Turkiye Petrol Rafinerileri AS
IST:TUPRS.E
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Turkiye Petrol Rafinerileri AS
Earnings Call Analysis
Q3-2023 Analysis
Turkiye Petrol Rafinerileri AS
The journey into Tupras' financial performance for Q3 2023 reveals the company has harnessed the tides of strong crack and improved capacity utilization to sail with a record-high net refining margin for the year. The winds of profitability were further filled by 8.4 million tonnes of sales, propelling the company to a net cash position of nearly $2 billion, courtesy of a splendid free cash flow of approximately TRY 65 billion.
Tupras isn't just content with basking in the sunlight of the present; it's planting the seeds for a greener future with solar power plants like the one in Kirikkale now operational with 12.6 megawatts capacity. The company is actively building its green portfolio, laying the groundwork for a larger 16.7 megawatts plant, and seeding progress with smaller installations that contribute to its strategic transition plan.
Crude oil, a ballet of supply and demand, saw Brent pirouette higher as Saudi Arabia and Russia led a choreograph of cuts. Despite a tumble in early October from a leap in U.S. inventories and slipping demand, geopolitical uncertainties keep the performance enigmatic.
The Turkish roads pulsate with vigor as road fuel demand accelerated by 12%, with gasoline leading the charge. The skies concurred with turbocharged jet fuel consumption, boosting Turkey into the top 10 nations for air traffic in the third quarter.
While diesel cracks experienced a slight decline to $31.5 per barrel compared to the previous year, they remained robust quarter-on-quarter. Jet fuel, an aviation artist, hovered at $30 per barrel, with Europe nearing pre-pandemic air travel numbers. Gasoline cracks, in their essence, averaged at $28 per barrel in the quarter, painting a stable picture for the product mix.
The production lines throbbed with life, churning out 7.1 million tonnes as the company operated at nearly full capacity. The sales portfolio blossomed with gasoline and jet fuel sales soaring by 26% and 23% year-over-year, compensating for the contraction seen in diesel and bitumen sales.
Concocting a potion of TRY 185 billion in revenue, approximately USD 7 billion, the brew was strengthened by a 50% currency depreciation even as Brent prices dipped by 14%. The cost of goods simmered down by 16%, increasing the gross profit to a robust TRY 33 billion.
The financial muscles bulged with TRY 30 billion of EBITDA, flexing a 7% growth over the previous year, and net profit almost doubling to TRY 21.3 billion. A disciplined approach to working capital management and EBITDA generation contributed to a sturdy net debt-to-EBITDA ratio of negative 0.7x as of the quarter's end.
Peering into the crystal ball, Tupras beholds clearer skies ahead with net refining margin forecasts revised from $10-$11 per barrel to $11-$12 per barrel on the heels of stronger-than-anticipated crack margins. The commitment to invest wisely is firm, with USD 360 million earmarked for CapEx focused on sustainability. Despite a slight lag in capacity utilization, Tupras expects to catch up and end the year within its guidance range, while meeting 60% of its ESG-focused investment target.
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Ladies and gentlemen, thank you for standing by. I'm Poppy, your Chorus Call operator. Welcome, and thank you for joining the Tüpras Conference Call and live webcast to present and discuss the third quarter 2023 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.
Thank you. Hi, everyone. Good evening to all from Tüpras 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 2023. Then we will continue with the Q&A session.
I'll 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 third quarter of 2023. 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 2023. As you will see on the top chart, we have recorded highest net refining margin of 2023 in this quarter. Strong crack and improved capacity utilization were the key factors driving this performance. We have ended the quarter at 8.4 million tonnes of sales, which also contributed to profitability growth.
On the mid row, we have the free cash flow generation. In the third quarter of 2023, we have recorded TRY 57.4 billion of EBITDA with TRY 11.7 billion improvement in working capital requirements and TRY 4.6 billion of CapEx. We ended the quarter with near TRY 65 billion of free cash flow and almost USD 2 billion of net cash position.
At the bottom chart, we share an update about the zero carbon electricity investments on our refining sites as part of our strategic transition plan. You can see actual photos of our solar power plants first phase being operational in Kirikkale with 12.6 megawatts capacity. Installations for 5-megawatt capacity in Batman were also completed and are ongoing for 16.7 megawatts capacity in Kirikkale.
The capacities that we currently have operational are and under construction has licenses and we are selling produced power to the grid and creating revenue.
As you know, we covered this section in 2 main components as developments in global oil markets and development in Turkish market. Let's start with the top-left box.
Starting July, Brent showed an upward trend due to voluntary cut decisions of Saudi Arabia and Russia. This moment continued as these production cuts were extended alongside increased Chinese oil demand and Polish inventory trends. In early October, Brent dropped with large increase in U.S. gasoline inventories and low implied demand and currently most primarily with elevated geopolitical risks.
Top right chart shows oil demand and refinery utilization rates in Europe. Starting with the third quarter, refinery utilization rate in Europe started to come down with outages and slowdown in refinery processes due to the elevated temperatures in the region. On the contrary, oil demand increased with seasonal support that pushed down product inventories and supported cracks.
Now taking a look at the bottom row, Turkish market. Based on the 7 months data, road fuel demand was 12% higher than last year with robust gasoline demand and resilient diesel consumption. Ongoing lower pump price of gasoline versus diesel continues to shape new passenger car choice towards gasoline fueled cars.
The bottom right chart shows evolution of jet fuel consumption in Turkey in 7 months that hit the highest level since August 2019. Turkey was among the top 10 countries in terms of air traffic numbers in the third quarter. According to Eurocontrol, Istanbul Airports was the busiest airport in Europe during summer.
In the third quarter of 2023, diesel cracks averaged at $31.5 per barrel, which was lower than the previous year, and they were significantly higher quarter-on-quarter due to ongoing supply concerns as well as reduced production in Europe. High temperatures and outages also led to lower refinery utilization rates, while demand remains elevated.
Jet fuel cracks averaged at $30 per barrel in the third quarter and moved in line with mid-distillate pool. European flight numbers reached 93% of September 2019 levels according to Eurocontrol data.
Europe experienced a seasonal peak in jet fuel demand in August and increased air travel in China during the summer season further supported the global product balance.
Gasoline cracks averaged at $28 per barrel in the third quarter. marking an increase from the previous year's $17 per barrel. This increase was attributed to switching into summer grade, robust demand during the high season and the tight supply environment.
High sulphur fuel oil cracks averaged around minus $8 per barrel in the third quarter of 2023, showing improvement year-over-year. OPEC's production cut decision played a significant role in supporting HSFO cracks and strong feedstock demand from United States and Asian refineries also contributed to this as well.
In October, mid-distillates were positively impacted by Russia's export ban, while gasoline cracks softened switching into the winter grade. High sulphur fuel oils discount wider with higher Brent as steady on mining of OPEC cuts has already been priced there.
Moving over to the crude price differentials. Heavy crude differentials continue to narrow in the third quarter as a result of lower crude supply after OPEC plus second cut decision. In terms of our of the slate, the impact has been somewhat mirrored with the help of wider differentials offered by Basrah Heavy in this quarter.
Today, I have included the financial outlook for the rest of the year point out further narrowing with the controlled crude supply conditions. Sales, potential developments regarding regional conflicts, decisions of oil producers, macro indicators and their influence on demand outlook will play a crucial role in determining the market condition.
Now let's take a look at Tupras operations, starting with the production volume. On the left-hand side, you can see our production volumes. Our total production in the third quarter of 2023 was 7.1 million tonnes. Heavy maintenances were completed during first half and some minor checkups were done this quarter ahead of next year's through maintenance. Our total crude distillation capacity utilization was 89%, and other feedstock capacity utilization was at 10%, reaching to 99% for the whole system in the third quarter of 2023.
Moving over to the sales. Let's start with the chart on the left-hand side. In the third quarter, our domestic sales and international sales reached to 6.7 million and 1.7 million tonnes, respectively, summing up to 8.4 million tonnes in total. Our domestic sales were up by 2% year-over-year, 7% contraction in domestic diesel sales and 15% weaker bitumen sales were more than covered by strong performance in gasoline and jet fuel that increased by 26% and 23% year-over-year, respectively.
Now let's move to the electric operations. This slide summarizes electricity production and sales activities of Entek in the third quarter of 2023. Entek produced a total of 447 gigawatt hours of electricity in the third quarter of 2023. Production growth versus last year remained limited due to lower hydrology this year.
In the third quarter, 68% of the electricity generated was from hydro power, 13% was from wind power and the rest was CCGT. Out of 365 gigawatt hours of zero carbon electricity produced, around 21% was sold to feed in tariff, which is $73 per megawatt hour and the rest was sold to the spot market.
Now let's move to the financials. Now let's take a look at the P&L items in detail for the third quarter of 2023. Revenues came in at TRY 185 billion, equivalent to almost USD 7 billion in the third quarter of 2023. The year-on-year change in revenues is mostly driven by 50% depreciation in Turkish lira as Brent prices decreased by 14%, while stronger cracks were also supportive for the quarter.
Cost of goods sold decreased by 16% in parallel with year-over-year decrease in Brent prices and lower energy costs. National gas tariff price for Tupras in the third quarter of '23 is 22% lower than last year's third quarter tariff.
Gross profit increased to TRY 33 billion from TRY 19 billion with higher cracks and lower energy costs. Increase in operational expenses were mainly due to higher personnel expenses, provision for donations related to the earthquake release and increase in logistic expenses parallel to Turkish lira depreciation.
Loss from other operations, which mainly stems from Turkish lira devaluation of payables were 43% lower than last year. [indiscernible] dollar versus lira compared to last year resulted in less FX impact on trade payables. TRY 1 million income was recorded from equity investments coming dominantly from OPEC.
In the third quarter, TRY 756 million of net financial expenses were recorded with TRY 2.1 billion of negative FX impact and TRY 1.5 billion of net interest income. At the conclusion of this, we have recorded TRY 21.3 billion of profit before tax in the third quarter of 2023.
Below profit before tax, we have recorded TRY 5.7 billion of tax due to higher statutory tax base. And as a result, we have recorded TRY 21.3 billion of net income in the third quarter of 2023. Our EBIT for CCS materialized at TRY 26.8 billion year-over-year. The increase was mainly driven by strong crack margins. TRY 580 million of this EBITDA was recorded from our electricity production company Entek.
While our hedging methodology helped us to mitigate the Brent price increase for approximately 2/3 of our crude oil inventory, we recorded around TRY 3.3 billion of positive inventory effect mainly due to depreciation in Turkish lira. Consequently, our reported EBITDA materialized at TRY 30.1 billion, which almost double of 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, TRY 8 billion of positive impact came from stronger cracks while heavy crude differential narrowed year-over-year. Energy costs were lower with lower natural gas tariffs. Total positive impact was TRY 1.5 billion. Contribution from inventory impact was also positive with TRY 2.9 billion due to depreciation in Turkish lira. Net interest and FX effect was positive with TRY 2.6 billion as our net cash position increased further in this quarter while FX losses were limited as well. All in all, third quarter of 2023, profit before taxes materialized at TRY 27.1 billion.
Now let's take a look at financial highlights. In the third quarter of 2023, we have recorded TRY 30 billion of EBITDA, 7% above of last year's same period. Accordingly, we recorded TRY 21.3 billion of net profit in the third quarter, almost doubled year-over-year. We maintained our net cash position with strong EBITDA generation and disciplined working capital management and with ongoing deleveraging of our net debt-to-EBITDA materialized debt negative 0.7x as of the end of the third quarter of 2023.
With strong cash generation, our current ratio remains same as 1.3x. And on the bottom right panel, we have the return on equity. As you can see, the total equity continues to remain at a very high level with 90% as of the end of the third quarter.
Now 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 87 billion and TRY 33 billion, respectively. We ended the quarter with TRY 53.3 billion of net cash mainly with the help of strong operational cash generation.
On the working capital side, with the help of the measures that we have been implementing and with lower volatility in prices, our working capital requirement turned negative to TRY 6.9 billion at the end of the third quarter. We ended the quarter with TRY 87 billion of cash position, more than double of the outstanding debt.
Now looking at the maintenance calendar for 2023. We operated with 99% utilization rate in the third quarter with major maintenances were completed within the first half. In the third quarter, we operated with higher -- materially higher capacity utilization compared to the first half. We will have a seasonal maintenance for Batman refinery in the fourth quarter.
Now on this slide, we have our expectations for 2023. Looking into the details with better-than-expected crack margins, we are revising up our net refining margin estimate from $10 to $11 per barrel to $11 to $12 per barrel. Regarding sales, production and capacity utilization figures, there are no change in our expectations.
Our consolidated CapEx target for 2023 did not change and is at USD 360 million. This remains in line with our previously announced long-term strategic transition plan, and we will spend around 60% of this CapEx all sustainable to focused energy efficiency and environmental projects.
Before we conclude on this slide, we would like to sum up some of the key figures for the first 9 months and compare them against our revised 2023 guidance. We had a net refining margin of $13.3 per barrel in the first 9 months of 2023, which is above of our full year revised guidance range of $11 to $12 per barrel. Higher-than-expected cracks were the main reason of outperformance.
Capacity utilization was at 84% in the first 9 months of 2023, which is slightly below of low end of our guidance range of 85% to 90%. As explained earlier, with higher utilization in the fourth quarter, we expect it to remain within the guidance range.
In the 9 months of 2023, we have produced 18 million tonnes and sold 22 million tonnes of product. We have spent USD 210 million in the first 9 months of 2023. We had about 50% of our CapEx in sustainable focused investment areas, lower than our target of 60% for the whole year due to tanker investments made by DITAS.
As our transition-related investment continues, we expect to meet our 60% ESG-focused investment guidance for the full year. This slide concludes our presentation, and we can now proceed to Q&A session.
The first question comes from the line of Lamb, Jonathan with Wood & Co.
Congratulations on a great set of results. I was just looking at the big pile of cash that Tupras has at the moment. And I wonder if we're going to see -- assume some ideas on how that might be invested or returned to shareholders because you seem to be generating large amounts of cash every quarter at the moment.
Thank you, Jonathan. It's Dogan here. Yes, the cash pie up is slightly above $3 billion at the moment. Part of it is obviously seasonal. And mind you, there is still a dividend distribution, which happened in the first day of this month. So that will be decreased from that amount. We're spending around $350 million for CapEx at the moment, and it will be the run rate going forward during our transition period. But there might be years that we might spend a bit more on CapEx, but there are obviously limitations on new business areas.
We are very keen on building up a lot of electricity -- green electricity capacity at the beginning because it's still feasible. Probably when it comes to hydrogen investments, i.e., the electrolyzers, it's not feasible yet. Hence, we are expecting it to happen as we get closer to 2030.
In the case of SAF. Yes, we are still in the planning phase, detailed engineering phase of our SAF production plant. But I'm not expecting anything happening on the ground in our refineries in the short period of time, which would mean another -- I mean, less spending for that -- for the coming year.
Our dividend distribution target is 80% on average. Mind you, we distributed slightly more than that this year with the availability of cash. But I must say you know very well that the cash has never been the bottleneck for dividend distribution in the case of Tupras. I mean the distribution is usually kept by the limitations on the income -- annual income as per Turkish regulation.
Therefore, in the long run, yes, we are expecting still good levels of cash. We said net debt-to-EBITDA would always be lower than 1, but we need to accept the fact that at the moment, there is a bit of a cash pile up, not a one-off, but slightly higher than long-term targets.
And working capital requirement is negative at the moment. In the last couple of quarters, they were positive. So it is a bit volatile depending on the mix. It's not because we changed the terms with any of our customers or suppliers. So we need to keep some cash for that purpose as well.
And last but not least, obviously, being in this part of the world, although we got a very good rating upgrades from the rating agency, we still quite -- have a quite a long way to go until we -- I mean, we are upgraded to investment grade. Until that happens, having -- the more cash you have, the more somewhat comfortable you are in an emerging environment.
The next question comes from the line of Kishmariya, Anna with UBS.
Congratulations with a very strong set of results. I have one question on green energy portfolio. And regarding this 55 megawatts of approved capacity, which is at planning phase. Just wanted to check when can we expect some kind of details on this project?
Thank you for your question. I mean these investments are quite different to investments in refining. For they usually happen in a matter of months once you have the green light from the authorities. So those investments that you have mentioned are waiting for the authorization for the licenses. Once we have those, I guess -- I mean it will be finished in a matter of -- I mean, a maximum of couple of quarters.
We have a follow-up question from the line of Lamb, Jonathan with Wood & Co. Mr. Lamb, can you hear us?
Sorry, I was on mute. I noticed that the contribution from OPEC increased substantially over the same quarter last year. What's the reason for that?
Good question, Jonathan. They are performing fairly better this year. There is a bit of a contribution from stock gains. Remember, that was tax adjustment in special consumption tax recently and that helped Turkish distributors who had their stocks.
So it's a little bit of a one-off?
Well, partly, I would say.
Okay, partly, but partly in normalization?
Yes.
The next question comes from the line of Bhat, Nikhil with JPMorgan.
I just have one, looking at the currency breakdown of your cash holdings, the portion of cash that you're holding in Turkish lira or at least held at the end of third quarter is quite high compared to recent quarters. I was just curious, is this because of the dividend payment upcoming? Or is that something we should expect going forward?
Thank you. Another very good question. Yes, you're completely right. There is an increase in our Turkish lira holdings because in the beginning of the year, that was less of an availability in forwards in Turkish market, whereas after the election, the forward market is open. And especially right after the election, during the initial stages of the summer, the rates for forwards were very favorable if you were expecting a rate hike.
So we capitalized on that, and we used more forwards than getting straight hard currency ourselves. Therefore, it created a buildup of Turkish lira, which gets a favorable rate in case of deposits. Therefore, we somewhat balance our FX exposure more with forwards at the moment than we did in the beginning of the year.
Sorry, just to follow up. Is this a sort of proportion that we should expect Tupras to maintain going forward? Or will it be variable and you look to be opportunistic depending on how the forward markets are?
Exactly. I mean if you were to hedge yourself with forwards in the beginning of the summer, for a long period of time, it would create you an arbitrage, which was the case in the case of Tupras. In return, you get deposit rates in Turkish lira for that period.
If we still have favorable rates in forwards,in the future, we would definitely go with forwards. If not, we would switch them to hard currencies ourselves. Would definitely depend on the arbitrage, it will be opportunistic, as you have mentioned.
Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.
Thank you. I take it as the result being appreciated as we had less of questions this time. But again, thank you once again for joining us this evening for the quarterly call. But before we conclude, I'd like to share a few closing remarks as well.
It has been another remarkable quarter, marked by record high profitability and a robust cash position. During the first half of the year, we have completed the majority of maintenance activities, allowing us to close the third quarter with higher capacity to ratio.
This comes at a time when many European refineries were experiencing lower runs, while we have benefited from a strong crack environment and increased seasonal demand.
Looking ahead to the financial -- final quarter of the year, we acknowledge the rising geopolitical risks and increasing uncertainties. As we transition into the winter, we anticipate some softening in the cracks, while we are confident in staying within our guidance range.
During our presentation, we shared our significant progress in expanding our zero carbon electricity portfolio, reflecting our commitment to our transition plan. We will continue to work on our plan and disclose developments accordingly. We have also successfully resumed the second dividend to our shareholders during this quarter, and we still continue to have a very strong cash balance.
I appreciate your time and trust in our company. Thank you all for listening to us today and wish you a great day ahead.