Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I am Girlie, your Chorus Call operator. Welcome, and thank you for joining the Tupras conference call and live webcast to present and discuss the fourth quarter 2020 financial results.

At this time, I would like to turn the conference over to Mr. Dogan Korkmaz, CFO; 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, 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 fourth quarter of 2020. Then we will continue with the 2021 guidance and Q&A session.

I'll now 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 2020 and the fourth quarter. Then we will go into detail for each subject on the following slides.

Let's start with a brief summary of the highlights for 2020. As we all know, it was a very exceptional year. We have seen numerous unprecedented events on both demand and supply side, which has affected our industry deeply.

Looking at the demand side. First, world oil demand declined around 10%. Negative crude prices were seen for the first time in history. Jet fuel cracks dropped below 0 for the first time and remained negative for 6 months in a row due to wide flight restrictions all over the world. Global crude and product inventories reached to peak levels and resulted in negative crude prices for the first time in history.

When it comes to the supply side, OPEC targeted to take the oil supplies of the market to boost oil prices and settled on sizable production costs. During the third quarter, this action has resulted as the narrowest heavy crude oil differential of the decade. All refiners, including Tupras, try to adapt to all these changes throughout the year. We can clearly say COVID-19 left its mark on the year 2020.

Let's move into the brief summary of the highlights of the market for the fourth quarter. In the fourth quarter of 2020, mid-distillate cracks showed slight improvement compared to the third quarter. Jet fuel cracks finally turned to positive. The key reason for this was normalization of the stock levels and the gradual recovery of the demand. Heavy crude differentials slightly widened quarter-over-quarter. However, they are still narrower than the 5-year average as a result of reduced output by OPEC+ numbers. On a positive note, Brent prices improved towards the year-end, especially with the constructive vaccine news.

Baseline gasoline demand remains resilient in Turkey with the uninterrupted infrastructure and logistic activities and performance for private vehicles in transportation during COVID-19. Turkish lira has appreciated in the fourth quarter of 2020, resulting in FX gains below EBITDA for Tupras. On the other hand, Turkish lira's appreciation limited our inventory gain in the fourth quarter of 2020.

Now let's take a look at Tupras' highlights in detail for the fourth quarter of 2020. Jet crack margins turned to positive figures for the first time since April. This has also been supported for diesel cracks as the weakness in diesel was essentially driven by jet fuel demand, related pulp in the first place. On the other hand, gasoline cracks softened slightly with seasonality, while demand originated from private transportation continue to support gasoline cracks. Now surprisingly, product and sales place were rewritten with COVID-19. Tupras remained competitive and proactively changed its product mix to accommodate to these changes. We decreased our jet fuel production and compensated this with higher diesel and bitumen sales.

On the last chart at the bottom, we have the development in Brent prices and U.S. dollars versus Turkish lira rate. As you can see, Brent prices increased almost 3% on average in the fourth quarter. However, due to Turkish lira's depreciation in the same period, our inventory gains remained limited. Some portion of this gain -- these gains will flip into first quarter of 2021, as upward trend in Brent prices goes on. On the other hand, Turkish lira's appreciation resulted in FX gain in both nonoperational items and financial expenses.

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 market and developments in Turkish market.

Let's start with the top left part. This chart represents jet kerosine stocks for the 3 major OECD countries and change in number of global commercial flights in 2020 compared to 2019. Both of these lines indicate that, that was a normal vision in the fourth quarter of 2020. Year-over-year change in the number of commercial flights have been improving, while jet kerosine in mature levels have also been declining. This picture broadly summarizes why jet crack margins turned to positive, and underlying trends indicate that this trend should continue in 2021 as well. In the top right chart, we see mid-distillate stock levels of 3 major OECD countries. As you can see, inventory is piled up from March to August. However, during fourth quarter of 2020, inventory levels entered the 5-year average range, and normalization started.

Now taking a look at the bottom row, Turkish market. Bottom left part shows us U.S. dollars versus Turkish lira in 2020. We observed that Turkish lira appreciated in the fourth quarter, especially gaining momentum towards the end of December, following the rate hike by Central Bank of Turkey.

Finally, we do have the Turkish fuel market data for the first 11 months on the right-hand side. With 1.5% increase versus last year, we can say that diesel consumption in Turkey is pretty resilient. Even during the most distressed period of the COVID-19, its performance was still strong with the help of uninterrupted food and essential goods transportation and logistics demand at the same time. Moreover, diesel demand has been posting positive year-over-year growth since June on a monthly basis with underlying robust business activity.

Decline in domestic jet fuel demand has been easing since April. However, it has contracted by almost 55% in the first 11 months of 2020 compared to the same period last year. Even though a number of domestic and international flights are down compared to last year, Istanbul airport is one of the less affected airports by COVID-19 in Europe. Gasoline demands has also been positive since July. It was 4% higher on average year-over-year during October and November 2020, with higher preference for private cars. Mind you, domestic gasoline demand for the first 11 months of 2020 was down by 1.1%, mainly due to contraction during April and May, which were the peak of the lockdowns in Turkey. As an additional note, asphalt demand continued to be strong in the fourth quarter of 2020 with ongoing highway and other infrastructure investments.

Let's take a look at the crack in comparison to last year's fourth quarter on this page. Even though crack margin environment improved quarter-over-quarter in the fourth quarter of 2020, excluding gasoline, they were still weak with respect to 5-year averages. Diesel cracks were down by almost $10 per barrel compared to last year's fourth quarter and averaged at $4.8 per barrel in the fourth quarter of 2020.

Diesel cracks increased slightly quarter-over-quarter as we started to see limited normalization in stock level. The key factors behind elevated supply levels were refineries applying swing cuts in their production and switching their jet fuel output to diesel as much as possible. This has resulted in elevated supplies and compressed diesel cracks through the year, including the fourth quarter. Normalization in inventory levels continue to support diesel in the first quarter of 2021 as well.

Jet fuel cracks averaged at $1.9 per barrel in the fourth quarter of 2020 and posted 11.2%, $2 per barrel decline compared to fourth quarter of 2019. Jet fuel cracks turned positive after 6 months in October. However, they are still weak compared to 5-year averages due to reduced number of flights globally.

On the other side, low temperatures in Asia due to winter season supported jet and kerosine demand and, therefore, cracks in the fourth quarter as well. Jet fuels remains on a recovery trans so far in the first quarter of '21 as well.

Gasoline cracks were down by $4 per barrel compared to last year's same period and averages at $4.6 per barrel in the fourth quarter of 2020.

Mobility declined in the fourth quarter due to car fuels being active again and along with the low season as usual. On the other side, people's views of their own costs continue to structure support gasoline cracks. As a result, gasoline has been gaining momentum lately and has averaged around $6.2 per barrel in January 2021.

Finally, high sulfur fuel oil cracks averaged around minus $5.2 per barrel in the fourth quarter of 2020 and increased by almost $23.07 per barrel compared to last year's same period. HSFO crack continues its strong performance and reaching historic highs in the fourth quarter of 2020 again. It has even outperformed the peak of the last 5 years despite the IMO 2020 during demand loss. This strong HSFO trend continued in the first month of 2021 as well and averages at minus $6.4 per barrel in January.

Moving over to the crude price differentials. After OPEC members have reached an agreement on reducing their production by a significant amount, differentials in the third quarter became historically narrow. In the fourth quarter of 2020, we observed that the trend reverted once again, with a slight gradual widening pattern. Simple average of main regional heavy crude oil differentials against the Brent price per barrel, as shown in the graph above, declined to negative 0.8% from the 0.1% positive in the fourth quarter. This widening trend also continues in January. However, the differentials are still quite narrow with respect to long-term levels in general.

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

Now let's take a look at Tupras operations, starting with the production volume. On the left-hand side, you can see our production numbers. Our total production in the fourth quarter was around 6.1 million tons. And with that, our total production for 2020 sums up to 23.4 million tons. Production of the fourth quarter of 2020 was lower than last year due to negative effects of COVID-19 on demand. In the fourth quarter of 2020, our total crude deflation capacity utilization was 78%, and other feets of capacity utilization was at 6%, reaching to 84% for the whole system. All in all, our capacity position in 2020 was realized at 82%, which is slightly above our full year guidance range of 75% to 80%.

Moving over to the sales. Let's start with the chart on the left-hand side. We generated total sales of 6.3 million tons in the fourth quarter of 2020. Adverse effect of the COVID-19 update was higher on export volume compared to domestic sales, as we have focused on increasing marginal profitability while supplying for the local demand completely. In the full year of 2020, our domestic sales and exports reached to 19.8 million and 4.7 million tons, respectively, summing up to 24.5 million tons of total sales. As you can see from the chart on the right, which presents the domestic sale for the selected products, jet fuel was the most severely affected product in line with expectations. However, the decline in domestic jet fuel sales was mostly offset by higher diesel and bitumen sales on the back of robust recovery in mobility and strong infrastructure activity.

Now let's move to the financials. Let me start with the refining margin developments with this slide. During the fourth quarter of 2020, Mediterranean refining margin increased by $1.8 per barrel compared to fourth quarter of 2019 and settled at negative $0.1 per barrel. Improvement in net margin compared to last year's same period is the result of low base created by IMO-related historic drops in HSFO cracks last year. Tupras net refining margin realized at $0.8 per barrel in the fourth quarter of 2020. OPEC per barrel dropped to $4.9 per barrel in the fourth quarter of 2020 compared to $6.2 per barrel in the same quarter of last year, with the fundamental cost advantages of Tupras. As you know, Tupras expenses are Turkish lira based, and we have lower logistic costs.

The decline in net refining margin compared to last year's same period, was driven by the historically weak crack margin environment and narrow differential. About $0.7 per barrel positive contribution from inventory effect was unable to offset the driver, and net refining margin materialized at $0.7 per barrel. As for the P&L items for the fourth quarter of 2020, our revenues decreased by 8% to around TRY 20 billion. This was mostly due to 30% lower Brent price and 10% decline in sales volume as well as weaker crack environment. 36% depreciation in Turkish lira versus last year's fourth quarter compensated a large portion of the drop. Our COGS also dropped by 6% with the decrease in Brent price and at around 0.7 million tons of lower production amount. Negatives from vehicle cracks and net over differentials were partially offset by demand for a gain in the fourth quarter. As a result, our gross profit declined by 44% and materialized at TRY 593 million in the fourth quarter of 2020.

Our operational expenses increased only by 1% in the fourth quarter of 2020, even though inflation in the whole year was 14.6%. This is largely driven by fundamental cost advantage of Tupras and additional OPEC measures that we have implemented in 2020. Due to Turkish lira appreciation at around TRY 0.5 in the quarter, the income from other operations materialized at positive TRY 562 million versus the TRY 464 million of loss in the fourth quarter of 2019.

We have recorded TRY 120 million of positive contribution from equity investments, i.e., OPEC. This was mainly on the back of inventory gains and FX gains by the company. Our net financial expenses were up by 62% compared to the fourth quarter of 2020. While we had FX gains due to the appreciation in Turkish lira in the fourth quarter of 2020 compared to last year's same period, net interest expenses increased due to elevated interest rates. As you can observe from the table, we have recorded negative $113 million of profit before tax in the fourth quarter of 2020. We have recorded about TRY 136 million of positive impact from tax cost carry forward. And consequently, our bottom line materialized at TRY 376 million of net income for the fourth quarter of 2020.

Now for the EBITDA, our EBITDA CCS materialized at TRY 256 million due to weak operating environment in the fourth quarter compared to last year. We have recorded around TRY 127 million positive inventory effect due to recovery in Brent prices. With the help of this inventory gain, our reported EBITDA materialized at TRY 383 million, which is 48% below 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, due to $3 per barrel narrower heavy crude differentials compared to last year's same quarter, we recorded TRY 380 million negative impact. Crack margins, obviously, were extremely weak and resulted in a TRY 303 million gap compared to last year's same quarter. Lower production amounts with respect to last year was also another unsupportive factor. This was largely due to lack of margin profitability beyond certain capacity utilization of the company. FX gains booked in this quarter pretty much was like the reversal of the same period of last year's fourth quarter and made the biggest contribution to the profit before tax delta compared to last year.

Inventory gains were also supported and contributed to TRY 270 million to the difference between 2 periods. Under other items, we do have positive contributions from OPEC and our other subsidiaries. All in all, the fourth quarter of 2020 profit before tax is materialized at negative TRY 130 million.

Now let's take a quick look at the 2020 full year profit before tax bridge. As expected, because negative impact derived from significantly lower cracks in the 2020 due to COVID-19 impact on demand. Simple leverage of jet, diesel, gasoline and HSFO crack margins declined to $1.2 per barrel in 2020 from $5.6 per barrel in 2019, and resulted more than TRY 2 billion loss from that. Lower production as a result of vehicle cracks and lack of demand in jet fuel with respect to last year was another unsupportive factor for 2020.

Inventory effect was also negative for the full year of 2020, mainly because of the sizable inventory loss that we have recorded in the first quarter of 2020. Even though we booked inventory gains in the third and fourth quarter, total effect remained negative as Brent did not fully recover back to 2019 levels. Differentials were slightly narrower than last year. Average differentials in 2020 were at negative $1.5 per barrel, while 2019 average differentials was negative at $1.6 per barrel. On the other side, operational profitability of our subsidiaries supported the results. All factors combined, 2020 profit before tax was materialized at negative TRY 3.8 billion.

Now let's take a look at the financial highlights. In 2020, we have generated TRY 545 million of EBITDA. Sizable year-over-year drop is largely due to COVID-19 related weakening in demand and product margins. As a result of weak EBITDA and Turkish lira depreciation, we have recorded TRY 2.5 billion net loss in the full year 2020. As discussed earlier, we believe 2020 presents a quite unique operating environment to our industry with historically weak crack margins and sharp drop in demand.

In order to present a more comparable representation of our leverage metric, we have classified 3 one-offs in our EBITDA calculations in this presentation. Although largely recovered in the following quarters, we set aside TRY 457 million of inventory loss as a one-off due to its nature and severity, especially in the early quarters. At Tupras, we operate in a diesel short growing emerging market countries. Hence, modus operandi of Tupras is to run around 100% capacity utilization rate as a base case. Due to unprecedented demand drop in the second quarter, we had to shut down Izmir refinery for 2 months and reclassified its impact on our financials as one-off due to the nature of the event.

Due to elevated stock levels, mid-distillate cracks have seen record low levels in the second half of 2020. Being designed a supplier of our mid-distillate short country, Tupras has been exposed to historically weak cracks and weight average crack margin of Tupras have been resulted materially below its past 10-years average level. When adjusted for this gap against the average of the past 10 years, we calculated around TRY 3.3 billion one-off impact on our EBITDA in the second half of 2020.

Summing all these together, we reached an adjusted EBITDA level of TRY 3.9 billion for 2020. Using this as a base, our net debt to adjusted EBITDA materialized at 2.4x in 2020. Our current ratio is at 1.1x, 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 rolling ROE materialized at 1% as of the end of 2020.

Now let's continue with the details of our balance sheet. As a start, we would like to highlight that our key strength is sound financial policies and a very strong balance sheet as a result of this. Our cash and cash equivalents and financial liabilities at the end of 2020 was TRY 20 billion and TRY 29 billion, respectively. Net debt is at TRY 9.4 billion as of the end of 2020. The key factor behind the reduced net debt is significantly extended payment terms to our suppliers, especially for spot cargoes, which have extended our payables to normalized levels. We have also accelerated collection of receivables and reduced payment dates for some of our products. And we have also used factoring to increase cash levels whenever we find [ better ] rates between factoring against deposit rates.

As you may see from the redemption schedule on the right-hand side, the majority of our short-term debt is in Turkish lira terms. Early in the year 2020, we have renegotiated some of our short-term loans to lower rates and extend payer maturity. We would also like to remind you that with quite favorable rates we have fixed at the beginning of 2020, this high level of cash in hand does not lead to any negative carry, way beyond the credit interest charges. Beyond 2021, we also continue to diversify our funding portfolio with additional Turkish lira bond in the first quarter of 2021. You are going to see portion of Turkish lira funding as a material amount in 2021 as well. On the bottom left, as we have discussed above, our working capital improved with better payables and receivables management.

Looking forward, some of the improvements that we have employed, such as supplier financing should positively contribute to working capital requirement. However, as we have guided before, ideal working capital should remain around 0 level with underlying operational trend work and ensuring funding the business itself.

Regarding our FX exposure management, due to normalized market conditions and stabilized Brent prices, our inventory amount normalized back to USD 984 million in the fourth quarter of 2020. Our hard currency cash position is reduced to USD 105 million as swap forward rates were more favorable compared to U.S. dollar deposit rates. As a result, we have decided to manage the foreign exchange rate through derivative instruments rather than depositing it in hard currency. Our payables climbed to USD 1.8 billion due to expansion in our payable terms and increase in Brent price. We continue to employ strict effective closure management policies, which targets a close position at period end.

Before we head into our guidance for 2021, we would like to sum up some of the key figures for -- from 2020 and compare them with our latest expectations for the year. We had a net refining margin of $1.3 per barrel in 2020, landing slightly above our full year guidance at around $1 per barrel. Net refining margin was at negative $0.2 per barrel for the full year in 2020, was just below our guidance at around $0 per barrel.

Our capacity utilization was at 82% for the whole year, slightly above the full year guidance range of 75% to 80%. In 2020, we have produced 23.4 million tons and sold 24.5 million tons against our existing full year guidance of 22 million tons of production and about 23 million tons of sales. We have spent USD 113 million for refining investments in 2020, in line with our guidance at USD 115 million. In addition, we have spent nearly $40 million for the investment in our shipping and railway subsidiaries, summing up to almost USD 153 million of total CapEx in 2020.

Now looking at the maintenance calendar for 2021. As you may remember, last year, we had to review our schedule frequently due to the extraordinary operating environment. We have to proactively adapt to the volatile market dynamics while ensuring the health and safety of our employees as COVID-19 related safety measures played a significant role in our planning. Our maintenance schedule for 2021 is also shaped by similar considerations besides seasonal norms. Nevertheless, we expect the majority of the activities to be over by the end of the first quarter of 2021.

Going over to the details, crude distillation units in our bottling refinery, which is mainly used for meeting the bitumen demand, has been going through some minor maintenance as in line with seasonally softer bitumen consumption. As we had discussed earlier in December, production in our refinery -- in Izmir refinery has been halted as of January 1 in order to carry out some event and maintenance activities. It has been progressing quite successfully and working in line with the schedule that we have shared earlier. We will have a revamp at our FCC units in Izmir. It would temporarily reduce our gasoline production, which is around 180,000 tons for the whole year. Yet, it will improve our gasoline yield afterwards. Our desulphurization unit in Iznik will also go through a periodic maintenance.

And the last but not the least, there is not -- there is not any significant maintenance activity planned for our Kirikkale refinery in 2021.

Now finally on this slide, we have our expectations for 2021, which will hopefully be a year of -- with improving operational profitability environment on the way to normalize supply and demand conditions.

Let's take a look at the details. We expect Med Complex refining margin to average between a range of $0 to $0.5 per barrel in 2021. We expect mid-distillate crack margins to improve but HSFO crack margins to soften in 2021, while Ural-Brent differentials to slightly wider compared to 2020. We expect Tupras net refining margin to materialize somewhere between $2.5 to $3.5 per barrel in 2021. We expect better mid-distillate and gasoline cracks margins but weaker HSFO.

While we expect a similar differential environment on average, we anticipate lower operational expenses per barrel and some minor inventory gains support in 2021. We expect 26 million to 27 million tons of production and sales amounts, while capacity utilization to be between a range of 90% to 95% accordingly. We target about USD 200 million of consolidated CapEx for 2021, and we anticipate that at around 40% of that will be focusing on energy efficiency and other environmental projects.

Thank you for listening to me.