Galp Energia SGPS SA

ELI:GALP

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen. Please welcome to Galp's First Quarter 2018 Results Conference Call and Strategy Execution Update. I will now pass the floor to Mr. Dias, Pedro Dias, Head of Strategy and Investor Relations.

[Pedro Dias, Head of Strategy and Investor Relations]

Good morning, ladies and gentlemen, and welcome to our first quarter 2018 results conference call. Joining me today is Carlos, who will start with a quick update on our operations during the quarter and our strategy execution; Filipe will then go through the results. At the end of the presentation, we will be available to take any questions you may have. I would like to remind you that we may be making several forward-looking statements. Actual results may differ due to factors included in the cautionary statements available at the beginning of our presentation, which we advise you to read. I will now hand over to Carlos. Thank you.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thank you, Pedro, and good afternoon to you all. I believe that today, we should be rather straightforward update considering our recent Capital Markets Day. So to start, let me give you a quick overview on what happened during this first quarter. We saw Brent trading as high as $70 per barrel, but on the other hand, refining margins were down significantly. On the operational side, we continue to execute our key projects and to manage our activity focused on each value optimization. And this, as we work on expanding our projects pipeline with new promising assets and solutions, aligned with our strategic guidelines that we well know.The cash flow generation from operations in the quarter reached EUR 245 million in spite of a significant investment in working capital, which Filipe will cover later on. Within this cash flow, you will see that Group EBITDA was up 17% year-on-year, mostly supported by the E&P businesses, which benefited from higher oil and natural gas prices, and as well, from the production growth. Q-on-Q, our EBITDA was down 4%, following a more challenging refining environment and of course, a weaker dollar. Regarding the Downstream businesses and besides the lower benchmark margins, I highlighted the planned maintenance in our Sines hydrocracker, which was executed safely. But as of course, it limited the quarter's throughput and the conversion capacity. Overall, Galp generated positive free cash flow in a tough quarter even though helped by the lower realized CapEx level in the period. You may have seen that we also continue to build our portfolio in Brazil, with Galp participating in the [ 16 ] concession bidding round and acquiring one exploration block in Campos Basin. We do believe this block holds pre-salt potential. This reflects our commitment to maintain a resilient portfolio and to expand our presence in core areas through strong partnerships. Our solid balance sheet enables us to take advantage of selective opportunities that might arise in the market, but always, I underline always following a financial discipline and a value over volume strategy. Let me just briefly cover the performance of our divisions and starting by the E&P on Slide 6 of our presentation. Production increased Q-on-Q supported by the continuous development of Lula and Iracema in Brazil. This came mostly from the FPSO #7 placed in Lula South, which have its sixth producer connecting during the period. The unit achieved its oil production plateau level just recently. This is just 11 months after its first oil and shows once again the tremendous job the teams are doing to execute on the risk, this world class project. I also highlight that the gas export will only start once the unit is connected to the existing gas network system, which is expected for later this quarter. Today, we have all the units in Brazil running at plateau. As you know, we expect 2 new units to come online in Brazil during the second half of the year. In Iara, we started the EWT in Sururu Southwest. This test will provide useful information to optimize the complete drainage plan for this reservoir. Meanwhile, in what respect to Carcara, we continue to work with our partners on the appraisal campaign. We have just concluded the DST in Carcara Northwest, which will enable us to better understand the quality of the reservoir and its potential for the period. We are currently assessing that data. Now moving to Angola on Slide 7. In Block 32, the FPSO to be allocated to Kaombo North arrived from Singapore and is already on its final location. Drilling campaign is progressing according to plan with 26 out of 59 wells already drilled. So we should start production during the second half of this year. Let's move now to the Downstream on Slide 8. Refining had a challenging quarter apart from the scheduled maintenance that we have anticipated in our Sines refinery hydrocracker. We also had a significant decrease in refining margins, which was well flagged on the European benchmarks, mainly due to the sharp increase in oil prices and the strong decline of gasoline and fuel oil cracks.Our benchmark was down 47% Q-on-Q with Galp being able to get an additional $1.50 per barrel as a spread over this benchmark, despite the hydrocracker maintenance and positively also impacted by the edge volumes during the period. All in all, our implicit refining margin was down only 22% Q-on-Q in dollar terms. As you know, we are working to increase the efficiency and conversion capabilities of our refining system, implementing projects to capture an additional dollar per barrel. There is already a part of this value on the spread achieved during this quarter. Finally, margins have slightly recovered earlier this month, but are again stressed by lower fuel oil [ cracks ].You should bear in mind that we have around 25% of our 2018 refining throughput that is edged at $3.80 per barrel. As for the marketing activity, despite the seasonally lower volumes and some impact from having lower refinery throughput, performance benefited from the Iberian Economic momentum and the consolidation that we have in our market share.In what respects to the Galp Gas and Power, we increased our sales to direct clients, namely to the industrial segments. On the training side, LNG continues to be somewhat limited and based on our structured contracts. The gas network trading activities maintained a supportive contribution benefiting from arbitrage opportunities between European hubs during the quarter even though the volumes were slightly down Q-on-Q, but with better margins.So that's it from me. I will now pass to Filipe that goes in the financials. Thank you.

[Filipe Crisóstomo Silva, Executive Director & CFO]

Thank you, Carlos, and good afternoon. Just a quick overview from me on the Q1 numbers, which will be fairly straightforward. I'll start with the P&L on Slide 10 where group EBITDA in Q1 was up 17% year-on-year to EUR 455 million. This is driven by much higher Upstream contribution. A slight decrease quarter-on-quarter was driven by refining headwinds and the weaker dollar.E&P EBITDA of EUR 293 million was way up year-on-year. It was flat quarter-on-quarter, as the weaker dollar and the slightly higher OpEx offset the higher realized prices. You will have seen that starting this year, we are booking as an expense all Exploration, G&A, and G&G costs, or Geological and Geophysical costs. These are now accounted for on the operational cost, so they are no longer capitalized. This successful efforts method leads to a lower EBITDA and a lower CapEx of the same amount. It also brings forward some cash tax efficiencies. We are showing 2017 numbers restated for ease of comparison. On Refining & Marketing EBITDA was EUR 122 million. This is down both quarter-on-quarter and year-on-year and mostly on the lower refining margins, but also impacted by the hydrocracker maintenance and the dollar depreciation. Gas and Power EBITDA was up EUR 14 million year-on-year, reflecting the slightly better European gas prices environment. And if you'll recall, Q1 2017 had been negatively impacted by sourcing restrictions in Algeria. But there's a bit of a base effect here as well.Below the line, I would only highlight the EUR 39 million in associates and the higher P&L taxes, mainly as a result of the higher E&P result mix. RCA net income was EUR 135 million during the period and EUR 130 million under IFRS. Non-recurring items were all related to the extraordinary taxes on the Energy sector.On Slide 11, CapEx was EUR 146 million and mainly allocated to BM-S-11 and Block 32 developments. This was a low realization quarter with the forthcoming quarters expected to catch up. The signature bonus for our recent bid round wind in Campos of about $33 million will be payable only later this year and same for the $17 million or so of the first payment for the acquisition or the 3% stake in BM-S-8, which we announced last year. On slide 12, we have cash flow from operations of EUR 245 million. This is already net of EUR 159 million of working capital billed. This is or was to a large extend commodity price induced but we also had higher inventory levels resulting from the maintenance period in the refinery and temporary restrictions in the Finnish ports at the very end of March. On Slide 13, net debt was stable at around EUR 1.9 billion with the implicit net debt to EBITDA standing at 1x. The average debt maturity is currently 2.9 years with the total cost of debt now under 3% and this is expected to hold further as we retire older more expensive debt. We have already refinanced most of the 2018 maturities. As for liquidity, we had around EUR 2.5 billion between cash and undrawn credit lines. And this is it for me. We are now happy to take your questions. Thank you.

[Operator]

[Operator Instructions] And your first question comes from Christopher Kuplent from Bank of America.

[Christopher Kuplent, Head of European Energy Equity Research]

Just maybe a bit more backdrop question so shortly after your capital markets day update. But as you look into Mozambique, have you got anything new to report in terms of the progress you're making and giving us a little bit of a head's up in terms of FID expected?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thank you, Christopher, for your question. We are having technical problems. So in relation to Mozambique and in what respects namely to numbers. So after the Exxon entering the consortium, we are together analyzing how we can optimize the development concept and that's the work that is being done so far. Of course, at the same times, we have parallel teams working on the marketing and also in the project financing. In what respects to the FID, we expect to have the FID next year. So basically, 2018 is a year to mature and to better appraise which are the alternative solutions to have the most profitable and competitive project in the business. Thank you.

[Christopher Kuplent, Head of European Energy Equity Research]

Just a quick follow-up. So that means that CapEx this year is going to be replaced incrementally. Because if you wait for another year with the FID, I don't expect Mozambique to cost you much in 2019.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

In Mozambique what you should consider all of us. It's basically that [indiscernible] is progressing according to plan. And therefore, we will invest in [ members ] so we're not short basically to deepening and to develop the concept that could be the alternative solution for Mozambique. So there's some CapEx that has to be spending, but for the concept development process.

[Operator]

The next question comes from the line of Oswald Clint from Bernstein.

[Oswald C. Clint, Senior Research Analyst]

I wanted to ask a question about the Upstream unit OpEx please, the $9.2 per barrel. It ticked up a little bit in the quarter. Is that simply the startup costs on the Iara EWT or the further declines in Angola? Or perhaps talk about that number, what's happening there, and your expectations for the rest of the year. And also related to Brazil, I think one of your key milestones this year was some of the EOR enhanced recovery initiatives on Lula. We're a third of the way through the year, so perhaps you could give us an update on where you are with those initiatives please.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

So in relation -- in respect to the OpEx comparing Q1, what is slightly the difference. First, we have an additional unit so we are executing the EWT in Sururu, which means that we have additional costs. We have also had during the period also some constraints on the Cidade de Angra dos Reis and of course, there are also some credits in Brazil that have been considered in the 4Q of 2017 that are not happening in the first Q of 2018. So all in all and going forward, if you should consider a figure, you should stand around $8 per barrel. In what relates to the other points, the EOR. So Galp, of course, has its own and is all is autonomous analysis in what relates to research and development and the studies that we are performing. But we are working together with our partners in BM-S-11 in order to provide an optimization in what respects to the infill assessment. So it's something that is an ongoing project within the consortium.

[Operator]

The next question comes from the line of Alwyn Thomas from Exane BNP Paribas.

[Alwyn Thomas, Analyst of Oil and Gas]

Could I just ask on Petrogal, as you move towards a free cash flow generating position, can you just talk a little bit about how the cash will be redistributed over the next I guess 2 or 3 years and whether that's more likely to come in the form of dividends, loan repayments, or used to reinvest in Brazil, whether you'll keep it in country or expected. And follow-up on that, can I just ask on the progress of the exploration drilling Carcara and the plans for the appraisal and exploration drilling on the north field as well.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Starting from the first question that you have addressed. So basically, if you go back to our CMD presentation, you can see how we intend to redeploy our capital in the coming years. Effectively, most of the CapEx is allocated for and approximately 60% is committed for the projects that are still undergoing. We do see some room space for expanding our activities for new solutions and also primary renewal energy that we consider between 5% and 15% and depending on the context, and the environment, and the progress of our operations, we will every year review our dividend policy accordingly that environment. So effectively, it's basically where we are today.

[Alwyn Thomas, Analyst of Oil and Gas]

Sorry, I meant Petrogal, just in Brazil, how you allocate the cash?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

In Brazil, looking into Brazil, so Brazil as you saw during the last I would say half a year, we have been actively participating in the bid round concessions that are held in Brazil and we will continue to do that. So we have basically 2 or 3 options to sequentially to adopt. The first one is to continue to search for new DROs on new opportunities in Brazil, which has been the case. Secondly, and I [indiscernible] we have a long run to go in order to extract more value with incremental projects on the existing assets, and we have quite a time to continue to desrisk, and to show, and to prove their endogenous value. And we only consider to redistribute and send back to the shareholders some dividends if we will not find additional investment opportunities. So we are very an open-minded way on approaching through Petrogal Brazil to continue to expand our activity. Is that clear for you?

[Alwyn Thomas, Analyst of Oil and Gas]

Yes. Carcara progress?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Okay. Let's go to the Carcara. So in Carcara, I would say that we can look to the Carcara as in all BM-S-8 plus the Carcara North. So we are working together in the JV with Statoil in order to continue the derisking program. We have performed DST in the Carcara Northwest. That has been done in the last 3, 4 months and that is confirming of some of our initial expectations as we recently concluded. We have also stated to you that in our program, we have the plan to enter in the appraisal of Guanxuma area, which is something that we are now taking in our hands. And we expect that in the second half of the year, we might step further north of the Carcara. But it's something that is being managed in a way to guarantee that we have all the conditions to start that process. So all in all, the appraising - the global appraisal that is being performed in this BM-S-8/north of Carcara is a well-established and documented program of appraisal in order to well define the concept development that we will have to decide in the coming years. Thank you.

[Operator]

We have the next question coming from the line of Matt Lofting from JPMorgan.

[Matthew Peter Charles Lofting, Vice President]

Two if I could, please. Firstly, just on -- if I can come back to CapEx, obviously, underspend in the first quarter relative to the implied full year run rate. If you could just talk about how you see the phasing around CapEx from 2Q onwards, the key drivers and the extent to which you're arguably seeing increased capital efficiency, particularly through the development process in pre-salt Brazil implying downside to that 1 billion to 1.1 billion for the full year. And then second, sticking with Brazil, the Campos basin block that you acquired through the 15th bid round, if you could just elaborate on the potential you see from that block and the extent to which it was a block that was specifically targeted by Galp.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thank you, Matt, for your 2 questions. So you're right, so as Filipe has mentioned, we had a slowdown in CapEx in the first Q, but in the year-end targets or guidance, you should consider our previous guidance of the CMD. Even though, we are not dis-considering, continue to work on optimization of our CapEx due to the dilution of some of the costs that we are incurred because as we mature our projects, we are being able to optimize the costs that the project is taking. But I have also shared previously, which if going forward, the OpEx that should count for Brazil, which is around $8 per barrel equivalent oil. In terms of what relates to the block that we have won in the recent bid round, effectively, it's an earlier frontier position. So it's too early to start to comment on what is the potential. But our preliminary analysis, and it was based on which we have made our proposal, we do see that this pure exploration asset has pre-salt potential. And I think it is too early to start to elaborate on that. We do need to provide all the exploration work, including a committed well that has been part of our offer before starting to speak more openly and deep. But we are happy for taking this block for Petrogal. Thank you.

[Operator]

The next question comes from the line of Thomas Adolff from Credit Suisse.

[Thomas Yoichi Adolff]

Two questions, please. Going back to BM-S-8, and your comment on the appraisal activity in the northern part of your license, I just want to clarify whether you said it's kind of confirmed your initial expectations. So is it fair to assume that the reservoir characteristics or the behavior are still limited to those in the south. So the reservoir looks very much homogenous. And I wanted to kind of ask you this whether you can confirm that and whether there's anything you can disclose on potential initial flow rates. Secondly, on Upstream production, what was the exit rate in 1Q?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thomas, thank you for your 2 questions. So to clarify, in Carcara, when I mentioned the DST that we have executed, it was in the Carcara Northwest Well. So we have re-entered in a well that we have drilled in the past and it is within BM-S-8. So the north part of Carcara, which is the one that we have recently acquired, together with Statoil and Exxon, this is still too early to elaborate even though we see that there are similarities in terms of the reservoir potential. So that's the maximum that I think we should release for the time being. In what relates to the exit production, it was around 110,000 barrels a day and we are slightly progressing according and looking forward to the year-end. We continue to maintain our production patterns. Thank you.

[Operator]

The next question comes from David Mirzai from Deutsche Bank.

[David Mirzai, Research Analyst]

Two questions for me. First, on obviously the [ interrupt ] in FPSO #7, it's come in quite a bit ahead of original 15 month ramp-up guidance. Can you say something about the critical path on future replicant FPSOs? This time frame, has it come down structurally? Is it down to quicker drilling, which can be carried through to future works? And just secondly, obviously, on the refined the margins, you've had a fairly poor Q1. Well aware that that's down to volatility in the market, but is there anything you can do in the current environment to improve those margins or are you somewhat reliant on, as you say, the fuel oil cracks and the gasoline cracks.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thank you, David. Effectively, the first replicant is for all of us in the BM-S-11 consortium a starting point in a new era. We have more units to come and this is a learning curve process but is amazing that even with that starting point, we have just reached the plateau within 11 months. So the critical path for this unit is still the connection to the gas export pipeline, which will occur, as I mentioned previously, during the second Q. Looking to the other units that are coming, what is important is the learnings that we have taken from this unit, we will be capable to institute them and to adopt in the units that are still being finished. So this is the first point. The second one is related with the normal logistics related with the fact that some of the units are being concluded in Chinese shipyards and others in Brazilian shipyards. So there are different challenges according to logistics and according to locations where the units are. Therefore, we will have to manage with different critical paths according to each individual unit. One thing is for sure. Everything is related with subsea facilities is not, I repeat and I emphasize, is not within the critical path. So moving to the refining margins, first, we have followed a kind of a sweetening curve in what related to our hedging strategy and has been consistently during the last couple of years. We do think that in a long-term series, the hedging strategy is consistent, we'll end up with a neutral financial contribution. And therefore, we will continue to follow that. So this is the first point that we'll contribute and is in our hands. The second one is accelerating, is fastening our set of projects that will contribute with an additional dollar per barrel. So we are I would say between 20% and 30% in terms of progression. So you may see in our premium over benchmark an additional $0.20 to $0.30 of dollar that are related from that contribution. Thirdly, and it is not less important, is of course keeping the operational efficiency but we will have full conversion capacity available and therefore, we will be in a completely different position looking forward. So these are the key basic things that we can do in order to protect our refining business. Thank you.

[David Mirzai, Research Analyst]

And just to be clear, you have refining hedge in 2019, do you?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Yes, we have hedged about 25% of our annual throughput during this Q and this year, you can consider the same, which is about $3.8 per barrel in terms of the margin. For 2019, we have already covered about 20% at $4 per barrel. So it's basically what we have already done. Thank you.

[Operator]

The next question comes from the line of Jason Kenney from Santander.

[Jason S. Kenney, Head of European Oil and Gas Equity Research]

Could I get some guidance on tax rates for the year please and where do you think net debt to EBITDA might end up at year-end 2018 also? And staying with net debt to EBITDA, what do you think a floor to debt measure is over the forward cash cycle and through your strategy plan?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Jason, I hope you are also okay. So this is typically CFO stuff, so I will pass to Filipe. Thank you.

[Filipe Crisóstomo Silva, Executive Director & CFO]

I would say this is typical Jason question. Jason, we just had our CMD, so you should not expect us to come up with anything new at this stage so early in the year. So what we said at the CMD was 40% cash tax. P&L tax closer to 50%. Now the mix this year is obviously different from what we had anticipated. So much stronger in E&P. Much weaker in Downstream. So the P&L tax should be a bit higher than anticipated but not materially different. Same message on our net debt to EBITDA. Yes, we are at 1x now. We don't see our net debt changing much. We do see our EBITDA as going up but we're not giving you different messages on floor and redeployment of capital at this stage. So this is inorganic transaction driven if any and the message the CMD was we will carefully monitor opportunities where we have a competitive advantage and we may or may not be able to do this. Thank you.

[Operator]

The next question comes from the line of Biraj Borkhataria from Royal Bank of Canada.

[Biraj Borkhataria, Analyst]

I had a question on Brazil and FPSO #7. How long can you maintain plateau production without hooking up to the gas export pipeline? I know you are at plateau but will you need to curtail oil production back ahead of time before you can hit the gas pipeline? And then second question is on maintenance. Do you expect the maintenance impact to be more in Q2 than in Q1?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

In relation to the FPSO #7, what is limited, the increasing more the usage of the unit is the saying that we have in terms of gas firing, and therefore the unit could be maintained as long as we intend, up to the moment that we will be capable to keep the gas export connection. In terms of the typical curve of production, what we are doing is looking in an holistic way in order to guarantee that the global [indiscernible] reservoir is managed not only looking up to this unit but taking an holistic approach for the global reservoir in order to extend as much as possible using our or taking into consideration our long-term goals in terms of recovery factors. So you should bear in mind that we continue to work towards 40% recovery factor or beyond that, depending on technology solutions and managing the reservoir in a long-term perspective, rather than looking to the short term. In what relates to the second question was related with the maintenance. So in what relates to maintenance. Yes, we will experience more maintenance planned for the second and the third Q and I also recall all of you that we have considered in an annual basis about 4,000 barrels a day in terms of the impact of those maintenance that are planned for recovery and also for some inspection obligation activities. And all the units will be maintained with the exception of precisely the FPSO #7. Thank you.

[Operator]

The next question comes from the line of Michael Alsford from Citi.

[Michael J Alsford, Director]

Firstly, can you maybe update a little bit more on the unitization processes going on in Brazil? Clearly, some of that will impact production, I guess, guidance. So I just wondered whether you could give an update on those processes, please. And then secondly, just on Angola and Kaombo, I just wondered whether you could provide a little bit more update as to whether the project is now sort of back on schedule from a timing perspective and when we should expect first oil from both the first FPSO but then the second FPSO please.

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thank you, Michael. So in relation to the unitization, you know that Lula process is undergoing. The only thing that has been done was an amendment to an IP that has been submitted recently to the ANP. We do think that the process might be ended by -- during the second quarter. So to clarify, and to have all of us on the same page, we did consider that the effects of the unitization in Lula will enter in place from 1st July onwards. So that's what we are counting on. In relation to Iara reservoir, so starting by Berbigão, Berbigão will follow a process that is similar to the one that we have done. The present status is that we have already submitted to the ANP we -- all the process back this February. In what respects to Sururu, the track, the initial track participation, and also the redetermination triggers have already been agreed. Therefore, we are now preparing the process and the agreement to be submitted to ANP during the second half of this year. And finally, we are working on Atapu. So it's the process that is in an early stage. So the parties are still negotiating the tracking participation and the redetermination triggers. And therefore, it's something that is still under negotiation. We still have -- and because most of the assets where we are required to unitize -- we still have Sépia East, which is one of the carve-out parts of the BM-S-24 where Jupiter is also placed. And that process is still under analyze by ANP, and we expect that the process might be concluded by the year-end. So basically, it's a sum up for the unitization process to clarify for us where we are. Moving to Angola, so Angola, we expect - we have already the first unit. So the Kaombo North in place. Now works are being provided in a way to have the unit with the first oil during this summer, I would say in the second half, but most likely still during the summer. In what respects to the second unit, we expect to have the second unit just in the year after. So it's one year after or so the first unit being producing. So this is the summary that we can provide to you. Thank you.

[Operator]

The last question comes from the line of Marc Kofler from Jefferies.

[Marc B. Kofler, Equity Analyst]

I just wanted to come back to the Downstream please. Obviously, a pretty impressive premium to the benchmark achieved in the first quarter. Can you say a bit more about how you're able to do that, I suppose particularly regarding the comments around the raw materials that you're processing and the different crude? And then can you also talk a little bit please about the margin environment into the second quarter, and I suppose on that side of things if you're seeing any remarkable trends given the movement up in oil prices over the course so far?

[Carlos Nuno Gomes da Silva, Vice Chairman & CEO]

Thank you, Marc. So effectively, I tend to agree with you. I think we are dealing with this process quite well. So first of all, embedded in the premium of our benchmark is related with some additional efficiency that came from the project that we implemented. So it's energy efficiency. So it's endogenous. The second point is related with the fact that we are selling gasoline for the United States, which has a premium over the benchmark that is relevant. The first point is still the optimization of the sourcing that has really been one of the relevant contributions for the element. So all in all, and looking forward, and you should bear in mind that we have forecast and assumed for 2018 the refining margin at $3.50 per barrel. We still have an effect that it will have a higher impact in the coming Qs, which is the fact that our consumption is based on natural gas and the natural gas is still next to the -- has a kind of a time lag effect in the system. When looking to the forwards of the refining margins, what we see is that the gasoline season is coming and the cracks of our benchmark are improving. The middle distillates are also recovering and the only one that we are not seeing reacting positively is the fuels. There are some justifications for that, some trends. One of them might be related with some de-stocking that the market is anticipating due to the IMO. Some trends related with the shipping activity. So but still too short term to have a more based on strong position. But going forward, we do see that the margins have all the conditions to continue to grow because once the Brent will stabilize and the demand will continue to grow, we will see that as a positive trend. Thank you.

[Pedro Dias, Head of Strategy and Investor Relations]

Thank you very much, everybody. I think we conclude now the conference call. Thank you very much.

[Operator]

Thank you for joining today's conference. You may now disconnect your handset.