Repsol SA (REPYF) CEO Josu Imaz on Q1 2021 Results - Earnings Call Transcript

Repsol SA (OTCQX:REPYF) Q1 2021 Earnings Conference Call April 29, 2021 6:30 AM ET

Company Participants

Ramon Alvarez-Pedrosa - Head, IR

Josu Imaz - CEO & ED

Conference Call Participants

Irene Himona - Societe Generale

Oswald Clint - Bernstein

Biraj Borkhataria - Royal Bank of Canada

Thomas Adolff - Credit Suisse

Alastair Syme - Citi

Alessandro Pozzi - Mediobanca

James Hubbard - Deutsche Bank

Jason Kenney - Santander

Matt Lofting - JPMorgan

Joshua Stone - Barclays

Ramon Alvarez-Pedrosa

Thank you, operator. And good afternoon, and welcome to Repsol's First Quarter Results Conference Call. Today's call 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, I advise you to read our disclaimer. During this presentation, we may make forward-looking statements, which are identified by the use of words such as "will," "expect" and similar phrases. Please note that actual results may differ materially depending on a number of factors as indicated in the disclaimer.

I will now hand the call over to Josu Jon.

Josu Imaz

Thank you, Ramon, and thank you to everyone joining this conference call. I hope that all of you are keeping healthy and well.

Today, I'd like to cover the following main topics. Firstly, a review of the key messages of the quarter; secondly, the operating highlights on financial results, and probably an update outlook for 2021. With four of our peers also releasing their quarterly results today. I'll make my best to go straight to the main points. Of course, at the end of the presentation will be available to answer your questions.

Let me start with the Chemicals. Supporting it in a solid set of quarterly results and cash generation Repsol's performance in the first quarter has continued with a positive momentum achieved in the last part of 2020. More than one year since the start of the pandemic, I think it's fair to say that our industry as a whole and Repsol in particular have successfully demonstrated the capacity to navigate through our crisis that it still has profound indications in our lives.

All business segments deliver a positive operating and free cash flow in the quarter. A weaker refining environment was more than compensated by the recovery of the oil and gas prices and outstanding performance in chemicals and the contribution of the customers and great business. The adjusted net income rates €471 million or 17% improvement over the fourth quarter of 2020 and 5% higher than in the first quarter a year ago.

Cash flow from operations amounted to €1 billion; 73% higher year-on-year. Operating cash flow cover CapEx in the rest of the business and most of the treasury shares acquired. Compared to pre-COVID levels, the operating cash flow was 11% lower than in the first quarter of 2019 which have a similar level of oil and gas prices. But a 10% higher production and a refining margin in the $5 range at that time I mean. Net debt including leases stood at €6.5 million; a €0.3 million reduction compared to December.

Then excluding the effect of the hybrid bonds issue and ripple change in the quarter, then net debt was in line with the end of 2020. Let me highlight that is standard and per some feature recognize Repsol's financially strength, we are affirming their trades rating a BBB with that stable outlook. We deliver on our remuneration commitment for January 2021 for and implementation of our buyback program to purchase and redeem the shares issued with the January scrip.

A total of 38.9 million shares were purchased in the quarter and the remaining 1.5 million shares have been bought in April. The share capital reduction was executed in April resulting in a final share capital of 1527 million shares. Going forward, the business will be fully paid in cash. Even this lower recovery of Europe's on a Spanish kind of usually remain cautious in the short-term. But Repsol is already working in this transformation.

We are accelerating investment in low carbon and progressing of the decarbonization of our industrial assets. In the first quarter of 2021, up 40% of our CapEx was deployed in low carbon platforms. Aligned with our strategy, the Upstream division each one of the cash generators that finances this transition maximizing value generation while getting ready to benefit from higher prices thanks to the flexibility of its portfolio.

Looking out bravely to a macroeconomic environment of the quarter. Brent grew with hub rates 61 bbl., 38% higher quarter-on-quarter and 22% above the same quarter a year ago. An improved outlook for all demand together with an extension of our production cuts supported the recovery of prices through the quarter. And we hope an average 72 -- sorry, $2.7 per million Btu's compared to the previous quarter and 35% higher than in the same period of 2020.

Driven by a strength of most regional gas references, Repsol's realization gas price rose to $3.4 per 1000 is core activity in this quarter. 26% higher than in the fourth quarter of 2020; a 42% higher than a year ago. In refining the margin indicator decrease quarter-on-quarter negatively impacted by a higher energy cost due to the Brent price that offset a stronger gasoline spreads.

Let me now review the main operating highlights of the quarter. The Upstream business benefits from better prices, lower cost and unstable contribution from Libya. Organic free cash flow amounted to €0.5 million; an 86% higher than in the same quarter a year ago. Production continue to be managed with our flexible and value-focused approach. Quarterly volumes average 638,000 barrels of oil equivalent per day; a 2% increase quarter-on-quarter and 10% below a year ago.

Year-over-year, volumes were negatively impacted by the weather issues in Eagle Ford, maintenance activities and the natural decline of this. This impacts more than offset the higher production in Libya or Libya and Venezuela. Libya contributed 37,000 net barrels per day comparing to an average of 6000 barrels per day in the same period a year ago. Although the environment is complex, there has been positive signs of stabilization in the country.

Our budget specs an average production of 36,000 barrels per day in 2021. The Upstream CapEx in direct terms was 14% higher than in the fourth quarter 2020 increasing the capital intensity per barrel produced; thanks to our capacity to accelerate investments in a higher price scenario. OpEx in the Upstream were 21% lower than in the first quarter of 2020. You then compare to the average of the last three quarters of 2020 that were impacted by the pandemic and the resilience measures, OpEx where 5% lower.

Our linear and more focused aspiration and strategy deliver another significant discovery in the Boicobo Sur well in the Caipipendi block in Bolivia. This discovery as it run -- TCF -- sorry -- FCF of new that resources you got already a profitable producing asset. Development activity remain focused on the 14 gear projects that YoY expect to put on a stream within the horizon of our strategic plan.

In Norway, the development of AMI completed successful installation of the drilling and production unit. First oil is expected in the fourth quarter this year. In Alaska, the development of Pikka keeps moving ahead and the operator expects the final investment decision by the end of the year. We first oil projected by 2025. We are working together with them in finding a new partner to step into the project.

In Indonesia, the development plan for Sakakemang was approved by the government allowing us to monetize the recent exploration success. FID is expected by the end of 2021 or the beginning of 2022, the first gas two years later. And in Brazil, the partners of the Campos 33 license approved the development concept of this important gas and compensate here. Let me now continue with the operating performance of the industrial business.

Despite the challenge in refining scenario driven by a weak demand for petroleum products, this edition was able to generate a positive free cash flow of €0.1 million in the quarter. And starting with refining, a margin indicator operates $0.20 per barrel which compares to $1 in the fourth quarter of 2020 and $4.7 a year ago. The premium unit in the CCS margin was a $0.60 over indicate. Year-on-year margins were negatively impacted by narrower middle distillates spread tighter heavy growth spreads and higher energy cost.

The relative strength of heavy crudes weights against complex refiners like Repsol. The utilization of our distillation and conversion units was 76% and 82% respectively; this was a modest quarter-on-quarter improvement but is still below the utilization rates of the first quarter in 2020. The chemicals business remain resilient through the crisis, delivering an exceptional quarter that was supported by high margin superior with utilization rates and stable states. International margins of intermediate products and polyolefins reach the highest levels in decades.

Driven by a solid demand the disruption in the Gulf of Mexico and supply restrictions in Europe. Higher product prices more than compensated increase in the price of the fixed stocks. In the quarter, our chemical business completely served sale of Repsol's propylene oxide and styrene, and polyols technology license for the construction of new plants in China. Moving now to commercial and renewals, starting with mobility.

Sales in our services station in Spain were 14% lower than in the first quarter of 2020. Reflecting the impact of mobility restrictions due to COVID-19 and the effect of the Filomena storm. Remember that Filomena was the largest snow storm we have experienced in Spain, mainly the high plains area affecting hardly-to-moderate over the last century. Compared to pre-COVID levels, sales were 22% lower than the first quarter of 2019.

After quarter closing, we've reached an agreement to divest our Italian services stations network and direct fuel sales business. This transaction will allow us to focus on the geographic areas where we have the greatest competitive advantage. In retail, electricity and gas, Repsol acquired minority state in Gana Energia a company with 37,000 clients that operates online and markets 100% green energy.

With this acquisition on the organic growth in the quarter, we currently have more than 1.2 million clients in this business. The lubricants, asphalts and the specialties business have another solid quarter, improving in sales compared to the first quarter of 2020. In renewables on generation the electricity generated by Repsol was 23% higher than the first quarter of 2020, thanks to a third cap of delta.

Remember the delta is a going production in the in our count in our this part of Spain and a higher contribution from higher. A Kappa, our first solar farm in Spain in the southern high plains in Ciudad Real with 126 megawatts of capacity is starting operations until next week we'll receive final initiative authorizations. We keep on working on the development and construction of the rest of the projects in our portfolio.

In Chile, our JV with Ibereolica signed a 14-year PPA for the development of the Atacama wind project, 13 global digit profitability of this asset. Moreover, Repsol signed a PPA with Microsoft to supply renewable wind and solar power to their operations in Europe. This agreement expanse the collaboration between both companies, will accelerate digital innovation and energy transition. Finally aligned with our strategic objective to explore either an IPO finding a suitable partner for our renewable business.

We are taking the necessary steps of the proper rearrangement of our corporate legal extract. At this point, I want to take you briefly through the progress in the energy transition on the transformation of our portfolio. In Cartagena of this part of Spain, procurement work has started ahead of the development of the new eco plant that we will start operations in 2023. In our methanol refinery in the north part of Spain, engineering work has started in this 10 megawatt renewable hydrogen plant.

In Tarragona, north east Repsol has joined Enerkem and Agbar to deal on waste to chemicals plant. And in this plant we will transform 400,000 tons per year or for year-around rates from the area in more than 220,000 tons of methanol from renewable plastic or plant biofuels. In Puertollano, we will build the first plant in Spain to produce chemically recycled polyurethane foam. This facility will be able to treat around 2,000 tons of waste per year and will be under operation in 2022.

In customer centric, we continue the new renewable services, we've done multi-technology approach offering comprehensive solutions in mobility and other products and services at home for our customers. In Iberia, Repsol opened its first ultra-fast charging point in Portugal. In Spain, we continue responding our recharging network with the ambition of reach more than 1000 charging points in our services stations.

And finally, within the framework of a next generation European front, Repsol has our portfolio of more than €6 million in projects associated with the energy transition for a 2021 to 2026 period that could be candidates for the next green plant.

Let me now review the financial results. The group's adjusted net income was €471 million which compares to €447 million in the same period a year ago. By the vision, the adjusted net income of the Upstream was €327 million €237 million higher year-on-year mainly due to higher realization prices, lower costs, and lower amortization rates. In industrial, the adjusted net income was €73 million which compares to €288 million a year ago; reduction and mostly driven by refining on Peru, partially offset by the strong performance of the chemical business.

The result in commercial and renewables was €101 million; €20 million lower than in the same quarter of 2020 primarily driven by mobility and LPG. In corporate and orders, adjusted net income was €30 million negative, a €22 million improvement over the same period a year ago mostly due to higher results from the electives from treasure stock positions. The group's EBITDA this year stood at €1.4 million in the quarter; 4% lower year-on-year.

For further detail on Repsol's results, I encourage you to refer to the detailed comments that were released this morning. Looking now at our updated outlook, we are increasingly optimistic on the macroeconomic the scenario for 2021. That will remain under resilience mode until we have clear signs of the Yen of the mobility restrictions and the effects of the pandemic.

In the Upstream, we have increased our CapEx budget by a 10% in 2021, we have focus on increasing activity in that conventionals. We expect to start drilling in Marcellus and Eagle Ford by mid-year after bringing one rig to each asset. The flexibility of our portfolio will allow us to select the best targets with a short payback to benefit from sustained higher price scenarios.

In chemicals, fundamentals of the first quarter have continue in April at the same level of with solving in March. And we have raised a full-year expected contribution of this business being in April. In refining, the market indicator has averaged $1.2 per barrel in April. We now expect an average full-year refining margin indicator of $2 per barrel. I mean, there is the mathematical effect of the delay in the exiting process of the pandemic.

And this increase of this margin, if on a point-of-view is going to be helped by the gradual recovery of demand and the adjustment of overcapacity in Europe during the second half of the year. Our respected full-year EBITDA this year's increases to €5.8 million as a result and I underline this fact of higher oil and gas price assumptions and a stronger better chemical margin, partially offset by the lower refining margin indicator.

CapEx remains unchanged at €2.6 million as the higher investment in non-conventionals will be largely offset by other moving parts in the portfolio. And lastly, let me update you on the arbitration proceeding we sign up with. In connection with the purchase in 2012 of 49% of the shares in Talisman Energy U.K. Along 20 April 2021, the arbitration tribunal first issue a new partial award in connection with a four issue spending resolution in the liability sides.

This missing sign of the claims on three of the claims, the Commissioning, Projects and Maintenance. And finding Talisman LIBOR in relation to production that in some ways overlapping would replenish our related to reserves. After this hour, the arbitration proceeding will continue to the quantum phase. The new hour is under analysis internally and with external counsel. However, our preliminary view is positive. The hour dismissed means most of the claims and our work to outline with more clarity the potential consequences of the conduct of Talisman group limiting our risks.

Once we have concluded our analysis, we will review the current accounting provision which presumably will result in a reduction of the amount initially registered. To compute our solid performance in the first quarter of the year has brought us one step closer to pre-COVID normalized levels. The resilience of Repsol's integrated model has however to deliver by strong set of results and a positive operating and free cash flow contribution in all our segments.

Mostly is not just refining. The structural performance of Chemicals and the contribution of like Customer Centric, even with these one short event I've related before Filomena that paralyzed mobility for two weeks in a main part of Spain, is allowing us to navigate or is still is accelerating refining demand scenario. After this performing aligned with our strategy, working in our deal and focus mode, reducing costs and maximizing cash generation wise, getting ready to capitalize on higher prices.

We continue maturing the project that we'll concentrate our EMP investment during the horizon of our strategic plan with most of the FIDs coming in next 24 months. The development of our renewables by blind remains on track. By year-end we expect to half semi 110 additional megawatts of capacity in operation well-planned to state your concession. This includes 517 megawatts in Spain, a 193 megawatts in Chile corresponding to a 50% stake in the JV we have with Yugra Evrotek.

The transformation of our industrial assets is ongoing. A vast biofuels and the renewable hydrogen, we play active role in the future of this emission. Looking into the rest of 2021, we will maintain a prudent capital allocation policy even though a revised macro outlook fast allow us to improve by at 10% the expected full-year EBITDA of six years and operating cash flow generation.

With that, I'll now hand the call back to Ramon who will lead us through our question and answer session. Thank you, very much.

Ramon Alvarez-Pedrosa

Thank you, very much Josu Jon. In case you run in technical problems, please contact us through our e-mail address [e-mail] and we will contact you immediately to try to solve it. Before moving on to Q&A session, I will like the operator to remind us of the processes to ask a question. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions]

Ramon Alvarez-Pedrosa

Thank you, operator. Let me now move to the Q&A session. Our first question comes from Irene Himona at Societe Generale.

Irene Himona

Thank you, very much. Good morning, Josu Jon. Two quick questions, please. Libya, can you say what contribution was to your upstream EBIT place in the quarter? And then secondly, you mentioned refining margins so far in Q2. And what are you seeing in terms of oil product demand and oil product sales in April, please. Thank you.

Josu Imaz

Well, thank you Irene. And first of all going to Libya. Let me say that in terms of production, the average has been at around 36,000 barrels per day. And the estimate EBIT in the whole quarter has been more or less €24 million. Anyway, I'm going to check the figures with our team but I can just add more-or-less there. Going to the refining margins, we are seeing under slight recovery of demand in April completing with the first quarter. More-or-less the first quarter we have experienced a 23% of total reduction of the demand in Spain.

And what we are seeing in April is that the figure could be at around 21% or in service of touching the Spain and 18% in Portugal. I'm comparing with 2019. Of course because you know Irene that comparing with 2020 and taking into account or being where confined, at that time was is a no sense. So, comparing with 2019 figures of their slight recovery. We are seeing of course this recovery in a clearer way in margins.

Still, we have a low margin $1.2 per barrel as a margin indicator then in April. But any but there is an important milestone in coming days and of course I don’t have a full priority about that. But on May 9^th, they alarm state that was declared a six seven months ago by Spanish parliament is going to win. And it seems to me that restrictions in some way we have experienced and suffered because the pandemic over the last months are going to be clearly easier from this day on in Spain.

So, I see that we are going to see and we are prepared to experience a clear demand increase in case of scene in coming which this demand or sorry this restriction is in process and an at demand increase as we expect due to the end of this wave of the pandemic that is in some way overlapping with the vaccination process in sorry in -- I'm going -- the EBIT figures Irene was €140 million in Libya, excuse me. It was my mistake, I was checking upper show months figure. €140 million.

So, going to your second question. We are seeing and expecting a clear a demand increase in coming weeks as a consequence of the Yen of the restriction. In some way, we are still prudent the game is not fully over but after one year, I could say that the Repsol has overcome the worst of this pandemic and we are prepared to recover and to go on in our growth process. Thank you, Irene.

Irene Himona

Thank you.

Ramon Alvarez-Pedrosa

Thank you, Irene. Next question comes from Oswald Clint at

Bernstein.

Oswald Clint

I mean, there's always lots of rumors around your proposed transactions renewable IPO, the customer centric business. I mean I know the rumors tend to be 80% 90% wrong but I wonder if you could just update as on your intent to execute those particular transactions say within the next 12 or to 18 months, please. And then, secondly just on unconventional CapEx, the Marcellus and Eagle Ford of course gas prices in U.S. are not as high as international.

And others are adding rigs into the gas place as well. So, could you outline what are those payback periods you're assuming. And what happens if gas was to perhaps pull back to mid-two levels or even below $2.5 per Mcf. Would you scale back that CapEx again? Thank you.

Josu Imaz

Thank you, Oswald. I mean going to your first question. I mean, let me again underline that growth we are now I announced last time eight weeks ago I present in the fourth quarter results. Both that we are going to launch an IPO alternatively find us sustainable partner for our renewable business. And we still have a 13 months ahead to take our final decision. I mean, sitting with our commitment.

And I mean and the rationale of these decision is mainly to halve the right vehicle acting of visibility of the low carbon business and the question the cost of capital of the company. That is the rational we have behind this decision. I mean, it's nothing related to the moment on renewables are living and nothing to do with the market current situation. So, we have no rest to loans and IPO or find our partner.

We are analyzing the process. We are in thoughts with potential partners and so on. And we will take a final decision once we decide it is the best moment to do so. But I mean, our target is not divesting, is first of all having the right vehicle with low cost of capital. Two, grow and secondly to push to foster to enhance the growth in this business. That is going be important and core for Repsol.

I mean, in the case of the customer centric business, let me show you Oswald, that we are always monitoring the market in order to search for in organic opportunities that could be beneficial for our shareholders. And in this approach I mean we have some time to evaluate the possibility to sell our minority stake in our customer centric business. But I'm going to be very clear. We are only to consider this option if a potential partner have the capacity to add value to the current Repsol customer centric business proposal.

Or let me say, that is not going to be an easy task. You know that we are on a strong position, Iberian energy leader with a high growth power customer business with more than 24 million customers and a strong brand with reputation and a growth variant. I mean, we have the expectation to grow up 40% in the EBITDA of this business by 2025 compared with 2019 levels. I mean, it's not easy to find a partner to improve this pathway.

But in any case I mean we are always because it's our duty analyzing the market. But let me say that in this case it's going to be harder than in the first one. Going to the Marcellus. I mean, first of all the payback is around 3.5 years if we take this increase we are going to have. Secondly, I mean I know, you know that was all but in Eagle Ford we have mainly liquids.

2/3rds of the production are 70% is either old or common set. So, in the case of Eagle Ford, we have a clear exposure to liquids that increase the economics. In the case of Marcellus, you're right it's dry gas. The drilling in the Marcellus is going to be the year of the increase we are going to have in CapEx terms at around $40 million and $50 million. I hope that I'm giving you the right figure after the any stake sorry again Irene.

Talking about Libya. And going to the breakeven, we are comfortable in cash terms because it's slightly below $2 per million of picky'ish how we have in the new drilling process we are going to put. We are comfortable in breakeven terms. So, of course, working exploring in this case an increase in CapEx has always some risks but we are quite comfortable taking to account the expectation for this gas price.

Taking into account of payback and taking to account the low breakeven in cash terms, of the new production we are going to drill in this campaign from June on with new rig. Thank you, Oswald.

Ramon Alvarez-Pedrosa

Thank you, Oswald. And next question comes from Biraj Borkhataria at Royal Bank of Canada.

Biraj Borkhataria

Thanks for taking my question, got two please. The first one's on Chemicals. When I look at to the model, I find one of the best results in several years. I was wondering if there's anything unusual in there or anything in cloud that was driving that near a significant improvement or is it just a broad-based kind of chemicals recovered there.

And then, the second question is on working capital. I think last year you talked about one of the strategic initiatives and it was one of them was to these working capital to have to protect the balance sheet. And how should we think about that into 2021. Have you baked anything into your net debt guidance for this year, some of the volume with high commodity prices, you might have a bit of a headwind there.

So, are there any comments on that would be helpful, thank you?

Josu Imaz

Alright. Thank you, Biraj. I was checking some days ago or you know this Monday, Tuesday. The tracking we have internally of Chemical internal index that is related to international margin on our own unit from 1991 on. That is a tracking we have. March, and let me say April are the highest numbers, the highest figures in merging terms in the series we have in Repsol.

Got this in some way behind. I mean, it's true that even in 2020 with the consumer growth, the automotive sector, construction negatively impacted because of COVID. The petrochemical demand kept globally steady sustained by applications like packaging healthcare and so on. But it's true that in 2020 we are seeing a clear demand growth that continues to provide a support to the market.

With certain recovery in some of those sectors that work more negatively in some way impacted in 2020. We have to offer that this quarter we have seen some supply constraints due to production and logistic issues in the case of the Chemicals and in the Gulf of Mexico in January you would remember that the weather problems they have and so on. On in some way, I see that the maintenance in some trackers and so on is also impacting in a positive way.

But our perception is that performance in this business is expected to continue at least in these throughout second quarter. And it will be quite rational to expect an honest move or decline in the third quarter as supply demand balance normalizes. But as I said before, we are seeing a clear results tracking in Repsol. And in April, we are in some way there sitting or overcoming the full expectation we have for the whole 2021 year.

And so, I don’t know what is going to happen but let me say that even in seen the end of this restriction, the second half it seems to me that is going to be a good second half for the Chemical business. Going to the working capital for the whole year. It seems to me that we can bring any and excluding any price effect our expectation was to have us €300 million increase in working capital over the whole 2021 year.

More or less a €100 million, €150 million could be related to the Upstream mainly Venezuela. And €150 million could be related to the Downstream activity receiving more for some a part of the store recovery we have at the end of December; that was very low and so on. On top of that, we could expect being a $60, $64, $65 per barrel at the end of the year, in that case perhaps you have to add a €500 million maximum €600 million to these working capital due to the price you need to sustain your inventory.

So, it's around €300 million that will be the figure of $50 per barrel at the end of the year and something close to €800 million as the total working capital increase over the whole year in none in the scenario put in the end through the year in that range of $60 to $65 bbl. per barrel more-or-less. Thank you, Biraj.

Biraj Borkhataria

That's very helpful. Thank you.

Ramon Alvarez-Pedrosa

Thank you, Biraj. Next question comes from Michele Vigna at Goldman Sachs.

Unidentified Analyst

This is John, thank you very much for the presentation. Two quick questions if I may. On the tax rate, what should we expect in a normalized environment as your Downstream business recover. Is it still fair to assume something between 35% and 40%? And then, finally on your commercial business, is it fair to assume that as the restrictions start to ease and traffic comes back into the summer that we could assume that the EBIT would go back to the €200 million plus the quarter perhaps starting from Q3.

Would you find that a reasonable modeling assumption? Thank you.

Josu Imaz

Thank you, Michele. Do you know, more-or-less all in all in our Downstream the average tax rate is around 25%. And in the case of the Upstream, I think that this quarter we have been the 45% even having a bit more Libya because we know so far the more North Americans all-in-all we have been in the 45%. But it's true that because the wake of the results in the P&L of the Upstream has been higher in relative terms comparing with the Downstream.

Because the situation in the refining business and so on we have been close to the 40 in the total figure of as an average in the first quarter. I mean, taking into account let me say a more normalized year. I think that we could be closer to a 33% 35% in case of having a more normalized Downstream but of course that is going to be the great of every business in the tax part. A bit, let me again underline what happened in Spain generally because that we'd not only experienced a restriction in mobility for to which even the non-oil business in our main part of Spain was not steady in a normal way because there's no term we suffer in generally.

So, all that of course added to the restriction mobility in the commercial side has impacted this quarter in this business. In any case, I think that we are going to see a clear recovery of this business in this quarter. The ease-in of restrictions is going to be clear. And in some way the customer centric business in this quarter I mean in next quarter could have more or less an average in the whole year we could have an EBITDA more or less of 800 -- €900 million.

And in a normalized quarter and I think that next quarter is going to be quite normalized in the customer centric area, we could be close to €250 million of EBITDA. And on EBIT that could be something between €150 million €170 million. That pricing the things are going to be clearly better after the end of the state of alarm from May on, Michele. Thank you, very much.

Unidentified Analyst

Thank you.

Ramon Alvarez-Pedrosa

Thank you, Michele. Next question comes from Thomas Adolff at Credit Suisse.

Thomas Adolff

Hi guys, a couple of questions going back to commercial and the renewable business. Just on the commercial to clarify. So, you've mentioned just now that any potential partner will find it really hard to add value. With effect that you started the process, to me suggest that you were looking for a good valuation which you don’t either didn’t get.

And then I guess my other question would have been why you need the proceeds for the commercial business considering you can't really grow in Spain. You've got a very strong position to unless the intention was to use the proceeds to maybe add another geography in renewables. So, just a little bit and not sure about how to read the activities in the commercial business.

And then secondly, maybe just on the renewables. You said not in a rush right now but obviously since you last spoke was the 4Q results, maybe you can at least provide us with a progress report over the past two to three months; what have you learnt; are you implementing more positive about the process; or not. Thank you.

Josu Imaz

I want to be very clear, we don't need the proceeds of any divestment come in from the customer centric business. Saying that is true, that in case of seeing let me say an enterprise value EBITDA proposals and offers evolved 11, 12 times. In that case I have to rethink both I said some seconds ago. But saying that so much. In case of having that partner and as I said that is not going to be an easy task at all.

If not today our center scenario, we need someone ready to add capabilities to our business; to grow in some way to fulfill in a better way the strategy plan we have on some one. In the case of the renewable business, let me say first-of-all that we are delivering what we said, every step we commit we are delivering to the market what was our commitment.

Secondly we are building the business, we are building the capabilities to manage this business. Today we have our reputed team that is already our reference in the market. secondly, we are working internally in terms of carve outs, legal entities and so on to prepare this business to have the right vehicle in financial terms to foster the growth of this business.

And that is going to be quite similar in both cases for the JV with a potential partner or the IPO. And in some way we are working finding the right partner for this business. The IPO is an option and let me say a combination of both is also an option. Because perhaps we could have a partner that could in some way help us to build this vehicle with a lower cost of capital preparing together the IPO that at the same time in the mid-term or in the long-term could be also an existing way for this potential partner.

So, we are working on that. At the same time, we are progressing the right way as you have listened some minutes ago, we have we started the operation in a new plant this week in Kappa. We are also improving the mix of the merchant and PPAs position of our business to have a more clear in some way a more clear expectation of future cash flows coming from this business, what we did with Microsoft related to our Spanish assets, it goes in that direction.

Same thing in Atacama in Chile that thanks to the PPA we signed I think that's when come in for 10 years is currently in the double-digit return for the equity position we have in this wind farm. In Chili, we are progressing in that direction and growth we are building some way are the capabilities to have a competitive a profitable business that in some way is going to need and that is what we are looking for now. The right financial vehicle to improve the cost of capital of this business to compete in a better way. Thank you, Thomas.

Thomas Adolff

Alright, thank you.

Ramon Alvarez-Pedrosa

Thank you, Thomas. Next question comes from Alastair Syme of Citi.

Alastair Syme

Thanks for that, Josu Jon. Can I just get you to comment on refining? The low margins is clearly a signal for the industry to rationalize capacity but you think you got this higher forecast and later on in the year which I guess is consistent with the end of lock terms. But I'm wondering if that's going to end up with the Industry rationalizing enough capacity if that scenario happens.

I'm just sort of interested in your perspective. And then can you talk specifically on Euro and refining portfolio what you were doing because there has been some press around so the temporary shutdowns for instance in Petronor but that did you see into these sort of the mid-term temporary shutdowns if that makes sense. And but that's all I had, thank you.

Josu Imaz

Thank you, Alastair. I mean first of all let me say that our five refineries are in the first quarter of the European competitiveness in a normal situation. Remember that even in 2020 when we take and publish figures, looking at the final more than a half of them were half and relative net cost margins and all of our five refineries in Europe they were in the positive sight.

It is true that we are seeing and experiencing a quite no usual situation in Europe market. The pandemic the mobility restrictions they have impacted in a dramatic way on some factors that are important even in relative terms for a refining system. First of all, I mean the lack of jet sales in the role is impacting in every negative way on the situation on the spreads of the middle distillates in the world.

And you know that we have a system that is in some way very related to the middle distilleries production. A less exposed to gasoline. What is an advantage? Being in Europe in a normal situation in this pandemic has been in some way in relative terms add differential negative competitiveness for our system. Secondly, we are more exposed to this spread or this count better said of heavy oars because the restriction in production that orbit and some other companies are enforcing or complying due to the drop of demand in the world.

The restriction of supply of this crude oil is higher than for some older alternatives and that is impacting also in a negative way on our systems. And thirdly, due to the drop because of restrictions in our interim Spain, Portugal, France, that is also part of our interim and so on. We are changing some position for at our CIF for us with higher margins by FOB positions with lower margins for our system.

I mean, these three facts are impacted in a negative way. That is slightly recovering but we are not still there because I mean we are waiting for the end of the mobility restrictions. And that is impacting in that temporary way and opening the door to shut down that are temporary that are affecting to our three or four of our refineries. Petronor and also in Spain, Bilbao, a Puertollano in the high plains, Coruna, and in some way we are prioritizing the continuity of our operation.

That is true that due to these demand drop, we are taking this kind of temporary shutdowns and temporary layoffs in our refinery with the target of improving the efficiency and increasing the competitiveness we have. We are and we expect that in some weeks or in a few months this situation could be recovered. Because in competitiveness terms, I mean we have our refining system of five refineries that having the first European cortile, they are not threat and in none of the scenario they are no threat in none of the scenario were at 25% of European capacity could be shut down in coming five six years because a lack of competitiveness of the European refining.

We are going to be there, we are going to be operating. But our duty in the mean time is of course protecting our P&L, protecting our assets and investing to transform them and to have a more competitive refining system. We are doing that, remember that we have in our strategic plan the target of reducing that 25% this year two emissions of our refineries. We have a more a higher production of ecofuels, reduction of our energy cost, geographic economy and so on.

We are taking advantage of this time to accelerate this transformation to have after the recovery that is going to arrive. And is going to arrive probably soon to have a more competitive refining system. Thank you.

Ramon Alvarez-Pedrosa

Thank you, Alastair. Next question comes from Alessandro Pozzi of Mediobanca.

Alessandro Pozzi

Yes, good afternoon. Thank you for taking my questions; I have three. And you had guidance on EBITDA by 10%. I was wondering that if you can have a bit more color on the various moving parts there thinking about what your price that you are using for this year but also the impact of the petrochem on the new guidance. The second question is on recovery front, I believe in Spain, government approved the new recovery fund.

And I was wondering to how that could help Repsol investing in energy transition and especially believe in that there are funds allocated for hydrogen as well. So, I was wondering how you can benefit from those. And final question is you ticked a little bit of the capital allocation increasing CapEx in the Upstream against maybe to with lower in the industrial. But I was wondering if refining margins also coming up in the second half, is it the right time maybe to increase the absolute level of CapEx.

That's all from me, thank you.

Josu Imaz

Thank you, Alessandro. And first of all going to the EBITDA, all-in-all we are giving our guidance where the EBIT of the industrial business is going to stay at the same level. And in some way the petrochemical improvement is going to offset the reduction of the EBITDA coming from the refining. Because we are also moving down the refining in this margin from the former $3.5 per barrel we have for the whole year for 2021 to $2 per barrel now.

Taking what could be challenge some weeks ago but today I think that is our proved approach on an EBITDA at around €700 million €750 million for the petrochemical business for the whole year. We are taking offset in some way the effect coming from the EBITDA reduction because they're pushing the margin index the refining margin index down. So, the €500 million that we are improving in terms of EBITDA, all of them they come from the commodity price.

So, what we are taking in this guidance, comparing with a $50 per barrel brent and $3 per million btu's in terms of Henry Hub what we are taking as assumption to give you this guidance for the whole year is around $60 per barrel brent as average for the whole year and $2.8 per million btu's in terms of the Henry Hub. Going to the recovery front, of course we are going to be there, we have bring it that all-in-all they the accounts for €6.3 million to invest in coming years that are related to this next generation plan.

And the main target we have, thanks to this public support, we can accelerate project and even in some cases we could develop projects that currently perhaps don’t meet our expectation in terms of profitability because they are technologies that are a not fully matured now. But thanks to these public support, I'm not telling in CapEx term, in some way it could come in regulatory terms. For instance, electricity cost for the hydrogen production and so on.

Thanks to that, we are going to be able to accelerate some projects to develop these projects and to have a privileged position as Repsol in the hydrogen market. That is very important for us because that is the seat of the future of the industrial sides of the company; circular economy and hydrogen market. We can't forget that the Spanish going to be the main European player in terms of hydrogen because the renewable production we have in the country and so on.

And Repsol is going to be the main player. We are today the main Spanish consumer in hydrogen terms. We operate today in Cartagena the largest hydrogen plant in Europe and on top of that we are starting to analyze and build new markets for Repsol. That will be the industrial seat; that will be electricity storage; that could be in some way the substitution of making natural gas; and even for some kinds of mobility transport fuels.

All that is going to arise, Repsol is going to be a player. We have competitive advantages to be there and thanks to this European next generation programs and funds, we are going to have the capacity to accelerate this position great cool to have. I mean, the organic CapEx of the year more-or-less the total CapEx of the year is going to be at around €2.6 billion €2.7 billion. We are more optimistic about the future.

Let me say that today of course with all the concerns we got the pandemic to see there. The view I have is more positive than the view I expressed and transmitted eight weeks ago when we presented the fourth quarter result. But it's true that I mean we are still in we're not resilient modes. We are going to be proud, we are going to wait to see the end of the tunnel. And of course we are going to analyze some other opportunities that could appear.

Even in a small in some way inorganic as more projects or positions that could accelerate the transformation of the future always in a prudent way, I'm not talking of our acquisitions and things like that but we are paving the way to have a framework where this excess of proceeds we could expect in coming months in coming years could accelerate the transformation of Repsol building this 25, 20, 30 year.

A company that is going to be profitable but at the same time less cover mix. Thank you.

Alessandro Pozzi

Thank you.

Ramon Alvarez-Pedrosa

Thank you, Alessandro. And next question comes from James Hubbard at Deutsche Bank.

James Hubbard

Yes, morning, thank you. I've got two questions. Your guidance in net debts on your new macro assumption is less than €6.8 billion at the end of the year done. I think and correct me if I'm wrong, it was the same guidance when you were using $50 a barrel. So, I'm wondering what's why you don’t expect that net debt to fall a bit more, is it just lost to working capital and the week refining in H1. So, that's the first question.

Second question is the Sakakemang projects in Indonesia. I believe that is your carbon capture project. Again, correct me if I'm wrong but assuming it is. Then I'm wondering what's happening to the CO2, I'm assuming and maybe wrongly that there is no carbon market in Indonesia and the government offers no incentives for people to not emit CO2, especially given what they do to the forest every year.

But if that's the case, what's happening to the CO2? Is this like charity, you're doing it to be a good proper citizen or is a commercial use for the CO2 that you found. Thank you.

Josu Imaz

So, thank you James. You are right, we are not changing our guidance. When we said below or less than €6.8 billion, it's true that it's not going to be finally the same figure. It's going to be a bit below that figure we have in the last in presentation. But in some way in case of seen as we said before, these guidance's in case of seen this recovery of the refining margin and so on, I think that we have some small room to increase in some way the CapEx even in organic way in this transformation process of the company.

But in any case my guidance by the end of the year is to have our net debt below €6.8 billion. In case of having I mean more proceeds, in case of having these the EBITDA and the cash flow from operation, we could expect in a better the scenario. I mean, we are going to be on big room to perhaps to invest a bit more either with this flexibility we expressed before in the Downstream or in a small pushes in this low carbon transformation.

We are of course analyzing many potential opportunities and in case of scene let me say something more material I will deliver to the market. in any case, I also want to express the fact that another way to be before or at the end of the year below this figure of €6.8 billion is being less exposed in financial terms though the due to the emission of what is taken into account the current that we have today that is €6.5 billion.

I think that we are going to be there and we have the opportunity to perhaps having a bit more room to increase the CapEx of the company. Thank you.

James Hubbard

Okay.

Josu Imaz

Sorry, that come on -- you're right! We are negotiating now with a regulator. And we have an opportunity a project to inject CO2 in Indonesia. We are never shaking the conditions of this injection. And in this case, of course we will be able to launch the project. Thank you.

Ramon Alvarez-Pedrosa

Thank you, James. Next question comes from Jason Kenney at Santander.

Jason Kenney

Good afternoon. A couple of questions on hydrogen. Again, just going back to an earlier comment. How do you think it's best to model that renewable hydrogen volume or equivalent this decade? Do we simply back out at each stop cost or an energy input the future of refining or you're assuming it as a commodity or a power even is own right in this decade. Then separately on the same with hydrogen. I was wondering if Repsol had any oil assets that could be tested or converted to in city clean hydrogen production which leaves CO2 in the ground obviously just produces clean hydrogen.

I mean, I'm looking at your international positions let's say mature but maybe even the smaller older Spanish assets too.

Josu Imaz

In the case of the hydrogen, first of all the most competitive on our point-of-view of the hydrogen application is going to be the substitution of a pack of the hydrogen we are using today in our refineries come in from the reforming of natural gas. That we are going to need let me say that prices they have to be there to substitute this hydrogen in that competitive way.

They are mainly two drivers that are going to help this hydrogen to be transformed. The first one is going to be what is reflected in European Rev Tool directive that considers the hydrogen that is going to be part of the molecules of our hydrocarbons as a buyer fuel that does is changing dramatically in a positive way. The figures in competitive terms of this hydrogen and the second one is going to be the potential energy transition framework that the Spanish authority could launch in terms of reducing the burdens coming from distribution transport and so on that could impact in an elected way.

The cost of the electricity that has to be used to produce hydrogen. All-in-all we expect to be able in coming years over this period 2021, 2025, to have 400 megawatts that is what is in our target by 2025 or have hydrogen that could be competitive and could help us to reduce in a dramatic way the CO2 exposure of our industrial sites. On top of that and I think that we are going to see new applications for this hydrogen that are going to come for sectors where electricity is not the solution for this decarbonization.

I mean, in sectors like they're still making sector, the paper mills, cement or some forms of mobility. That is going to come perhaps a bit later. Today in our model of five years of we have is mainly a bit in favor of building this position in Repsol. In the case of the Green, the oil assets to test Green hydrogen, we have the possibility of injecting CO2 in Brazil inside Equinor and we are analyzing the rest of the assets.

But in our first view, we could have places in the U.K. perhaps in the future prospect of Alaska and Libya could be in geological terms a very suitable asset to inject this CO2. And let me add a bit more, that a part of this CO2 can't be transformed in some other way. For instance, in the project we have in Bilbao, to produce synthetic fuels and that is going to be in operation is a first a scalable plant in three four years.

What we are doing is taking this CO2, reducing the CO2 to carbon monoxide and using this carbon monoxide with hydrogen in a pressure drop cycle to produce this synthetic fuel. So, what we are doing is some way is using the CO2 to not to be injected but after been reduced in chemical terms using this CO2 to produce a synthetic fuel molecule. So, the future is going to be different, different technologies are going to be competent. And what is our bet is to have this industrial sites of anew half or the output we are going to have is going to be of course energy for mobility and energy for homes.

But the input is going to be different. Oil is going to be there of course, gas is going to be there but we are going to have these raw materials for this input we are going to have a green power electricity, we are going to have biogas coming from the urban wastes. We are going to have some wastes coming from the recycled plastics and so on. All that is going to transform and is changing our current sites. Thank you.

Ramon Alvarez-Pedrosa

Thank you, Jason. Next question comes from Matt Lofting at JPMorgan.

Matt Lofting

Hi gents, thanks for taking the question. Just one left actually. I think during Q1 you net issued further hybrid bonds. Coming back to the previous question, I assume that when you've left net debt guidance between '21 unchanged that excludes that net benefit that's come from the hybrids and then link to that. Could you also just remind us how you think about the role of hybrids within Repsol's financing structure internally.

And then, how you calibrate it within the context of the broader debt and financing structure of the company. Thanks.

Josu Imaz

So, briefly, yes you're right. We're excluding any positive effect coming from the issuing of these hybrid bonds in this guidance. So, I mean today that debt comparing with the debt we have at the end of 2020 will be 6.8 today is 6.5 due to the effect of the hybrid issuing and represent we have this quarter a €0.3 million more or less. But what we are giving you as guidance is fully excluding any effect coming from this hybrid potential issuing process.

And then we only have the hybrids are an integral part of our capital structure. And we consider this hybrids some baseline to preserve the flexibility of the company to be prudent in financial terms. The plan we have is in many case to maintain the equity content of the existing hybrids. But we are not going to take any of this figure to say that again on the year we are going to be below €6.8 million. We are giving you this guidance excluding any effect coming from the hybrid issuing.

Ramon Alvarez-Pedrosa

Thank you, Matt. And next question comes from Joshua Stone of Barclays.

Joshua Stone

Thank you, Ramon, and good afternoon. Just a question on this displaced the chemical plant in Tarragona with the -- with Enerkem and Agbar. And could you talk about what's going to be achieved taking a FID on this project and largely return to your targeting. And separately when you think about this 20% reflecting targets of the polyols in production.

Could this technology be rolled out across the rest of the portfolio or would you consider different technologies to get that. Thank you.

Josu Imaz

So, thank you Joshua. I mean, first of all I mean you know that's the transformation process of I think I remember that for 100,000 tons of mainly waste coming from the urban in Tarragona's area. They are going to produce they had in mind a figure up to 100 to 120,000 tons per year of methanol. Growth is going to be the total CapEx of Repsol; that is going to be at around €130 million €140 million that in equity terms.

Because you know that we having none JV with two other companies Enerkem and Agbar is going to be in the 60s -- €60 million, €70 million roughly speaking. I could get the figure later, if you would like Joshua. And growth we are seeing in terms of return is around I have to check the figure but 16% 17% more-or-less. So, it's a profitable business, it's increasing the competitiveness of our Tarragona site. That you know that is the most performing and competitive chemical site we have in Repsol.

Is fully integrated circular economy strategy using wastes to produce methanol that is going to be used either to produce fuels or to produce materials chemical products. And in some way I mean that is thank you for the question Joshua because this is a good example of what we I was saying some minute before. I mean, we are transforming our industrial sites.

We don’t have only refineries or chemical plants. In some way our industrial sites are starting to be also part of the circular economy that is going to drive the future of industrial activity in Europe in coming years. Thank you, Joshua.

Ramon Alvarez-Pedrosa

Thank you, Joshua. That was our last question.

Ramon Alvarez-Pedrosa

At this point, I'll bring our first quarter conference to an end. Thank you very much for your attendance and stay safe.