Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the Tüpras conference call and live webcast to present and discuss the first quarter 2022 financial results.

At this time, I would like to turn the conference over to Mr. Dogan Korkmaz, CFO; and Mr. Levent Bayar, Head of Investor Relations. Mr. Bayar, you may now proceed.

[Levent Bayar, executive]

Thank you. Hi, everyone. Good morning to all from Tüpras headquarters in Istanbul, and welcome to our teleconference. I am Levent Bayar, Head of Investor Relations. I'm here with Dogan Korkmaz, CFO, and team members from Tüpras Investor Relations and reporting departments. Over the next hour, we will first go over our operational and financial results for the first quarter of 2022, then we will continue with the Q&A session.

I'll draw your attention to our cautionary statement on this slide. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially. Please refer to our financial reports and material disclosures for more details. These documents are available on our website. In the next 2 slides, we will provide you with a brief summary of the key highlights regarding the first quarter of 2022, then we will go into detail for each subject on the following slides.

Now, let's take a look at Tüpras highlights in detail for the first quarter of 2022. On the top, we have net refining margin bridge showing the first quarter of 2021 and the first quarter of 2022. Product cracks were very supportive to net refining margin, especially in March. Inventory gains with increased Brent prices also boosted NRM. On the other side, falling natural gas prices continue to push up refining costs. Although compared to the European prices, increased natural gas tariffs in Turkey also had a negative impact on our profitability and limited net refining margin performance in the first quarter.

On the second chart, it is clearly visible that the demand has fully returned to prepandemic levels for the main products. Tüpras domestic gasoline and diesel sales increased by 46%, 15%, respectively, compared to their pre-COVID 5-year averages. Increased passenger car use and high industrial and logistics activity continues to be supportive for land transportation fuel demand. Jet fuel sales is also improving, now only 14% lower than pre-COVID levels. We have been seeing weakness in bitumen sales for some time, which prevents us from reaching peak capacity to ratio rates. The bottom chart shows our position in accumulated losses. With the improving operational profitability, we continue to cover our losses from 2019 and 2020. With the profits we made in 2021 and in the first quarter OF 2022, we managed to reduce our accumulated losses of TRY 4.2 billion to almost TRY 2 billion. We will be resuming dividend payments when we recovered the rest of our accumulated losses.

Let's move on to the market section and take a look at the global and domestic developments in the following 3 slides. As you all know, we covered this section in 2 main components as developments in global oil markets and developments in Turkish market. Let's start with the top-left box. Geopolitical tensions had major impact on oil prices during the first quarter. Brent price surged over Russia and Ukraine war and has seen above $100 per barrel level. And its sanctions on Russia, news reports regarding the alternative oil supplies, SPR releases and China's COVID lockdowns moved Brent prices slightly lower towards second quarter. On the top right, the development for the product inventories was no different from the crude oil products. Both mid-distillate and gasoline stocks were down below the 5-year range in the first quarter of 2022 with supply issues, while strong demand continued to be supportive for cracks.

Now taking a look at the bottom row, Turkish market. Number of flights in Turkey was up by 44% year-over-year as of the end of March, supporting jet fuel demand in Turkey, which increased by 58% in the 2 months of 2022 compared to the last year. It has been also supported with the increased mobility, especially on the international flights. In line with the improvement in global flight trends, flight numbers in Turkey is only 20% lower than 2019 levels. On the bottom right chart, we have the Turkish road fuel market data for the first 2 months of 2022. Road fuel demand was firm in this period as diesel consumption increased by almost 2% year-over-year, which came above prepandemic levels. Gasoline consumption also showed a strong ground, increasing by 43% in the first 2 months of this year.

Now let's take a look at cracks in comparison to last year's and past 5 years first quarters on this page. Strong post-pandemic demand and tightened supply conditions with the Russia-Ukraine war drew down product inventory levels dramatically and throw mid-distillate cracks to record levels. With same conditions starting to reduce its stock levels, gasoline cracks also showed an elevation during the quarter. HSFO cracks were weaker mainly due to elevated Brent prices.

Taking a look at the details. Diesel cracks were up by $14 per barrel year-over-year and averaged at $18.5 per barrel in the first quarter of 2022. Diesel cracks performed in line with the seasonal averages in January and February, but skyrocketed in March, with improving demand in almost all regions, following the almost full opening of the economies and significant tightening in Europe inventories following the abandonment of Russian products. In addition to the ongoing impact of the war, soaring energy costs also pushed up product cracks. Diesel cracks continue to perform very strong in April, which increased to $44 per barrel with ongoing product imbalance in Europe. Jet fuel cracks averaged at $15.4 per barrel in the first quarter of 2022, posting $13.5 per barrel increase compared to the first quarter of 2021. Similar to diesel, undersupplied European market has led to sharp increase in jet fuel cracks in March, while January and February were in line with the seasonal averages. According to Eurocontrol data, European air traffic during March was at 76% of 2019 levels, and the agency now forecast to see 80% level in the second quarter, even under its low demand scenario.

Similar to diesel, tight jet fuel market continued to drive up the cracks, and they have averaged at $45 per barrel in April. Gasoline cracks were up by $4.4 per barrel compared to last year's same period and averaged at $12.3 per barrel in the first quarter of 2022. Gasoline has experienced a steady trend in the first quarter. Margin levels supported with elevated passenger car usage with the pandemic in almost all regions. Starting with Russia, Ukraine war, intermediate product availability for converging units started to drop, leading to increasing gasoline production costs and ultimately cracks. This carried them to $25 per barrel in April.

High-sulfur fuel oil cracks averaged around minus $21.6 per barrel and were almost $13 per barrel, weaker compared to the first quarter of 2021. This was mainly due to sharp price in Brent prices leading to elevated costs for fuels almost globally. With the drop in Russian product availability in the market, we are observing an improvement in HSFO cracks in April, reaching to minus $20 per barrel.

Moving over to the crude price differentials. Heavy crude differentials narrowed in the first quarter mainly due to elevated demand towards heavier grades [indiscernible] by the U.S. players. Following the Russia-Ukraine war, Urals are offered to the market with deep discounts due to limited demand with self-sanctionings. As a result of this, other similar grades are becoming more expensive. This trend continued in April and May as well. Looking forward, we continue to believe the outlook for heavy differentials will be very hard to predict. Because of the Russia-Ukraine war, potential developments on the other sanctioned producers and the decisions to be taken by OPEC will continue to be decisive in this regard.

Now let's take a look at the Tüpras operations, starting with the production volume. On the left-hand side, you can see our production volumes. Our total production in the first quarter of 2022 was 6 million tons, 30% higher year-over-year, with better product demand and in line with pre-COVID 2020 figures. In the first quarter of 2022, our total crude distillation capacity utilization was 76%, and other feedstock capacity utilization was at 8%, reaching to 84.5% for the whole system.

Moving over to the sales. Let's start with the chart on the left-hand side. In the first quarter, our domestic sales and international sales reached to 5 million and 1.5 million tons respectively, summing up to 6.5 million tons in total. Our total jet fuel sales continued to improve, were 46% higher compared to last year in the first quarter as a result of the improving trend in aviation. Gasoline sales continue to be firm with rising personal vehicle use and switching from LPG to gasoline. Diesel sales in the domestic market were also firm in the first quarter with industrial and logistics activity remaining steady. Due to the decrease in regional bitumen demand, our bitumen sales were 56% lower year-over-year in the first quarter.

Now let's move over to the financials. Let me start with the refining margin developments with this slide. Med Complex refining margin, which is a theoretical calculated figure, has 100% Urals as oil in its share calculation for the crude slate. Due to significant widening in this crude type, net margin improved to $9.5 per barrel in this quarter. Skyrocketed mid-distillate cracks and strong gasoline have also supported this performance in Med margin. Tüpras net refining margin were realized at $5.2 per barrel in the first quarter of 2022, increased by $3.7 per barrel year-over-year. This strong performance in the first quarter was mainly driven by strong mid-distillate and gasoline cracks. Material contribution from inventory effect continued in this quarter as well as the upward trend in the Brent prices. As discussed earlier, sharp increase in the natural gas prices have kept net refining margin generation in the first quarter. As a side note on this front, we would like to inform you that, starting from the first quarter of 2022, effects of new hedging will be included in net refining margin calculation as these operations had a material impact on our inventory effect in the net refining margin.

Let's take a look at the P&L items in detail for the first quarter of 2022. Revenues almost tripled year-over-year and recorded at TRY 77 billion in the first quarter of 2022. Total product sales were up by 29% in the first quarter versus past year, with sales increasing in all major products, excluding bitumen. Average Brent price in the first quarter increased by 67% year-over-year, which accompanied by 89% depreciation in lira and led to the revenue growth. COGS also almost tripled year-over-year as well with higher production amount, higher Brent prices and increase in the energy expenses, especially energy expenses were near 5x of last year's first quarter figure, mainly driven by natural gas hikes and higher capacity utilization.

Gross profit significantly increased to TRY 5 billion with improvement in cracks, better operation performance and inventory gains. Material increase in operational expenses was mainly due to logistics expense that was led by higher sales, inflation and lira depreciation. Increase in general expenses was mainly due to personnel expenses in parallel to inflationary adjustments to the salaries. Loss from other operations was TRY 1.5 billion. That largely includes FX gain and loss on trade payables and receivables due to lira depreciation. When considered together with the FX losses below EBITDA, a total of TRY 3.2 billion negative FX impact was more than offset by TRY 4 billion inventory gains.

Income from equity investments, i.e., Opet was recorded at TRY 208 million contribution. As a conclusion of this, we have recorded TRY 1.1 billion of profit before tax in the first quarter of 2022. Below PBT, we have recorded TRY 126 million tax expense as an outcome of higher operational profit, as we have recorded TRY 896 million of net income in the first quarter of 2022. Now for EBITDA, our EBITDA CCS materialized at TRY 565 million. The year-over-year increase was mainly driven materially in the better crack margins, wider differentials despite elevated energy expenses. We recorded TRY 4.1 billion positive inventory effect in the first quarter of 2022. This material increase was mainly due to elevated Brent prices and Turkish lira depreciation. With the new hedging methodology, we aim to mitigate the pricing risk from out of 2 quarters of crude oil inventory, which also enables us to protect against high volatility in Brent prices. Consequently, our reported EBITDA materialized at TRY 4.7 billion, which is substantially better compared to last year's same period.

Now, let's take a look at the profit before tax bridge. As you can see from the waterfall chart, inventory gains continue to support our profit before tax at TRY 2.6 billion contribution was recognized as a result of increased Brent prices and lira depreciation. Due to lira depreciation and higher interest rates in the first quarter, negative TRY 1.7 billion impact was recognized in the first quarter compared to same period of last year. Crack margins significantly improved year-over-year, especially in March, and positively contributed to the profit before tax reached with a sizable amount of TRY 3.4 billion. With support of slightly wider heavy crude differentials year-over-year, we recorded TRY 545 million of positive impact this quarter. Natural gas costs were the most important factor limiting the profitability growth in this quarter. The increase in natural gas prices had a negative impact of TRY 2.5 billion on the PBT year-over-year in the first quarter of 2022. That would also other smaller effects amounting to negative TRY 225 million impact on the bridge. All in all, the first quarter of 2022 profit before taxes materialized at TRY 1.1 billion positive, which indicates an overall TRY 2 billion improvement compared to last year's same period.

Now let us take a look at the financial highlights. In the first quarter of 2022, we have recorded TRY 4.7 billion of EBITDA and nearly 5x of last year's same period. This is largely achieved with strong operational performance. Accordingly, we have recorded almost TRY 900 million net profit in the first quarter of 2022. With strong EBITDA generation and disciplined funding management, our net debt-to-EBITDA materialized at 0.7x as of the end of the first quarter. The current ratio is still at 1x, which is in line with the last few years. And on the bottom right panel, we have the return on equity. As you can see, we have recorded 38% return on average equity as of the end of the first quarter of 2022.

Let's continue with the details on our balance sheet. Cash and cash equivalents and financial liabilities at the end of the first quarter was TRY 19.3 billion and TRY 32.2 billion, respectively. Net debt slightly increased quarter-over-quarter in dollar terms and stood at $865 million. On the working capital side, sharp rise in Brent prices reduced working capital buffer. However, our payable day continue to remain sizably above receivables and inventory days, creating a material operational funding source. While near-term debt looks at elevated weight average cost of lira portion of this debt is 14.8% against the weight average deposit interest rate of 28.5%, allowing us to create positive carry out of this position. We also have around TRY 19 billion of cash, which can easily cover short-term portion of -- if there's an immediate need.

Regarding our FX exposure management, we ended the quarter with USD 20 million loan position. Following the ongoing increase in Brent prices, our inventory amount registered at USD 2.4 billion in the first quarter of 2022. Our currency cash position is at a strong level with USD 1 billion. While slightly lower quarter-over-quarter basis, we continue to manage a sizeable position of FX assets with forwards. Trade payables continue to be upward momentum and reached at USD 4.1 billion, largely due to sharp increase in Brent price especially towards the period-end. On the liability side, both our short-term and long-term debt maintained compared to the last quarter, totaling at USD 1.4 billion. We continue to employ strict FX exposure management policies, which targets a square position at period end.

Now looking at the maintenance calendar for 2022. We have completed periodic maintenance scheduled for the first quarter in Izmir and Izmit refineries. We are going to operate with peak utilization in the second and third quarters since there are no planned maintenances during these periods. In the fourth quarter, we will have 6 weeks maintenance in Izmit and 9 weeks revamp in Izmir. There is no maintenance activity planned for our Kirikkale refinery in 2022.

Now taking a look at the expectations for 2022. We have decided to stop sharing expectation for net complex refining margin since it is a calculation and had lost its indicative quality due to the high volatility observed in the oil markets. We have increased our refining margin expectation for 2022 to $8 to $9 per barrel from $4 to $5 per barrel earlier. We expect current high cracks to continue throughout the second quarter, but to start to normalize towards the end of the quarter. Regarding operations, there are no changes in our expectations. We still expect 26 million tons to 27 million tons of production, 28 million to 29 million tons of sales while we expect capacity utilization to be within a range of 90% to 95%.

Our consolidated CapEx target for 2022 has also remained the same at USD 300 million. We are planning to spend 45% of debt on sustainability-focused energy efficiency and environmental projects. Out of USD 300 million, USD 80 million will be spent for logistics investments.

On this slide, we would like to sum up some key figures for the first quarter and compare them against our year-end guidance. We had a net refining margin of $5.2 per barrel in the first quarter, which is on the upper end of our previous full year guidance range of $4 to $5 per barrel. Our new guidance range for the whole year, $8 to $9 per barrel. Capacity utilization was at 85%, seasonally came as expected for the first quarter, which is below our guidance range of 90% to 95%. In the first quarter, we have produced 6 million tons and sold 6.5 million tons, keeping our existing full year guidance of 26 million tons to 27 million tons to 28 million tons to 29 million tons both in production and sales. We have spent USD 18 million in the first quarter, keeping our guidance at USD 300 million. We have spent about 55% of our CapEx in sustainability-focused investments in the first quarter, in line with our target for the whole year.

Before we conclude our presentation, we would like to provide an update to our Strategic Transition Plan, which was announced in late 2021. First, the -- in zero-carbon electricity, along with Koç Holding and Aygaz management teams, we have decided to take over 99% of Entek shares while offering new shares to Koç Holding and Aygaz shareholders. Based on the independent valuation report, we will be issuing 24.8 million new shares. We have applied to Capital Markets Board of Turkey for the process. And once approved, we will convene an extraordinary Annual General Meeting and plan to complete the transfer by the end of August. We are currently assessing Entek site for potential synergies in terms of our electricity and green hydrogen plants. In terms of Tüpras [indiscernible], we have received green light for 12 megawatts of wind power, which is 3 turbines in Izmir and [indiscernible] equipment providers. We have also applied for 12.5 million tons of -- megawatts of Izmit and Kirikkale solar power projects.

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