Bacalhau Ramp Up And Refining Upgrades Will Support Long Term Cash Generation

Catalysts

About Galp Energia SGPS

Galp Energia SGPS is an integrated energy company with upstream, refining, gas, commercial, and renewable power operations focused on disciplined growth and cash generation.

What are the underlying business or industry changes driving this perspective?

• The ramp up of the newly onstream Bacalhau FPSO, one of the most efficient oil units globally, is expected to lift high margin upstream production volumes through 2026. This supports EBITDA growth and higher operating cash flow.
• Continued portfolio high grading in upstream, including optimization of Tupi participation and disciplined capital allocation, is intended to sustain low breakevens below 40 dollars per barrel. This helps stabilize net margins even under softer commodity prices.
• Refining system upgrades and the current major turnaround, combined with structurally tighter light and middle distillate supply in Europe, position Galp to seek above historical refining margins over the cycle. This is aimed at supporting resilient refining EBITDA and free cash flow.
• Expansion of LNG sourcing from the U.S. and strengthened gas trading capabilities are leveraging global gas trade growth. This is designed to improve midstream earnings quality and smooth revenue volatility across energy price cycles.
• Scaling solar generation with a focus on ancillary services and storage enables monetization of power market volatility and rising electrification demand. This supports diversified revenue streams and is intended to gradually increase returns in renewables segment EBITDA.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Galp Energia SGPS's revenue will remain fairly flat over the next 3 years.
• Analysts are assuming Galp Energia SGPS's profit margins will remain the same at 4.9% over the next 3 years.
• Analysts expect earnings to reach €960.5 million (and earnings per share of €1.37) by about December 2028, down from €975.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €1.1 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 17.6x on those 2028 earnings, up from 12.6x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 1.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Long term global decarbonization policies and declining structural oil demand could erode the value of large new upstream assets such as Bacalhau and Mopane. This could lead to lower realized prices and underutilized production capacity, which would pressure revenue and EBITDA over time.
• Reliance on currently favorable refining and gas trading conditions leaves Galp exposed to cyclically weaker margins when product markets normalize or oversupply emerges. This could compress group EBITDA and reduce free cash flow resilience versus recent levels.
• A prolonged low pricing environment in power markets, highlighted already in the solar portfolio, could delay returns from renewables and low carbon investments made during the current turnaround. This could weigh on segment earnings and group net margins as capital intensity rises.
• Execution and safety risks around major projects and turnarounds, including the large refinery outage and the ramp up of the Bacalhau FPSO, could drive unplanned downtime, higher operating costs and potential cost overruns. This would negatively impact earnings and free cash flow.
• Repricing of legacy upstream interests such as the Tupi adjustment, along with future portfolio reshaping in Brazil and Namibia, may crystallize additional cash outflows or less favorable fiscal and contractual terms. This would lower net income and constrain balance sheet flexibility despite the current low net debt to EBITDA level.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €19.61 for Galp Energia SGPS based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €23.0, and the most bearish reporting a price target of just €15.8.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €19.5 billion, earnings will come to €960.5 million, and it would be trading on a PE ratio of 17.6x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of €17.63, the analyst price target of €19.61 is 10.1% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.