Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2020-Q2

[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 to present and discuss the second quarter 2020 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, Maria. Hi, everyone. Good evening to all from Tüpras headquarters, and welcome to our teleconference. I am Levent Bayar, Head of Investor Relations for Tüpras. I am 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 second quarter of 2020, then we will continue with the Q&A session.

I will draw your attention to our cautionary statement. 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 second quarter and will go into detail for each subject on the following slides.

Let's start with an assessment of the COVID-19 pandemic in Turkish market in the first half of 2020. On the top left side, we do have the Turkish fuel market regulator data for the first 5 months. With only 6% contraction versus last year, we can say that diesel remained pretty resilient during the most distressed period of COVID-19. This was mostly due to uninterrupted food and essential goods transportation as well as logistics demand during that period.

Jet fuel demand was very weak in April and May as expected, resulting in a cumulative drop of 47% year-over-year. Gasoline demand was also quite resilient. However, because of heavy lockdown schedule in May due to a high number of public holidays, gasoline demand also weakened. Although we have all red arrows here, with the strong pace of recovery since reopening in June, we will likely see a healthy recovery starting with June figures.

On the right-hand side, we do have the Tüpras sales performance on a monthly basis in the first half. As you can see, both diesel and gasoline sales reached record levels in June, following the easing of the measures. Jet fuel demand is also showing signs of recovery in June as well. On the bottom left side, we do have credit card payments data in fuel stations provided from Central Bank of Turkey's data set. This could be interpreted as an indicator of fuel consumption going back to pre-COVID levels in June and continue to remain healthy in July onwards.

On the bottom right-hand side, the number of flights data for Turkey is gathered from State Airport Authority of Turkey. As you can see, with the easing of travel restrictions and summer season impact, recovery in domestic flights reached almost 75% in July compared to last year's same period. While the recovery is slower for international flights, the trend is also picking up and airlines continue to add new international destinations almost every week.

Now let's take a look at Tüpras highlights for the second quarter of 2020. As we have discussed earlier, cracks for major products hit their bottom in the second quarter, particularly in May, where measures peaked globally. We observed an ongoing improvement in cracks with normalization in economies globally. We believe even if there would be a case of a second wave, crack should not necessarily be impacted as much as they did initially unless strict lockdowns are reintroduced.

We have plotted inventory effects by month on the second chart. As we have mentioned in our previous call, we have incurred substantial inventory loss in April as a result of the ongoing downward trend in Brent prices at that time.

With OPEC+ production cut agreement, Brent prices started to recover in May and has been on an upward trend since. We have recorded inventory gains in May and June accordingly. However, due to lower sales demand in these months, we haven't fully captured positive momentum and some of the impact has been delayed to the third quarter.

The last chart on the right-hand side, we have an indicated simple average of fee, main regional heavy crude oil price differentials against Brent price, per barrel basis. As you can see, the heavy crude differentials widened materially in the second quarter. This has contributed to Tüpras' second quarter performance as well. Differentials were narrower in July as part of the OPEC+ production cut agreement, but started to widen again in August and September. Looking forward, they will likely remain volatile due to several factors on demand and supply dynamics.

Now let's summarize the key figures from the second quarter of 2020. We have about produced 4.9 million tons of total crude and other feedstock, sold about 5.3 million tons of refined products and ended up with an around TRY 477 million of EBITDA.

Now let's take a look at the crude oil and refining market development on the following 2 slides. As expected, second quarter of 2020 presented a weak crack margin environment. While gasoline and mid distillates have suffered through unprecedented demand contraction, supply reaction was not enough to counterbalance as well. As a result of this, inventories increased and created sizable crack margins of distillates and gasoline, especially during April and May.

With reopening of economies globally, we have observed an improvement in crack in June. On the other hand, high sulfur fuel oil had a completely different story due to its own distinct fundamental demand and supply dynamics. Following this introduction, let's take a look at individual cracks and their performance against last year's second quarter.

Diesel cracks were down by $5.7 per barrel compared to last year's second quarter and averaged at $6.5 per barrel in the second quarter of 2020. Diesel cracks have been quite resilient compared to others during the second quarter. The main reason for that is diesel is mainly consumed in heavy-duty transportation and logistics, which seemed less impacted compared to the other mobility forms globally.

In addition, diesel demand was supported further by contango opportunities due to products relative to suitability for longer-term storage compared to the others. However, refinery switching daily yield to diesel from jet fuel and inherent pressure from the demand side led to an inventory buildup that eventually softened diesel crack margins. May and June cracks have averaged around $5 per barrel, respectively. With easing of containment measures and reopening of the economies, July crack margin average was around $6.4 per barrel. That's about $1.5 better than April and May.

Jet fuel cracks' average debt minus $2.4 per barrel in the second quarter of 2020 and posted a historical $13.2 per barrel decline compared to the second quarter of 2019. The downward trend in Jet fuel crack margins since the beginning of the year has deepened in the second quarter. With virtually no consumption in April, jet crack margin moved down to negative territory, averaging at minus $1.7 per barrel. And in May, was even lower at minus $3.9 per barrel on average.

However, as of June, jet cracks have been on a recovery path. Although the pace and scale has been varying, countries have been gradually opening up domestic flights and flights to international destinations followed with some lag as well.

Although the total number of daily flights across the globe is still way below the pre-COVID levels, the recovery has been supporting crack margins. With this comeback, July average for jet crack margins were around minus $0.60 per barrel.

Gasoline cracks were down by $7.3 per barrel compared to last year's same period and average debt $3.3 per barrel in the second quarter of 2020.

The second quarter has been quite volatile for gasoline on a daily basis. Initially, demand was resilient with increased personal mobility with passenger cars, but following mobility restrictions on a global scale, cracks have seen even negative figures in some days. However, after seeing the bottom in April at $2.4 per barrel, gasoline cracks have been improving around $1 per barrel every month and reached $4.6 per barrel in July. High sulfur fuel oil cracks averaged around minus $6.9 per barrel in the second quarter of 2020 and increased by nearly $3 per barrel compared to the last year same period.

After reaching historic highs in April, HSFO cracks continued to perform strong in the second quarter, even outperformed against last year's higher-than-average level despite the demand-driven loss stemming from IMO 2020.

There were a number of factors behind strength of HSFO, including lower high sulfur fuel oil supply with run cuts by simple refineries due to COVID-19; decreased available heavier crude grades due to OPEC+ production cuts; reduced overall HSFO output; competitive price advantage, which is dollar per calories against natural gas and coal used for power generation as crude oil price was significantly lower also supported HSFO cracks as well. The strong high sulfur fuel oil trend has also been going on in the third quarter so far. High sulfur fuel oil crack margin has averaged at minus $7.1 per barrel in July, which is the 5-year maximum point.

Moving over to the crude price differentials. Heavy crude differential started the year -- quarter with a widening pattern following the unsuccessful meeting of OPEC+ on March 5. As you would recall, the meeting ended without an agreement on further production cuts. Following that outcome, Saudi Arabia decided not only to increase production, but also to apply handsome OSP discounts. Other major heavy crude suppliers in the region also declared similar actions, leading to a widening in differentials for the majority of the second quarter.

Eventually, OPEC+ members have reached an agreement on reducing their production by a significant amount of 9.7 million barrels per day, starting as of May. This decision resulted in a reversing of the wide differentials offered in April and May. And as a result, June and July the financials were narrower. The latest decision of OPEC+ to reduce the total production cuts amount by 2 million barrels per day, starting as of August, indicates that heavy crude supply will increase again in the third quarter. As a follow-up to this decision, OSP announcements for September is wider at around $2 per barrel compared to August, which indicates a widening trend again.

Looking forward, we continue to believe that the outlook for heavy differentials will remain volatile and will be set in accordance with level of global demand recovery as well as supply cut decisions by the major suppliers.

Now let's take a look at Tüpras operations, starting with production volume. On the left-hand side, you can see our production numbers. Our total production in the second quarter was around 4.9 million tons. The main reason for the year-over-year drop was the decreased demand due to outbreak. Our Izmir refinery, which is the largest in nameplate capacity, has stopped operations in May and June as a reaction to the drop in demand. We have successfully reinstated operations in Izmir, in line with the disclosed time line.

In the second quarter of 2020, our total crude utilization was 64% and other feedstock capacity utilization was at 5%, reaching to 69.5% for the whole system. Considering that Izmir refinery contributed to approximately 40% of total capacity, we could say that the rest of the refineries have been running at nearly full capacity during the quarter.

We have already factored in the demand drop and subsequent refinery shutdown in our revised estimates. Therefore, we maintain our production guidance of about 24 million tons of production, along with 80% to 85% capacity utilization rate.

Moving over to the sales. Let's start with the chart on the left side. We generated total sales of 5.3 million tons in the second quarter of 2020. Both domestic sales and exports were adversely affected from the COVID-19 outbreak. As you can see from the chart on the right, which represents the domestic sales for the selected products, jet fuel was the most severely affected product as expected.

As a pleasant price, domestic bitumen sales have improved compared to last year from around 400,000 tons to 700,000 tons with strong infrastructure activity during the second quarter of 2020. Starting with late May, our sales in all of the products began improving. And by June, we have reached pre-COVID level of sales. Since the drop in second quarter was in line with our revised estimates, we do not change our sales guidance of near 25 million tons for the whole year.

Now let's move to the financials. Starting with the refining margin developments on this slide. During second quarter of 2020, Mediterranean refining margin decreased by $2.3 per barrel compared to second quarter of 2019 and settled debt negative $0.6 per barrel. Weakness in jet fuel, gasoline and diesel crack margins were the main factors behind the decline in Med margin despite stronger high sulfur fuel oil margins.

Tüpras' net refining margin was materialized at $0.9 per barrel in the second quarter of 2020. The decline compared to last year's same period was driven by weak jet fuel and sluggish gasoline and diesel crack margins and nearly $1.6 per barrel negative inventory -- negative crude inventory effect compared to the second quarter of 2019.

Now let's take a look at the P&L items for the second quarter of 2020. Our revenues decreased by 61% to around TRY 9.3 billion. This was mostly on the back of 58% decline in Brent price and 26% decline in sales volumes. 17% depreciation in Turkish lira versus last year's second quarter compensated some portion of the drop.

Our cost of goods sold also dropped by 62% with the decrease in Brent price, widening differentials and lower production. Widening of differentials covered some portion of the profitability loss coming in from weaker cracks, and our gross profit declined by 47% and materialized at TRY 890 million in the second quarter of 2020.

Our operational expenses increased by 24%, mainly due to Turkish lira depreciation and higher logistics expenses compared to the second quarter of 2019. Due to Turkish lira depreciation at around TRY 0.28, the loss from other operations materialized at TRY 92 million of loss versus TRY 82 million of gain in the second quarter of 2019. We have recorded TRY 57 million of loss from equity investments, i.e., OpEx. This was due to lower sales related with mobility restrictions in the second quarter and inventory losses. Our net financial expenses decreased by 31% compared to the second quarter of 2019. In details, we have renegotiated some of our short-term loans to reset their interest with lower market rates and extend their maturities.

With the help of higher Turkish lira amount of cash reserves, our net interest expenses decreased by 55% compared to the second quarter of 2019. We had more FX losses due to higher depreciation amount in Turkish lira against U.S. dollar in the second quarter of 2020 compared to last year's same period. As you can observe from the table, we have recorded negative TRY 329 million of profit before tax in the second quarter of 2020. Below profit before tax, we have recorded about TRY 169 million of positive impact from deferred tax asset revaluation and tax loss carryforward in the second quarter. With these 2 positive contributions, our bottom line materialized at negative TRY 185 million for the second quarter of 2020.

Now for our EBITDA. Our reported EBITDA materialized as TRY 477 million in the second quarter of 2020. We have recorded minus TRY 8 million negative inventory effect due to the fact that nearly all of the negative impact from April was offset by the positive impact in May and June. When we deducted inventory loss from the reported EBITDA, we reached TRY 484 million of clean EBITDA or EBITDA CCS in the second quarter of 2020, which is 41% below last year's same period.

Now let's take a look at the profit before tax bridge. As you can see, despite more favorable differentials, profit before tax declined compared to the second quarter of 2019. There were 3 major factors playing a role in this outcome. In the second quarter of 2019, we had recorded a significant amount of inventory gain at around TRY 675 million. This was not the case for the second quarter of 2020. So although we only have minus TRY 8 million of inventory loss in the second quarter of 2020 due to sizable inventory gain of last year, we have this negative delta impact on the bridge.

Crack margin environment was considerably weaker in the second quarter of 2020 due to COVID-19-related reasons as discussed earlier. We had to reduce our production with Izmir shutdown due to demand contraction driven by COVID-19. All in all, second quarter 2020 profit before taxes materialized as negative TRY 329 million.

Now let's take a look at the financial highlights. In second quarter, our EBITDA was realized at TRY 477 million, that's summing up to a negative TRY 814 million in the first half. We have a net loss of TRY 185 million in the second quarter of 2020. This brings our net loss for the first half to TRY 2.45 billion. While reported EBITDA in the second quarter is weaker than last year, net debt-to-EBITDA ratio inclined quarter-over-quarter to 12.5 from 6.4.

We would like to remind here that first half of 2020 has shown quite unprecedented developments in our sector, and there are several effects that happened as a result of these. While it is not limited to inventory effect only, if we were to take a more refined look at our financials through stripping off the inventory effect, our net debt to rolling EBITDA CCS would register at 3x. This indicates that our core operational profitability still matches a sizable amount of our net debt position, and our gearing is not excessively increased. And on the bottom right panel, we have the return on equity. Due to negative bottom line, our rolling return on equity materialized at minus 21%.

Let's continue with the details of our balance sheet. Let's take a look at the top row first. Our cash and cash equivalents and financial liabilities at the end of the second quarter of 2020 was TRY 18 billion and TRY 29 billion, respectively. Net debt is TRY 11 billion as of the end of second quarter of 2020.

We have been increasing our cash position throughout the second quarter to ensure we have ample liquidity in case we run into tighter liquidity conditions. To put things into perspective, our net debt level is at the same level year-over-year in Turkish lira terms, while it is below last year's second quarter in U.S. dollar terms.

As you may see from the redemption schedule, the majority of our short-term debt is in Turkish lira terms. During the second quarter, we have renegotiated some of our short-term loans to reset interest rates to near lower levels than extend maturities. These actions will help us ensure lower interest expenses in due course. On the bottom left, working capital requirements stood at a negative TRY 3 billion, slightly improving compared to the first quarter of 2020.

There are no material changes to our payable and receivable days as of the end of the second quarter. Due to fluctuations in demand in the first 2 months of the quarter, we have experienced some volatility in inventory turnover. But with the reopening of Izmir, our inventory turnover is also normalizing.

Regarding our FX exposure management policy. Due to storage optimization and drop in Brent prices, our inventory amount dropped to USD 752 million from USD 826 million in the first quarter. Our hard currency cash position has increased from USD 681 million in the first quarter to USD 922 million in the second quarter. Together with our Turkish lira reserves -- cash reserves, it sums up to around USD 2.6 billion of total cash position, if you take a look at the -- from the liquidity standpoint.

With the switch to prioritize bulking up Tüpras reserves in the second quarter, our forward demand decreased accordingly. We continue to employ strict FX exposure management policies, which targets a closed position at period end.

Before we head into 2020 expectations, let's compare the current status as of the first half against the targets. We have a net refining margin target of $3 to $4 per barrel in 2020. First half performance is below that at $1.1 per barrel, but there is $2.1 per barrel negative impact -- inventory impact in it, indicating that it could be recovered if Brent continues to improve. Net refining margin was at $0.6 per barrel in the first half of 2020, below our full year guidance range of $1 to $2 per barrel, but still within overall expectations.

Our capacity utilization was at 77% for the first half of 2020. Although it was below our full year guidance range of 80% to 85%, it was in line with the expectations since the impact of Izmir refinery shutdown during May and June was already incorporated in the full year guidance. We have produced 11 million tons and sold 11.5 million tons in the first half of 2020, against our full year guidance of about 24 million tons of production and about 25 million tons of sales.

Our refining-only CapEx target is about USD 125 million for 2020, whereas we spent USD 46 million for refining investments in the first half. We have also spent about USD 24 million in the first half for the investments in our shipping and railway subsidiaries, reaching USD 70 million of total CapEx in the first half.

Now looking at the maintenance calendar for 2020, you might notice only a minor update. The planned maintenance so far, U-400 FCC unit -- 4000 FCC unit in Izmir is also postponed to 2021. As you know, we have disclosed that our Izmir refinery was temporarily shut down until July 1 due to decline in demand. Our maintenance team has used this shutdown in Izmir as an opportunity to carry out some intermediary maintenance activity. All the work related to this operation has also been successfully completed during the shutdown. These intermediary maintenance actions allowed us to postpone the periodic maintenance activities planned for the fourth quarter of 2020 to 2021. With the completions of -- and the postponement, there isn't any major maintenance activity planned for the rest of the year. We would like to remind that we are providing the table with details in order to increase awareness and provide further information. Given the ongoing uncertainties related to COVID-19, there could be changes in our maintenance schedule.

Now finally, on this slide, we have our 2020 expectations. We maintain our 2020 guidance as disclosed in April 20. Let's take a look at the details of our current estimates for 2020. We expect Med complex refining margin to remain in the range of $1 to $2 per barrel this year. We expect Ural-Brent to be better compared to 2019, but jet fuel and gasoline cracks to remain weak.

We expect to Tüpras net refining margin to materialize in the range of $3 to $4 per barrel in 2020. Weak outlook for jet fuel and gasoline cracks against resilient diesel and stronger HSFO cracks. We will also recover the inventory loss of the first quarter as much as Brent recovers in the rest of the year. We expect around 24 million tons of production and around 25 million tons of sales, with 80% to 85% capacity utilization for the whole year. For CapEx, we target about USD 125 million of refining-only CapEx in 2020.

Thank you for listening to me.