Galp Energia Sticking with Strategy for Stronger E&P Business

Portugal's Galp Energia is continuing with its strategy of strengthening its production activities, while complementing these with competitive downstream and gas businesses, according to investment bank Jefferies.

Jefferies analysts recently met with Galp Head of Strategy Pedro Dias, they reported in a brief research note Tuesday. They said that the meeting revealed that the path to the company generating free cash flow by 2019 is in progress, with the firm's Downstream business generating earnings that will provide a near-term cushion as the firm executes a 25-percent annualized increase in its production.

"Near-term delivery in the Santos pre-salt continues to impress and Iara development planning is moving forward. Progress in Area 4 offshore Mozambique is slow but also grinding on with the Area 1 partners recently selecting the CCS JV [CB&I, Chiyoda Corporation and Saipem] as contractor for the initial onshore development," Jefferies said.

Meanwhile, ahead of a new strategic update from Galp's partner Petrobras, Jefferies said that it "sensed management remain comfortable" with the one-year delay to the Replicant FPSO vessels that were due to begin production over the BM-S-09 and BM-S-11 blocks, offshore Brazil, this year. (Galp holds a 10-percent interest in the BM-S-11 block, which contains the Iara discovery).

"A pragmatic response to delivering the BM-S-11 projects seems increasingly likely in our view. In the past, we have suggested the consortium has good flexibility around international tenders for rigs and other services as local content requirements… are currently satisfied. International contractors likely provide cost savings while new deepwater rig contracts could be circa 30-percent below current rates in the fleet. Fewer drilling days may also represent upside with drilling and completion costs representing circa 50 percent of total costs. Galp sees less scope for savings in complex subsea infrastructure/larger turnkey facilities," Jefferies added.

Galp reported at the end of April that, in spite of increasing its first-quarter production by 48 percent, its 1Q EBITDA operating profit fell to $102 million (1Q 2014: $113 million) as a result of the lower oil price.



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