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OCI NV
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Hello, everyone, and welcome to the OCI N.V. Second Quarter 2022 Results Call. Thank you for your patience.
My name is Daisy, and I'll be your coordinator today. You will have the opportunity to ask a question at the end of the presentation. [Operator Instructions]
I would now like to hand the call over to Hans Zayed, the Group Investor Relations Director to begin. So Hans, please go ahead.
Thank you, and good afternoon and good morning to our audience in the US. Thank you for joining the OCI N.V. Second Quarter 2022 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. And as usual, at the end of the call, we will host a question-and-answer session. The quarterly reports and the presentation are available on our IR website that we posted this morning, and I would like to remind you that any forward-looking statements made on this call involve risks and the actual results will differ materially from these statements.
With that, let me hand over to Ahmed.
Thank you, Hans, and thank you all for joining us today. Hassan and I will provide some more perspective on the results we published this morning throughout this call. We're pleased that we continued our strong performance with an adjusted EBITDA of $1.3 billion for the quarter and $3.8 billion for the LTM trailing 12-month period and a reduction in net debt to a very low leverage level. This enables us to return almost $1.1 billion of cash to our shareholders this calendar year and pursue value-creative decarbonization and growth opportunities. However, we have to put these results in a global perspective as the global and especially European macro environment faces many challenges. The uncertainty is particularly true for gas markets in Europe as widely discussed. Many European producers in our industry cannot recover their cash costs due to the high prices of gas, especially those that cannot import ammonia as an alternative. Yet we were able to deliver excellent results as we benefit from our flexibility and diversified platform across Middle East and North Africa, US and Europe and our leading position in the global ammonia market.
This enables us to reduce gas consumption in Europe when necessary by replacing that with the ammonia from our global operations as well as third parties. Currently, we're running our ammonia lines at approximately 40% of our capacity in the Netherlands. All this is reflected in our results. We recorded strong results in the US and in Fertiglobe, and we were able to operate our downstream production in Europe profitably while we continue to provide essential nitrogen fertilizers to our European agricultural customers and nitrogen products to our industrial customers. The latter is even more important in the current environment. At OCI, we aim to address potential green shortfalls and be part of the solution to help alleviate overall food security concerns by providing as much product as possible and fill in the play gaps that may arise. Our methanol operations, however, stopped production at the end of June last year when gas prices were already high, making it difficult to run the plant economically.
You can also see this in our group's own produced sales volumes of 3.1 million metric tons, which were down 5% during the second quarter compared to the second quarter of 2021. But this can largely be explained by the continued shutdown of BioMCN in Europe. Our overall European business also benefits from the sale of excess EUAs or CO2 credits, including $88 million reported during the second quarter. As we discussed in our past conference calls, we are excited about our strategic growth opportunities that can both decarbonize and grow our asset base in a value accretive way in the emerging hydrogen economy. We are pleased with our progress on the various projects under development. But as always, and before I hand it over to Hassan, I'd like to cover our top priority, which is safety, as we want all our employees and contractors to go home safe every day. We also see safety as crucial for our business as ESG performance as we improve occupational safety and process safety, reliability and even energy of site will increase all part of our operational excellence program.
Our 12-month rolling and reportable incident rate at the end of March was 0.37 incidents per 200,000 man out, slightly higher than at the end of Q1. Despite being below industry averages, we continue to stress our relentless focus on operational and process safety across all our facilities. The whole OCI team is working hard to make this happen. I'd like to thank all our employees for their strong commitment to safety as well as operational excellence and growing our business at the same time via commercial excellence and growth projects. I'll now hand it over to Hassan for further commentary on the company's results. Hassan?
Thank you, Ahmed. I'll begin with summarizing some positive developments for both OCA and Fertiglobe that occurred in the last few months. Following the earlier upgrade of OCI to investment-grade status is a stable outlook by S&P, resonate credit rating agencies have now also issued first-time investment-grade ratings on our ADX subsidiary, Fertiglobe in June, recognizing its strong free cash flow generation, financial policy and robust outlook. We're also pleased that in the month of June, OCI was included in the MSCI World Index and the Stock 600 Index, making a return to some of the world's leading global equity indices for which we dropped at the beginning of a prolonged downturn for our end markets in 2016. Benefit conclusions coincided with a noticeable step-up in the liquidity of our shares to a consistent $40 million to $50 million per day on average this year compared to previous levels of $10 million to $15 million per day, partially reflecting some share price appreciation and changes in our shareholding structure. In addition, Fertiglobe was also included in the FTSE EM emerging market index in June following its March inclusion in the FTSE ADX15 index, which represents that we see largest and most liquid companies of the Abu Dhabi Stock Exchange. We hope that such developments combined with the prospect of a consistent offering of the dividend yield and the exciting growth prospects that lie ahead for OCI in the energy transition should continue to broaden our appeal to the investor community.
Turning to the quarter's results. Focusing on the quarter results, OCI's consolidated revenues increased by 95% to $2.9 billion. And as Ahmed mentioned earlier, our adjusted EBITDA rose by 141% to almost $1.3 billion during the second quarter compared to the same quarter last year as we continue to benefit from higher prices for all of our products. And all segments of the business contributed to this growth. In line with our guidance, our adjusted EBITDA is also 33% higher than the first quarter. Compared to the same quarter last year, consolidated adjusted net income saw a marked improvement of 322% and reached $528 million for the quarter, and our reported net income increased by 226% to $478 million. The primary difference between adjusted and reported net income is related to balance sheet FX translations and treatment of one-off refinancing costs. We also generated $928 million of free cash flow during the second quarter. Of note is that this free cash flow figure is after deducting $250 million of dividends paid to non controlling interest. This includes $170 million of semiannual dividends to Fertiglobe's minority shareholders other than OCI. Excuse the interuption. As I was saying, this is after deducting $250 million paid in uncertain interest, which includes $170 million of semiannual dividends to Fertiglobe's minority shareholders other than OCI, minorities in EBIC, which is Fertiglobe's subsidiary and some minorities and some dividends who they met the group minorities.
Also after tax payments of 800 -- sorry, this is also after tax payments of $82 million, mostly on [indiscernible] which are up from a year ago due to the improvement in performance. And this is also after interest payments of $51 million, which were down substantially $91 million in the second quarter of 2021 as a result of our continued deleveraging. For the full year, we expect cash interest on gross debt to be below $120 million, which is a substantial reduction from 2021 interest level of over $180 million. Below the free cash flow line, we had cost to the tune of $65 million related to our successful refinancing of IFCo in April, which we covered in the previous quarter results and conference call. We have successfully returned to cash to shareholders of €1.45 per share or the equivalent of $320 million. The first cash payments to our shareholders is our listing in Euronext Amsterdam in 2013. Fertiglobe also paid an interim dividend to shareholders during the second quarter of $340 million, of which 50% was received by OCI and 50%, of course, to ADNOC, our strategic partner and the minority investors in Fertiglobe.
After all these cash distributions and one-offs, net debt still declined by $553 million during the second quarter to $708 million as of 30th of June 2022, or the net leverage of 0.2x based on the last 12 months EBITDA of $3.8 million. This is compared to a consolidated leverage of 0.9x as of 31st December 2021. Looking at proportionate leverage as of 30th of June 2022 and based on OCI's ownership, so adjusted for all minorities and including off-balance sheet debt at Natgasoline, the proportionate leverage at 30th of June was 0.5x compared to 0.8x as of March 31st of March and compared to 1.3x as of 31st December 2021.
With regards to future returns of capital to shareholders. In early July, we announced the proposal for a cash distribution with respect to the performance of our performance in H1 2022 of €3.55 per share or just over $750 million based on the FX risk day. We have scheduled an extraordinary general meeting for this on the schedule on the 19th of August. And this distribution will bring total return to shareholders during the calendar year 2022 to €5 per share or just shy of a total of $1.1 billion returns to shareholders applying a dividend yield of 15% on yesterday's evening closing price, but that we saw some positive share price movement today, so that number would have changed.
Separately, Fertiglobe announced today in line with the dividend policy of distributing excess free cash flow to the shareholders a cash distribution of $750 million for the first half of 2022 payable in October 2022. OCI's share of this dividend will be $375 million accordingly. The 2 dividends, combined with the declared dividends and noncontrolling interest in Algeria, of $342 million, which were related to the last year will result in cash outflows of almost $1.5 billion in the second half of 2022. Even with these cash outflows, we are still poised to maintain a healthy balance sheet, which enables us to continue to return capital to shareholders, balanced while with investing in strategic growth opportunities, both within an investment-grade framework, as we have consistently laid out.
On a pro forma consolidated net leverage basis as of 30th of June, after taking into consideration all these proposed cash distributions and without giving any regard to cash generation during the second half, our leverage effectively would be at 0.6x on a consolidated basis and below 1x on a proportionate basis. With regards to growth opportunities and CapEx, there is no change to our CapEx guidance for 2022. We continue to expect around $300 million of maintenance CapEx. In addition, we continue to guide for between 75.50 of growth CapEx depending on the various progress on projects and potential FIDs in 2022. We also maintained our estimate of up to $350 million to $450 million in growth CapEx for 2023, which includes previously announced projects. However, ultimately, all projects depend on factors such as legislation incentives and market developments.
Moving to natural gas. Our natural gas procurement -- regarding our natural gas operant and hedging activities. As you will have seen in the press release, we covered that the topic expensively with the prospect. As we saw the prospect of increasing LNG exports in the US, Europe in the coming years, we have locked in a large part of our long-term gas requirements in the United States. As Natgasoline already had hedges in place, this applies mostly to new hedges related to IFCo and our OCI Beaumont operation and marked change in OCI's policy with respect to long-term hedging.
In the first half of 2020, Fertiglobe accounted for 60% of our global natural gas consumption. The US accounted for 31%, including our proportionate share of Natgasoline and Europe were on 9% given that our BioMCN operations remains shut. And we are also running our ammonia capacity in Europe at reduced rates around between 40% to 60%. Therefore, the hedging alongside Fertoglobe's favorable gas up life contracts gives good visibility on more than 90% of our long-term gas requirements that further enhances our cost resiliency. For the period between 2023 and 2029, we have hedged circa 50% of our gas requirements in the US and locked in natural gas prices at a weighted average price of $4.3 per MMBtu. For the period between August and December 2022, so the balance of the year, we have hedged circa 60% at a weighted average price of $5.3 per MMBtu, which compares to the Henry Hub price of $8.3 per MMBtu for the September, December 2022 forward curve.
Note that OCI does not apply hedge accounting and commodity hedges. Therefore, mark-to-market gains and losses are recognized in the P&L statement, except for the physical purchase contracts, which is treated under their own use exemption methodology, and we're happy to provide anybody who requests some additional narrative on that. However, market-to-market gains or losses on excludes from adjusted EBITDA and our adjusted net income when we reported. Current mark-to-market as of the close of 1st of August 2022 indicates a gain of $184 million in these hedges. With that, I would like invite Ahmed to provide further commentary on results, commodity market conditions and the strategic initiatives of the company. Ahmed?
Sure. Thanks, Hassan. Our outlook for our end markets has not changed directionally since we last spoke in May despite volatility that we've seen over the last few months. If I start with the outlook for nitrogen market, we had expected we saw some declines in pricing over the summer in line with usual seasonality but remained at much higher levels than we have seen in the off-season period during 2016 to 2020 downturn given the demand-driven environment we currently see ourselves in today. Going forward, we continue to see an environment with support for pricing for the medium term driven by a few key items. Firstly, the prospect is structurally higher gas pricing environment in Europe for a prolonged period of time. On today's gas price in Europe of $60 per MMBtu, the ammonia support level would be $2,100 a ton for marginal costs, excluding CO2, which people are increasingly viewing as a variable cost.
In our presentation, you can see that based on gas price futures, long-term support levels for ammonia, urea and nitric pricing for this year and 2023 are 6 to 9x higher higher than the support level we saw for marginal cost producers during the downturn period of 2016 to 2020. Pricing today is actually materially lower than the support levels, but it is not uncommon to see prices drop below such floor levels during off-season period with low liquidity. Economics have historically prevailed when margins for producers remain negative for a longer period, triggering shutdowns as we have already seen happening in Europe over the last 12 months. In Europe, we estimate that around 7 million tons of ammonia capacity out of the total of 19 is currently shut due to high gas prices. And given elevated futures and risks associated with Russian gas supply, more capacity may be shut down should selling prices remain below gas-based production costs. In total, up to 19 million tons of European ammonia capacity is at risk of being shut if pricing remains materially below cost versus same period of time.
Secondly, nitrogen supply is expected to be structurally tighter over the next several years between 2022 and 2026 compared to the previous 5 years with limited new capacity additions. This is exacerbated by a less supply promotion on the ammonia side in the black seed, which impacts circa 2 million tonnes of ammonia or 10% of the global sales. The Chinese government continues to curb exports and prioritize domestic supply at least until H2 2023, which tightens the markets further. Exports are expected to be below the 3 million ton level per year over the medium term and even lower than that level in 2022. To put this into context, in January, the expectation was that China would export over 4 million tons in 2022. As we moved on to May, this number had reduced to $3 million and now has dropped further to $1.5 million for calendar year 2022. This $2.5 million drop in expectations since the beginning of the year represents approximately 2 world-scale facilities running the whole year out.
Thirdly, Propundamentals remain supportive for nitrogen demand to help alleviate critical grain shortages. The global grain stocks such ratio remains a decade low and will take at least until 2024 to replenish stocks assuming strong nitrogen applications. Grain futures with US corn futures that are around $6 and weak futures at $8 a bushel from the second half of this year until the end of 2024 remain at levels that incentivize farmers globally to maximize yields by using more nitrogen in grain exporting regions such as the US, Brazil, Europe and Australia, where demand is expected to be robust in 2022 and 2023. Furthermore, dry weather in the US, Europe and Argentina is expected to lower corn and wheat yields, which combined with lower corn production in Ukraine tightens the agricultural cycle even further into 2022.
In India, we also expect strong import demand for urea in 2022, with a series of tenders expected to be issued over the coming months to replenish low stock levels and support for [beer] demand. 2022 and 2023 is expected to be higher than last year, given its high wheat prices man for Indian wheat on the back of the Russian Ukraine conflict, good monsoons and nitrogen subsidies in place. In addition, there have now been news reports in the last day that India is rationing gas supplies to fertilizer customers after imports were limited given global LNG shortages into the crush.
Now moving on to methanol. The volatility in the macro environment had some effect on prices in Q2, but we've seen some improvements in the stock prices in the last few weeks. Last week, US contract price for [August] settled at $592 per ton, almost the same level as in July. Of course, we are monitoring the macroeconomic environment closely as part of the methanol linked to GDP, but we are currently seeing stable methanol markets into Q3 and continued downstream demand from a diversified customer base. Our operating rates for major derivative segments, including formaldehyde acidic acid MMA are reported to be at healthy rates in the United States and Europe. In China, in particular, economic development is expected to improve as a result of financial stimulus measures.
Fuel consumption in China is picking up post-covid lockdowns and higher oil prices are supportive of methanol substitution for other fuels and supported for MTO or methanol olefin economics as a result of higher energy and olefins pricing in China and are supporting operating rates to continue to exceed 80%. Methanol is currently also significantly cheaper than LNG and gasoline and other oil substitutes and can be used as a lower cost and as a cleaner alternative to multiple fuel applications worldwide, including heating and transportation. Looking at the medium term, we continue to expect tighter methanol market fundamentals over the period of 2022 to 2026 with incremental demand expected to exceed supply by approximately 8 million tons and no new major supply expected to come on stream during this year. This does not consider obviously the meaningful upside and additional sense from hydrogen fuel demand, notably for road and in particular, marine fuel applications that, as you all know, is developing.
This leads to some comments on our growth strategy and outlook. We continue to make good progress with our pipeline of projects to capture value-accretive opportunities from emerging demand for clean hydrogen as we aim to become one of the largest producers of clean fuels and feedstock. We see large upside from additional demand emerging in a range of new applications and sectors as a result of the hydro hydrogen transition, notably for road and marine fuels applications where ammonia and methanol are ideally positioned. In June, we announced the expansion of our Rotterdam ammonia import terminal, which is the only ammonia import terminal in Rotterdam, and we're tripling the throughput capacity to 1.2 million tonnes per year during 2023. This infrastructure has been crucial in our flexible operating model and the current high gas price environment as discussed earlier. For the second phase, OCI has completed the basic engineering package for the construction of a new ammonia tank at the terminal, which along with the scale up in the jetty infrastructure will allow a potential increase in throughputs above 3 million tonnes per add. The terminal is strategically located to facilitate emerging ammonia demand for bunkering to ocean-going vessels and the unique supply chain is the one we can also leverage in the future by importing low and no carbon hydrogen in the form of ammonia methanol, which can help decarbonize the EU as well as reduce reliance on imported natural gas during [indiscernible].
We're also pleased that period a waste and biomass gasification project developed by RWE was selected for funding by the EU Innovation Fund. This project will produce hydrogen at the industrial site in Camila using household waste from Limburg in the Netherlands to replace natural gas. OCI is expected to be the offtaker for the circular of hydrogen to use in our ammonia synthesis, replacing part of our steam methane reformer and to produce hydrogen. Which would result in a reduction in our carbon footprint and lower the carbon intensity of our ultimate products. Throughout the value chain, the project will reduce emission about 500,000 tonnes of CO2 per year, corresponding to the annual consumption of about 26,000 households or 250,000 conventional passenger cars. First, the project is still under development with FID expected in 2023, subject to definitive documentation in commercial briefs.
To conclude, we are excited about the prospects for the company. In 2021 and year-to-date 2022, we saw the start of a strong and we believe sustained general improvement in nitrogen pricing. Shorter-term recent nitrogen price movements and the outlook for natural gas provides good visibility and set us up well for Q3 and Q4 of this year. OCI's nitrogen and methanol assets are favorably positioned on the global cost curve given stock spread between the regions. The hedging in place at attractive pricing levels now in the US gives us visibility on more than 90% of our long-term national gas requirements. We are ideally positioned as we leverage our competitive global platform, growth scale young assets and strong logistics platform and harmonize our hydrogen strategy with our continued focus on shareholder and stakeholder value. With that, we'll open the line up for questions.
Thank you. If anyone would like to register a question on the telephone line, please press star followed by one on your telephone keypad. If you would love to withdraw your question please press start followed by two. And when preparing to ask your question, please ensure you are unmuted locally. Our first question is from Christian Faitz from Kepler. Christian, your line is open. Please go ahead.
Yes. Thank you. Good afternoon Ahmed, Hassan and Hans. Two questions, if I may. First of all, how do you see ammonia demand for the upcoming fall application in the US? Do you have any early signs from your salespeople on the ground? And then second, can you give us an update on the gas cost situation for both your used and methanol operations as well as for IFCo? Thank you very much.
Sure, Chris. Good. Thanks for the question. So obviously, we know that we had a pretty weak ammonia demand for the spring, just given weather conditions that we saw in the US. For this coming fall, we've seen quite a lot of demand for fall prepay, which has helped soak up some of the excess inventory that was in the system following kind of the weak spring that we just ended. And we also see, obviously, exports to Europe that make a lot of sense in this type of pricing environment. So Trinidad and US, Gulf, alone you have to make way the Euro proband grows in the Midwest. So with kind of the reduction in those supplies over time, some of the fall prepay, if the weather cooperates, we should have a record season. And I think the industry will start to work through a lot of the stocks that have been in place from the end of June. Thank you. Could you repeat the second question?
Yes. Just update us on your gas costs setup in the use methanol operations and IFCo, please?
So Hassan walked through, we've done quite a bit of hedging of the underlying gas exposure in the US to the levels that we discussed. I think it was 60% through December and then from the beginning of 2023 until 2028, approximately 50%. And the way we buy our gas in Iowa is actually off of South in our Southwest basis, which is on average usually for the year, quite an attractive basis level, and we would have hedged the basis across most of the hedging. And with regards to OCI Beaumont, we're on the Houston Ship Channel, sub Texas basis. And we've been able to also hedge basis as well as the underlying 99. Are you asking about what you're seeing today in the market? The best price?
Yes. Yes, indeed. Indeed.
So I think I don't have them right in front of me, but basically, you look at the Henry Hub price and to get the basis for A&R Southwest because it's been relatively volatile. That will give you a sense of kind of the underlying gas that we're using to supply our IFCo plant in our Southwest hub, and we have some transport long-term trends we have taken out with TransCanada, our pipeline there. So I think generally, we're about flat to Henry Hub when it comes to Iowa. With regards to Beaumont, Texas, we end up being a little bit of a discount to Henry Hub based on where the fusion ship channel in South Texas bases levels of trading. But you would look at SPX South Texas basis and you look at Houston ship channel when it comes to OCI.
Okay. Great. And then if I may, one last question on IFCo and then I'll shut up. If I'm not mistaken your last bigger turnaround in Iowa and it more or less exactly 3 years ago. So when do you believe the next bigger turnarounds or maintenance is scheduled?
So I mean, as you know, we don't give kind of guidance with regards to turnaround, but typically, they happen every 4 years, depending on which plants you're at. We had a long outage, which we did a lot of turnaround activities on, as you know, last year. It's actually still reflected in our LTM numbers. So despite the strong LTM performance, Iowa, which is obviously a very important plant in Q3 of 2021 had a very low EBITDA and free cash flow generation because the outage we had there at that plant. So I think in future years, we'll see if we provide more guidance around turnoffs, but they're typically every 4 years. So I'll leave it at that for now.
Okay. That is very helpful. Thank you, Ahmed.
Thank you. Our next question is from Lisa De Neve from Morgan Stanley. Your line is open, please go ahead.
Hi. Thank you for taking my questions. I have 2 and the bit related too. First and foremost, can you following on from the last question, you discussed a little bit of demand trends on the ammonia side. But can you also share what you're seeing on the demand side for the other nitrogen products you're selling? And where you're seeing still some levels of potential down-trading or some levels of price elasticity or liquidity concerns, and maybe where you actually see a pickup in demand? And my second question is, in your presentation, you sort of detailed that nitrate stock levels are at pretty low levels. Can you share a little bit about how, for example, urea inventories are at a global level where they are high low? Any sort of indication on that because there's no real data on these things would be helpful. Thank you.
Sorry, I was speaking to myself on mute. So back to your question, Lisa, with regards to the the questions on how demand is looking. European farmers are seeing still very strong economics to continue to apply nitrogen for for example, wheat production. And this is despite the drop we saw in pricing on the grain side for both wheat down to $8 a bushel now and corn down to $6 a bushel on the futures for the next few years. You run those numbers and the math around that, they're still making a good margin, and that's why we're seeing increased hedging forward and some buying of fertilizer forward even in this off-season period. So still seeing good demand there, and we've built kind of a healthy order book on nitrates here in the third quarter as we've seen some increased prices.
I think I talked previously as well about India, where we still see very low stocks. That's one where we see stocks of about 11% lower than prior period. Still needs several million tons by the end of this year to support the [beer] demand and replenish stock levels as well. So we see imports close to the 9-plus million tons versus the 7 or so last year. On the Latin America side, we've seen demand picking up. Brazil needs another 4 million tons of urea yet, and farmer economics still look quite strong there. And Argentina will need a little over 0.5 million tons, probably close to 600,000 tonnes at that side. Across the system, we're still seeing very low inventories globally historically low levels for almost all nitrogen products. Some of what you talked about with regards to demand destruction, we think was not just, for example, commentary on Europe was not a function affiliate, demand destructure for price, but actual availability.
Russia is a big provider of ammonium nitrate and there were just difficulties getting ammonia nitrate and enough stock and levels to get into the market. And when it comes to other areas for kind of "demand destruction concerns", areas where it's difficulty in accessing credit, sub-Sahara Africa, some areas in South Asia, outside of India have been a concern. So we've seen multilaterals and government transactions helping support the purchase of nitrogen fertilizer with replenish use levels. So I think that covers most of there other particular geographies you'd like to talk about or specific products?
No, sorry, that was actually very helpful. I just wanted to get your thoughts on inventory. And I think the conclusion is that overall inventories have reached quite low levels across those nutrients. I think that's a fair assumption, is that? I mean, to the extent we can see that.
Yes, I'd say that qualitatively, Lisa, I'd say that we think it's historically, the fact that China is not exporting is a big deal. The fact that there's a lot of shutdowns in Europe is a big deal. There was some overhang in the US as you know with some UAN that didn't get put down in June and now you look into Q3, they're getting into that turnaround season and others have announced some turnarounds in Q3. So we're seeing that combined with a decent fill program producing UAN levels. And on the ammonia side, as I stated in the past question, we've seen exports from the US as well as all prepaid sales, really work through some of the stocks there for UAN in athemoment. So those are kind of the 2 levels. And I think now the next step is to see how harvesting looks and where yields are at in terms of the outlook for demand.
Okay. Great. And I was going to take the following question offline because I think it's a really stupid one, but I'm going to ask it anyway. So in your presentation and your statement, you say that you have now visibility of more than 90% of the company's long-term [debt] requirements. How do we get to the 90%? Is this just US, Fertiglobe, your hedges in place? I mean, how do I get to that 90%?
Yes, that's exactly right. When you think about our overall exposure, it's the combination of where we're at in terms of gas exposure. We do not have long-term hedges or medium-term hedges on in Europe, but we're also not consuming much gas in Europe right now. And with the outlook, it doesn't look like we're going to be running methanol anytime soon, given how stored methanol has been, and that's been the case for over a year now. And with regards to ammonia, we're running at 40% right now. And with the disconnect between product pricing for ammonia and gas cost of producing ammonia, we're assuming that kind of we made a [surge] on that level, put that in the numbers as well as Fertiglobe with the long-term contracts and the US hedging that Hassan talked through.
Okay. Yeah. That makes sense. Thank you very much.
Thank you. Our next question is from Mubasher Chaudhry from Citi. Mubasher, your line is open. Please go ahead.
Hi guys. Thank you for taking my questions. Just a couple, please. Are you able to provide any guidance range for the second half, given that you had quite a strong first half as well and then we're looking forward to what looks to be a relatively strong second half at all. And any comments around the cadence between the third quarter and the fourth quarter would be helpful. And just on the kind of on the macro level, can you provide any thoughts on the quantity of the harvest being reported on in the recent weeks out of the US? And just trying to gauge around your commentary on stock-to-use ratios not normalizing until at least 2024. Yes, I just wanted to kind of go those 2 comments, please. Thank you.
I can take the first question regarding guidance. I mean, we have provided a time certain level of guidance looking at quarter ahead. However, like most of our peers, we usually don't give any existing guidance exept for directional comments on the market outlook, which we hope the ones we provided this quarter were health in that regard, focusing really on sort of pricing environment, the macro variables that underpin our business performance, the predictability of our increased feasibility of our cost base, the most important cost base. So I think the combination of all these is sort of our attempt to give some directional guidance to our investors in the market. But as we get closer, as in November as part of our Q2 results, we will be giving some more guidance on sort of the next dividend cycle as we have a bit more visibility on our order book that's relevant for the performance of that period. And as we continue to sort of see how the markets unfold given the past changing environment. What do you want to add?
Yes. I mean in terms of your other question with regards to harvesting and everything that’s obviously a few months away in the US But in terms of kind of crop conditions today, they’re a bit behind the 5-year average and behind last year in terms of the corn ratings from what we can see at this point. There are concerns on yield in terms of a little bit less nitrogen application that happened in the course of Q2, as you know. And lease planting combined with quite dry weather. So there are concerns about what yield we’ll see come kind of September, October time frame and what that means for grain stocks overall? And this is similar to what we’re seeing in Europe on the very dry summer so far here in Europe. And so those 2 are areas of concern in terms of yields, but I think we’ll see more and no more over the coming months. And I think I did mention earlier, LatAm dry conditions, particularly if we look at the wheat in Argentina. Those are some of the areas where there are concerns about the production there of crops, and then when you look forward and what that means, that means potentially a more difficult time replenishing stocks of grains and driving some of the commentary you were saying about, I think, your last question there, which is the need for replenishing grain stocks to get to more normalized levels because we are at decade lows where we stand today and have risks around the output and the yield that we anticipate seeing later this year.
Thank you. Our next question is from Chetan Udeshi from JPMorgan. Chetan, your line is open. Please go ahead.
Yes, hi. I had two questions. I'm just wondering on your comment that you are running your European ammonia capacity at I heard 40% utilization. I'm curious why are you even running it at this point, even though it's really not going to be profitable. And the second question was, you've talked about, at least we've seen the press filings on some Greenfield projects in the US, are you able to give us some color on how should we think about the CapEx road map for OCI over the next two, three years? Are we talking about a big step up or are we talking about maybe a few $50 million increase per year until you get to a point where there is a peak CapEx on some of these Greenfield blue, green ammonia, or methanol plants globally? And do you worry that maybe some of these new green and blue plants are coming way too soon compared to when the real demand will start to kick in?
Sure. No, good question. I mean your 40% question makes a lot of sense when you think about our capacity. You talked about 1 million tons per year of ammonia capacity we have in the Southern Netherlands. We announced that we're at around $400,000. To your question, could it be 0 given where we're at right now, it could be 0, and I wouldn't move that out. But when we look at the products that we produce, some of the products we produce, as you know, like urea for the production of melamine or urea for the production of UAN, you need the CO2 from that ammonia line to run some of that. And that's some of the concerns people have and why it's not just an ammonia effect, but it's a UAN effect, is really affected by gas bit.
The importance of imports is very important for us to be able to continue to buy ammonia from third parties at $1,000 a ton when the cash cost of making it is still north of $2,000 a ton. So that generates the margin of itself. But we have the ability to potentially shut down both lines and continue to potentially produce CAN because that doesn't need CO2 to produce. So you just import ammonia, you run your nitric acid plant and you produce calcium ammonium nitrate into that market. So yes, it's a good question, and that's one of the areas you can find us in depending on how pricing trajectory moves and how gas prices move. Is that clear on the first question?
Yes.
Okay. With regards to your other question, so we have given CapEx guidance growth CapEx guidance, I think in the prior conference call of $350 million to $450 million a year next year. And that's informed by obviously being within our financial policy and subject to the FID of projects. And so if we FID a project, we'll obviously come to the market with that to announce that we've actually FID'd a project subject to our economic return focus, our focus on decarbonization, and then staying within our investment-grade financial profile target. So that guidance assumes that there's some forward movement in FIDs on potential projects in terms of informing it. So to kind of give you a sense of the bookends of if growth CapEx were to get to that level.
Understood. Thank you.
Thank you.
Thank you. Before we take our next question, I would just like to remind everyone if they would like to ask a question on their telephone line, please press star followed by one on your telephone keypad. Or if you have joined us on the webcast, please write in the question box. The slide presentation can also be found on the webcast under the meeting materials. Our next question is from Faisal Al Azmeh from Goldman Sachs. Faisal, your line is open. Please go ahead.
Hi and congratulations on the strong set of numbers. Just a quick or two quick questions on my end. The first one is on your stake in Fertiglobe. I mean, at some point, are you or not thinking about reducing your stake to allow the company to be included in MSCI increased liquidity. Is that something that is being considered or at no stage would you be reducing your stake in the business? That's my first question. And my second question relates to the methanol market. I've been reading that effectively, they're changing the contracts from quarterly to monthly contracts, how do you look at this development? I mean does it change anything at all? Or is this something that is better or worse from your perspective? Thank you.
Yes. So Faisal with regards to your first question, obviously, Fertiglobe is a strategic asset for OCI as well as for ADNOC. So we have the ability of both ADNOC and OCI in the future to reduce the stake. And yes, there's MSCI inclusion, but we would come back to the market and announce plans to do so if we were intending to do so in the near term. So there's a responsibility to do it continues to remain strategic to both the sponsors. We both enjoy the asset significantly and as you know, it's doing very well. But yes, I wouldn't rule that out in the long term. But for now, we're comfortable with the stake that we have in place and obviously has a lot of synergies with OCI's place in business.
It's also a very important growth platform given the positioning of the business as an export platform at a time where exports are very important and the balance sheet is really under leverage, allowing us to look at both growth opportunities and continue to return a really good dividend shareholders going forward. So we're very happy with this partnership and this investment is intense.
Thank you.
And then the second question. Your second question, it's in regards to the European contract price, which has been an interesting one that is set quarterly. We haven't been a huge fan of that because as a European producer, we haven't been producing in 13 months out of our BioMCN the European producer. We thought that they're always just going to be this lumpiness and lag and it's not good for the suppliers, and it's really not good for the customers, but we've seen that the suppliers have gotten the short end of the stick often, right? You'll have a 3-month period where global price in methanol change, where gas price in Europe changes you see daily now, and you're set for an entire quarter. So usually, one side's relatively happy as a buyer seller on the other side, conversely unhappy. And so we would likely see how that develops over time. We'd be in support of that and be in line with how monthly contract pricing is set in the US, and you wouldn't just have this disconnected price, for example, where there could be a demand shock or a supply shock in either direction and you're stuck in a quarterly pricing low.
Great. Thank you very much.
Thank you. Our next question is from [Stinch Demeister] from ING. [Stinch], please go ahead your line is open.
Yes. Good afternoon. [Stan Demeisters] ING. My question is on the sale of EUAs. Is the entirety of the €88 million recorded in methanol? And should we expect you to continue this policy of selling credits as long as these operations are idle? And then maybe also a follow-up on the question of Mubasher on the cadence of Q3 versus Q4, which I think you haven't really answered. So maybe here some color on this. Thank you.
Yes. So with regards to the $88 million EUA sales that is lost fully in the European methanol business, a portion of that is. I think the number is $68 million has gone into the European results, and there's some cost, obviously, of BioMCN in the business itself, that's a negative. And then the Clean Fuels business has done over a little over $20 million of EBITDA all factored into that. That leaves approximately $20 million that was not reported at the segment level. It was done at the whole co level in Europe. And then to your question of whether we would continue to do so going forward? Kind of just depends on what we're doing operationally at the time. But yes, we think that there is an excess surplus of units that we have. We are able to sell that to offset the cost. But obviously, as you know, kind of as you have less production, we get [indiscernible] over tax. So that's something we take into account. And we're having, I think, quite constructive discussions about the green future of our methanol business in Europe with the Dutch government. You see as this is one of the largest companies in the Netherlands, I think we're number 1 or 2 hydrogen producer consumer who are fully running in the Netherlands. And as a partner in [Norwich] too with some of these projects in the Northern Netherlands where our classes that they'll sell with the electrolyzer hydrogen offtakers in need. BioMCN buying can is a private candidate for that. So we're working through what we can do on that to get to that great future and bridging some of the costs that we have associated with keeping the flat their EUAs. And I think it seems like a good job we're doing purposing some of our personnel to other parts of the business that have been very busy, like the Rotterdam import terminal or our OCI nitrogen plant. So good work across the board kind of collaborating during this difficult time. Your second question, I didn't fully understand. You said something about Q3 and Q4?
Yes, there was a previous question on sort of how should we look at the cadence or the strength of Q3 versus Q4? Not really guidance, but yes, we're in sort of abnormal situation, should we expect a typical seasonal restarting in Q3 or should that be sort of dampened this year? Your view here.
Well, so like we mentioned before, we're reluctant to give any specific guidance for the remaining quarters of the year. I think what we have shared is our view on the price, sort of the support level for nitrogen pricing and the recovery in methanol stock prices. And we, of course,-- what is within our control is our continued focus on our manufacturing excellence program and to make sure that our plants are running better CAN not only for the financial results, but because we feel it's our responsibility to do so in such a volatile time where there is inventory levels are low and there's clear shortages across the system as Ahmed described earlier. So the combination of those factors are big motivators for us. But as you can see, the pricing environment continues to be tight and hopefully without any disruption in our operations of note that we should continue to perform well and continue to leverage our position in the global cost curve to generate free cash flow that allows us to move on with our forward with our plans. of being able to look at the growth opportunities that we already guided to in terms of the growth CapEx number for next year using government calls and hopefully continuing to meet expectations and generate excess cash flow that we can give back to shareholders as well. I hope that answers your question to some agree to some degree.
To some degree, yes. Thank you.
Thank you. We will now move on to the webcast questions. So over to Hans to read them.
Yes. Thank you. There are a few questions from Richford [Backenhouse]. And I'll read the first question, which is in the press release, you mentioned that in a low seasonal period, prices can drop below cost of marginal producers, do you expect a quick ramp-up in prices when demand picks up in Q3? That's the first question.
Yes. As we covered in the call, we've seen good recovery in the nitrogen prices as Hassan has mentioned, kind of the start towards the recovery given the higher cash costs and still operating at a biggest the cash cost right now in Europe with the production curtailments as well as the demand that we talked about the system. Australia, Brazil, India, southern hemisphere type demand that really needs to come up as well as some positive grain-producing hedging going forward to buy some products in the field period and a reasonably strong fall prepay already on ammonia. We think that's supportive, it's hard to give kind of month-to-month guidance, but definitely it has a bit of a bull trajectory from what we're seeing in the market and how we see transactions taking place. I think we talked about methanol spot prices also recovering a bit. That's obviously less affected by European gas. But there's been a recovery there, and I think a lot of outages globally on the methanol side as part of the support into that stock market. Also, we tend to obviously see later in the year, as you recall, some more methanol switching, for example, for industrial boilers, we expect to see that later this year. And I think now methanol's the cheapest, as I mentioned on the last call, it's been relative to other products. So we should see more of that and that could give some support for demand in the East Asian markets and potentially the transport market over time.
Thanks. And then the next question is, do you see any signs in recession by lower demands for industrial application of ammonia and methanol?
Yes. So with regards to the reduction in demand, it's also an important question. We have seen some of these kind of higher ammonia price levels. We've seen some demand destruction in some of our products but overall, people are still consuming a reasonable amount of ammonia. And obviously, there's more than enough demand to go around given the shutdowns that we're seeing on the macro side. Given the energy crisis and reductions in supply of kind of energy in the form of methanol and ammonia, we're seeing a lot of supply related reductions offsetting the demand for [indiscernible] . But it's something you have to watch, right? Because the SMB is if you have some demand destruction because they can't get access energy, for example, in Europe or because of the recession, how does that affect overall SMBs? So far from what we've seen, it hasn't been something kind of that gives us a material concern, but it's something we'll continue to monitor, particularly for methanol and ammonia.
I think I'll also mention that other industrial products, we're still seeing strong demand for spot diesel exhaust fluid for truck movements. But that's something if there's a recession, if you see some reduction, that's something that we're monitoring closely. But there's a natural increase year-over-year with just increased conversions to SCR engines and global ES demand and less supply for TDS globally that helps support that market. We've seen also melamine pricing continue to be relatively strong with potentially some demand destruction in certain areas, but at the same time, offset by how the business in the United States as well as curtailments in Europe, which are obviously gasoline as well as in China so in offsetting some of the Chinese import Europe. Yes. I mean I think we've covered the main areas.
Yes. Thanks, Ahmed. Next question is several US producers note that they have large planned turnarounds in Q3. Are you going to respond to this in the US?
I mean, as we've stated before, our goal is to maximize production, particularly at these margin levels outside of Europe. So we'll continue to maximize production where we can. I mean we obviously have a time scheduled turnaround, as you know. But we have seen that there have been more turnarounds that have been kind of postponed from last year into the Q3 period, which is typically a bit slow. So that's supportive for that first question that came in with regards to the trajectory of potential nitrogen and ammonia price.
Thanks. And then the next question is, what is the current status of ammonia and methanol application as a shipping fuel? When can we expect real demand picking up for this?
Yes. I mean we have seen quite a number of vessels ordered by various players with methanol, the shipping fuel. We expect demand for nontraditional kind of methanol consumers going into, for example, container vessels, et cetera, to come on in 2024, 2025. But we already have, for example, Methanex, which is the largest ethanol producer in the world, half of its fleet is running on methanol. Others in the market are running on methanol as well so we're starting to see that fast. Absolutely, the retrofit engine possibilities are there. We have them on the water already. We're very bullish on seeing a lot more methanol demand even as soon as 2024, 2025. And as I stated earlier, I think we have demand outstripping supply by 8 million tonnes between 2022 and 2026. That doesn't take into account the marine fuels, which can be quite substantial changes, and we think we're just still to provide per given the movements with the IMO, you focus on decarbonization and people making big CapEx decisions on [indiscernible] saying, "You know what, I need to have an alter fuel that I can be carbonized and methanol is a good one." So that's what we see on the methanol side.
Ammonia, we see it coming later. Ammonia has a few things kind of potentially going forward on the demand side. Ammonia blending into coal-fired power plants to reduce emissions in Korea and Japan, which is moving along quite swiftly, and we're going to see a few million tons of demand of that probably by the middle of the decade and potentially launch more by the end of the decade. We see increasingly more and more chatter in Europe of using ammonia as a feedstock for a power class for gas-fired power class. And I think we mentioned this in other investor interactions but when you think about taking a ton of blue ammonia out of the Middle East, for example, the US, not even green and it's GHG footprint where you requested the CO2, we take that ammonia, you move it with minus 30 degrees refrigerated on a tanker into Europe and then you combust it in Germany in a power plant or in France in a power plant.
The only CO2 emissions were very upstream right in the beginning with the production of that ammonia and you've reduced the carbon footprint of it already, but you're not producing CO2 to move it. You're not producing CO2 when you combust it ultimately in Europe as NH3,so there's no carbon. That compares very favorably to LNG, you have to produce quite a lot of CO2 to liquefy it, you have to have boil-off and produce CO2 on the way to Europe. And then in Europe, you're going to have to produce CO2 again when you combust it for energy. So increasingly, more and more discussion of that where ammonia can be a win-win, particularly with the advent of carbon bordering mechanism to reduce CO2 as well as diversify away from natural gas, imported natural gas, in particular, but potentially even LNG having that as an alternative. Lastly, marine fuels I put at kind of 2025 is where that starts to your question and increasing potentially quite swiftly from there, but there are a few elements that need to come in place. One, primarily and most importantly, the engine, which we think will be ready in, call it, 12 to 18 months and then start seeing ship orders for 2025 and into 2026. So following methanol.
Thanks. And the next question is why such large dividends and not share buybacks? Do you think your valuation is too high, with not opportunistic buybacks on share weakness and retiring stock not improve long-term per share value will be significantly more valuable?
Yes. I mean, this is the first year of -- we returned capital to shareholders, we mentioned earlier since since we listed on the Euronext Amsterdam in 2013. So we're very pleased that we're out of the gate with such an attractive return and such a meaningful dividend yield. I think we're just shy, as I mentioned earlier of $1.1 billion of cash distributions in a very tax-efficient manner for all our shareholders holders. We wouldn't rule out any other mode of returning capital shareholders. Everything is on the table. We'll be evaluating all available avenues going forward. Normally, I would not and actually I'm not going to comment on valuation per se on this call, but I would point you to a new slide that we added in our results presentation, which we find interesting. And it's looking at just some back on Page 9 of our results presentation, which shows that our market cap growth has been largely a reflection of our net debt reduction despite the underlying performance of the business, the derisked balance sheet and the improved outlook. And I think it's a very interesting choice that we decided to include. So hopefully, that gives some geate content for discussion in terms of the outlook of the company.
In terms of forward guidance. And I mean we're reluctant to give any specific guidance per se, but I think the underlying drivers in the market, if we come throughout the call, looking at pricing, looking at our focus on volume reduction and looking at our continued focus on value creation. I think we believe we're in a good position, and we're relatively comfortable with the outlook for the year. And also, we have reduced our gross debt by $1 billion since the beginning of the year and leverage almost consolidated leverage at 0.2x, I think we're in a really good place and poised to really to deal with any conditions that may come our way in the future while maintaining our condition to grow and continue to return capital to shareholders. Thanks.
Yes. Thank you. The next question is, can you give an indication on third quarter EBITDA relative to the second quarter given current spreads imply a big drop?
Unfortunately, we're reluctant to give this kind of guidance. As I mentioned earlier, the underlying drivers of our business continue to be relatively healthy for the remainder of the year.
Thank you. And the next question is about how you can promote the company as a clean fuel producer at the upcoming COP 27 and COP 28 conferences? Is there an opportunity to achieve a re-rating for the shares if ESC investors start to understand the story?
So it's a good question. With COP 27 and COP 28, the stars have aligned quite well with our Fertiglobe business, right? COP 27 is in Egypt, COP 28 is in Abu Dhabi. So obviously, we'll have a presence, a heavy presence in both of those markets. I think increasingly OCI and Fertiglobe's profile has increased over the last year, and we are seeing increasingly more ESG investors looking at the value they can derive by getting into a cash flowing business trading that we believe to be quite low multiples and have the growth trajectory associated with sitting in the markets in which we sit in with the assets that we have that are advantaged to decarbonize and through the hydrogen economy. So we think over time, as ESG investors are looking at where to allocate capital, having an asset or an investment in a company like OCI, companies like Fertiglobe that are cash flow and providing these stable baseline dividends and have solid growth opportunities while below replacement cost with good target IRRs are ones where we're going to showcase in both COPs in both of those locations, working closely with government. I mean the government is a partner as an equity investor in Egypt and our EBIT side at a big partner as a result of wealth Egypt in our EBIT green plant. And we work closely with all the various ministries and stakeholders there in Abu Dhabi. I mean it goes without saying the Abu Dhabi government is a shareholder of Fertiglobe. It is a gas provider at Fertiglobe, and we're doing blue and green ammonia projects together with [Postel] as well as ADQ and ADNOC there. So quite a lot of opportunity over the next 2 COPs to showcase OCI and increase the already growing interest from ESG investors.
Thank you. I think that was the last question that came from one of our investors in 91. I don't see any other questions on the web either.
All right. Thanks, Hans. Thanks, everyone for your patience on the call today. So to get back to your summer, and we look forward to catching up for Q3 results.
Thank you.
Thank you, everyone, for joining today's call. You may now disconnect your line, and have a lovely day.