Galp Energia: Producing Oil At $2.1/Barrel While Discovering New Oilfields (OTCMKTS:GLPEF)

Introduction

As it has been more than six months since I last discussed Galp Energia (OTCPK:GLPEF) (OTCPK:GLPEY) here on Seeking Alpha, it’s perhaps time for an update. Not only has the company released its full-year results, it also made what appears to be a sizable new discovery in Namibia while the Brent oil price is now trading above $90/barrel. Plenty of tailwinds for Galp but the share price is currently just 15% higher than where it was trading seven months ago, so I wanted to check if this perhaps created an interesting opportunity.

Galp’s primary listing is on Euronext Lisbon, where the stock is trading with GALP (straightforward) as the ticker symbol. The average daily volume is approximately 1.6 million shares, which makes it the trading venue which offers the highest liquidity numbers. There are currently 773.1M shares outstanding, resulting in a market capitalization of approximately 12.15B EUR at the current share price of 15.72 EUR per share.

Ending 2023 on a strong note

The company produced an average of just over 122,000 barrels of oil-equivalent per day in 2023 but the average production rate was definitely weighed toward the second half of the year as the Q3 production rate was just over 125,000 boe/day while in Q4, the total working interest production came in at almost 127,000 boe/day. The production cost per barrel of oil-equivalent was just $2.1 in the fourth quarter of 2023 which explains the amazing margins generated by Galp.

As the table above shows, the average oil price definitely decreased (which again didn’t come as a surprise) but it was good to see the refining margin during 2023 remained relatively stable although there was a severe decrease in the final quarter of 2023 when the refining margin fell to just $6.1 per barrel of oil-equivalent.

Looking at Galp’s Q4 results, it reported a total revenue of 5.23B EUR (Galp calls the revenue “operating income” which is pretty confusing) while it reported a total EBITDA of 763M EUR. That’s a 40% decrease compared to the preceding quarter due to a lower total revenue and higher operating expenses. Fortunately there were no further additional negative results and the EBIT of 454M EUR was about 50% lower than in the third quarter of the year.

As the income statement above shows, the pre-tax income was 374M EUR which resulted in a net profit of 393M EUR of which 336M EUR was attributable to the common shareholders of Galp. That’s an increase of approximately 12% compared to the preceding quarter which is quite a surprising move given the 50% EBIT decrease. The difference could be explained by the 175M EUR difference in windfall taxes. Whereas Galp recorded 76M EUR in windfall taxes in Q3 2023, it was able to reclaim some of its previously-recorded taxes resulting in a net tax benefit in the fourth quarter.

Looking at the company’s full-year results, the total EBITDA was pretty flat, a decrease of less than 5% is a pretty decent result in a year where the oil price was substantially lower and the refining margin slightly lower. The reported net profit was approximately 1.24B EUR which includes approximately 1.1B EUR in taxes (including a net windfall tax of 95M EUR). Divided over the current share count of 773M shares, the EPS was approximately 1.42 EUR (the reported EPS of 1.33 EUR per share is based on the average share count).

The high oil price will benefit Galp in 2024

With Brent oil prices exceeding $90/barrel, there’s little doubt the year has started well for Galp Energia. The company’s FY 2024 outlook is based on an oil price of $80 for Brent, so it’s safe to say the 3.1B EUR EBITDA guidance and the 2B EUR operating cash flow guidance are relatively conservative based on the current oil price. Should the Brent oil price continue to trade around these levels, I would think it’s realistic to see Galp hiking its full-year guidance.

Interestingly, Galp’s capex plan to spend 1B EUR per year includes approximately 700M EUR per year in growth and transformation capex. Indeed, Galp is guiding for a sustaining capex of 300M EUR per year which means that using an operating cash flow of 2B EUR per year, the underlying net free cash flow on a sustaining basis is approximately 1.7B EUR or 2.20 EUR per share. Based on how Galp Energia provides its guidance, we should still deduct approximately 300M EUR in interest and lease expenses from this result, indicating an underlying free cash flow of 1.4B EUR or 1.81 EUR per share. On a reported basis, the 1B EUR in free cash flow (including the 700M EUR in growth and transformation capex, mainly in the renewables segment where Galp mentioned it has a 14% ROIC) would still result in a free cash flow result of 1.3-1.35 EUR per share and 1.15 EUR per share after taking payments to minority interests into account. The attributable FCFPS could potentially be even higher if the company continues its share buyback program.

Galp also provided a sensitivity analysis and for every $5 change in the Brent price, the operating cash flow will be impacted by 85M EUR per year. So if the Brent oil price averages $85 for the year, the free cash flow result per share will increase by approximately 11 eurocents per share.

I’m also looking forward to seeing more details on its recent discovery offshore Namibia. Galp Energia owns an 80% stake in the licenses but is keeping its cards close to the chest for now.

For what it’s worth, Canada-listed Sintana Energy (SEI:CA) has a 5% indirect stake in the license and currently has a market capitalization of approximately 138M EUR. Although Sintana has other assets as well, the majority of its valuation is underpinned by the 5% stake in the licenses.

Investment thesis

I have a small long position in Galp Energia as I like the company’s low operating expenses thanks to its exposure to low-cost oil fields. The sustaining capex is low which creates additional financial flexibility for the company. Galp will pay a 0.54 EUR dividend per share (subject to the 35% Portuguese dividend withholding tax) while it has kicked off a new 350M EUR share buyback program which should reduce the share count by approximately 3%.

I’m looking forward to seeing the results of the Namibia discovery and although I don’t think this will add billions to Galp’s market capitalization, it could further fill its development pipeline. The Bacalhau oil project should be up and running in the summer of 2025 and this will add a few 10,000 barrels per day of low-cost oil to Galp’s production basis.

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