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OCI NV
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Hello, and welcome to the OCI Global and First Quarter 2023 Results. My name is Elliot, and I will be coordinating your call today. [Operator Instructions]
I would now like to hand over to Hans Zayed, Global Investor Relations Director. Floor is yours. Please go ahead.
Good afternoon, and good morning to our audience in the U.S. Thank you for joining the OCI Global First Quarter 2023 Conference Call. With me today are Ahmed El-Hoshy, our Chief Executive Officer; and Hassan Badrawi, our Chief Financial Officer.
On this call, we will review OCI’s key operational events and financial highlights for the quarter followed by a discussion of OCI’s outlook. As usual, at the end of the call, we will wrap it up with a Q&A.
The results press release and presentation are available on our website at ociglobal.com in the Investors section. We will be referring to slides in the results presentation during this call. I would like to remind you that any forward-looking statements made on this call involve risks and the actual results could differ materially from those statements.
Let me hand over to Ahmed.
Before we go into results, we start every call with reaffirming our strong commitment to safety, which remains our top priority. Our 12-month rolling recordable incident rate was 0.39 incidents per 200,000 man hours at the end of the last quarter, significantly beating industry averages.
Despite being a relatively good number, we will continue our relentless focus on operational and process safety throughout the organization as part of our manufacturing. And it’s fair to say that Q1 experienced both market and operational challenges, which we set out to explain and bridge in the numbers and the results that we shared with you today.
Compared to the record results in 2022 in the same period, prices were much lower, driven by a large reduction in European natural gas pricing affecting the cost curve, along with weather-related events in the United States, which ultimately affected buying patterns.
We realized gas hedging losses during the quarter. Our operations also experienced some unplanned outages, partially related to the U.S. winter freeze at the end of last year. While our plants have been running smoothly since the repairs were undertaken, the impact on Q1 was quite visible in our figures, as you can see.
The impact takes both the form of growth opportunities lost in EBITDA and material incremental maintenance expenses that were reflected in EBITDA. We try to take advantage of such situations to improve our plants on a sustainable basis to be better positioned for the future as part of our improvement journey.
In spite of such short-term volatility, we remain positive on the overarching fundamentals of the commodity markets in which we operate. We have seen good signs of recovering demand during the second quarter, which reemphasizes the supportive fundamentals we are seeing in agricultural markets more broadly. Buyers that have deferred demand have stepped up purchases, particularly in the United States, which is driving up pricing, but those buyers are also now facing logistical bottlenecks when product is needed and highlights the need to buy earlier in the season rather than some of the just-in-time demand buying we’ve seen.
During the call, we will also share progress with our hydrogen fuels transition initiatives, which OCI is clearly developing and where OCI is clearly developing a leading position, leveraging our development experience and globally advantaged existing facilities, infrastructure and distribution level.
Starting with the highlights of our performance during the quarter, I’ll begin by handing over to Hassan to walk through some of the key aspects of the first quarter results.
Thank you, Ahmed. Turning to Slide 7 and 8 for a summary of our financial results for the quarter. We reported consolidated revenues of $1.4 billion, adjusted EBITDA of $336 million and an adjusted net loss of $15 million for the first quarter of 2023. Our Q1 results were lower compared to a year ago, which can be explained by several factors Ahmed already alluded to, which includes lower nitrogen selling prices in Q1 and the sharply lower natural gas pricing, which resulted in continued demand deferral and lower volumes sold than typically expected.
We also recorded realized natural gas hedge losses of $98 million, comprised of a negative $60 million in the nitrogen segment and $38 million in methanol. We continue to view our long-term natural gas hedges as a risk management approach providing the company with a suitable long-term cost structure.
As we have stated before, we are hedged in the U.S. for the balance of the year until 2029 at a weighted average price of $4.30 per MMBtu. As is typical in the gas curve, you see the higher pricing for winter compared to summer spreads and as such, given expectations for very tight gas markets, we hedge Q1 2023 gas at higher levels, but the hedge price for the balance of the year is materially lower.
Our European nitrogen business was naturally the most impacted by European energy prices and demand deferral. Deliveries of all produced volumes in Europe were down 46%. Margins in the European nitrogen segment were impacted by high-cost inventories produced in Q4 and sold in Q1 as we experienced a record single quarter fall in TTF of about 40%. We estimate the effect of this to have been around $52 million. We also had restart delays following the fourth quarter 2022 turnaround, which we estimate to have an impact of around $22 million.
Lastly, unplanned outages in the methanol U.S. segment resulted in extremely low utilization rates and additional repair costs during the quarter. This was partly due to the winter freeze in the U.S. We quantified the negative impact from these outages following this event at around $30 million. In Texas, we had further shutdowns that resulted in around $47 million of lost volume opportunity and extra repair costs.
Following the restart of the facilities in February, the plants of Texas have been running well. Worth noting that our fuels business was unaffected and contributed to the tune of $21 million of our EBITDA in the quarter. The U.S. nitrogen business generated an adjusted EBITDA of $89 million compared to $153 million a year ago. But excluding realized gas hedging losses, the adjusted EBITDA of the segment would have been $132 million.
On Slide 9, we highlight the continued competitive position of IFCo, our Iowa-based production facility and distribution center, which has been able to achieve relative to the serious peers. We are consistently generating higher margins and higher EBITDA per nutrient ton than any other North American business, reflecting its competitive positioning in the premium U.S. and Midwest markets, leading position in DEF and overall improved operational performance.
IFCo has also had the highest free cash flow conversion metrics in the industry, given tax advantages and lower maintenance CapEx expenditure resulting from young asset age and efficiency metrics. Adjusted EBITDA for the underlying business, excluding the N7 distribution business, was 49% in Q1 and excluding realized gas hedge losses, this was about 75%.
Our Abu Dhabi-listed Fertiglobe subsidiary also reported a resilient performance. Total own produced sales volumes were up 9%. First quarter ‘23 adjusted EBITDA was $297 million, with free cash flow of around $271 million. Fertiglobe also guided for H1 2023 dividend of at least $250 million, which is stable in October later in the year, half of which, of course, is received by OCI. The final dividend amount will be confirmed with the second quarter results, which is scheduled for August.
Looking at Slide 10, with the recent volatility in commodity markets, it is worth noting the structural cost advantages inherent to our platform. Almost all of our plants currently sit in the first quartile of the global cost curve, reflecting a multitude of factors which we describe in our investor presentation on Page 10. Only our European business, which represented 6% of our global gas consumption in the first quarter, and similarly 2022, is on the higher end of the cost curve.
However, relative to European peers, our European nitrogen assets are top quartile from a gas to ammonia conversion efficiency perspective. Nevertheless, we aim to further optimize our cost position through our operational excellence program, which is on track to deliver better reliability of our plants on a sustainable basis.
Additionally, we also recently launched a group-wide initiative to reaffirm our cost-conscious culture and assess opportunities to reduce both operating costs and overhead. As part of this, Fertiglobe has already identified and is targeting an annualized run rate of at least $50 million in savings to reinforce its cost position, which is planned to be achieved over the next 12 to 18 months, also benefiting from the recent devaluation of the Egyptian pound, which is expected to have a positive impact on the company’s cost base. We will provide an update on the target for OCI as a whole in terms of cost reduction as part of our second quarter results.
Turning to Slide 11. We recorded free cash flow before growth CapEx of $151 million during the quarter and a reduction in net debt of 9%. Our consolidated net leverage stood at 0.3 times at 31st of March 2023. There were no dividends paid to minority during the quarter, but after the close of the quarter, Fertiglobe distributed $700 million, of which, of course, $350 million was received by OCI, while OCI distributed approximately $800 million or the equivalent of €3.50 per share to our shareholders. OCI plans to provide guidance on the next semi-annual dividend typically past October as far as our Q2 results.
As we look ahead, all of our plans and approach to investment opportunities and strategic initiatives continue to be subject to our financial policy, which we set in place last year for the long-term.
I’ll end my comments by also reaffirming some guidance we provide on a regular basis, which includes leakage to minorities, given the guidance by Fertiglobe for October dividend of at least $250 million and the known dividend to Sonatrach from Sorfert Algérie, which is a Fertiglobe subsidiary, as a result of the super [indiscernible] formula for the 2022 results.
We expect around $1.4 billion of minority leakage in 2023. This is unusually high figure due to Sorfert and will be at much lower levels given lower prices in [2023]. So this number will be normalized.
Our CapEx guidance is unchanged from what we have mentioned on previous calls. We expect maintenance CapEx in the region of $300 million per annum of the run rate and growth CapEx between $350 million and $450 million as stated earlier.
With this, I’d now like to hand back to Ahmed for further commentary on the market backdrop, our ongoing growth initiatives and a few remarks on the strategic review. Ahmed?
Thanks, Hassan. I’ll start with highlighting some interesting dynamics in the nitrogen market that have driven results in the sector as a whole and may come across as somewhat detached from fundamentals, which remain healthy over the short, medium and long-term.
As discussed, nitrogen markets have been volatile, driven by huge swings in natural gas pricing, which was exacerbated by the Ukraine conflict and concerns over energy and food shortages. An exceptionally mild winter resulted in gas pricing normalizing quite quickly. In turn, this had an impact on lowering marginal costs and resulting in higher priced inventory carryover for producers and at the retail level. This caused buyers to defer demand closer to the start of the season, and actually application time and led to nitrogen price correcting in Q1 2023 as well as much lower volume exchange over the course of the quarter.
In the U.S., as we entered the season with the largest lags in the urea and UAN buying that we’ve seen. In Europe, farmers substituted nitrates at times with cheaper urea imports from unusual origins, such as Nigeria and Vietnam, aided by the recent temporary removal of duties and tariffs against some of the other markets, driven by the EU during the period of higher pricing last year. At the same time, global trade flows normalized with Russia exporting more grains, urea and UAN in 2022 than pre-war levels also at a discount to major – to almost all key markets.
However, we remain constructive on the market outlook for nitrogen’s ultimate short and medium-term backed by three key structural drivers. First, as you can see on Page 12, agricultural fundamentals are underpinned by decade-low grain stocks during a period of heightened concerns for food security and more volatile weather. It is still expected to take at least two more growing seasons to replenish these stocks, and that’s assuming conducive weather in key growing regions.
This translates into outstanding farmer economics for the third year in a row, which combined with decrease in fertilizer pricing and the 50% improvement in nitrogen affordability, should drive global demand higher in ‘23 and ‘24, including substantial pent-up demand from key importing regions that were priced out of the market last year.
We’re now seeing this thesis play out in the United States with a significant acceleration in nitrogen demand and rebounded corn acreage driving urea pricing higher and expect it to also provide an uplift for UAN pricing for [indiscernible] demand. A reset in nitrates pricing in Europe has also resulted in higher sales volumes in Q2 after [indiscernible] been reached.
Higher domestic production in India with the new plants from 2022 wrapping up and now running at 80%, capped the imports in Q1 where we only saw one major tender. But with demand expected to be up over 2% this year, this implies imports in the 7 million ton range this year, which is still quite robust. This, together with capped exports from China and the recovery in demand driven by improved affordability levels, should provide support for urea during the balance of the year, particularly as the new production from last year gets digested in the system, the run rate production levels we’ve seen over the new year.
Second, cost curve economics should eventually play out. You see that on Page 13 of the slide that ammonia pricing today is around $100 per ton below the marginal cash cost floor, excluding CO2 pricing, which is not sustainable in the long-term in Europe. We expect curtailments in Europe to go up from the current levels of approximately 30%, replaced partially with higher money imports and also marginal closures in other regions such as Indonesia and the Far East over the summer to balance the market.
We’re also not out of the woods yet on gas with LNG imbalances not expected to meaningfully change until the middle of the decade into 2026 when new capacity comes online. European gas futures over the next winter and 2024 to 2025 winter are pricing expectations of a tighter market than current levels.
For this coming winter, they imply ammonia cash cost support levels of $650, excluding CO2; and $815, including CO2, which is increasingly becoming a variable cash cost that people think of like natural gas and electricity.
Third, incremental supply is unlikely to keep up with demand growth over the next few years as highlighted in our presentation and the press release. Similarly, on ammonia, only one project in the U.S. is commissioning later this year – or is expected to, and then the only other large project that has reached FID is ours in Texas, which is starting in 2025. This will be the first ammonia plant to capture the incremental regulatory value at a world scale arising from the IRA and CBAM in Europe and several years ahead of other new build projects that are announced as highlighted on Page 15.
On the methanol side, we’ve seen pricing come down as a result of higher global operating rates and demand impacted by global macro headwinds, lower coal cost support and slower-than-expected rebound from the Chinese reopening this Lunar New Year.
However, we also remain constructive on medium-term methanol market fundamentals driven by three key factors. One is that end demand should pick up by improving methanol affordability levels that we’ve seen, and we expect to see upside from the Chinese rebound in the second half of this year, with housing and construction recovery, maintaining low inventory levels in Asia.
We’ve already started to see MTO operating rates recovering to about 70% level from the recent historic growth of 60% and still below the run rate levels we’ve seen in the past. Cost curve economics are also supported with low U.S. gas pricing and high oil pricing, that now remains a much cheaper fuel source than, for example, LNG or gasoline. So we should see more affordability-driven demand for that type of substitution.
And thirdly, methanol as a marine fuel is quickly becoming a reality with only 300,000 tons per annum consumed today and in the next few years, ramping up over 10x to 4 million tons per annum.
We’re focusing on this third driver. You can see that laid out on Page 17 as we have in the chart with over 135 new methanol fuel container ships slated for delivery increasing and supporting this demand projection I just gave. It’s also an increase over the last quarter when we were at 3 million tons per annum asset, and we do that now up to 4 million tons.
Turning now to our energy transition focused on growth projects. We’ve been talking this past year about the strategic position of both methanol and ammonia as incumbents in the energy transition supply chain being some of the most effective carriers from a technological and sustainability footprint perspective.
Spearheading the transition for OCI is a 1.1 million ton blue ammonia project in Texas, which has advanced significantly over the past few months, and the project remains on track to start production in the first half of 2025. Notable to mention is that Linde signed an agreement with ExxonMobil in April for the CO2 off-take and sequestration to take advantage of the IRA incentives that were driving a lot of the benefits of this project in our aggregate pricing.
On Slide 20, we shared some photos of the site and the project is in a key construction phase where piling is near completion, and we’ve ramped up critical labor on site to accelerate civil work and foundation work as we start receiving major pieces of equipment over the coming 6 to 12 months.
We’re estimating a 15% to 20% unlevered IRR range at mid-cycle grade pricing when we look at the last 10 years. This doesn’t include upside from premiums for low-carbon ammonia. And to give you a sense, for every $50 incremental blue ammonia premium, that should add approximately 4% IRR.
A clear upside is expected to come about with the regulatory measures in the Far East and Europe to incentivize the use of lower carbon products. The implementation of the CBAM or the Carbon Border Adjustment Mechanism in the fuel EU maritime from 2026 is expected to create a differential for ammonia price where low-carbon ammonia has an inherent advantage relative to grey ammonia.
And we should see that continue to develop and be embedded in marginal cost lines with the phase-out of EUA allowances post implementation of the CBAM. Given the forward EUA pricing, this adds approximately at least another $100 a ton of returns net of freight for our blue ammonia from Texas going into Europe.
I’m also very excited that we recently announced an agreement with NuStar to enhance our ammonia distribution infrastructure and competitive Midwest positioning by connecting to their existing ammonia pipeline network at our IFCo platform. This allows us to transport ammonia very cost effectively and safely from the U.S. Gulf Coast into the Midwest, better served with four agricultural markets, leveraging the Midwest premium and our existing infrastructure storage facilities in IFCo as well as our distribution capabilities there.
This very cost-effective project allows OCI to buy cheap ammonia tons out of the season in the U.S. Gulf, utilizing the NuStar pipeline and transporting those tons to Iowa. And we definitely see that as a possibility not only with our own Texas blue tons, but third-party tons to be able to move those tons up the Midwest. We can then make a large margin uplift on these tons in season at a fraction of the logistics cost involved in transporting ammonia using other modes, including more expensive barging given the Jones Act.
Moving to Page 25, our gasification opportunity in the Netherlands has also made progress with the submission of our application to the EU innovation fund in March. The vision here is to potentially transform renewable, waste-driven feedstocks such as wood waste, agricultural waste and non-recyclable municipal solid waste into renewable circular methanol, adding to our existing low carbon and green methanol supply that has robust demand ahead of it in the marine and vehicle fuel sectors as we’ve discussed in the past as well as in the chemical markets.
We’ve entered into a strategic partnership with Petrofac, where Petrofac will be the exclusive global engineering partner for gasification-based hydrogen fuel projects in the future as we wrap up our learning curve and knowledge of this sector. This is a potentially critical step in scaling green methanol and hydrogen technologies with a future focus on transportation flow that further solidifies our leadership in that market today.
Also worth noting is our Egypt Green hydrogen project. which we announced the commissioning of in COP27 in November ‘22. During the quarter, not only produced green hydrogen, but we were able to also produce green ammonia on-spec in the month of March to do so for the first time in the Middle East and Africa. So a major strategic milestone as we build up to the potential FID of the larger 100-megawatt project, which we continue to do work on.
Finally, on the topic of the strategic review, which is briefly addressed in the earnings press release. In March, we received a letter from one of our shareholders, which highlighted that OCI’s share is trading at a significant discount to our intrinsic value. We have shared our views as management, but we fundamentally agree with those comments received regarding the trading levels of our shares.
This disconnect has been at the forefront of our strategic thinking as we remain diligent in our focus on value creation. And we view our business that activist prism on a continuous basis and are self-respected. With that said, the Board has given management permission to conduct an internal strategic review to evaluate our current business model and business lines. This will include an evaluation of our current Dutch listing in light of our future strategy.
We’ll be looking to further unlock the strength of our incumbent business, galvanize our pioneering lead in hydrogen fuel’s transition within a framework of our financial policy as Hassan had mentioned. We’ll keep the market updated on any developments that may arise from the review as and when appropriate.
To conclude, we’re proud of what OCI and Fertiglobe teams have continued to achieve so far. We continue to be excited about the prospects of the group over the medium and long-term.
With that, we’ll open the line for questions.
Thank you. [Operator Instructions] Our first question today comes from Christian Faitz from Kepler. Your line is open.
Yes. Thank you. Good afternoon. Good day, Ahmed, Hassan and Hans. Two questions, if I may, an operational one and regarding the listing on that – your listing comments. Can you please elucidate your remarks regarding the Amsterdam listing? What are the options here from your viewpoint? I mean, would your key shareholders, including the activist be ready to take the company private? Or do you believe you are likely to see a more appropriate market rating if you were listed in a different region?
And then the operational question. How has European nitrogen demand been so far this season, i.e., also going into Q2? I’m aware we had a rather slow start – weather-related also in the U.S., obviously, but European farmer economics are also in pretty good shape. So do we see more volumes in the meantime, i.e., trading conditions in May? Thank you.
Thanks, Christian, for the question. So with regards to the volumes question, we are seeing demand really pick up, like I said, a lot of just-in-time buying was an exacerbation of the fact that farmers don’t like to buy when pricing is going down, they like to buy when pricing is going up.
So that – the focus on trying to find a floor became a bit of a challenge with the on product – the ramping up of the 2022 supply in the nitrogen market and European natural gas pricing going down. What we witnessed particularly over the last several weeks is that demand has been robust. Inventories remain low at the retailer and at the farmer level.
So we do anticipate that picking up because, to your point, the affordability levels look quite strong still in Europe, and we see that continuing for the next several months, including on into July with the gas plant demand on the nitrate side. We’ve seen some switching between urea and nitrates at times affecting those different levels.
And as OCI, given we have exposure to both those types of products, we think we’re on kind of both sides of that trade, to put it lightly, and we’ve been seeing very good market share from Fertiglobe for urea. And now we’re seeing more nitrates going down into the market and are seeing stronger volumes here in Q2.
With regards to the listing venue. When we look at the different locations, the Netherlands is, let’s say – we have in the investor presentation, 15% of our proportion EBITDA, right? And we’ve been listing at Netherlands for approximately a decade now.
Part of the strategic review is to look more broadly at other potential listing venues because we do have a sizable part of our business, as you know, in the United States as well as in the Middle East. And the focus for a lot of our growth is in both the United States and the Middle Eastern markets as we think about these decarbonization projects and what we move forward with.
We look at the – when we think about the sum of the parts and what the increase of capital, as said in the letter, when we look at the individual pieces of the business and you look at the jurisdictions in which some of our peers trade in, we see a discount for how we’ve traded that ultimately at the Dutch level. So that’s kind of the driver behind those and that’s why, accordingly, we’re looking at alternative venues.
Okay. Very helpful. Thank you very much, Ahmed.
Our next question comes from Mubasher Chaudhry with Citi. Your line is open.
Hi. Thank you for taking the question. Just following up on the last question, to be honest. You’re talking about listing in a different region as a means to close your discount to some of the parts. But then I think in your own comments, you just said that the listing in the different region will help close the discount to peers. So I just wanted to connect the difference between the two comments? Because if I look at some of the U.S. players as well, I think, arguably, they’re also trading at a discount to some of the parts.
So I’m just trying to understand why a listing in the U.S. is the right way to go even if the U.S. players are already trading at discount. Is the real aim of the game here to try and close the discount to peers? Because I think those are two different levels? That’s the first question.
And the second question is a little bit more admin-related. Is there any timing to be communicated around the strategic review and the outcome of the strategic review? When can we expect this, maybe, I don’t know, 3Q, 4Q?
And the final one is around the gas hedges that you’ve got in the U.S. Is there a way of you exiting those hedges should your internal view on the long-term gas prices in the U.S. change because at the moment, the spot prices are well below those hedges. So I was just wondering if there’s an option for you to exit those, and if yes, at what cost? Thank you.
Good question. So, I think I heard you fully there. But on your first question with regards to the listing venues and how we’re looking at on the sum of the parts basis. We think in terms of the overall European market, we’ve been seeing probably – maybe looking at both the U.S. business, our Middle Eastern business and the European business that we are trading at a discount to our peers and globally for the internal and some of the parts.
Maybe it’s on valuation metrics you’ve used, the time period you’re looking at – we look at it, for example, on a mid-cycle basis, when you look at replacement cost, all of the above, we do see that discount. And I think increase of capital in their letter also shares our view on that remark. And this isn’t definitely complete. It’s something that we’re looking at as we speak in discussions with our Q1 Board results as part of the strategic review as being a possibility, okay?
On the second question with regards to – third one was on the gas hedges?
Strategic review timing.
Oh, the strategic review timing, yes. As we said in the prepared remarks, we’re going to come to the market when appropriate if there’s something to say that’s market appropriate. It’s something, obviously, we’re spending a lot of time on now. And in any case, we will provide an update to the market with the Q2 results.
Maybe I’ll take the third question on gas hedges. I mean, as we previously disclosed, our gas hedges go out all the way to 2029. So the forward curve has moved around a lot. So I don’t think we’ll be looking to exit these at this time, but we’ve just continued to monitor how these hedges perform. I mean in the past, we’ve recorded the net gains up to 2022, and we’ll just see how the energy landscape continues to evolve going forward.
So the question wasn’t will you exit, the question was if you wanted to exit then can you? It was more a hypothetical question. So I understand it depends really on your view of the forward curve, but I just wanted to kind of understand the mechanics if you wanted to exit then…
Yes. No, there’s always a possibility, but then you’ll be crystallizing a loss, which may not exist as you get closer to the period. We’ve seen that move around quite a bit. These are liquid instruments [indiscernible], nothing too exotic. So if there’s a market, we could if we wanted to exit them. But just reiterating what Hassan said, there’s obviously a bid-ask with intermediaries at the time, but it’s definitely something we could attempt, but it’s just not on the cards.
Understood. Thank you.
Yes, it’s a commercial call. And I think just one other thing, Mubasher, to your question on the – the first part of your question, just in terms of how you look at the various businesses and you look at the sum of the parts, even individual ones, and I think we’ve had some conversations with our IR team on this.
I think that comparables when you take in account, for example, our U.S. nitrogen business, which we shared some data on using publicly available information today in our slide deck, you can see the incremental EBITDA per nitrogen ton premium that IFCo, for example, enjoys over all U.S. nitrogen peers and has for the last several quarters and years.
So I think that’s one example. I’m sure that there are others in terms of differences in valuation when you look at how peers are trading relative to our own production. Also, how you value the clean ammonia project in Texas, which also has innate advantages with the blue ammonia production that we expect to have when the plant starts up. So I think there’s some idiosyncrasies around that problem.
Our next question comes from Faisal Al Azmeh from Goldman Sachs. Your line is open.
Hi, and thanks for the opportunity to ask questions. Maybe just a question on the blue ammonia project. I guess given the high level of returns that you anticipate for that expansion, why not do more? And if it’s a matter of capital, why actually not bring in ADNOC as a partner, potentially, given that they have global ambitions on that front – or maybe Fertiglobe. That’s my first question.
And then just my second question for me. Going back to that listing component, are you fixated on, particularly on the U.S.? Or would you look at any other market potentially even in the Middle East? That’s my second question. Thank you.
Faisal, I appreciate the question. So with regards to the Texas blue project, where we have the ability to do the second line, and we have invested in some utilities, underground piping and OSBL, certain things where definitely the cash cost of the second line would be less than the first line. That stage remains to be a possibility. We have not FID’d such a project, and we will take it into account with our financial policy, as Hassan stated that we will think about those.
The opportunity of potentially partnering with others is always there, as you can imagine, following the strategic review. Even in advance of that, we’ve had a lot of inbound increases – the only blue ammonia project that is FID’d in North America for a new world-scale plant, right?
And so there’s inbound from different geographies and others that could potentially invest and want to be participating in the product, which could allow us to bring more tons into the market. But I also think our team is working and executing this first one, first and foremost. That option does exist, and we want to execute well on this one, and we’re pleased with what’s been happening so far given it’s on schedule and on budget so far.
With regards to the listing, you’re right, in terms of where it could be, U.S. – given a lot of our investments and presence in the U.S. today, a big part of our businesses there is one potential venue of evaluation. But the Middle East, given our recent IPO in Abu Dhabi in the second half of 2021 is another potential area given we have growth within our Middle East business than we’ve had in the past. And we have familiarity with that market and that’s been a very growing market for new listings as we’ve seen over the last couple of years. We’re just still thinking it through.
Thank you.
Our next question comes from Rikin Patel with BNP Paribas. Your line is open.
Yes. Hi, thanks for taking my questions. I had a follow-up on the market. It sounds like you’re a lot more constructive on demand and farmer economics for Q2. So I wanted to check if we should be assuming that volumes in nitrogen will be up year-on-year? And I guess, taking into accounts what you see around production and any potential outages for the quarter, whether that’s, I suppose, is a safe assumption to make?
And then secondly, sorry, just going back to the debate around the listing. I mean, is it on the table for you guys to consider a dual listing at all? Or are you just considering moving it altogether? Thank you.
Yes, so with regards to the first question, if I heard you correctly, you were asking about our view on nitrogen demand and how constructive we are on it for Q2 and more broadly for this year? Is that what you’re asking?
Yes, and I’m just curious if volumes will be up year-on-year in Q2.
Yes, so generally, as we’ve said, we’ve been seeing as we started Q2 here, not just volumes, but also pricing in the U.S. and Europe continue to do better than Q1. It’s on the right trajectory. Obviously, you’re still less than halfway through the quarter and weather tends to be a big swing factor.
But directionally, we’re seeing that we’re making up for a period of – under an application of nitrogen last year, right? And we had a 3% decline in nitrogen demand last year driven by affordability credit level issues in the nitrogen markets last year, and we’re seeing new – some buyers come back in the African markets in Australia, and last, in some South American markets come up and look for more demand than they had last year. And the only exception would be India that has been importing less, but they’re going to still have some decent demand given their restocks. For now, from what we can see it looks quite good for Q2, if I can leave it at that [indiscernible].
With regards to the listing venue, I’d say that we’re doing the evaluation right now, and I wouldn’t comment on whether it’d be a dual listing or a singular listing at this stage here. We’re just looking at the other markets, and we’re taking into account what maximizes shareholder value. And obviously, we’re going to be focused on liquidity, and we would be a bit concerned about split liquidity as well.
Great. Thanks.
Our next question comes from Chetan Udeshi with JPMorgan. Your line is open.
Yes. Hi, thanks. I just wanted to follow-up on the outages in the methanol business because this business tends to have outages almost after every two or three quarters. I know we had a Texas freeze. I don’t know if it’s more got to do with the – just the follow-up from the disruptions from Texas freeze. But I think it’s just – I’m just curious why do we seem to have so many outages at the methanol business of OCI, especially in the U.S., given that these are quite, I would say, young plants compared to some of the other plants in the U.S. Gulf Coast.
And the second question was just around the blue ammonia project. Are you expecting to get a premium over the benchmark ammonia prices with your blue ammonia sales, because from what I understand one of your peers in the U.S. have agreed to sell ammonia to a Japanese power company at cost plus model. So it doesn’t feel like they necessarily are charging a premium. So how realistic will it be for you to assume a premium if one of your key competitors is willing to sell blue ammonia in cost plus or on cost plus basis? Thank you.
Yes, Chetan, I mean, on your point on the operational side, you’re absolutely right. This is – it was not a good operational showing for our U.S. business. And we’ve been on this manufacturing improvement journey that’s been, I think, directionally moving in the right direction.
We’ve seen stronger site leadership and corporate teams on the manufacturing side that just weren’t there in the last few years. And we have a relentless focus on process safety and our liability, where we’re doing things in terms of monitoring our operating windows, putting in leading standards for KPIs on the bus side that have continued to improve.
So from the leading perspective, we see that we’re moving in the right direction. But looking at this last quarter, I can’t say that we’re happy about where we’re at. This was one of the worst production quarters that we’ve had in the last several years, particularly in the Texas site. This did start with the winter freeze that happened in December and upon restart, we did have several, as you saw in the prepared remarks and in the press release, several issues upon start-up with that freeze.
We had, if you recall, a few years ago in Iowa, some winter-related issues and outages where you have learnings of winterization, right, where you may have certain parts of the plant that are exposed that don’t have what’s called heat tracing to keep the plants from during very cold periods.
And in Texas, we’ve had unseasonably cold winter weather in certain weeks in December and also two years ago in February ‘21. So those – we learn from them, so that we can avoid the winter outage in and of itself. And overall, we do continue to feel strong that we will see improvement in our production and volumes after what was a very tough quarter that started with these electric fees. So that’s on the operational side.
On the premium for blue. So I think what you’re referring to for the East Asian sales into Japan and Korea, I think these have all been MOUs with no bonafide agreements signed, right, also no bonafide FID’d new blue ammonia projects other than the one that we’ve announced. There’s been mainly brownfields where they’re doing carbon capturing.
Cost plus, obviously, a big question to give you what’s the plus, right, and what’s the cost? Both of those are big questions. So the plus and the cost will determine what the price ultimately looks like. I think we’re still in the early innings of what that looks like in terms of where the market sales are up, but the beauty of our Texas group projects and our global ammonia reach is that this ammonia will find its way home into the fertilizer markets, most likely in the Midwest, as via this recent announcement on the NuStar pipeline. It will find its way into the domestic U.S. Gulf Coast market, where we have an existing 350,000 tons of production. And it will be exported not just towards the far east, potentially, but also into Europe, where, as you know, we’ve been running at curtailed ammonia in our OCI nitrogen facility now. We’re running only one of two lines, 40% of our overall capacity.
So, we have effectively over the last 18 months, had a 600,000 ton short for ammonia. And we know just given where marginal costs are, that we’re going to start seeing more permanent shutdowns following CS announcement in the UK and the ASF announcement in Germany of reducing ammonia production.
So to the extent you go, for example, to that European market with CBAM that’s moving in the right direction, as I mentioned earlier, Europe is going to be pricing from 2026 urban carbon at a price and carbon today is €100 in the forward curve, plus or minus a ton and every ton of ammonia is about 2 tons of carbon. So it’s about a €200 are being charged that will start being implemented.
So structurally, different than kind of having a bilateral negotiation, say, on what’s the value of blue or green. Structurally, there will be an advantage to having something that’s a blue product versus a grey product in the market, and that can allow for the premium that we’re discussing here.
And as you saw in the economics we shared in the slide deck, we were showing the economics excluding that type of premium and just showing a sensitivity, if you had, for example, a $50 blue premium, we get an extra 4% on the IRR.
Thank you.
[Operator Instructions] We have no further audio questions. I’ll now hand back to Hans Zayed to answer questions received on the webcast.
Yes. There are a few questions on the webcast that I will read through. So the first question that we have is we saw a lot of delay in demand in the first quarter. In the press release, you stated that the market is tight and demand is improving. Why don’t we see this back into urea and ammonia pricing? The information buyer proof shows that there is still a lack of buying interest.
Yes. So we’ve seen an uptick in both urea and nitrates pricing and volumes in the last several weeks, as I was saying. Urea more broadly is up about $25 in the last month. We’ve seen some buying into the Mediterranean markets with the Egypt stepping back up. But really, it’s been in the U.S., quite significant where we see U.S. Gulf pricing going up over $130 a ton in one month, that’s for short-term I believe. So $143 per metric ton.
The European nitrate pricing, in particular, has also moved over week-over-week. We’ve seen participants in that market, including ourselves again this morning, adding to pricing, selling limited volumes and then going up in pricing as inventories have been low on the retail side.
I think that some of the challenges that we experienced in OCI nitrogen part of the business was we produced inventories in Q4 of this year at elevated gas pricing, right, almost €100 a megawatt hour and then the prevailing gas pricing was in the €40 megawatt hour lower price level in Q1.
So what that meant is when we made sales in Q1, we were selling them at losses because of one of the biggest gas price drops in history going into the buying season. Now a lot of the retailers had similar issues. They bought some tons in Q4, right, and Q3 at elevated pricing. And they were very worried about buying and they suppressed their buying until they really saw the demand in front of them from the farmer side, and we’re starting to see that emerge where it gets low enough, we see a bottom to the market where they can go in and buy during the season here.
So that’s what we’re seeing week to week now. Obviously weather plays into it as a factor and we’re also going to be seeing, I think, a recovery more broadly in these under applied nitrogen demand markets and the key growing markets over the next several quarters and into 2024.
Okay. Thanks Ahmed. The next question is, any comment on how a possible increase in gas prices in the next six months may influence next quarter’s results?
Yes. So for an increase in gas prices to specify in the U.S. and Europe because those have different implications. Hello?
Yes.
So every $1 an MMBtu increase in European marginal gas price at $65 a ton marginal cost, excluding CO2, as we’ve stated and cost curve economics would play out. As we said, we’re already operating at levels below the European cash cost today at the low teens trading level. So we can see that being quite substantial when we think about the pricing on products.
Thanks. And the next question is, the first quarter was a difficult quarter in terms of volumes and prices. Can you shine some light on Q2, and if Q2 will be significantly better?
So from a volumes perspective, overall, we don’t give specific guidance, but clearly, volumes were very, very low in Q1 with this demand deferral that I was talking about earlier. Q2 is generally a normally seasonally strong quarter. We’ve seen April and into May be better on the nitrogen side and our methanol prices as I’ve said, have been back up and running. And therefore, directionally, we see that Q2 ‘23 should be definitely better than Q1 and it looks like directionally moving to be better than Q2 of 2022. This will also obviously depend on the pricing environment that we see as well.
First, the next question is how sustainable is the expected cash flow for paying the base dividend of $400 million this year?
Yes, I can take that one. We’ve already set out our dividend policy. Any deviations in the future will depend on market conditions with, of course, a view that we are continuously trying to maximize shareholder returns. We will provide more guidance on the H1 ‘23 dividend as part of our Q2 results.
As Ahmed mentioned, it’s been a volatile market. We’re seeing signs of recovery now, as we mentioned in our prepared remarks and the commentary Ahmed alluded to in the context of the Q&A. So we still have a constructive view on the outlook, and we’ll be balancing that with the long-term growth prospects and make these determinations accordingly.
Thanks Hassan. And I think there’s a question on – there’s a call in the queue. Operator?
Yes, we have a question from [David Hill from 91]. Your line is now open? David, your line is now open. We have no further questions.
In that case, we’ll go to the next question. We as shareholders still have fresh in mind the course of events about the strategic review of the methanol business in 2019. It took a long time and a lot of talk for the shareholders what the outcomes were of this review. Can you ensure that this strategic review will be communicated to shareholders in a more comprehensive manner?
I mean I think in this case, we intend to continue to communicate to shareholders in a transparent manner as we continue – as we’ve tried to do over the last several years. If I recall with the last strategic review that happened on the methanol side was also during a period where we entered into the COVID-19 pandemic crisis in the middle of that strategic review, where oil prices were negative and gas prices had dropped off meaningfully.
So it was a very big fundamental change in the market in that short period of time. And I think we discussed that on some of our quarterly calls as that develops. But here, we have, obviously, a strategic shareholder or inclusive capital and others who’ve poised their views on the market, and we’ll do our best to continue to stay transparent.
Thanks Ahmed. And the next question is, is there a financial allocation to start a large buyback program?
So the way we think about whether it’s buybacks or dividends or return of capital, it’s all coming from that same pool of returning capital to shareholders. And I think we’ve gotten some of these questions separately, that could be part of the way and form of returning capital to shareholders depending on what we decide to do with the Board in terms of how we do so. Some of you…
No, I’d agree. I think it’s – we’ve had this question before. We’ve had an efficient manner to – efficient mode to return capital to shareholders previously, but we continuously reevaluate what is the optimal avenue to do so.
And obviously continue with our commitment towards the investment grade in our financial policy.
And maintaining our liquidity, of course.
So the next question is, how sustainable is the expected cash flow for paying the base dividend of $400 million this year?
I think we already covered the question earlier.
We did. Yes, there is no further questions. And I’ll hand back to Ahmed.
Okay. Thank you all for joining this call and look forward to our next discussion with the Q2 results. Thank you.
Ladies and gentlemen, today’s call has now concluded. We’d like to thank you for your participation. You may now disconnect your lines.