. Both ratios show a declining trend with the first
ranging from 74% to 53% while the cash ratio equals 31% in 2013 and only 4% in
2020. This declining pattern is explained by a higher increase in current liabilities
when compared with current assets, mainly generated from the E&P project
needs. Solvency ratios allow for an assessment of the firm´s long-term financial
viability, which makes them useful. In addition to the net debt-to- equity and net
debt-to-EBITDA ratios, we have also analysed other solvency ratio, the debt-to-
assets ratio. This ratio shows a more stable trend with values fluctuating around
60% and showing the company´s concern on its financial structure and on a
“robust balance sheet. This ratio helps assess whether the company’s financial
risk profile is improving or deteriorating over time and quantifying the use of debt
by the company to finance its assets.
Finally we have measured three different operational ratios: ROE (return on
equity); ROIC (return on invested capital) and assets turnover. Taking the first
into account, in 2012 equals 5,12% and experiences a large growth until 2020
when reaches 26,31%. Also the ROIC begins with 4,3% and starts to grow after
Financial and operational
ratio analysis
Company ‘strategy concerns on its financial
structure
Figure 33: Operational Ratios
Source: Galp, Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 32/37
2017, getting 15,48% in 2020. This is, once again, explained by the investments
in upstream projects, and with this huge increase being explained by the fact that
E&P invested capital starts generating returns for the company. Also, the assets
turnover ratio (which measures the operating income generated per unit of asset)
matches 7% until 2016 and after that starts rising until 19% in 2020 which is
explained not only by a more favourable scenario of the G&P segment after 2015
but also to more mature stages of Brazilian fields.
Multiples
We have performed a market multiples analysis to understand where Galp
Energia is positioned in relation to its peers. We have looked at 4 different
multiples: P/E, EV/EBITDA, EV/EBIT and Net Debt/EBITDA. We have calculated
Galp Energia ratios and then compared with the average of 5 peers (which data
was extracted from Bloomberg). Regarding the first indicator P/E we can
observer that of Galp is much higher than the average. In general, a high P/E
suggests that investors are expecting higher earnings growth in the future
compared to companies with a lower P/E, in our case, this is mainly explained
with the fact that the price of the company is not yet reflected in the earnings.
Actually, the main source of value is coming from future operations and the
company expects an increase in cash flows (upstream operations) which
explains a raised ratio. Secondly, the EV/EBITDA and EV/EBIT ratios are also
greater than the average of the comparable; this fact is again essentially
explained by the current margins, which don´t reflect the company´s value since
the E&P operations are not generating yet the expected returns. Finally, the Net
Debt/EBITDA multiple of Galp Energia is slightly higher than its peers which
transmits us an idea that Galp had to incur in higher levels of debt to finance its
operations in Brazil, Angola and Mozambique.
Galp´s multiples higher than the average
Figure 34: Peers Multiples Analysis
Bloomberg, Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 33/37
Financial Statements
Balance Sheet €Mn 2012 2013E 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Tangible Assets 4.490 5.267 5.275 5.382 5.798 7.184 7.636 10.680 11.060
Goodwill and Intangible Assets 1.690 1.900 1.888 1.904 2.023 2.457 2.591 3.563 3.676
Associates and Financial Investments 1.320 2.065 2.878 3.005 3.023 2.719 2.653 2.061 2.076
Inventories 1.976 1.399 1.987 2.146 2.259 2.369 2.416 2.651 2.698
Current Accounts Receivable 2.113 2.287 2.549 2.410 2.542 2.662 2.715 2.972 3.021
Non-current Account Receivable 432 2.083 2.045 2.059 2.061 1.737 1.636 1.050 1.026
Cash and cash equivalents 1.887 2.637 3.781 2.802 2.808 2.391 2.261 212 527
Total Assets 13.909 17.638 20.403 19.708 20.514 21.520 21.908 23.189 24.086
Current Accounts Payable 2.483 3.704 4.509 4.247 4.473 4.556 4.604 4.694 4.772
Non-current Accounts Payable 1.137 1.686 2.074 1.941 2.049 2.088 2.110 2.152 2.188
Interest bearing debt 3.583 5.390 6.583 6.188 6.522 6.644 6.713 6.845 6.960
Total Liabilities 7.203 10.780 13.165 12.375 13.044 13.289 13.427 13.691 13.919
Shareholders' Equity 5.058 5.078 5.113 5.146 5.182 5.248 5.318 5.430 5.564
Net Income Attributable to Equity Holders 343 410 686 676 703 1.318 1.415 2.232 2.675
Minority Interests 1.305 1.370 1.439 1.510 1.586 1.665 1.749 1.836 1.928
Total Equity 6.706 6.858 7.238 7.333 7.471 8.231 8.481 9.498 10.166
Total Liabilities + Equity 13.909 17.638 20.403 19.708 20.514 21.520 21.908 23.189 24.086
Income Statement €Mn 2012 2013E 2014F 2015F 2016F 2017F 2018F 2019F 2020F
Total operating income 18.644 20.077 20.791 19.372 20.549 21.904 22.329 24.085 25.068
Total operating costs(except Amortizations and Provisitons) 17.606 18.798 19.331 17.952 19.020 19.479 19.709 20.192 20.586
Cost of Sales 16.196 17.226 17.733 16.468 17.448 17.870 18.080 18.523 18.885
EBITDA 1.038 1.278 1.460 1.420 1.529 2.425 2.620 3.893 4.482
Amortisation, depreciation and impairment losses -426 -468 -469 -460 -508 -624 -665 -908 -943
Provisions -69 -79 -85 -80 -96 -159 -174 -255 -297
EBIT (Euros) 542 731 906 880 925 1.641 1.781 2.730 3.242
Profit from Investment in Associates 82 74 86 85 85 80 80 73 71
Other non-operating results -63 -118 -94 -87 -75 3 21 121 171
Profit Before Tax and Minority Interests 561 686 898 878 935 1.725 1.881 2.924 3.484
Income tax -171 -201 -118 -114 -120 -192 -228 -322 -373
Non-Controlling Interest -47 -75 -93 -88 -112 -215 -239 -369 -436
Consolidated Net Profit 343 410 686 676 703 1.318 1.415 2.232 2.675
GALP ENERGIA COMPANY REPORT
PAGE 34/37
Cash Flow Map €Mn
Operating Cash Flow
EBITDA 1.038 1.278 1.460 1.420 1.529 2.425 2.620 3.893 4.482
D&A -426 -468 -469 -460 -508 -624 -665 -908 -943
Provisions -69 -79 -85 -80 -96 -159 -174 -255 -297
EBIT 542 731 906 880 925 1.641 1.781 2.730 3.242
Statutory tax -135 -183 -226 -220 -231 -410 -445 -682 -811
Tax adjustments -29 107 105 114 239 242 409 498
NOPLAT 406 519 786 766 808 1.470 1.578 2.456 2.930
D&A -426 -468 -469 -460 -508 -624 -665 -908 -943
Provisions -69 -79 -85 -80 -96 -159 -174 -255 -297
Operating Gross Cash Flow 902 1.066 1.340 1.305 1.412 2.254 2.417 3.620 4.169
Capex 0 1.455 466 582 1.044 2.444 1.251 4.924 1.436
Change in NWC 0 -1.596 60 254 43 173 61 167 308
Change in Non-Current Assets and Liabilities 0 1.181 -342 227 -11 -203 51 -373 237
Operating Investing Cash Flow 0 1.040 184 1.063 1.075 2.414 1.364 4.718 1.981
Total Operating FCF 902 26 1.156 242 336 -160 1.053 -1.098 2.188
Non-Operating Cash Flow
Profit from Investment in Associates 82 74 86 85 85 80 80 73 71
Other non-operating results -63 -118 -94 -87 -75 3 21 121 171
Statutory Tax -5 11 2 1 -2 -21 -25 -49 -61
NonOPLAT 14 -34 -6 -2 7 63 75 146 182
Change in Associates 0 745 812 127 18 -303 -66 -592 15
Change in Excess Cash 0 721 1.130 -951 -17 -444 -139 -1.814 26
Non-Operating Investing Cash Flow 0 1.467 1.942 -824 1 -747 -205 -2.406 41
Total Non-Operating FCF 14 -1.500 -1.949 822 7 810 281 2.551 141
Total FCF to the firm 917 -1.474 -792 1.064 343 650 1.334 1.453 2.329
Financing Cash Flow
Change in Equity -333 -401 -669 -678 -773 -1.403 -1.585 -2.443
Change in Debt 1.807 1.193 -395 334 123 69 132 114
Total Financing FCF 1.474 792 -1.064 -343 -650 -1.334 -1.453 -2.329
2013E2012 2020F2014F 2015F 2016F 2017F 2018F 2019F
GALP ENERGIA COMPANY REPORT
PAGE 35/37
Appendix
E&P
Repsol SA REP SM Equity 12772 24076 53,05% 44,59% 1,06 0,82
Exxon Mobil Corp XOM US Equity 1999 415970 0,48% 39,43% 0,96 0,95
Total SA FP FP Equity 16259 105634 15,39% 54,65% 0,90 0,84
Chevron CVX US equity -9013 237166 -3,80% 43,16% 1,07 1,10
BP PLC BP/ LN Equity 28683 91274 31,43% 37,18% 0,96 0,80
BG Group PLC BG/ LN Equity 11073 42595 26,00% 48,02% 1,12 0,98
R&M
BP PLC BP/ LN Equity 28683 91274 31,43% 37,18% 0,96 0,80
Neste Oil OYJ NES1V FH Equity 1925 3777 50,97% 31,76% 1,11 0,83
Esso SA Francaise (ES) ES:FP 159 582 27,22% 40,21% 0,72 0,62
ERG SpA ERG IM Equity 550 1360 40,44% 25,62% 0,87 0,67
Hellenic Petroleum SA ELPE GA Equity 1857 2781 66,78% 29,06% 0,71 0,48
Sistema JSFC AFKS RM Equity 12668 257028 4,93% 29,81% 1,04 1,01
Gas
Acsm - Agam SpA (ACS) ACS:IM 126 83 152,28% 51,41% 0,78 0,45
Spectra Energy Corp SE US Equity 12739 22567 56,45% 26,15% 0,81 0,57
Gas Natural SDG SA GAS SM Equity 14508 18092 80,19% 24,78% 0,96 0,60
ONEOK Inc OKE US Equity 6760 11845 57,07% 22,79% 0,86 0,60
Power
EDP - Energias de Portugal SA EDP PL Equity 18814 10034 187,51% 19,29% 0,97 0,38
REN - Redes Energeticas Nacionais SGPS SA RENE PL Equity 2638 1204 219,18% 30,61% 0,55 0,22
Iberdrola SA IBE SM Equity 26309 29359 89,61% 6,72% 1,07 0,58
Enagas SA ENG SM Equity 3631 4653 78,05% 30,07% 0,69 0,44
Ticker Net Debt Market Cap D/MktE Tax rate βl βu
2014 2015 2016 2017 2018 2019 2020 2021 2022
Operating CF 7.130 6.988 7.541 13.903 14.959 19.171 21.014 23.221 27.000
Investing CF -4.649 -6.305 -8.281 -17.095 -10.780 -16.429 -15.922 -15.414 -17.020
FCFirm 2.481 683 -739 -3.192 4.178 2.742 5.092 7.807 9.980
Operating CF 458 429 856 2.557 3.220 3.699 3.883 4.302 4.357
Investing CF -119 -336 -2.416 -2.559 -2.576 -1.974 -4.392 -1.798 -1.466
FCFirm 340 93 -1.559 -2 644 1.726 -509 2.504 2.891
Operating CF 0 0 0 0 0 2.909 4.417 5.261 5.804
Investing CF 0 0 0 -866 -1.165 -3.279 -3.753 -4.024 -4.312
FCFirm 0 0 0 -866 -1.165 -370 664 1.237 1.491
E&P
Cash Flows ( Mn $)
Brazil
Angola
Mozambique
Appendix 1: Comparables data
Source: Bloomberg, Analysts Estimates
Appendix 2: E&P Cash Flows
Source: Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 36/37
2014 2015 2016 2017 2018 2019 2020 2021 2022
Working Interest Production ( Mn boe) 170 170 187 379 405 511 573 643 776
Operating costs (Mn $) 1.190 1.190 1.309 2.655 2.838 3.574 4.008 4.503 5.435
Lifting costs (Mn $) 1.020 1.020 1.122 2.275 2.433 3.064 3.436 3.859 4.659
Working Interest Production ( Mn boe) 19 19 54 128 160 176 210 202 202
Operating costs (Mn $) 151 149 429 1.020 1.280 1.411 1.683 1.613 1.613
Lifting costs (Mn $) 76 75 214 510 640 705 842 807 807
Working Interest Production ( Mn boe) 0 0 0 0 0 80 130 159 178
Operating costs (Mn $) 0 0 0 0 0 800 1.300 1.590 1.780
Lifting costs (Mn $) 0 0 0 0 0 240 390 477 534
Operational Data
E&P
Brazil
Angola
Mozambique
Appendix 3: E&P Operational data
Appendix 4: ERSE Remuneration profit
Source: ERSE Report
Appendix 5: SINERGIES, Galp Energia an integrated multi-energy operator, present in all stages of the oil, natural gas and electricity value chain.
Source: Analysts Estimates
Source: Analysts Estimates
GALP ENERGIA COMPANY REPORT
PAGE 37/37
Disclosures and Disclaimer
Research Recommendations
Buy Expected total return (including dividends) of more than 15% over a 12-month period.
Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.
Sell Expected negative total return (including dividends) over a 12-month period.
This report was prepared by Afonso Freitas a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.