Improving Downstream Outlook Offers Signs Of Recovery

BMI View: Portugal's lone refiner Galp Energia is offering hope for a country hit by austerity measures. The company has seen crude input at its two refineries increase, and is reporting an increase in demand from the domestic market. This uptick in petroleum demand could signify the initial buds of a return to economic growth for the southern European nation.

In a rare glimmer of hope for faltering Portugal, the country's integrated energy company Galp Energia is seeing positive business developments at home and abroad. Galp has struggled over recent quarters as a result of the recession in Portugal and Spain significantly reducing demand for petroleum products . In a recent presentation, the company displayed that it is not expecting positive GDP growth to return to the Iberian Peninsula until 2014, though there are signs that despite the considerable austerity measures currently in force , demand may be returning.

Galp's upstream portfolio is looking strong, particularly with their 10% stake in the Lula oilfield. The Brazilian field began pumping 120,000 barrels per day (b/d) from the Cidade de Paraty FPSO in June . This has helped the company's crude output increase 12.5% year-on-year (y-o-y) , in the third quarter of 2013. The company has further exploration assets throughout Brazil, Namibia , Mozambique and Angola and an extensive drilling programme outlined for the coming years.

While t he current oil price dynamics are conducive to upstream profitability ; i t is the downstream segment, particularly in Europe, that has struggled . P rofitab ility h as been hit by th e challenging economic s ituation limit ing demand growth and more efficient producers from Asia and the Middle East encroach ing on the market share of European refiners.

Galp's greater availability of crude , largely from the Lula field start up, has allowed the company to increase the oil it processes by almost 5 % y-o-y , and the company refined a total of 22.3mn barrels at its Porto and Setubal refineries from July to September. Refinery utilisation rate reached an average of 84%, while the larger Sines refinery was, according to G alp, running close to 96%. The Sines refinery completed the installation of a new hydrocracker in January 2013 , which has help ed the facility increase its diesel output.

Most interestingly for Portugal, demand for Galp's petroleum products increased 3% in Q313 over the previous year , with sales of around 24.9mn barrels of petroleum products . Much of the increased demand came from the domestic market with exports of petroleum products actually falling 1%. This uptick in domestic demand could be an indication of the initial sparks of economic recover y in the country .

Galp's share price movements compared to the ISE Global Oil Refiners (RAW) index, shows the company is steadily beginning to outperform. The company is expected to release full Q3 financial results on October 28 th .

Portuguese Refining On The Up?
Galp Energia Share Price (EUR) vs RAW ISE Refining Index

These positive signs from Portugal may indicate the success of harsh austerity measures the country has had to implement in order to rebalance its economy. The rebound in sales could also point toward a wider improvement for petroleum products demand in Southern Europe. Galp relies largely on domestic demand for sales (around 76.5%), with current demand supplied by the company's two refineries.

We are expecting many of the Southern European economies to edge towards positive GDP growth in 2014, though our outlook for Portugal remains negative due to the continued limitations in wider domestic economic demand. Nevertheless, our Country Risk team recently revised up the 2014 growth outlook for Portugal from -3.0% to -0.5%.

Slow Return To Growth
Real GDP Growth In Portugal, Spain & Italy (%)

It is therefore expected that some European refiners will slowly begin to escape the doldrums of cripplingly low margins, as domestic demand slowly returns in line with a recovery in economic activity . While European- wide demand for petroleum products has stayed flat for some years , those refiners that have managed to become more efficient could begin to benefit from a piecemeal recovery. Portugal may be benefiting greater than traditional refining countries as foreign exports are not a major component of its sales. Thus, the increase in demand for petroleum products within Portugal should be a good reflection of the more general direction of its wider economic development.

This article is tagged to:
Sector: Oil & Gas
Geography: Portugal, Spain, Italy

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