Galp raises refining margin outlook for 2017 to $3/bl
Madrid, 2 May (Argus) — Portugal-based Galp has raised its forecast for the average benchmark refining margin for the basket of products from its 330,000 b/d Portuguese refining system in 2017. It lifts it to $3.0/bl from a previous $2.5/bl, reflecting continued outperformance of crack spreads since the beginning of the year.
The improvement is modest considering that Galp's benchmark margin is currently averaging $4/bl in the second quarter, up from $3.5/bl in the first, when it was boosted by stronger middle distillate crack spreads than the company expected — reflecting higher demand for diesel and kerosine — and a widening of gasoline crack spreads compared with competitors in Africa.
Galp is concerned that the build-up of gasoline inventories in the US ahead of the summer driving season could affect arbitrage opportunities, while the agreed production cuts from Opec members and a group of non-Opec producers could also increase the price of Brent, chief executive Carlos Gomes da Silva said. This has led the company to maintain a cautious outlook despite the margin strength in the year to date.
Galp achieved an average real refining margin of $5.1/bl in the first quarter, beating the benchmark by $1.6/bl after it managed to offset some of the negative impact of an unplanned outage of a crude distillation unit (CDU) at its flagship 220,000 b/d Sines refinery by sourcing vacuum gasoil at a discount to Brent to keep its conversion units running at full capacity during the halt, as well as diversifying its crude slate.
Galp's refineries in Porto and Sines should continue to beat benchmark refining margins by more than $1/bl over the rest of the year since they have no stoppages planned over the second and third quarters. The only planned work in the rest of 2017 is a turnaround lasting no more than one week in the fourth quarter, which will affect a CDU and a fluid catalytic cracker (FCC).
The company has 20pc of expected 2017 refinery production hedged at a margin of $3.45/bl, while hedging 7pc at $3.6/bl for 2018 and 5pc at $3.8/bl in 2019.
Galp is expecting solid economic growth, which has outperformed expectations in both Spain and Portugal in the first quarter, to continue to support its key service station network and other direct clients in Iberia, which form the main outlet for its refinery production.
Galp's downstream division posted growth on the year of 27pc in operating profit to €187mn, thanks to the refining margins it achieved and the strength of the company's retail division, as well as an increase in wholesale volumes of jet fuel and bunker fuel.
Iberian demand for jet fuel is on track for a second consecutive year of record demand in 2017 on the back of the ongoing strength of the tourist industry, while fuel oil sales in the first quarter may have seen support from the threat of strike action at ports in neighbouring Spain, which obliged charterers to change routes and use alternative nearby deepwater ports such as Sines, where Galp's 220,000 b/d refinery is located.
Galp increased its total sales volumes by 6.7pc on the year to 4.4mn t in the first quarter, after higher sales from trading activities offset lower sales to direct clients in Iberia. Sales to direct clients in Africa, where it operates networks in the former Portuguese colonies, were up by 12pc year on year at 197,000 t, boosted by an opening of the gasoline arbitrage with West Africa.
The focus on shunning lower margin wholesale deals in Spain and Portugal in favour of channelling more of its production through its retail network to extract more value led to a 3pc fall in sales to direct clients to 2.1mn tonnes in the first quarter from a year earlier, which masked "robust demand in the retail sector," as well as the higher volumes of jet and bunker fuel sold wholesale, Galp said.
Galp's replacement cost accounted profits, which strip out the effect of the changing values of inventories and other one-off items fell by 13pc to €99mn ($108mn) in the first quarter from a year earlier as the operating strength at its upstream and downstream division was hit by higher taxes on oil production.