Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and Gentlemen, thank you for standing by. I am Geli, your Chorus Call operator. Welcome, and thank you for joining the Tupras conference call and live webcast to present and discuss the third quarter 2021 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]

Hi, everyone. Good evening to all from Tupras headquarters in Istanbul, and welcome to our teleconference. I am Levent Bayar, Head of Investor Relations. I am here with Dogan Korkmaz, CFO and team members from Tupras Investor Relations and reporting departments.

Over the next hour, we will first go over our operational and financial results for the third quarter of 2021. Then we will continue with the Q&A session. I would like to 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 3 slides, we will provide you with a brief summary of the key highlights regarding the third quarter of 2021. Then we will go into detail for each subject on the following slides. Now let's take a look at Tupras highlights in detail for the third quarter of 2021. In the third quarter, global product inventories remained at the low end of plus 5-year range, while demand continues to improve.

This has resulted in mid-distillates cracks reaching past 5 years average point, while gasoline cracks exhibit the upper end. Combined with widening differentials and inventory gain, our net refining margin for the third quarter of 2021 materialized at $5.9 per barrel, which is the highest of the past 12 quarters.

On the second chart, we have the evolution of our domestic market sales starting from the third quarter of 2019. Similar to the challenges globally, our sales volume declined from 2019's third quarter to 2020's third quarter mostly due to the drop in jet fuel demand. While we have observed a material improvement in jet fuel in 2021, improvement in gasoline and diesel also helped our sales volumes to return to their pre-COVID levels.

Third quarter was also a quarter of record as gasoline sales reached the highest point since 2008, while diesel sales volume reached to the highest point since the third quarter of 2018. The bottom chart shows our normalized gearing levels with our improved EBITDA. Our unadjusted gearing level aligned with the adjusted gearing indicating both normalization in underlying parameters and accurate selection of fall-offs as well.

Let's move on to the detailed market section and take a look at the global and domestic development on the following 3 slides. As you know, we cover this section in 2 main components as developments in global oil markets and developments in Turkish market. Let's start with the top left front. Global petroleum product inventories continue to decline in line with the increasing demand, especially on the road field side. The summer season increased both air and road travel and supported demand.

On the diesel side, the strong industrial activity also resulted in an increase in demand and lower stocks. Reduced stock levels supported cracks for gasoline and mid-distillates. On the top right, we have highlighted flight numbers compared to the pre-COVID levels. Global commercial flight numbers are now only 29% lower than 2019 after a very weak set of quarters following the pandemic.

Jet fuel consumption was robust as international slides in both Europe and U.S. recovered. Passenger numbers reached to a highest level since the coronavirus pandemic began with summer being the peak flying season.

Now taking a look at the bottom row, Turkish market. Both air traffic and road traffic improved in Turkey, visible on the bottom left of this slide. Flight numbers in Turkey is 34% better compared to the last year and 32% short of 2019. Air travel improved, especially starting from June with ease of restrictions and causing free air travel as tourism season began.

On the bottom right chart, we have the Turkish fuel market data for the 8 months of 2021. Diesel consumption increased by 6% year-over-year in 8 months, reaching pre-pandemic levels in April. Gasoline consumption also showed a strong run with summer season during the first 2 months of the third quarter, increasing by almost 19% in 18 months compared to the low base of last year.

Domestic jet fuel demand was 38% higher year-over-year than the last year's 8 months, showing significant improvement after record with the opening of the flights. Let's take a look at crack in comparison to last year's as well as past 5 years, third quarter on this page. Strong demand and tight supply conditions, which drove down product inventory levels support and gasoline cracks.

HSFO cracks were weaker mainly due to the excess supply in the market. Taking a look at the details. Diesel cracks were up by $2.6 per barrel year-over-year and increased by $2.1 per barrel quarter-over-quarter, averaging at $7.1 per barrel in the third quarter of 2021. Key factors behind the strong rebound in diesel cracks were increase in road fuel demand, fuel exceeding 2019 levels and acceleration in industrial equities backed by better PMI figures and less diesel jet fuel plant with the recovery seen in air traffic.

These underlying trends continued in October as well, which drove diesel cracks up to $12.6 per barrel, reaching 5-year averages. Jet fuel cracks averaged at $4.4 per barrel in the third quarter of 2021 and posted $6.5 per barrel increase compared to the third quarter of 2020. Robust demand with summer flying season and list of air travel restrictions supported jet fuel cracks.

According to Euro Control data, daily flights with a 7-day moving average reached 77% of 2019 levels by the end of October. Supported by the strong recovery, jet fuel cracks reached $10 per barrel in October, nearly touching 5-year averages. Gasoline cracks were up by $9 per barrel compared to the last year's same period and averaged at $14.8 per barrel in the third quarter of 2021.

Cracks in Med region were first lifted by gasoline export pen in Russia. Hurricane Ida-related outages in the U.S. resulted in a tight gasoline balance and further moved up the gasoline cracks within September. While showing slight correction in October, gasoline cracks remained at average $14.1 per barrel, which is still well above 5-year averages.

High-sulfur fuel oil cracks averaged around minus $12.4 per barrel and study in the third quarter of 2021, which was mainly due to the return of the capacity. HSFO showed a slight improvement with the increase in demand as an alternative of natural gas for power generation amid elevated price of the natural gas.

We observed HSFO cracks at minus $12.6 per barrel in October as underlying drivers remain same within the third quarter. As a final note, based on what we have observed in cracks in October and within the very first phase of November, elevated natural gas prices are also supporting cracks from 2 sides. On the demand side, some of the refined products are cheaper alternatives to natural gas, which increased their demand.

On the supply side, since natural gas is an important part of hydrocracking and the sulfurization processes in refineries refining costs are elevated, especially for the players with sport procurement contract. Supply reductions from these refiners to address this valuation is reducing refined product supply and boosting cracks.

Moving over to the crude price differentials. Widening pattern for crude financials continued in a softer pace in the third quarter, a simple average of main regional heavy grade financials widened to minus $2.9 per barrel in the third quarter of 2021 from minus 2.8% in the second quarter of 2021.

Relating to progress on a monthly basis, OpEx plus continued to increase production by 400 barrels per day -- per month and extended the validity of agreement concerning easing cuts until the end of 2022. Production amount taken as a base forecast will be 43.9 million barrels per day until April 2022 and 45.5 million barrels per day after May 22.

Looking forward, we continue to believe the outlook for heavy differentials will be remain hard to predict. However, meaningful correlation between OpEx plus production cut reductions and differentials continued in the third quarter of 2021 and may continue further given the agreed production cuts removal of 400,000 barrels per day per month.

Now let's take a look at Tupras operations, starting with production volumes. On the left-hand side, you can see our production volumes. Our total production in the third quarter of 2021 was 6.9 million tons. Production of third quarter was improved by 500,000 tons compared to last year, in line with better product demand. In the third quarter, our total crude distillation capacity utilization was 93% and other feedstock capacity utilization was 3%, reaching to 96% for the whole system.

Moving over to the sales. Let's start with the chart on the left-hand side. In the third [Audio Gap] sales were 32% higher compared to last year in the third quarter as a result of increased air travel due to the summer season and accelerated vaccination numbers. Due to the decrease in regional bitumen demand, our bitumen sales were lower year-over-year in the third quarter of 2021.

As you will remember, we stopped production in Batman refinery in June and July to manage our stocks more optimally. As you can see from the chart on the right-hand side, all 3 white products, diesel, gasoline and jet fuel focused growth year-over-year, indicating strong underlying demand for mobility in Turkey.

Now let's move to the financials. Let me start with the refining margin developments with this slide. During the third quarter of 2021, maintaining and refining margin improved by $4.8 per barrel compared to the third quarter of 2020 and reached at $2.8 per barrel. Sharp recovery in net margin compared to last year's same period is largely a result of record high gasoline and materially improved jet fuel crack margins.

Tupras net refining margin realized at $5.9 per barrel in the third quarter of 2021 increased by $3.8 year-over-year. This level is also the highest quarterly net refining margin since the third quarter of 2018. This performance was mainly driven by material improvement in mid distillate and record high gasoline cracks. Differentials were also wider compared to last year's same period, while inventory gains contributed to the strong margin performance as well.

Let's take a look at the [ P&L ] items in detail for the third quarter of 2021. Revenues more than doubled to around TRY 40 million in the third quarter of 2021. Total product sales were up by 19% versus last year, with sales increasing in all major products, excluding bitumen. Near 2x higher Brent price was the lead reason behind the growth in revenues accompanied by 18% depreciation in lira. Cost of goods sold also more than doubled year-over-year as well with higher production amount and higher Brent prices.

Gross profit significantly improved with growing cracks, better operational performance and inventory gains. Operational expenses increased by 23% year-over-year in the third quarter due to 18% depreciation in Turkish lira against U.S. dollar and inflationary adjustments. Income from equity investments, i.e., OpEx was recorded at TRY 246 million, mainly due to reimbursement of the Competition Board find recorded in 2020 as well as improved operational performance.

Net financial expenses have increased by 52% compared to the third quarter of 2020. While FX losses increased by TRY 775 million compared to last year, our net interest expenses fell by TRY 300 million and managed to reduce the burden of FX losses considerably.

As you can observe from the table, we have recorded TRY 1.2 billion of profit before tax in the third quarter of 2021. Below PBT, we have paid TRY 145 million of tax and our bottom line materialized TRY 988 million profit for the third quarter of 2021.

Now for the EBITDA. Our EBITDA at CCS materialized at TRY 2.2 billion due to year-over-year better crack margins, differentials and lower OpEx per barrel. We recorded around TRY 500 million positive inventory effect due to increase in Brent price and depreciation in TL. Consequently, our reported EBITDA materialized at TRY 2.8 billion, which is substantially better compared to the last year's same period.

Now let us take a look at the profit before tax bridge. As you can see from the waterfall chart, due to less inventory gain in the third quarter of 2021 compared to the same period of last year, the delta between 2 quarters is negative TRY 923 million, with proactive refinancing actions that we did, we continue to have lower interest expenses and recorded a positive contribution compared to last year's same period from net interest expenses at around TRY 300 million.

We recorded TRY 544 million more FX loss in the third quarter of 2021, mainly due to depreciation in lira. Crack margins significantly improved year-over-year in the third quarter of 2021 and positively contributed to the bridge with a sizable amount of TRY 1.3 billion. Due to $3 per barrel of wider heavy crude differentials year-over-year we have recorded TRY 754 million positive impact. As you may recall, differentials were positive at $0.1 per barrel in the third quarter of last year after members aggressive compliance to the OpEx production cut decision for the period.

Increasing capacity utilization rate and strong sales volume in the third quarter of 2021 resulted in TRY 707 million positive effect from the increase in sales. All in all, third quarter of 2021 profit before tax is materialized TRY 1.2 billion.

Now let's take a look at the financial highlights. In the third quarter of 2021, we have generated TRY 2.7 billion EBITDA, sizable year-over-year increase is largely due to better operational performance. Thus, EBITDA of 9 months of 2021 summed up to TRY 6.4 billion. As a result, we have recorded TRY 998 million net profit in the third quarter of 2021.

This brings our net profit for the first 9 months to TRY 1.9 billion. Despite the recovery we have observed in the third quarter, the first 9 months of 2021, altogether were still materially behind of pre-COVID terms, and we have continued to measure the performance to show the full extent of the divergence between these 2 periods.

In order to provide a more comparable representation of our leverage metrics, we continue to explore one-offs in relation with stores that we crack of which still are effective in our trailing EBITDA calculation. Within this context, when adjusted, we calculate TRY 3.4 billion one-off impact on our EBITDA in the fourth quarter of 2020 and in the first 9 months of 2021 together.

Adjusting for this, we calculate around TRY 10 billion adjusted rolling EBITDA from the fourth quarter of last year to the third quarter of this year. Using this as a base, our net debt-to-adjusted EBITDA materializes 0.9x as of the end of the third quarter of 2021.

Unadjusted rolling EBITDA also recovered strongly standing at TRY 7 billion, shows a much more normalized gearing level with 1.4x net debt to EBITDA. This indicates that the one-offs that we have adjusted have been accurate in terms of their impact and lifetime.

The current ratio is at 1x, which is in line with the last few years. And on the bottom right panel, we have the ROE. Once we use the adjusted EBITDA in our return on equity calculation, our adjusted ROE realized at 37% as of the third quarter of 2021. Let's continue with the details of our balance sheet.

Cash and cash equivalents and financial liabilities at the end of the third quarter was TRY 20.8 billion and TRY 30.1 billion, respectively. Net debt declined further quarter-over-quarter, both in Turkish lira and U.S. dollar terms and now standing at TRY 9.3 billion as of the end of the third quarter. On the working capital side, our payable days continue to remain sizably above the receivables and inventory days, creating a sizable operational funding source.

In the third quarter, the increase in Brent price and the depreciation of TL towards the end of the quarter had an additional effect on our trading trade payables as well. While it had an adverse effect on our FX losses, this unrealized FX rate effect supports working capital positively. Given the unique environment that created this effect in working capital, it is reasonable to expect normalization from this level in the coming periods. As we have guided before, ideally, working capital should remain around 0 level with underlying operational framework, ensuring the business funds itself.

The weighted cost of debt portfolio of Tupras are much better compared to the current market rates with proactive refinancing actions that we did. We continue to enjoy positive carry out of our outstanding cash position versus the short-term loss that we have. Moving forward to the exposure management. Regarding our FX exposure management, we ended third quarter with USD 12 million short position. Following the ongoing increase in Brent prices, our inventory amount reached at USD 1.9 billion in the third quarter of 2021. Hard currency cash position was at USD 506 million.

We continue to manage a sizable position of FX assets with forward as swap forward rates were more favorable compared to the U.S. dollar deposit rate. Trade payables continued their upward momentum and reached USD 3.4 billion, largely due to increase in Brent price, especially towards the period end. On the liability side, both our short-term and long-term debt decreased totaling to USD 1.8 billion.

We continue to employ strict FX exposure management policies, which targets the square position at period end. Now looking at the maintenance calendar for 2021. In parallel to the initial plan, majority of the activities were completed by the end of the first 9 months. The revamp at our FCC unit in Izmit is ongoing and is planned to be completed by early December. This has temporarily reduced our gasoline production at around 180 kilo tons in total for the whole year, and it will improve our gasoline yield afterwards.

Earlier, we had plans for 2 more maintenances in Izmit relating to the loop complex and vacuum units. However, these were also postponed to 2022. We have added a short regular periodic maintenance in a crude unit in Izmit at the fourth quarter to improve production performance, and this has been completed as well. There is no maintenance activities planned for our Kirikkale refinery in 2021.

On this slide, we have the revised expectations for 2021. Taking a look at the details, we revised our average net complex refining margin expectation from the range of [ 0 to 0.5% ] to a range of $1.5 to $2 per barrel in 2021. Our Tupras net refining margin expectation was also revised from $2.5 to $3.5 to $4.5 to $5.0 per barrel in 2021 as progression in cracks differentials are performing better than our initial expectations, while steady improvement in Brent prices also boosted inventory effect.

Regarding operations, our expectations are unchanged. We expect 25 million to 26 million tons of production, 26 million to 27 million tons of sales, while we expect capacity utilization to be between a range of 85% to 90%. We revised down our consolidated CapEx target slightly from USD 200 million to USD 175 million for 2021. We aim to spend at around 50% of that on sustainability focused energy efficiency and environmental projects.

In the light of our revised guidance for 2021, we would like to sum up some key figures in the first 9 months and compare them with our latest expectations. We had a net refining margin of $4.3 per barrel in the first 9 months which is just short of our full year guidance range of $4.5 to $5.0 per barrel.

Med refining margin was at $1 per barrel in the first 9 months. For now, this is below the low end of our guidance range of $1.5 to $2 per barrel. Capacity utilization increased to 84% with better utilization rate in the 9 months. It is just short of the full year guidance range of 85% to 90%. In the third quarter, we produced 6.9 million tons of products and sold 8 million tons.

Accordingly, first 9 months of production and sales summed up to 18.1 million tons and 19.6 million tons, respectively. We have spent USD 109 million for total investments in the first 9 months, revising down our guidance at USD 175 million. We have spent about 55% of our CapEx in sustainability focused investments in the first 9 months of 2021, higher than our target of 50% for the whole year.

This is all from our side. Thank you for listening.

[Unknown Executive]

Thank you once again for joining us this evening for the third quarterly call of 2021. Let me make a few closing remarks before we end the call. After almost 2 years with the COVID-19 crisis, I'm very happy to see a concrete improvement in mobility as a result of the increase in vaccination. Majority of our head office staff returned to work in our new headquarters in Central Istanbul.

We have also started face-to-face meetings with our investors. Globally, we saw the positive effect of vaccination on the demand. As Tupras [indiscernible], we were also were very strong this year, increased 19% year-over-year. Normalization in jet fuel demand continues with summer season and increasing tourism activity. For example, the number of foreign visitors arrivals to Turkey more than tripled in the third quarter compared to the previous quarter, and it has increased 140% compared to the same period of last year.

Our core profitability improved significantly with the improvement in demand and crack margins. Gasoline cracks hit last 5 years highs and jet cracks reached to $10 per barrel. I'm very happy to be back on track. We're getting very close to the pre-COVID days, I must say. Increase in crude oil prices supported our financials for some time now, but that's obviously a one-off improvement in cracks while the main total we have been following for normality.

As you all know, currently, one of the hot debates in the global energy industry is the sharp surge in natural gas prices as we have discussed during this call and in the Q&A session. While we are not -- as these advantages as our peers will procure their gas on spot tariffs. Our operational profitability is also adversely affected. While it is difficult to cast an opinion for the prices for the next year, I believe demand would begin to stand in first quarter '22 with warming rather conditions.

We expect the increase in natural gas prices to be at least partly reflected in cracks in our pricing reference region in the meantime. While closely tracking the developments in the oil and gas sector, one of the priorities for this year was to determine our road map for 2 strategic transformation. We are getting final internal approvals and expect to send you invite for an online event to be held during the last week of November in a very short time frame.

Finally, as always, we are available for your questions related to the company and business. I'm looking forward to meet you all soon in person. Until then, we hope that everyone will remain safe and sound. Have a goodnight.