OCI NV
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OCI NV
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Hello. Good afternoon, and thank you for joining the OCI N.V. Fourth Quarter and Full Year 2021 Results Call. My name is Jen, and I'll be the operator for today. [Operator Instructions] I'll now hand over to our host, Hans Zayed. Please go ahead, Hans. Thank you.
Yes. Thank you, and good afternoon and good morning to our audience in the U.S. Thank you for joining the OCI N.V. Fourth Quarter and Full Year 2021 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 our outlook. As usual, at the end of the call, we will host a question-and-answer session.As a reminder, statements made on today's call contain forward-looking information. These statements are based on certain assumptions and involve certain risks and uncertainties, and therefore, I would like to refer you to our disclaimers about forward-looking statements. Let me hand over to Ahmed.
Thank you, Hans, and thank you all for joining us today. We're pleased to announce a strong set of results in the fourth quarter with an adjusted EBITDA of more than $1 billion for the quarter, resulting in over $2.5 billion for the full year 2021 as our end market continued their upward trend, which has accelerated our goals to achieve a strong balance sheet. I'd like to thank all our employees for making this another excellent quarter and for their strong commitment that improving and growing our business. A lot of hard work is done into bringing it to this point, and I'm excited about what our dynamic team and state-of-the-art asset base can accomplish with this balance sheet and market backdrop.We are pleased that we can start returning capital to shareholders as Hassan will discuss in more detail, whilst also having capital leftover strategically deployed in decarbonizing and growing our asset base in a value accretive way for the future hydrogen economy. I'd like to start as always by covering our top priority, safety, as we want all our employees and contractors to go home safe everyday. Our 12-month rolling affordable incident rates at the end of December was 0.35 incidents per 200,000 man hours, well below industry averages. Of course, I'd like to reiterate that our goal remains to prioritize process safety and to reduce official safety incidents to 0 at all our production facilities across the globe. I'd like to give some highlights and also of our performance during the quarter. Despite 3 large planned turnarounds during the quarter, a shutdown of our European methanol operations since last summer, the shutdown of one ammonia mine at OCI Nitrogen and a significantly higher feedstock price environment in Europe, our EBITDA and cash flow from operations improved significantly year-over-year. Our business model showed its effectiveness during the quarter as we continue to operate and maximize our downstream productions in Europe by sourcing record volumes of ammonia from our operations in Fertiglobe and the U.S. as well as third-party volumes to support our Dutch fertilizer and industrial operations at OCI Nitrogen.Effectively, we bought ammonia at a big discount to European natural gas, and the team did an excellent job increasing throughput capacity through -- by an annualized 300,000 tons per annum in our ammonia supply chain in Rotterdam, where we enjoy having the only ammonia terminal in the Rotterdam port. By doing so, we've been able to combat the volatility in feedstock pricing and continue to provide essential nitrogen fertilizers to the European agricultural community as well as important industrial products to the value chain there. This unique supply chain is one we can leverage in the future by importing low and no carbon hydrogen in the form of ammonia and methanol to help decarbonize the Netherlands and the broader European Union and help them meet sustainability targets over the medium term. OCI is actually 1 of the top 2 largest consumers and producers of hydrogen in the Netherlands. Our own product sales volumes were lower at 2.7 million metric tons during the fourth quarter compared to the fourth quarter of 2020. Total own produced hydrogen product loans were down 16%, largely due to turnarounds at Fertiglobe and the shutdown of one ammonia line at OCI Nitrogen, partially offset by growth in ammonia volumes at Fertiglobe as well as DEF volumes in the United States. Methanol volumes declined 44% due to a planned turnaround at Natgasoline extending into the fourth quarter and no production from BioMCN in the Netherlands due to the high gas price environment in Europe. Total own produced volumes in 2021 were down 7% year-over-year overall due to turnaround in 2020 being deferred to 2021 due to COVID-19. We expect in 2022 across our platform, the benefit -- from the operational benefits resulting from our manufacturing excellence and improvement program that we've rolled out at all our 9 specs [indiscernible] 17:20.I'll now hand it over to Hassan to discuss the financial results in more detail. Hassan?
Thank you, Ahmed. Firstly, I'd like to echo Ahmed's earlier express gratitude and thanks to all our employees for their resilience and commitment that is ultimately instrumental of the results that we achieved this last quarter and for the year. Looking at the Q4 and annual results, we believe the business is starting to demonstrate its free cash flow potential, yet still leaves room for further improvement, which is the focus of our manufacturing improvement initiatives across our sites. OCI consolidated revenues increased by 112% to $2.2 billion, and our adjusted EBITDA rose by 291% compared to the same quarter last year to just over $1 billion at $1.04 billion, and as we continue to benefit from higher prices for our products. Our adjusted EBITDA margin also captured the benefits of higher pricing coupled with a competitive cost base coming in at 46% in Q4 2021, and this is compared to 20% margin in Q4 2020. We achieved this result despite the higher European gas price environment. Our consolidated adjusted net income line also saw a market improvement and reached $400 million for the quarter. For the full year, consolidated revenue was $6.3 billion. Adjusted EBITDA totaled over $2.5 billion and adjusted net income reached $732 million. Focusing on free cash flow, which is a primary KPI for our financial performance, we generated $789 million of free cash flow from operations during the fourth quarter, bringing the total to approximately $1.6 billion for the full year 2021. Cash flow from operations received growth CapEx and more importantly, several transactional events which occurred during the quarter. These include, firstly, the successful IPO, what is now our [ 50.1% ] subsidiary, Fertiglobe, which took place in October. The IPO resulted in net proceeds to OCI of $447 million following an IPO that was 22x oversubscribed. Secondly, there was also the special dividend extracted via IPO through a dividend recap at Fertiglobe, which totaled $850 million, which is the reason you see a leakage of approximately $357 million in the -- below the free cash flow from operations in our press release tables. The net result was a decrease of $825 million in net debt during the quarter to approximately $2.2 billion. We reached a net debt to adjusted EBITDA leverage ratio of 0.9x, down from $3.7 billion of net debt and a net average of 0.3x a year -- just a year ago at the end of 2020. The drop in net debt was before proceeds of $375 million from the sale of 15% stake in our methanol group. So adjusting the leverage ratio on a pro forma basis, this takes us to about 0.7x leverage ratio. We expect the positive trajectory to continue into Q1 with further improvements to our balance sheet as our LTI continues to improve, and our key product markets continue to perform the stronger in a healthy pricing environment.The company has continued to focus on reduction of its growth of our growth debt as well. During 2021, we redeemed bonds at OCI N.V. and IFCo for a total of $1.8 billion and consequently, have reduced gross debt by around $600 million to $3.8 billion, which was further reduced by the proceeds, as I mentioned earlier, of the divestment of [ 50% ] taken on methanol group, which takes us to just under $1 billion of gross debt reductions. Concurrently, we lowered our weighted average cost of debt from 4.3% during 2020 to around 3.2% by the end of 2021 and reduced our cash interest by more than $60 million per year, which will have an effect 2022 onwards, positively impacting our run rate free cash flow. Following the transformation our capital structure during 2021, we believe we are experiencing a quick and pace towards achieving our objective to reach an investment grade credit rating. With the upgrade by Fitch in December, we are now one-off below investment grade across all 3 rating -- by all 3 rating agencies. From that perspective, we will be reevaluating outstanding debt to identify refinancing opportunities that could further lower our borrowing costs. A good example of that is over $850 million of municipal bonds at IFCo, which are above 5% interest rate, we believe -- where we believe we can meaningfully lower further as we continue to have access to that market.Turning to our newly announced dividend or capital return policy. As we already indicated in our previous conference call, we are pleased to confirm our new capital allocation policy was approved by our board. Under this policy, which we have fleshed out for this results call, we will distribute a consistent semiannual baseline amount, which we have set at $400 million per year, which will be split to 2 semiannual installments. So $200 million every 6 months. The policy is subject to maintaining our investment-grade profile. In addition to the baseline in periods of high performance, we aim to pay a variable component, which is linked to the level of free cash flow generated while pursuing our value-accretive hydrogen-focused initiatives and growth opportunities. We will work to maintain an investment-grade credit profile and have a target of less than 2x that leverage to the cycle, which is a bit of a change from our previous objective of 2x -- at 2x through the cycle.To put this into practice, as you will have seen in our press release, we are proposing an interim distribution of EUR 1.45 per share or around circa $350 million, which includes the $200 million base distribution. We have now clarified the mode of distribution to be expected through our capital repayment. The benefit is removing withholding tax at the source, which we believe extends to all minority shareholders. The form of distribution required in AGM, which we have complicated yesterday for both the next 2 distributions. As you may have read in our EGM documents, we are availing -- we're giving the Board the flexibility to determine the variable component in the October distribution, which will be based on the first half 2022, up to a similar amount. That will be, of course, subject to market conditions and company performance. The first interim distribution based on H1 2021, which was envisions for April, will now likely take place in June due to the capital reduction process. For the plan of COVID distribution, we have given an indication that we expect to pay a variable component in addition to the $200 million base distribution. Again, that incremental part will be based on market environment and outlook for volume and prices. In terms of guidance, looking at important aspects of our cash flow conversion, namely CapEx, interest, tax and how post minority interest, we expect around $300 million of maintenance CapEx. In addition to that, anywhere from $75 million to $150 million of growth CapEx, which will depend on the project's progress and FIDs. Cash tax for regular activities are expected to be somewhat in line with 2021, where the cash taxes came in at just above $130 million. For the interest expense as a result of the actions that we described earlier and the lower cost of debt, we expect more than $60 million of reduction in cash interest in 2022, and we hope to continue to find new savings opportunities as we capitalize on our rating improvement. So based -- and looking at minority interest, based on the circa 25% of EBITDA guidance at the Fertiglobe level, which is how we quantify leakage relative to EBITDA, we believe you need to add the 50% of dividends that is distributed by Fertiglobe's shareholders, which is attributable to minorities and our strategic partner as well now calculation of dividends are leakage of 15% to our new methanol group partners based on the transaction that we just closed -- that we are closing soon. These are the contributors to the leakage of OCI consolidated level. Finally, we are pleased to announce -- we are pleased to announce earlier the execution of definitive documentation for the state of the 15% stake to ACH and ACQ in February. OCI expect that due to close take place and date, including receipt of proceeds, which amounts to $375 million, implying a $2.5 billion equity valuation, what is essentially a debt-free business. The deal marks another positive step towards positioning the company strategically in the Abu Dhabi ecosystem, which we see as a catalyst for hydrogen-based growth opportunities in the future and further enhancing our future strategic optionality as a group.With that, I would like to hand back to Ahmed for commentary on our markets and operating environment. Ahmed?
Thanks, Hassan. We're Excited about 2022 as outlook for OCI remained positive for this year and into 2023, supported by strong underlying demand for nitrogen fertilizers, driven by low grain inventories and healthy farm economics. We also see continued good demand in our industrial markets for ammonia, methanol, melamine and DEF. Spot urea prices in February have declined compared to the end of last year, but they remain at elevated and health level. Ammonia nitrate and melamine prices remain very strong, and we see supportive fundamentals going forward. We have good visibility into H1 2022 with a healthy order book across our core markets and some well-priced sales into Q2 2022. Our distribution capabilities, including the ability to manage inventories close to key demand centers coupled with a disciplined commercial strategy, allows us to optimize benefits from the current market conditions. This bodes well for our outlook as exemplified by the recent awards to Fertiglobe to supply approximately 0.5 million tons of urea to Ethiopia, which is -- distributed 150,000 tons in Q1 and 350,000 tons in Q2, collectively at an average price of $725 a ton as well as supplying approximately 450,000 tons of urea to India this quarter.If I start with the outlook for nitrogen markets, I'll start by going into the low-grain inventory and stocks-to-use ratio globally that we're seeing supportive of sustained crop prices at current levels, which amplifies the need for the application of nitrogen fertilizers, crop yields and ease food security concerns. Recent weather concerns in South America have contributed to further tightness in the global grain markets. Current crop prices are supported with foreign incomes in key grain exporting regions even with higher input prices, incentivizing farmers to expand crop area and maximize yields, which is important to ensure enough output to meet food demand. Global grain markets in 2022 and 2023 are expected to be tighter than last year with corn futures above $5 a bushel through the end of '23 and spot prices currently at $6.50 a bushel. We are seeing robust fertilizer demand in key import markets, further supported by low inventories with Europe, Ethiopia, U.S. and India importing products ahead of the season in Q2, 2022. U.S. nitrogen outlook remains strong, supported by low inventories and strong demand. U.S. agriculture is expected to be one of the best years on record with net farm income 26% above its 10-year average. We had one of the best fall season for ammonia, with current ammonia prices in the Midwest over $1,300 a short ton, and the system is the least bothered we've seen going into the spring season, providing more upside for in-season sales in Q2 2022, which is a plus for our well-located production and assets. On the UAN and urea side, we see significant buying still to be done, where farmers are eager to have the product and retailers are starting to make purchases to ensure supply for the season. In Europe, we maintained a healthy order book as nitrates demand is strong with limited prebuying the season and low inventories across the system. Production curtailments due to high gas prices in the fourth quarter and the ban on Russian UAN imports has led to further tightness in the spring season. Several other factors were play affecting supply and demand dynamics. Urea export banned by the Chinese government are limiting their participation at least until the end of their domestic season in July with China implementing mandatory requirements for summer stocking and tighter environmental restrictions as we all know. Russia, one of the bigger nitrogen exporting countries in the world, also has export quotas on urea, nitrates and the ban on ammonium nitrate exports until the second half of this year, further tightening global nitrogen balances and limited and imports is likely believed the increased substitution to our main product, CAN. We expect markets such as Africa, Australia and Asia to step up in Q2 2022 with the end of the season in the Western Hemisphere and purchased large quantities of urea to cover need. India, key urea import market, is a prime example where lack of availability has hampered demand in 2021 as domestic production fell in imports for 3 million tons lower year-over-year, limited by peak buying in most markets. We expect a significant rebound in 2022 to replenish low inventories and increased stocks from the 3.5 million ton level they're at to date towards the government's target of 6 million tons, which is supported for east of say supply-demand dynamics. At the same time, the medium-term supply outlook is tightening as projected new capacities are below the levels seen over the last 5 years and with the demand growth continuing and startups being delayed. Switching over to the industrial side, we're also benefiting from a strong rebound in all global major economies in many sectors. This gives us good visibility on end markets and will boost demand for methanol, melamine, ammonia, which are used in many downstream end markets ranging from construction to health care to automotive textiles, among others. Ammonia prices in Q4 '21 and into Q1 '22 have been supported by strong fall application season in the U.S., lowering inventories ahead of the spring season as well as high demand for downstream phosphate production and a number of planned and unplanned outages across the ammonia, the production market. Over the next 5 years, the ammonia market is expected to continue to tightly structure with incremental demand expected to exceed new supply by 3 million tons without accounting for the medium-term low-carbon ammonia demand in new applications we expect towards the middle of the decade. Melamine markets have continued to tighten, driven by strong demand from home renovation and construction markets, tight supply in Europe and low global inventories process supply chain. Quarterly contract prices increased by 35% in Q4 '21 and increased a further EUR 775 a ton to EUR 3,965 a ton in 2022 for the first quarter. Tight supply logistics bottlenecks in China following the Lunar New Year expected to continue to support pricing into the second quarter.DEF now represents more than 30% of our sales from IFCo and DEF prices have been supported by the recovery in truck sales and freight activity across the United States. The higher netbacks from this product enabled us to continue to enhance returns for our U.S. nitrogen operations going forward, and we've renewed a 3-year offtake contract with Dyno Nobel for DEF and other industrial urea projects via a successful N-7 partnership and have successfully grown our volume for the 2022 season. Methanol markets also remain positive. U.S. spot and contract prices in Q1 2022 have been supported by continued recovery in demand low global inventories as we've both seen a recovery in oil prices. Whereas, there is no major supply for methanol expected to come on stream in 2022. Transportation applications also continue to lack other sectors, which is expected to rebound with COVID-19 restrictions easing and should keep the market conditions tight in 2022. Further, strong demand is set to continue as operating rates for major derivative segments, including formaldehyde, acetic acid, MTBE and MMA are reportedly higher rates in the U.S. and Europe and provide good visibility on our sales and pricing into the first half of this year. Methanol-to-Olefins or MTO operating rates have also recovered to approximately 80% in Q1 2022 and are expected to remain healthy in the quarters ahead with the affordability of purchasing in methanol, improving on the back of higher naphtha and oil prices. A new 1.8 million ton MTO facility starting up in China later this year, which should provide a further capacity boost to consume more methanol.We've also seen strong visibility and medium-term pricing environment as we continue to expect tighter methanol market fundamentals with increased demand expected to exceed new supply by 8 million tons per year through 2026. This like in the case of ammonia, doesn't consider the additional upside from hydrogen fuel demand, notably for marine fuels application, which represents meaningful medium- to long-term demand upside we've talked about in prior calls. On gas markets and globally, higher marginal feedstock costs are provided support to markets with prices, particularly natural gas in Europe currently at approximately $45 an MMBtu for the balance of 2022 and at approximately $15 an MMBtu for 2023 and 2024. Those levels in 2023 and 2024 are 3x higher than the levels we witnessed between 2016 and 2020, raising the marginal cost floor, lowering utilization rates for marginal producers and providing support for selling prices over the medium term to keep ammonia and nitrates. For us, we have a strong competitive advantage with our gas contract in Fertiglobe and continue to benefit from the low-cost gas environment in the United States. In addition, we are fully hedged for Q1 2022 at all our operations in the United States at approximately $3.90 of planned Btu. With some of these hedges in the form of call options that allow for downside participation should the prices of natural gas decline. We also continue to make good progress in our efforts to capture value creative opportunities for emerging demand for clean ammonia and methanol as we aim to become one of the largest producers of hydrogen fuel feedstock in the world. We recently strengthened our methanol platform considerably through a new strategic partnership in Abu Dhabi, as Ahmed highlighted, highlighting our growth leadership in renewable energy markets and committed -- and commitment to a green future. As one of the largest producers and traders of ammonia and methanol globally with a strategically located asset base and access to low-cost renewable energy sources, OCI is actively pursuing ways to leverage its existing infrastructure to help decarbonize sectors that make up approximately 90% of global greenhouse gas emissions today.To conclude, before we go into Q&A, we are excited about the prospects for the company. Shorter term, we expect healthy fundamentals in our core markets and advantaged feedstock costs in MENA, and the United States to continue to support our robust balance sheet and healthy free cash flow as we also expand our free cash flow conversion via the step down in gross debt and focus on operational excellence. We expect a further drop in net debt and net leverage by the end of this quarter in Q1 2022, which positions our new capital allocation strategy wealth and focused on targeted investments in hydrogen and other growth opportunities. Our end markets are looking positively into 2023. Nitrogen and industrial markets continue to be the strongest that we've experienced in years with robust underlying demand-driven fundamentals supporting our medium to long-term ones. We also see large upside from the additional demand emerging a range of new applications and sectors as the hydrogen transition continues where ammonia and methanol are ideally positioned in key beneficiaries. We're ideally positioned as we leverage our global platform, world-scale on assets and strong logistics platform and harmonize our hydrogen strategy with our relentless focus on shareholder value.With that, we'll open the line for questions.
[Operator Instructions] Our first question today comes in from Christian Faitz of Kepler.
Two questions, please, as a start. First of all to Hassan, what is your view on cash flow evolution during the course of 2022? You mentioned CapEx, but how do you see free cash flow evolving also in terms of working capital management moves, et cetera? Then second, can you remind us of any plans or currently unplanned outages that you have at any of your operations, whether it's on the nitrogen or the methanol side.
Thank you for the questions. I mean, unfortunately, we don't give that kind of explicit guidance on free cash flow or adjusted EBITDA for the year, but we do strive to give you guidance on some important components. Hence we shared our CapEx guidance we have not shared earlier as we refresh on our plans for the year and also highlighted the interest -- the reduction in interest expense, which is a run rate benefit. And we've help to estimate our cash tax bill, which should be consistent with last year, but beyond that, really, it's a function of prices. In terms of planned shutdowns, as Ahmed mentioned in previous calls, due to commercial sensitivity, we don't really share with the market except with the benefit of hindsight with each -- in each quarter what we have done. I mean, overall, this is a business, which is planned shutdowns are a routine part of our operating model in order to maintain asset integrity and maintain our overall utilization rates, which have consistently been improving as we focus on rolling out the manufacturing improvement plans at our 9 sites and have also made significant hirings over the past year in various positions that really has drove our technical capabilities and [indiscernible].
Our next question on the line comes from Mubasher Chaudhry of Citi.
Just help me on the market dynamics. Where are you seeing the current shutdowns in the urea ammonia capacity in Europe? And could you talk about your thoughts on the -- as far as inventories in Europe. That would be helpful. And then on capital allocation, can you talk about your decision [indiscernible] given in terms of the [ $300 million to $400 million CapEx ] [indiscernible] breakeven come flow requirement of around $800 million. Should we see that within cost cycle environment both being able to achieve higher cash flow than that number? Would you think there is a [indiscernible].
Sure. So I mean, with regards to the question on Europe, it's obviously a dynamic situation with natural gas price in Europe and on [indiscernible] and shutdowns. On the [indiscernible], we think that in December, you had a [indiscernible] ammonia capacity of around 9 million tons in December, but a lot of resource happen [indiscernible] where we think that number is offline and close to 3 million tons. It's interesting to kind of think about today when you're something around $24, $25 an MMBtu for just GAAP and add on to that back in Q2 which is around EUR 90 a ton. We're about EUR 2 a ton -- sorry, [indiscernible] per ton of ammonia. EUR 180 or $200 [indiscernible] full production as a floor that will be [indiscernible] ammonia pricing as well as nitrate pricing. And that is one more [indiscernible] is the projection for the entire year of losses. So there continued to be volatility on the ammonia side, and [indiscernible] just below that variable cash cost at times, and that's what the team did a great job of capitalizing on it in Q4. But eventually, the fundamentals probably saw some shutdown in some markets that ammonia decline from the levels discussed today.On urea side, we've seen some curtailments on urea nitrate side as well. I don't have the numbers here with me right now, but some nitrates are at lower capacity, and on urea side, some of the less efficient plants maybe down with about 0.5 million tons annualized for urea. So that currently is more cost producer globally [indiscernible] and that looks like, but they also can't operate if urea prices declined [indiscernible] doing starting on the natural gas. The other question you have now handed over assets on dividends [indiscernible]?
[indiscernible]
I guess that was your last question on [indiscernible]
Yes. Because from a fertilizer perspective, do you think they're all startup? Or do you where you were coming in versus prior year?
I think there's been a lot in the dynamics in the last couple of months, we've given a cost delayed buying. In some cases, lack of [indiscernible] ability of nitrate in the second half of last year [indiscernible] the inventory is very historical lows in many of the key regions. And like we said, we have about 3.5 million tons of inventory with government [indiscernible]. We would have seen Europe has been a bit delayed, and we're starting to see that come back in Europe. In the U.S., the retailers work [indiscernible] seeing now demand again in nitrate. Those on the nitrate size, on urea side, [indiscernible], which is a facility of market. We have never [indiscernible]. So I don't think that demand still have to come. There's been a bit of looking to see the demand [indiscernible] price levels we've seen, but we do think that is going to happen. We do think that [indiscernible] in line with last year from the levels of customized and we add that to the ground at the prices.
Part of the question you put up, we -- I think we didn't answer the question on free cash flow expectations. [indiscernible] Move on to then your question on the dividend baseline at. But for the -- in terms of working capital in Q4, we did have a net operating working capital into [ $155 million ]. Generally, working capital obviously gets affected by the higher price [indiscernible] in number without anything -- not one thing specifically standing out, but includes having prepayments during the quarter, higher payables in -- over the course of the business related to our gas bills [indiscernible] et cetera. But overall, for the year, we would expect normal seasonality and some unwinding of prepayments, and overall, our working capital requirements should remain fairly stable from the perspective of the year.In terms of your question on dividends, as we mentioned, the dividend policy, which now is a consistent base return of capital of $400 million per year with an additional valuable component, which will be linked to the free cash flow generation. I think we demonstrated already with the announcement of the interim distribution related to H2 2021 that we are distributing a number higher than that, circa $350 million or EUR 1.45 per share. We haven't given specific guidance for the October distribution yet, except that we will be expected to be higher than the baseline based on the outlook for markets and the company performance. This policy is obviously, as we mentioned, subject to maintaining an investment grade credit profile and ensuring a disciplined balance sheet going forward. We believe based on the sort of underlying improvements that we see in our business, continued reduction of our interest expense, which has led to higher free cash flow conversion and the impact of our operational excellence projects that couple that with the demand-led environment that Ahmed described at length earlier in the call, that we are well positioned to maintain a healthy distributions going forward. I hope that answers your question.
Yes. Just a follow-up. I guess I wanted to more touch on -- I know it makes sense in kind of the current pricing environment and it's relatively lucrative at the moment. But in terms of from a trough cycle analysis, is there any way to think about that? Or would you -- you talk about maintaining investment-grade ratings. So I see that $400 million is in taking to push competition of the $400 million could be reduced as well.
I mean, yes. I mean, again, the -- it's a triangulation between maintaining an investment grade profile, looking at the growth initiatives that will tend to be sort of asset-light initiatives with intelligent CapEx deployment. And yet -- and with this, we -- and given the -- how the low leverage that we've been able to achieve combined with our free cash flow conversion capabilities as a company, which we have started to demonstrate not even a full potential yet, but because we have a lot of concentration of planned shutdowns. We think that we're in decent shape given the market environment sort to maintain these level of distributions going forward.
Mubasher, I'll just add that and kind of coming what Hassan was saying, the operational excellence program, which is one [indiscernible] utilization rate, this is a recognition of where we'd like to be in terms of operations. I'll say that now what we've done is significant focus at the plant level on personnel. We've changed out 6 out of the top -- 6 of the 8 plant managers globally in the last 12 months within OCI and have a stronger centralized team. That has a significant effect on our ability to generate EBITDA and better energy efficiency and conversion. And then also from a maintenance CapEx perspective, yes, we've given guidance of around $300 million this year, but obviously, this year is one where we have significant free cash flow as we last year 2021. So we're kind of restocking and putting in some state-of-the-art equipment that we have the ability to flex down during lower periods as well. So between that ability to have lower maintenance CapEx, interest expense, and as Hassan mentioned, the triangulation around our balance sheet, we think it puts us in a good position.
Rikin Patel from BNP Paribas.
Just firstly, on the market, could you maybe provide some context to the quite sharp decline in urea prices year-to-date, and how that sort of relates to the disconnect versus ammonia and nitrates? And where you think the directionality of those products will go in the next couple of weeks and months? And then secondly, on the clean ammonia side, for the projects you've announced alongside Fertiglobe? Could you possibly give us an indication of what the order book looks like for some of those projects? And what the sort of indicative interest is, and at the moment, those tons? And just finally, again on clean ammonia, could you give some sort of indication on what the CapEx could look like for some of those projects in maybe 2023 and 2024. That would be helpful.
Sure, good relevant question. So just starting with the urea one, which has been, like you said, significant decline from the end of 2021, and we think the last one tender last year was $995. And then we've seen obviously that come down in Jan, Feb with a few reasons behind that. One is, the market is somewhat sentiment driven, right? So with the period where the U.S. is still the -- the river isn't open until March to be able to take tons up to the Midwest and the season is more in the May timeframe. There was this kind of period of liquidity where traders continue to focus on building length, having lower prices in the market and shorting the market in Brazil and the United States by making trades and bringing down of few small trade, the sentiment in the market. In terms of the outlook, we don't give outlook receptively with regards to the view on pricing. We think that this India tender, India is taking almost 1.5 million tons is going to clean up a lot of the market and excess supply that was there in time for the season in Europe and the U.S., which we said are significantly underbought. So there's going to be more tons that need to make it the way into the United States and in Europe and will probably to your question in terms of the relative value with ammonia nitrate versus urea, at this point, I think we're starting to see some people who have the ability to curb urea production. We will do so and sell ammonia where they can find better value. So that kind of keeps a little bit of linkage on that front. And in terms of nitrate, the nitrates are at a much higher premium than urea today, and we're seeing even new season sales taking place in Europe at pricing that's more attractive on a nitrogen basis than urea today. So we could see, where possible, some switching to area in the United States as well as in Europe. So taking a little bit of market share from nitrate because nitrates are less available, but it's going to be restricted to some extent because of the equipment and people have in place. So it's going to depend on the location. In our case in the Midwest, we see that UAN and ammonia are more used rather than urea. So we'll probably continue to see the UAN demand there, but certain areas like the Northern Plains and some of the other areas in the United States could see some marginal UAN area switching, which should have for them out. And we think in the Midwest, there's been some underbuying there. Lastly, we've also seen a delay of turnaround with the high price environment in the second half of last year and the beginning of this year, where we could see some turn in Q2 and Q3. Typically, even in Q3, in the market that also can help balance that market to some extent. Is that clear on urea side?
Yes, that's great.
So your next question was on the market for green ammonia and blue ammonia in terms of what the offtakes look like and things like that. We'll share that in more detail of the market as things progress with the various projects that we're looking at. As we said in the past, our focus is on low-hanging fruit opportunities where we're comfortable with the cash cost, which relates to your next question around CapEx. We're looking at what makes most sense both can we do incrementally, that's not a big CapEx where we take a major bet. We are leveraging existing ammonia synthesis capacity that consumes in gas from a reformer and now building in green and blue hydrogen into the back end of existing funds for the most part and trying to do so with very minimal CapEx so that the return is dependent on a low cash outlay at the beginning. So that's our main focus. The one exception to that is the project harvest ammonia plant in Abu Dhabi that we plan to FID later this year. There were a minority investor. We're focused on cash, cost and competitiveness. We brought in some long-term offtakers in the form GSEnergy and Mitsui into Korea and Japan. So looking at ways to derisk these projects and really try to move forward because we do need to start making moves towards decarbonizing and driving that decision.
Our next question on the line is from Lisa De Neve of Morgan Stanley.
I have 3. So just going back to Mubasher's question. You mentioned something about there's some delays in turnarounds, which you're announcing in the market. Would you be able to share what turnarounds are you're seeing in what parts of the market or region? That's my first question. Then secondly, we talked a bit about green and blue ammonia, but can you also share your midterm growth emissions for the OCI methanol group and provide maybe an update on the MOUs we have with ManEnergy, Hartman and Eastern Pacific. And then certainly, I have a question on the UAE carbon credit. So could you please share the EBITDA contribution that you saw in the fourth quarter, if you don't mind? And of course, as some of your European operations are still not running year-to-date being by MCN and your OCI Nitrogen one ammonia line. Should we assume that you may saw more excess credits this year into the market? Or will you keep them for maybe the other part of this year in the assumption that you will run these assets?
Thanks, Lisa, for the question. To your first one, yes, I mean, I think we know some public ones in the United States where they said that they've actually moved turnarounds from H2 of last year to this year. Other than that, I think it's been more kind of market intel that we have on our side around some of the turnaround place when people saw significant pricing increases and the ability to push turn around. To your second question on Man Energy and Hartman, we continue to work closely with regular discussions and meetings with on the ammonia engine as well as the retrofitting and the retrofitting methanol engine. We'll be getting forward on Heartland and Eastern Pacific shipowners, and we're encouraged that there's actually significant focus on bringing those to market and others have actually placed orders in the container vessel lines for not just Merck, but others for decarbonizing container vessels. So more demand around us that can help create that additional increase in the market.The last question on EUA you were asking, what was that? Contribution out of the performance of the European Methanol Group. Is that the question?
Yes. And also if we may see similar sales of credits this year as well, given some of your operations in Europe are still down.
Yes. So the sale was key ways in the European performance in methanol was approximately $90 million in Q4. This offset a couple of things of the normal operating expenditures that we have of around $8 million for the plant itself as well as some covering of contract volumes because we were down. We had annualized contracts in the settlement a quarterly basis of around $8 million. The other thing that is in those results is that the fuels business in Q4 did over $20 million of EBITDA, which is great as we've seen transportation demand and the use of the second-generation biofuel in the form of biomethanol gain market share as roads and transportation have moved up, and we see it as given its second generation and qualified for a higher premium, a great outlet for us and ability to take gray methanol out of the market and sell it in the lower carbon biomethanol markets.With regards to the -- how we've treated it in EBITDA item, we think and we view that this is an operating cost, and we said it in previous calls as well. People aren't appreciating that the key ways are an operating cost. We have to think about if we start a shutdown. It's not just natural gas, it's variable, it's also the price of CO2 because if you build -- if you do produce, you're going to have to buy CO2 credit in the market, if you don't have them. Or if you do have them, then you're going to use them where you could otherwise sell them. So they do have a value. And so we think that affects ammonia by about $200 a ton at today's prices and methanol by approximately $100 a ton just on the CO2 side. In terms of how we would treat EUAs for this year, we're not going to be providing guidance about the treatment of the EUAs. The allocations change from year-to-year and depending on operations, and it's something that we'll share with the market if there any big changes on that and if things progress for the quarter.
Our final question on the phone lines comes from Kenny Zhang of JPMorgan.
I have a couple of questions. Firstly, so you talked about the market price and nitrogen. Do you see any lag in realizing these prices? And if you can remind us, historically, do you see any lag versus in 4Q or so far in 1Q '22? Do you see any difference in the lab, if any? And the second question, I want to go back to dividend policy. So you mentioned also the capital allocation on growth projects. So is it right to understand given the dividend policy right now, you actually prioritize at least paying the base dividend of $400 million before considering growth projects.
Sure. So with regards to the realized pricing, there's often a lag between spot and realized prices depending on how your order book looks. So in Q4, you could see there could be a little bit of lag kind of month-over-month like 9 months or so depending. I mean the one that kind of really sticks out, I'd say, in our Q4 performance was probably fall ammonia in the U.S., where you typically see prepays happening in the summer for fall application. People want to know that they have that secured. So that would have lagged by a few months. But otherwise, overall, our aim is to try to get that realized price mix in the market. So in Q1, we have some sales at the place in Q4 that are in Q1, which benefit from the higher pricing. And we have an order book like we've said on urea with the [indiscernible] sales into Q2. At Fertiglobe, we have sold into early Q2 as well and some nitrates in Europe. And we have an order book that takes us almost in the end of Q1, early Q2 as well on UAN in the United States. So those types of -- that type of order book profile could result in some differences on how realized pricing performs, but that's what kind of specific. Does that answer your question?
Yes, that's helpful.
And I'll just say one -- actually, one other last one is that you sometimes see a 1-month lag on contract customers on ammonia. So that kind of has a 1-month lag for our U.S. business, when it's industrial and [indiscernible]. I'll hand over to Hassan to discuss the dividend side.
Regarding your question on the sort of dividend, I think, I mean, we have triangulated our dividend policy on the basis of how we view our business performing going forward. We have the ability to extract consistently dividends from Fertiglobe, which has its own stated dividend policy, as you may have seen. And the results that were released simultaneously coupled with what is now a substantially better performing business in the U.S. without IFCo. Our plant in Iowa ramping up and really starting to realize its full potential. And of course, the outlook for methanol that is quite positive and potentially tangibly benefiting from the new sources of demand going forward. And we believe we have the balance sheets breath to maintain a dividend policy -- our dividend policy going forward and continue to deploy CapEx or growth CapEx in a disciplined manner in a context where we are no longer building these large sort of multibillion dollar investments that you typically receive because of the way these new projects are set up. There are more sort of intelligent asset type of projects that we selectively pursue. So it is sort of a different type of requirements there and spread over time. So we believe that we're really well positioned to address sort of all -- both aspects of our word focus areas going forward.
Sorry, if I may clarify. So it sounds like we should be confident in addressing both. So it doesn't sound like there is a priority one or the other. You might fact your dividend policy accordingly if the need to meet both the growth and dividend policy, right?
I mean, again, I refer you back to the way the dividend policy was stated, and we believe we're fairly confident that we can address both areas, both areas of focus of returning capital to shareholders in a disciplined manner in the parameters of the dividend policy while pursuing our growth initiatives, which will continue -- which we have guided already this year to be anywhere between $75 million to $150 million based on the progress we make on projects. And we'll continue to give future guidance as these projects materialize further, and we reach -- and potentially reach FID stages.
We currently have no further questions on the telephone lines. So I'll hand that over to Hans to the webcast questions. Thank you.
Yes, thank you. I'll read out some of the questions that have come in. And the first one is from [indiscernible]. Thanks to all the company for the great performance last year and especially the fourth quarter. My first question, in the report about the Iowa fertilizer company credibility from fixed ratings the agency assumes that after 2022, the fertilizer prices will go back to 2018 levels. Do you agree with this outlook?
So we don't give projections in terms of pricing views, but with the information we have right now, we see that 2023 -- if you look at pricing for natural gas in Europe, 2022 and 2023 on average, it's around $20 an MMBtu. You compare that to 2018, which was in that kind of trough period, you were sitting at about $5, $6 an MMBtu. So you're basically triple cash cost for the marginal cost producer and potentially even a little bit higher than that. And -- so we think that that's probably kind of not an updated or reflected view on the market, given the information.
Next question is, your 4Q '21 U.S. nitrogen revenue growth was 137%, which was well short of the year-over-year growth in UAN and ammonia benchmark pricing. Does this simply reflect the pricing lag? Or is there another pricing dynamic at work? Currently, Midwest UAN pricing [indiscernible] expensive relative to urea on a nitrogen equivalent basis. Do you expect weaker UAM volumes as far as substitute to urea for UAN?
Yes, I think we ended up covering some of these in 2 separate questions, but we had a little bit lower volume in Q4 '21 for ammonia, urea and UAN in the United States, and that was coming off of a significant extended turnaround in Q3 that you know that ended just in the beginning of Q4. So that was part of the impact. You had some sales given the turn that came from earlier periods, and like I said, all ammonia specific that we prepaid market where you saw European gas skyrocket and ammonia prices go up a lot more than what some of the sales we said earlier. So I kind of attribute any to that. Regarding UAN and urea switching up to 20% of demand could potentially go from urea to -- from -- sorry, the UAN to urea and vice versa, but like we said, in the Midwest, where we were at out of the [indiscernible] plant in Iowa, Illinois, Missouri area, Indiana, Ohio, Michigan, we're seeing that the UAN to maintain market share, and we have a solid order book at good pricing here for Q1 and even with some sales in Q2.
And the next question is, how is the run rate still now in the first quarter 2022?
The run rate.
I assume, the operational run rate.
The operational run rate? As Hassan mentioned, we don't guide on how we're performing these competitive aspects around that.
Okay. And the next question, how well positioned is OCI in the spot market because mobile fertilizer producers were able to maximize their profits in Q4 because of long-term contracts at the head during the quarter.
I mean, it's a good question, and one we talked about in prior calls. We think that when you think about the global traded urea market, for example, it's a 50 million-ton market. We export around 4.5 million tons. Traders have approximately 30 million tons worth of market share, and they benefit from these netback and index-linked contracts that can let them and product where it makes most sense for the trader, not necessarily where makes more sense for the producer. So when you see that happening, then you can end up being stuck in contracts that send you -- send your product so part of the world that doesn't make the most sense for you. I think we've talked about it for Fertiglobe specifically, you could see Fertiglobe send 6 vessels in the United States one year and another year, it sent to Europe. And we've seen very big differences in how we ship our products, depending on where can we get the best netback. So I recommend commercial team for that focus and that flexibility not have a system that just send 1 location in the 3 dealer gives it to an intermediary that may take it to a market where they have the best benefit and having more control and visibility on where that product is going, leveraging the inland distribution capabilities in Europe and the United States and increasingly in LatAm and East Asia to generate better netbacks for our production assets.
Next question is, what is the targeted net debt level for the end of Q1 2022?
We haven't given any explicit guidance on that specific number, but we did share that we continue to see a healthy trajectory with more deleveraging on a net debt basis occurring in Q1 as we continue to benefit from a positive operating environment. But again, we're only a couple of months away. So our May results will attach to that, when we are issuing our Q1 results.
Also. And the next question is, this year, you're returning significant dividends to the shareholders. What were the reasons to prefer paying dividends above starting a buyback program? And are you considering a buyback program? Is free cash flow allows that possibility in the future?
Well, there's 2 parts to this question. The first part is that this is not a typical dividend. We have sort of opted for a capital repayment process. Technically, as a company, when we listed in whole, we were able to establish a certain share premium reserve that we're able to tap into to effect these capital reductions, which effectively extends these reductions or make these reductions tax free in terms of withholding tax. And this benefit is extended to -- should be extended to all shareholders, of course, subject to any other personal sort of tax circumstance, but in general, the extendable to all shareholders. And we believe that is a very efficient way of returning capital to shareholders.In terms of future buybacks, I think we've alluded in the last conference call that subject to achieving sort of our investment grade -- future investment-grade rating, and we are in a good trajectory to achieving this goal. We hope that we would then at that juncture, potentially explore other avenues of returning capital to shareholders. However, we do believe that this capital return or capital reduction, as it's called, technically, is quite an efficient way of returning capital to shareholders.
Thanks. Next question is, how flexible are you in deciding to shift to more ammonia production instead of conversion to urea? Ammonia prices are looking very profitable and urea prices come a bit down since Q4 2021.
Yes. I mean, we're uniquely positioned that on OCI Nitrogen and Iowa fertilizer companies, we have significant ability to switch to products like UAN, DEF, urea and ammonia. And in the case of generation in the Netherlands, we can also switch among products and make daily decisions if there are big changes in the market. But general, we can make -- sorry, is there a big change in the market, but generally something that we focus on to get the largest contribution margin for our product. In terms of switching in some of the other plants from urea to ammonia that's something we always keep in mind, we have the benefit in both -- in all of our pretty good assets actually have ammonia export infrastructure at Fertiglobe and Abu Dhabi, significant ammonia export infrastructure in Egypt as well as in Algeria. And I think that's quite unique to our platform probably a few other companies have that ability because generally, the focus on ammonia export or urea. That doesn't mean that we'll necessarily do that, but it's something that we monitor the large disconnect in pricing in either direction.
Thank you. And after the Fertiglobe IPO, does OCI plan to maintain a controlling stake in Fertiglobe for the foreseeable future?
Yes, there's been no change in guidance around that, as we mentioned in the IPO.
And then, one more question. Referring to the question on nitrogen price lag, just confirming, we do not see a material lag in Europe as majority of the lag is contributed by the U.S. Do you measure the normal average lag globally.
Yes, it's something that we look at significantly, obviously, the lag and where we are in the market. In Europe, if you're saying specific to us, we have sales that could be 1 or 2 months ahead of time, given our order book goes into the first part of next quarter. But they're kind of some of the pricing levels that we've seen in the last few months that kind of supported for our Q1 and this will be in Q2.
I think that's all the time we have for the questions. I'll hand back.
All right. Thanks, everyone, for joining the call. Look forward to the next one in May. Thank you.
Thank you very much for joining us today, ladies and gentlemen. You may now disconnect your lines. Have a good afternoon. Thank you.