July 20, 2016 [OPIS] - Falling oil refining margins are a legitimate concern for global oil refiners, but strong petrochemical, lubricants and marketing performance could help boost profitability.
Barclays Capital expects European downstream earnings to remain seasonally robust despite the impact of maintenance.
European refining margins have come under pressure in the past four weeks, falling over 60% from $3.50/bbl in June to $1.20/bl last week, it said.
Nevertheless, even at $1.20/bbl it still remains above the average level achieved in 2010-2014 when Brent was averaging above $100/bbl, the bank said.
While the falling margins raise concerns about the profitability and cash flow generation of downstream, Barclays expects earnings and cash flow across the downstream to prove more resilient than many anticipate.
One area the market tends to overlook is the contribution of marketing, lubricants and petrochemicals, which does provide a core level of profitability that should not be ignored, the bank added.
More important is the structural reform of the downstream over the past five years, which includes a 12% reduction in headcount and 20% reduction in refining capacity that should lead to meaningfully more resilient earnings even with lower margins, Barclays said.
The outlook for free cash flow should also be reassuring with downstream capex in the coming five years set to average 25% lower than the previous five years and close to depreciation, it said.
This should be supportive of dividends for BP, Royal Dutch Shell and Total, and for Repsol and GALP, this is a source of free cash flow that the bank sees as undervalued.
Meanwhile, Repsol’s Spanish second-quarter refining indicator margin of $6.50/bbl was up 3% quarter on quarter. Galp’s benchmark refining margin of $2.90/bl was down $0.40/bbl from the first quarter.
Total’s European Refining Margin Indicator at $35/ton was broadly flat, although the realized margin could be lower due to strikes.
