Repsol, S.A. (REP) Earnings Call Transcript

Hello, and welcome to the Repsol Second Quarter 2024 Results Conference Call. Today's conference will be conducted by Mr. Josu Jon Imaz, CEO, and a brief introduction will be given by Mr. Ramon Alvarez-Pedrosa, Head of Investor Relations. I would now like to hand the call over to Mr. Alvarez-Pedrosa. Sir, you may begin.

Thank you, operator. Good afternoon, and welcome to Repsol's second quarter 2024 results conference call. Today, we will be hosted by Josu Jon Imaz, our Chief Executive Officer, with other members of the executive team joining us as well. Before we start, let me draw your attention to our disclaimer. During this presentation, we may make forward-looking statements based on estimates. Actual results may differ materially depending on a number of factors as indicated in the disclaimer. I will now hand the conference over to Josu Jon.

Thank you very much, Ramon. And thank you, everyone, for joining us today. To begin with, I will take you through the main messages of this quarter before moving to a review of our business performance and results. Following the presentation, we will be available to answer your questions. The first half of the year has allowed Repsol to move forward in the direction defined in our recent strategic update. We are addressing the challenges of the energy transition from a position of strength, leveraging on our advantages and on our value creation track record in Low Carbon. We keep on developing the new business platforms that will allow us to generate more value with less emissions advancing our multi-energy proposition and diversifying our energy mix. Last quarter, Repsol delivered another set of resilient results supported by a solid operational performance across divisions. The commodity scenario was characterized by a less favorable refining environment, a stronger oil price and the ongoing weakness of natural gas. Second quarter adjusted income reached EUR 859 million, 4% above the same period in 2023 and 32% below the first quarter of the year. Cash flow from operations was EUR 0.9 billion, 32% lower quarter-over-quarter and 45% below last year. Cash generation was negatively impacted by EUR 1 billion payment related to the acquisition of the remaining 49% stake in our U.K. JV and the settlement with Sinopec as agreed last year. Excluding this effect, the operating cash flow was EUR 216 million higher than in the same period of 2023. Net CapEx amounted to EUR 1.5 billion in the quarter. The contribution of divestments and asset rotation was EUR 0.3 billion for a total of EUR 0.4 billion delivered in the first half of 2024. Our disciplined CapEx policy remains aligned with investment plan and our commitment with maintaining a strong financial position. Our businesses are carrying on an intense portfolio activity with the objective of optimizing our capital and financing new investments. Net debt stood at EUR 4.6 billion by the end of the quarter, a EUR 0.7 billion increase compared to March, mostly related to the purchase of treasury shares and new leases. In July, the company distributed the second dividend of the year for a total of EUR 0.9 per share in 2024, approximately a 30% increase over 2023. In addition, this month, we have completed the buyback program launch in March, executing the 40 million share capital reduction committed in our February presentation. These 2 concepts add up to EUR 1.7 billion in total shareholder remuneration delivered as of July. Moreover, aligned with our strategic cash flow distribution objective, we have announced today a new 20 million share buyback program and its corresponding share capital reduction to be executed in the second half of the year. This will bring the total number of shares canceled in 2024 to 60 million, equivalent to 5% of our share capital at the beginning of the year. The number of shares outstanding by year-end will reach 1,157 million, considering the 3% increase of the funds dedicated to cash dividends in 2025 for a total of 1,128 million as committed in our strategy, the lower number of outstanding shares implies a dividend of a minimum of EUR 0.975 per share next year. This is equivalent to more than 8% DPS increase compared to 2024 with further buybacks, completing our cash flow from operation distribution range for 2025. Looking now briefly at the macroeconomic scenario for the second quarter. The oil price continued to be affected by geopolitical instability and the production policy of OPEC countries. Brent oil averaged $85 in the quarter, up by 2% quarter-over-quarter and 9% above second quarter last year. In gas, the Henry Hub averaged $1.9 per million BTU, 17% below previous quarter, and 10% lower than a year ago, driven by high inventory levels and technical restrictions still limiting U.S. exports. Our refining margin indicator averaged $6.3 per barrel, in line with the same period a year ago 45% lower quarter-over-quarter. Compared to the first quarter, the sharp decrease in diesel and kerosene differentials more than offset the stronger gasoline spreads. The euro-dollar exchange rate averaged 1.08 in line with the previous quarter and with the same period in 2023. Moving on now to the performance of our businesses. The Upstream division reported an adjusted income of EUR 427 million, a 4% increase over the same quarter last year and 3% below the first quarter in 2024. Year-over-year, the negative impact of lower gas prices was more than offset by higher oil realization and higher volumes sold. Our business remains focused on the efficient delivery of the project pipeline, actively managing our assets to capture emerging opportunities in the portfolio. Production averaged 589,000 net barrels per day in line with the previous quarter and year-over-year. Compared to the same period in 2023, the higher volumes in Marcellus, U.K. and Venezuela were compensated by a lower output in Eagle Ford and Norway, and the divestment of our Canadian assets effective since the fourth quarter of last year. The hedging policy implemented for our North American gas production is helping us protecting profitability in this depressed natural gas price scenario. Around 20% of our volumes in 2024 have been covered with a floor of $3 per million BTU. Roughly speaking this structure allow us to fully compensate in the second quarter results, the decrease in the Henry Hub compared to the same period in 2023. During the quarter, we operated one rig in Eagle Ford and one rig in Marcellus. And at the end of June, the rig in Marcellus was effectively released with the aim of protecting value in this gas price environment. In Eagle Ford, we agreed the divestment of our stake in the southwestern portion of our acreage as part of ongoing optimization of our position in this asset. Development activity in our 3 main projects continue progressing according to plan. Pikka in Alaska and Leon-Castile in the Gulf of Mexico are expected to start production in the next 12 to 18 months, contributing with a combined 50,000 oil barrels per day of profitable, higher cash flow from operations per barrel production. In Brazil, the Campos 33 project progresses under plan in cost and time. The development reached a significant milestone with the construction of the FPSO, [ Curo's ] first giga block. In Venezuela, Repsol and PDVSA agreed to incorporate 2 new fields, Tomoporo and La Ceiba to the Petroquiriquire JV. These 2 fields currently produce 20,000 barrels of oil per day in gross terms. And let me say that this agreement is going to help us to recover past commercial debt, increase production and improve the cash profile of the JV to repay the loan granted by Repsol, enhancing also the availability of crudes to our refining system. Lastly, in the exploration front after quarter and the operator of Block 9 in offshore Mexico announced positive results in the Yoopat well. The preliminary estimation is of around 300 million to 400 million barrels of oil in place and Repsol holds a 50% stake. Also in Mexico, the development of Block 29 is currently in the conceptualization phase and this new discovery increases the potential to consolidate this pacing along with our growth plans in the region. Moving now to Industrial. This division continued maximizing value in the current environment, strengthening the competitiveness of the conventional business while scaling up the newer, lower carbon platforms that will drive its transformation. The adjusted income amounted to EUR 288 million, 16% below a year ago. The higher results in refining, chemicals and trading were more than compensated by a lower result in wholesale and gas trading and a lower contribution from our business in Peru. In this case, we have to take into account that we have the program turnaround in the refinery -- in this Peruvian refinery this quarter. The refining business benefit by high utilization rates, partially offset by a more challenging margin scenario compared to previous months, with some seasonality effects that resemble what we had in the second quarter last year. If you compare the margin is more or less the same we had 1 year ago. The average margin indicator stood at $6.3 per barrel, declining compared to the first quarter, mostly due to narrower middle distillate differentials, and year-over-year the indicator was in line with the same period of 2023. Margins have not yet shown the seasonal strength we were expecting at this point, mainly due to the elevated stocks in the Atlantic Basin. But I mean, we are convinced that going forward and thanks to a better demand for diesel and improved economic scenario in Europe, we are going to see this recovery. The margin premium was $0.30 over the indicator, materially below the previous quarter and in line with the second quarter last year. Let me say that this premium was negatively impacted by the planned turnarounds in Puertollano and Bilbao and a less favorable market environment. We have almost finished the tour around campaign this year. The average utilization of distillation capacity was 87%, while the run rate of the conversion units reached 96%. In both cases, above the levels achieved in second quarter 2023. Maintenance activity included the multiannual turnaround of Puertollano started in the first quarter and completed in May and the shutdown of the FCC unit in Bilbao finalized in July. And as I said before, we have already completed all the major planned maintenance for the year. And that means that we'll increase our plant's availability in the second half. Last quarter, our refineries received more than 5 million barrels of crude from Venezuela, which compares with the 2 million barrels processed in the first quarter in the year. And this increased supply, together with the diversification of our crude diet should allow us to maintain the current share of heavy crude oil in our feedstock mix for the rest of the year. In the Chemicals business, Repsol's petrochemical margin indicator averaged EUR 269 per tonne, 31% over the previous quarter and 6% lower than in the same period a year ago. The EBITDA contribution was EUR 23 million, which compares to loses of EUR 48 million in the second quarter of 2023. Despite this relatively improved picture, thanks to better demand and margins, I mean, market is improving. It's true, but it's still being affected by the fragile situation in Western Europe, where we are seeing, let me say, some recovery in the market, mainly in the polyolefins market, but there is still a slowdown of Chinese economy that is impacting in this recovery. Looking forward, the Sines expansion project, which is expected to begin operations in the last quarter of 2025 should contribute an EBITDA of more than EUR 100 million, even in this challenging scenario. Looking now at the progress in our transformation projects. Last quarter has been the first one with the Cartagena Advanced Biofuels plant producing at full capacity thanks to the flexibility of its design, production alternated HVO and SAF depending on market conditions. The project is expected to contribute around EUR 50 million of EBITDA this year at this low margins. Because you know, renewable diesel margins have experienced a decline in last months, mainly due to the mandate caps applied in Sweden and oversupplied market in the U.S. and the influx of Asian products into Europe. We see this situation as transitory anticipating a progressive recovery as we move forward to 2025 with the implementation of the new blending mandates in both sides of the Atlantic. The demand is there, and we will keep working to build a leading renewable fuels platform in Iberia. The transformation of our traditional sites into highly integrated renewable biorefineries and circular hubs is the most competitive, fastest and affordable way to reduce the carbon footprint of our operations. The project to retrofit an existing gas oil hydrotreater to produce HVO in Puertollano progresses as planned, with first production expected in 2025, at the end of 2025, the beginning of 2026. Also, the strategic agreement with Bunge announced in March will allow us to cover around 80% to 85% of our total biofuel feedstock needs by the end of this decade. Finally, renewable hydrogen in July, our electrolyzer project in Bilbao and Cartagena refineries received public European funds of EUR 315 million. Continuing now with the Customer division, our strategy remains centered on maximizing the competitiveness of our fuel business, consolidating our multi-energy offering and growing the scale and returns of retail power and gas. The adjusted income was EUR 158 million, in line with the first quarter and 7% higher year-over-year. And compared to the same period in 2023, the higher contribution of retail power and gas, aviation lubricants and mobility was partially compensated by lower results in LPG. Mobility sales in services stations and wholesales were affected by higher imports and the alleged fraud practices of some operators aiming to increase their market share in Spain. The growth of the Waylet app continues to drive expansion of our multi-energy offering. And let me underline this important fact because I think that -- I mean, we have reached more than 8.6 million total digital clients by the end of June. So digital clients using our apps to buy energy or some other products. Currently, Repsol has around 350 service stations in Spain and Portugal, offering 100% renewable fuel solutions with the goal of reaching more than 600 a year and 1,500 in 2025. This way, we are accelerating our plans to achieve, as we expressed and mentioned when we presented the Strategic Update in February. We talk about 1,900 service stations in 2027. So we are anticipating this target, and we are going to reach the figure of 1,500 in 2025. And I mean, that's a figure equivalent to almost 45% of our total network. Finally, in retail, power and gas, Repsol's client base reached 2.4 million customers in June, roughly an 8% increase compared to December. So we are going on growing in this business, in this case, in an organic way. And the contribution of this business remained very solid, having generated an EBITDA of around EUR 90 million in the first half of 2024. Finally, in the Low Carbon Generation division, we progressed in the development of our extensive quality product pipeline, mainly in Spain and the U.S. The adjusted income was EUR 1 million positive in the quarter, negatively impacted by the decline in power prices in Spain and a significant lower contribution of combined cycles. This result compares to losses of minus EUR 6 million in the first quarter this year and a positive result of EUR 12 million a year ago. The average pool price in Spain was EUR 33 per megawatt hour, its minimum level since 2020, and that was driven by record level contributions of renewable sources to the Spanish generation mix. Mainly, I mean, it was a big rainy half of the year and the impact of the hydro production was, let me say, exceptional and very material this half of the year impacting on prices. Now we are seeing a recovery of these prices in July. And thanks to our integrated position in Spain, the low prices impacting the generation business are opening, of course, an opportunity in retail, as we discussed before [Technical Difficulty] with our disciplined growth plans of renewables working in parallel on our first asset rotation in the U.S. Our installed operational renewable capacity reached 3.1 gigawatts in June. And we are developing the new pipeline platforms with the goal of reaching 4 gigawatts of global capacity by year-end. Having completed the frame project last quarter, we are now looking to the startup of outpost later this year, which is expected to add the first 400 megawatts of production in the fourth quarter and an additional 229 megawatts in the first quarter of 2025. In July, we have announced the disposal of the residential rooftop solar business in France that was, remember, acquired with the Australian transaction. And finally, last week, we signed a collaboration agreement with EDF Renewables or offshore wind opportunities in Iberia, expanding our technological routes. Moving now briefly to the financial results. In this slide, you will find a summary of the figures that we have discussed when reviewing the performance of our businesses, and for further details, I encourage you to refer to the complete set of documents that were released this morning. Moving now to our updated outlook for the year. Starting with refining. Our margin indicator has averaged around $8.5 a barrel year-to-date. Considering the current Brent price and product express, we anticipate an average indicator of $8 in 2024, in line with our initial guidance and a CCS margin premium of around $1.7 for the whole year over indicator. Upstream production is expected to remain in the 570,000 to 600,000 barrels per day range as indicated earlier this year. Cash flow from operations is now expected to be in the lower end of our EUR 6.5 billion to EUR 7 billion range for 2024, mainly negatively affected by the lower gas prices. This cash flow from operation figure doesn't factor, of course, the EUR 1 billion payment related to Sinopec litigation. Net CapEx after disposals and asset rotation is also unchanged at EUR 5 billion for the whole year. And finally, considering the 60 million shares to be redeemed in 2024 and the estimated cash flow from operations figure as mentioned before, I mean, the lower range of this EUR 6.57 billion, the total shareholder remuneration in 2024 under these assumptions, of course, will be equivalent to around 31% of the operating cash generation. To conclude, we have completed the first half of the year with another remarkable performance, positioned to deliver on our objectives for 2024 in terms of strategic delivery, cash generation and shareholder remuneration. The second half of the year we'll pivot again around advancing our strategy and delivering value. We have made good progress in some of the upcoming FIDs as our teams remain focused on maturing the projects that will drive cash flow growth and profitability in coming years. We remain committed to our decarbonization route, leveraging on the low-carbon solutions available to us required to decarbonize the largest portion of today's European economy that is not electrified. We are confident that the regulatory environment will evolve in a positive direction to guarantee security of supply and the investment needed in our sector. With this, I will turn it over to Ramon as we move on to the Q&A session. Thank you very much.

Thank you, Josu Jon. Now as usual, before moving on to the Q&A session, I just would like the operator to remind us of the process to ask a question. Please, operator, go ahead.

[Operator Instructions]

Thank you, operator. Now we'll move to the Q&A session. Our first question comes from Biraj Borkhataria at RBC.

The first one is just going back to the financial framework. At the time of the CMD, Josu Jon, you were clear around pointing us to the net CapEx guidance and suggest that even if the macro was to weaken, you'd slow down the gross spending. So first half '24 gross spending is at the run rate of just about EUR 6 billion. So could you just update us on the divestment plans for the year, both in Upstream and Low Carbon and how we should think about that? I'm just trying to understand what goes behind the decision to go to the low end of the payout ratio range. And related to that, acquisitions like ConnectGen, is that included in the net CapEx guidance or is that on top of that? And then the second question is just related to the U.S. gas hedging, you mentioned the 2024 hedges. Could you just remind us where you are for 2025 and 2026 and what's currently in place?

Thank you for your questions, Biraj. And going on to your first question. I mean, I remain confident about the net CapEx guidance of EUR 5 billion for the whole year. And as you mentioned, this figure also includes the ConnectGen acquisition. I mean, that could be probably, let me say, a Curo's surprising scene, the evolution over the first half of the year. But I mean, let me remind that, I mean, we are going to have in general terms over the strategic plan period, some kind of a gap for [indiscernible] between the time of gross CapEx that is developed month after month and the rotation and the divestment and disposal process. But we are expecting additional divestment shutdowns in Upstream and 2 asset rotation processes over this half in the renewable business, either in Spain and also in the first, let me say, round or basket of our U.S. assets. So EUR 5 billion is the net CapEx guidance we have for the whole year, including the ConnectGen investment that, as you know, it was announced and almost closed at the end of 2023. But it was, because the regulation permits and so on, closed in the first quarter of this year. So this figure is included. If we go to the whole gas hedge strategy for the net year in 2025, we have almost 55%, 60% of the total gas American production close with a [ call ] put call with a put at $3, million BTU and a call at $6.1, million BTU. So that means that we are guaranteeing this, let me say, a floor of $3. And we have all the upside to $6.1, million BTUs. The figure I have here more or less approaches 57% of the total production of the year. When we go to the 2026 year on the average of the strike we have is 50% of the total production. And I mean, there are 2 different kind of position, but at average, I could summarize saying that we have a put, so a floor of $3.20 per million of BTUs and a call. So we are going to capture all this price till $5.1 million of BTUs. That is the strategy, but the strategy -- that is not the strategy. That is growth we have executed for 2025 and '26 at the moment. Of course, we still have open strategies to increase this position in case of seeing market opportunities. Thank you, Biraj.

Thank you, Biraj. Our next question comes from Sasikanth Chilukuru at Morgan Stanley.

I had 2, please. The first was on the buyback and the announcement of the 20 million shares buyback in the second half and the 60 million shares retirement overall for 2024. I was just wondering if you could provide some color on how we should be thinking about this 20 million buyback. Is this 20 million share buyback for the half year reflect the expected cash generation under current market conditions? Or is the 60 million per share for the full year, more reflective of the cash generation and the current market conditions? Slightly related to that, I was wondering how you came around to that 31% CFFO versus maybe the top end of your guidance range, 35%. If could provide some color on that. The second one was more of a clarification on your 2024 cash flow guidance. I was just wondering if that includes the EUR 1 billion cash out for the acquisition of RR U.K., if that is included or whether or not?

Thank you, Sasi. I mean, first of all, we are going to launch the buyback program in coming weeks, and that is going to be executed over the second half of the year. I mean, we will announce the development of this plan. And let me be crystal clear about why 20 million shares now, and why we are taking this 31% of cash flow for operation as guidance this year in terms of distribution for our shareholders. First of all, today, our best approach and our best guidance is that because mainly the gas prices, not only Henry Hub also gas prices in Europe and so on, comparing with the assumptions we had at the beginning of the year, we are going to be in the low range of this guidance of EUR 6.5 billion, EUR 7 billion. Of course, when I'm talking about EUR 6.5 billion, EUR 7 billion, just for clarifying in real terms, it's EUR 5.5 billion, EUR 6 billion plus EUR 1 billion applied to the Sinopec transaction. So we are not taking into account when we say this EUR 1 billion in order to define what is going to be the guidance for the shareholder distribution as we said and we committed at the beginning of this year. So if we take this EUR 6.5 billion, we think that from the guidance we expressed when -- and we mentioned when we presented our strategic plan, that remember, was from 25% to 35%. And for, let me say, a good year, we said that we will be something between 30%, 35%. So we prefer to be prudent, Sasi, seeing that we have still some challenges in the year related to gas price and so on. And that will be, let me say, the commitment we are taking for the second half. I'm not going to hide that in case of seeing in October that we are -- we have a better cash flow from operation and expected a better business environment and so on. Of course, we will apply, let me say, this rule of taking a figure something between 30%, 35%, and we could have room for a potential additional buyback announcement in October. But I prefer to be clear and transparent. Today, we are not there. Our best view about the guidance for the year is these assumptions of EUR 6.5 billion, EUR 7 billion in the low range. In case of seeing a better environment, a better cash flow from operation generation, of course, we will follow this guidance because that is going to be, let me say, the driver we are going to have over these 4 years to define the shareholders' distribution. And for that reason, I said that for next year, the cash dividend is going to be a minimum of EUR 0.975 per share, a minimum because that is what we have today, and we could commit today in case of seeing a better environment, of course, we are open to change or to add an additional program, but today, we are there. Thank you, Sasi. Sorry, Sasi. Yes, I think that I answered in some way. I mean, the guidance of cash flow for operations when I've been talking from EUR 6.5 billion to EUR 7 billion, we are not including the EUR 1 billion of signup. That means that if we include the reduction of cash flow from operation coming from this announced transaction, the cash flow from operation will be EUR 5.5 billion to EUR 6 billion in the low range. Thank you, Sasi.

Thank you, Sasi. The next question comes from Michele Della Vigna at Goldman Sachs.

2 questions, if I may. The first one relates to your renewable plants in Spain. It looks like it's been a very tough environment in the second quarter. You've got great opportunities in the U.S. where actually the price, but also the power growth is more attractive. I was wondering if you are perhaps thinking of shifting some of your investments towards the U.S. or if you think that Q2 was a bit of an aberration in Spain, and that profitability will recover in the coming quarters. And then secondly, I was wondering how your discussions with the government are going on the windfall tax. We've seen some more hopeful signs from the government, but I was wondering how that is progressing.

I mean, going to our renewable plans in Spain. I mean, first of all, let me say that we are quite comfortable about the rotation, asset rotation process in Spain that is on track. We have advanced in a significant way in this process. I think that today, the probability of seeing crossing in the second half of this year is very high in Spain, starting from the asset rotation environment. Going to renewable plants, I'm not going to -- let me, first of all, to comment some things. I think what we have seen over the last quarter, better said over the first half of the year, it's not going to be the new, let me say, mainstream marina in Spain in price terms. Probably, probably not. In many parts of the Spain, the rain in liters per square meter over this half has been significantly higher than the average over the last 30 years. So that means that we have coped with a period, very good in terms of rain level. But in terms of hydro production, has increased in a significant way, hydro production, reducing the time when the combined cycles are entered in the system and the prices drop in a significant way. I think I have in mind the figure of EUR 30, EUR 33 per megawatt watt hour over the last quarter. But when we see next quarters -- I don't have a crystal ball, but what we are seeing is something close to EUR 75 or EUR 90 per megawatt hour. Even this July, we are at figures that are closer to this price. As I mentioned before that what we saw in the second quarter. So first of all, going to this part of the business. Secondly, new plants. We rely more on the wind than on solar for new future plants in Spain. The reason is technically clear. The solar production is very concentrated in the central hours of the day. That means that the capture capacity of the green production that is more distributed over the whole day because that depends on geographies, wind regimes and so on, has a better capacity to capture prices. So we rely and we are very confident about new wind projects in Spain. And in solar projects, we are going to be, let me say, more selective, more opportunistic. In some cases, we are going to promote hybridization processes in current wind farms we have because the CapEx level, because we could use securities infrastructures and so on, is lower. And we are also engaging a program to bid solar plants in our industrial sites where because the toll regime and so on, the returns are significantly higher. So I take your point. The market is getting tough in Europe and particularly in Spain, but we are capturing in a good way, the opportunities we have in the market, despite the -- even though the results on the P&L we have seen in the quarter that is related to this price drop. But as I said before, we have -- and we are starting to build an integrated business. And in the P&L of the Customer business, we are seeing, let me say, a positive part of this price reduction in the pool, in the wholesale pool of the power system. Are we shifting to U.S.? Yes, but in a current way, as I mentioned when we present the strategic plan. Now we are in building the outpost project that I mentioned in my speech, probably is going to add new 400 megawatts before the end of this year and 2030 more or less in the first quarter of last year. And probably, we are going to take some FIDs over this year. And we are going to have in production 6 gigawatts before the end of 2025, all in all in our whole system, and probably almost 2.2 gigawatts by the end of 2025 are going to come from the U.S. So we are quite comfortable about this shifting process to the U.S. Going to our rotation process of assets in the U.S., we are already involved in this program. And probably we are going to see in coming months, the first rotation of our assets in the U.S. And that is going to be significant in the use of capital because we are looking for a 50% of disposal of these assets. And that means that we are going to remain probably with at capital and equity at the end of the process in every asset that is going to be close to 10%, 15% of the total capital we put as CapEx in this project. So the effect in terms of reducing the net CapEx of the company, as I mentioned before, in my answer to Sasi and Biraj is going to be significant. Going to the windfall taxes discussion. I mean first of all, I mean, we keep going our position, you perfectly know. We think that is unfair, it's illegal and that is going to be reversed in -- by the judiciary either Spanish or European system in the future. But my perception -- I don't want to remind all the reasons we have to oppose this windfall tax because my perception is that we are experiencing a new reality. In November, the European Commission stated a report where they expressed in a very clear way that there is no reason now for these kind of taxes that the priority has to be to guarantee the security of supply, the investment in the energy sector. Even over the last months, the Spanish prime minister said that [ this co ] in Spanish government should be reanalyzed that they'll have to rethink this government to make investment possible in the energy sector. Even over the last weeks, the economy minister, Mr. Cuerpo, said that when we talk about this windfall tax, we have to think and we have to prioritize the need of investment in the energy sector that has to be taken into account. So I could say more. I could say that in the current Spanish political arena, I don't know, a majority could make this windfall tax of this government permanent. But my point is we are -- we have a new reality. I think that -- probably we could anticipate that this potential government is going to be over in coming months. And of course, we are going to follow what could happen. And of course, we'll take our investment decision depending on the framework we could see. But I think that today, there are reasons to think that is starting to be a part of the past. And in the midst, we are working. Of course, we are working in the preparation of our industrial sites to be prepared for a future scenario.

Thank you, Michele. Next question comes from Lydia Rainforth at Barclays. Please Lydia, go ahead.

2 questions, if I could. The first one, I'm sorry, just to come back -- because I think I missed what you said. On the refining margins, where are we currently on those margins? And you talked earlier in the speech about you expect them to strengthen as we go into the second half of the year. I'm just wondering sort of what dynamics if you can just talk us through a little bit on refining supply demand? And then a very different question actually, please. On the Upstream, we talked at the Capital Markets Day in Madrid back in February about a monetization event in 2026. And I'm just -- obviously, the Upstream had very good results this quarter. I'm just thinking, where is your progress in the Upstream compared to where you expect it to be, both operationally and financially?

Thank you, Lydia. Going to the refining margins, being very concrete, of course, I don't have a crystal ball. But today, our expectation for refining margin for the second half is for our system $7 a barrel. That when we are taking the guidance of $8 a barrel for the whole year, we are taking the first part of the year plus this $7 per barrel. What is behind? Behind is many. We see the gasoline is strong. We see that the concerns we could have 2 months ago related to the scarcity of heavy oil and so on, I think that we are going to have better discounts as expected. We see an increase of diesel demand in Europe that is going to be in the [ third ] quarter at the end of the year, more significant. And we see potential events that could -- and that is -- we could take a statistical approach, if you like, but that could be, of course, at winter, that could be in some way, a driver of this increase. Secondly, the hurricane campaign in the Gulf of Mexico is always a factor. Because what we have seen is that the demand and the supply are quite tight. And when the demand and supply are tight, any event could reverse the current situation. And there are some announcements last week, for instance, Alexander Novak, the Russian vice prime minister announced that because the scarcity of gasoline they have in Russia, they are analyzing the reinstating gasoline export ban in coming weeks. So there are factors related to the -- what is happening in Central and Eastern Europe, the potential disruption coming from the Middle East. So all in all, I think that we are quite comfortable with this approach for refining margins and taking into account that the turnaround campaign for Repsol this year is over. We are also comfortable with the $2 per barrel of premium for the second half of the year, that all in all could have as a consequence, the $1.7 per barrel for the whole year, I announced before. Going to your question about the Upstream. I mean, in operational terms, let me say that the FID -- all the relevant FIDs, all of them were taken. The projects development is progressing as expected. I mean the Leon-Castile Alaska. Even the of the worst is performing in a very good way. In Alaska, we are comfortable about the project -- probably even more positive than we were some months ago, taking into account the behavior of the wells. The free cash flow in relation is in line with the strategic plan in the Upstream, going to the financial expectations you mentioned. And the production in 2025 at the end of 2024 is going to be mainly related or conditioned to potential inorganic transactions in these dynamic of portfolio improvement because we are going to have new barrels, better barrels entering in from -- the end of 2025 on Alaska Leon-Castile and so on. And we are going to reduce probably our exposure in some places where we think we can't create value. Thank you, Lydia.

Thank you, Lydia. Our next question comes from Alessandro Pozzi of Mediobanca. Please, Alessandro, go ahead.

I was wondering if you can give us maybe your view on what is happening in a moment in the biofuels market. You still expect to have a positive contribution from the new project for 2024, but the market is clearly much weaker compared to the start of the year. You mentioned Chinese imports, maybe the EU is putting in duties that could potentially help as well. But I was wondering how you see this imbalance between supply and demand at the moment evolving over the next few quarters? And also, going back to the Upstream, can you tell us what are the key -- where you are with the next key FID that you're planning to take in Upstream?

I mean going to the biofuels. I mean you are right. The current situation in the market is quite depressed. That is not new. I think that the main driver was the reduction of the mandate in Sweden that put an additional 1 million tonnes a year in the market. That is significant because that would be something between 5%, 6% of the total European market. And what we are seeing -- I mean, the mandates are going to grow in 2025 in both sides of the pond. In Europe, there is also a clear indication in terms of growing in coming years in the current European directives, there are 2 out of 3. So I mean, market is going to grow. And today, we are, as you expressed, being a very weak balance on supply -- demand. Today, the prices are very low, $600 per tonne more or less in terms of HVO minus UCO margin. I mean, let me say the margins are depressed, but even at these margins, taking into account our production. Cartagena C-43 has an EBITDA of EUR 50 million in -- for the whole and complete year. So it's not the EUR 180 million we expected when we plan these plants. But if we take even what we had 5, 6 months ago, I mean, $1,000 a tonne of margin and that we are going to have probably in coming months. I mean this EBITDA will be closer to EUR 140 million, EUR 150 million coming from this project. So let me say, we are comfortable about the C-43 in Cartagena. Not every biofuel project is going to get money that we have to be clear about that. But projects that are mainly biofuel, even Cartagena because the integration level in utilities site and so on is fully integrated in the Cartagena site. And of course, Puertollano that is going to start in operation at the end of 2025, plus the integration in the site, plus focusing in our internal market and Repsol meets -- I mean, we are comfortable with these FIDs we took with this production we have. And I am going to see more. I mean we are working technically and preparing to take in some other Spanish refineries, new FIDs in coming probably 2 years. So we have to prepare the projects in technical terms. But what we are seeing is that because the mandates that are already approved in European directives, we are going to have a very tight market in terms of supply/demand for this kind of renewable fuels in Europe. And let me say more, as I mentioned before, we are starting to sell 100% renewable fuels in our service stations already 350, 600 service stations at the end of the year. So we are seeing even on specific market for these kind of products. Going to the Upstream, probably 2 clear projects asked to take FID in coming 2 years. Sakakemang in the gas production in the Sumatra Island in Indonesia and Mexico. I mean, we are very happy with Mexico, you know that we have our 2 wells that were positive. We already have an area to be developed -- and thanks to this discovery of the project operated by ENI where we have a 50-50 stake. I mean we see opportunities to optimize the whole area. I mean we have, of course, to talk and to discuss about that. But I think that we have a clear case for a new FID that is going to support the sustained and improvement history of production barrels of the E&P of Repsol.

Next question comes from Alejandro Vigil at Santander.

One question is about Venezuela. If you can elaborate about the potential recovery of loans and the agreements you mentioned as well in terms of heavy oil access coming from this country. And the second question is in terms of your -- in your Low Carbon business, you have about EUR 5 billion of capital employed and the profitability, and looking at the numbers looks relatively low today. But I'm sure in terms of this asset rotation, basically you can confirm in the profitability targets you have for this unit.

Going to Venezuela. First of all, we are entering a new dynamic in Venezuela. And that is important. I mean, when we were talking about the downstream, for instance, we saw that over the last quarter, we processed 8 cargoes coming from Venezuela. And we are processing 2 more this July. In terms of recovery over the last months, I think that we have recovered loans by 5 cargos supported by -- I mean paying the debt of Petroquiriquire and 5 cargos for the gas production in Cardon. So I mean, we are improving in the right direction. There is a rationale behind this transaction, we closed 1 or 2 months ago. We have an agreement to incorporate 2 new fields, Tomoporo and La Ceiba, they produce 20,000 barrels gross. There is an agreement that establishes a direct allocation of a part of this Petroquiriquire revenues to pay the financial debt that is owned by Petroquiriquire to Repsol. We have seen potential synergies with the current wells and areas we have there, Barua-Motatan, Mene Grande and so in the Maracaibo basin. We have a strong potential to improve the recovery factor of fields because, I mean, we are talking in these new fields, about 5 new billion barrels of oil in place. Of course, you have to multiply the recovery factor, but we are talking about 5 billion barrels. So I say that it's a win-win agreement. I mean it's allowing us to recover the past commercial debt, and we are advancing in this direction. We are starting to increase the production that is going to happen because we are starting to invest in this JV we have with PDVSA and in Petroquiriquire. We are improving the cash flow profile of Petroquiriquire in order to pay the financial debt to Repsol. And we are also improving the feedstock profile of our refining system and it's very positive for the Venezuelan society because we increased production, and we increased the tax payment coming from this production in the country. So we are quite happy. We are seeing the results. And I mean, we are working hard in this direction to optimize the execution of this agreement. You said about the profitability looks great -- Let me say something, first of all, there is a part of the revenues and of the returns and of improvement coming from this business that is not going to appear in this P&L. I mean every time we are rotating an asset -- and in many cases, I mean, the buyers are acquiring a 49% pay in, 1.3, 1.4, 1.35x the CapEx we develop. I mean this acquisition of this disposal from our side, and this, let me say, in figurative terms, P&L is not technically a P&L because we maintain the control of the 51%, it doesn't appear in what is the P&L of this business. Secondly, I mean, this business is growing. That means that we have a structure. We have developers. We have new companies like ConnectGen, they have costs, but they don't have revenues now. So we have, let me say, supporting and structure that could be able to be operating 9, 10 gigawatts by 2027 and 16, 18 gigawatts by 2030, that is charged over the 3 gigawatts we have today in operation. So from the point of view on P&L, there is a temporary effect there. Thirdly, as I mentioned before, the first half of the year in price terms in Spain where you have to take into account that we have a 50%, we include combined cycles, hydro and so on of the positions open. It's not the same in the U.S., where we have PPAs above 80%, 85% of the total production. So all that is behind what you mentioned of a weak P&L in the Low Carbon business. But again, in any project we have in our hands, and we have disposed in all cases, we have returns that are clearly above the 10% of the equity return in this business.

And the next question comes from Matt Lofting at JPMorgan. Please Matt, go ahead.

Two, if I could, please. First, I just wanted to come back to the numbers that you referenced earlier on the outlook around the cash return. If we take the low end of the sort of the 6.5% to 7% CFFO and 31% CFFO, I guess you're implying about EUR 2 billion of cash return for the full year. Could you just clarify the sort of the assumptions or the numbers that you're assuming on the buyback side to get to the 31%, because it did sort of seem to us as if there might be a bit of underlying headroom based on the 20 million shares within that already. And then second, on the payment that Repsol made to sign a pact related to the U.K. E&P business. Could you just clarify with the CMD, capital allocation outlook that you gave you, how that was treated? Was it ever in your CFFO or net CapEx numbers? Or was it always excluded and assumed to just be taken onto the balance sheet, given the gearing headroom that you have?

So I mean, going to your first question, I mean, the assumptions are the dividend pay that is EUR 1.12 billion, I think, this year, 60 million share buyback that all in all, it's EUR 2 billion, more or less, probably speaking. And comparing with EUR 6.5 billion, that will be behind the 31%. In any case, Matt, of course, you could check this figure with our IR team if either I'm not explaining that in the right way, that is always possible. That we say we have any kind of a mistake. I mean, the IR team is going to check these figures for you. Going to the payment to sign OPEC, I mean, of course, we also could check that. But there is no any impact on net debt because when you take the -- there is a reduction of the cash flow from operation, but in the other side, you have a reduction of our financial debt we commit in 2023. So when you take -- I don't have in front of me now, the exact -- yes, I have it. I mean, when we take the part of this year in terms of the financial part of the business. What we see is that when we take the interest leases and others, there is a positive figure that is fitting the negative one that is reducing the cash flow front operations. So there is no impact in any case in capital employees.

Our next question comes from Irene Himona at Bernstein SG. Please, Irene, go ahead.

Juan, you mentioned that you have received around EUR 300 million of EU aid for the renewable hydrogen projects. Do you treat that as part of net CapEx in your first half numbers? And have you applied for other potential aid which may come through in the second half? And my second question, following the settlement of the Sinopec litigation. You still have an outstanding issue with the potential liability for Peru, the oil spill in Peru. You have taken a provision there. What is the total amount you have been sued for? And what is your lawyer's best estimate for the time line to resolve this litigation, please?

I mean, first of all, I mean, there is no anything in our accounting today related to this announcement that goes down by the European Union and Spanish government. So we didn't receive yet any proceeds coming from these subsidies you mentioned. In case of going on and investing that will be considered as less CapEx. So -- but again, as I mentioned before, when I answered, I think that it was to Michele, we have to -- I mean, now with these subsidies to re-analyze the project to see the potential returns to analyze the environment in tax terms, in business terms and so on, and we'll take our decisions over the year 2025. But in any case, that is going to retreat as our contribution to net CapEx. But again, there is anything today. There is not anything in our accounting, and probably that is not going to be in 2024. If we go to the oil spill in Peru, I think that for this purpose of everything linked to containment, cleaning, monitoring of all the affected areas to minimize the impact to the environment. Again, underlining that we were not legal responsible of this spill that we take the responsibility in -- let me say in moral terms of leading the cleaning of the area. Remember that this spill happened due to a sudden movement of the Italian ship Mare Doricum during unloading of crude oil, and that was the reason causing the pipeline factor. So all in all, we have spent more than $350 million in this cleaning remediation and social compensation. By the end of last month, by the end of June, I think that the final compensation agreements were closed with more than 98% of the impacted people taking into account the database of individuals that was done by the government. We have a total estimation of today of EUR 470 million, EUR 480 million at the end of the road. And of course, we have to take into account also the assurance recovery that is also going to be significant. So that will be, Irene, all in all the summarized, I could develop now about the oil spill in Peru.