Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2021-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Constantino, your Chorus Call operator. Welcome, and thank you for joining the Tüpras conference call and live webcast to present and discuss the fourth quarter 2021 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]

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 Tüpras Investor Relations and reporting departments. Over the next hour, we will first go over our operational and financial results for the fourth quarter 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 fourth quarter of 2021. Then we will go into detail for each subject on the following slides.

Let's start with a brief summary of 2021. Brent price started 2021 at $50 per barrel and ended the year at $77 per barrel, a sharp increase with post-pandemic recovery of demand profile as well as stringent OPEC+ production regime. Throughout the year, OPEC+ reduced its production cuts. And as of the end of January 2022, OPEC+ cumulative production cut amount is at 3.4 million barrels per day compared to historic 10 million barrels per day cut announced in March 2020. With a cumulative 10.5 billion doses administered, global vaccination rate reached 62% as of February 2022.

This, along with milder variant Omicron, indicates that restrictions on mobility are unlikely to return, while some countries are lifting pandemic measures altogether. Fuel demand in Turkey remained strong in 2021, posting 5% growth year-over-year. The only fuel that is behind pandemic is jet fuel, which is 35% below 2019 levels, while demand for gasoline and diesel continue to post strong growth levels. Within this context, crack margins continue to be upward trajectory throughout 2021 and reached the prepandemic levels in December.

Now let's take a look at Tüpras highlights in detail for the fourth quarter of 2021. On the top, we have highlighted the strong correlation of TTF natural gas prices with mid-distillate cracks. In the fourth quarter, oil and natural gas prices continue to push up refining costs in Europe. While seasonal maintenance shutdowns and refiners' cautious stance on ramping up their production has also drawn down inventory, surge in energy costs have been almost fully reflected in the cracks in Europe in such tight market conditions.

On the second chart, you see historically high fourth quarter domestic sales for diesel and gasoline that were recorded in 2021. Increased passenger car use and high industrial activity continues to be supportive for land transportation. Recovery in jet fuel sales continued, which was mostly backed by domestic flights. Total flight numbers in Turkey were only 15% below prepandemic in 2021. The bottom chart shows our balanced position and its high FX volatility that was seen in the fourth quarter. With the FX-based pricing mechanism that affects us on operations and financing activities were largely offset by inventory gains.

Let's move on to the market section and take a look at the global and domestic developments in the following 3 slides. As you know, we cover this section in 2 main components: a development in global oil markets and developments in the Turkish market. Let's start with the top-left box. Global crude oil inventories continue to decline, especially towards the year-end, and remains below of the 5-year range. This is coupled with oil demand recovery despite new COVID variants, resulting in strong improvement in Brent prices in the fourth quarter on a both quarter-over-quarter as well as year-over-year basis.

On the top price, the developments on the production inventory side was not different from the crude oil part. Both diesel and jet fuel stocks are below their 5-year range in the fourth quarter of 2021. Along with strong demand, this has been an important factor supporting mid-distillate and gasoline cracks. On the gasoline cracks, strong demand for personal car use and steady naphtha demand were among supporting factors.

Now taking a look at the bottom row, Turkish market. Volatility in Turkish market dynamics did not affect fuel market dynamics in the fourth quarter of 2021. Despite Turkish lira depreciation and high CPI in 2021, both air traffic and road traffic improved in Turkey, visible on the bottom left of the slide. In line with the improvement in global flight trends, flight numbers in Turkey is now only 15% lower than 2019 levels and driving in Turkey was also 2x better. On the bottom right chart, we have the Turkish fuel market data for the 11 months of 2021.

Diesel consumption increased by 4% year-over-year in the first 11 months, reaching prepandemic levels in April. Gasoline consumption also showed a strong run, increasing by 24% in the 11 months compared to the low base of last year. Domestic jet fuel demand was 37% higher year-on-year compared to last year's first 11 months, showing significant improvement, especially after April, with opening of the flights.

Now let's take a look at cracks in comparison to last year's and past 5 years' fourth quarters on this page. Strong demand and tight supply conditions, which drew down product inventory levels supported mid-distillate and gasoline cracks. HSFO cracks were weaker, mainly due to lower demand in market.

Taking a look at the details. Diesel cracks were up by $6.4 per barrel year-over-year and averaged at $11.2 per barrel in the fourth quarter of 2021. Diesel cracks are from a strong rebound, thanks to regional tightness with off-line capacities in Europe having drawn down diesel stocks, strong PMI readings offsetting mild decrease in mobility due to Omicron and soaring energy costs that having pushed up product cracks. Diesel cracks continued to perform well in January, which increased to $12 per barrel, while demand kept strong as winter starts.

Jet fuel cracks averaged at $9.1 per barrel in the fourth quarter of 2021 and posted $7.2 per barrel increase compared to the fourth quarter of 2020. Higher demand over Christmas season supported the cracks while uncertainty over international travel persisted. According to Euro Control Data, European air traffic during the fourth quarter was down by 23% of 2019 levels. Jet fuel cracks has seen $15 per barrel and averaged at $12.9 per barrel in January, exceeding the past 5-year averages. Jet fuel yields are -- got close to 5-year averages as uncertainty around Omicron was short-lived.

Gasoline cracks were up by $7.8 per barrel compared to last year's same period and averaged at $12.5 per barrel in the fourth quarter of 2021. Cracks in Med region continue to mark well over the winter period. Key factors behind these were maintenance shutdowns in several refineries in Europe, strong gasoline consumption and supportive export dynamics in the region and higher blending costs. Gasoline demand softened after holiday period, which showing a slight correction in January, which came in at $11.6 per barrel.

High-sulfur fuel oil cracks averaged around minus $14.5 per barrel and posted $2.1 decrease compared to the third quarter of 2021, which was mainly due to its wider regional balance as a result of capacity reduction, which results in lower high-sulfur fuel oil demand. We observed HSFO cracks continue to be weaker at minus $24 per barrel in January as the underlying drivers remain largely the same.

Moving on to the crude side of the financial. Gradual widening trend of crude differentials continued in the fourth quarter at simple average of main regional heavy grades differentials widened to minus $3.2 per barrel in fourth quarter of 2021 from minus $2.9 per barrel in the third quarter of 2021. Despite expectations that OPEC would keep production stable as a result of the emergence of the Omicron variant in the fourth quarter of 2021, OPEC has stuck to its previous decision and continued to increase production by at around 400,000 barrel per day per month.

Looking forward, we continue to believe the outlook for heavy differentials will remain hard to predict. However, meaningful correlation between the OPEC production cut reduction and differentials continued in the fourth quarter of 2021 and may continue further given the agreed production cut removes of 400,000 barrels per day per month.

Now let's take a look at Tüpras operations, starting with the production volume. On the left-hand side, you can see our production volumes. Our total production in the fourth quarter was 7 million tons, the highest figure of the fourth quarter since 2016. Production in the fourth quarter of 2021 was improved by at around 1 million tons compared to last year, in line with better product demand. In fourth quarter of 2021, our total crude distillation capacity utilization was at around 91% and other feedstock capacity was around 7%, reaching to 98% for the whole system.

Moving over to the sales. Let's start with the chart on the left-hand side. In the fourth quarter of 2021, our domestic sales and international sales reached to 6.0 and 1.7 million tons, respectively, summing up to 7.7 million tones in total. Our total jet fuel sales continued to improve and were 42% higher compared to last year in the fourth quarter as a result of the improving trend in the aviation.

As we mentioned earlier, compared to the same quarter of the previous year, we had historically high gasoline and diesel sales in the domestic market in the fourth quarter of 2021. The rise in personal vehicle use and industrial activity was the driving force behind this increase. As you can see from the chart on the right, all 3 white products, diesel, gasoline and jet fuel, posted growth year-over-year, indicating strong underlying demand for mobility in Turkey. Due to the decrease in regional bitumen demand, our bitumen sales were 24% lower year-over-year in the fourth quarter of 2021.

Now let's move to the financials. Let me start with the refining margin developments on this slide. During the fourth quarter of 2021, Mediterranean refining margin improved by $3.7 per barrel compared to the fourth quarter of 2020 and reached at $3.6 per barrel. Despite materially weaker HSFO cracks, strong trends in gasoline, jet fuel and diesel have led to the strong performance in the Med margin.

Tüpras' net refining margin was realized at $9.1 per barrel in the fourth quarter of 2021, increased by more than $8 per barrel year-over-year. With this performance in 2021, net refining margin of Tüpras materialized at $5.7 per barrel for the whole year. Strong performance in the fourth quarter of 2021 was mainly driven by strong mid-distillate and gasoline cracks. There is also a material contribution from inventory effect as well with the help of strong upward trend in Brent prices.

Let's take a look at the P&L items in detail for the fourth quarter of 2021. Revenues almost tripled year-on-year and recalled that TRY 56 billion in the fourth quarter of 2021. Total product sales were up by 22% versus last year, with sales increasing in all major products, excluding bitumen. Average Brent price in the fourth quarter doubled year-over-year, which accompanied by the 41% depreciation in Turkish lira led to this revenue growth.

Cost of goods sold also more than doubled year-over-year as well with higher production amount, higher Brent prices and increase in energy expenses. Especially, energy expenses were 2.6x of the last year's fourth quarter figure, mainly driven by tariff hikes during the quarter and higher capacity utilization.

Gross profit significantly increased to TRY 8 billion with improved cracks, better operational performance and inventory gains. Material increase in the operational expenses was mainly due to logistics expense that was led by higher production and Turkish lira depreciation. Increase in general and administrative expenses was mainly due to personnel expenses in parallel to inflationary adjustments. Loss from other operations was TRY 9.7 billion, that's including FX also on trade payables, which significantly increased due to Turkish lira depreciation.

This was largely offset by almost TRY 3 billion FX gain on financing and TRY 5 billion inventory gain. Income from equity investments, i.e., OPEC was recorded at TRY 287 million, mainly due to improved operational performance accompanied by inventory gains. TRY 108 million additional income was also booked from our subsidiary detach tanker sale in the fourth quarter of 2021. We have recorded net financial income in the fourth quarter, which came in at TRY 3.3 billion.

We maintained our FX exposure square in line with our policy and with higher hard currency cash position, resulting in FX gains on the net balance of deposits and borrowings. Our net interest expenses was at TRY 290 million, lower compared to the last year's TRY 320 million with front-loaded fixed rate financing, creating an advantage with the current rates. At the conclusion of this, we have recorded almost TRY 670 million of profit before tax in the fourth quarter of 2021. Below PBT, we have recorded TRY 775 million of tax income with investment incentives and revaluation gain of the fixed assets, and our bottom line totally materialized at TRY 1.3 billion for the fourth quarter of 2021.

Now for the EBITDA. Our EBITDA CCS materialized at TRY 2 billion year-over-year and the increase was mainly driven by materially better crack margins and wider differentials. OpEx per barrel largely remained flat year-over-year, and higher energy costs were offset by better utilization. We have recorded TRY 5.2 billion of positive inventory effect, and this substantial increase was mainly due to elevated Brent price and Turkish lira depreciation. Consequently, our reported EBITDA materialized at TRY 7.3 billion, which is substantially better compared to the 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 Turkish lira depreciation in the fourth quarter, TRY 6.4 billion, higher FX losses were recognized in the fourth quarter of 2021 with strong inventory gains in the same quarter compared to the fourth quarter of 2020. This FX loss was largely offset, and the net delta between 2 periods was only negative TRY 1.3 billion.

Crack margins significantly improved year-over-year, reaching out to pre-COVID levels in the fourth quarter of 2021 and positively contributed to the PBT bridge with a sizable amount of TRY 2.4 billion. With the support of $2.4 per barrel of wider heavy crude differentials year-over-year, we recorded TRY 627 million positive impact to the PBT. The increase in natural gas prices had a negative impact on the PBT year-over-year. Based on average tariff of potash natural gas prices increased almost 150% year-over-year for the fourth quarter of 2021, this had an impact of negative TRY 1.3 billion.

Increase in capacity utilization rate and strong sales volume in the fourth quarter resulted in TRY 650 million positive effect from increase in sales. We continue to have lower interest expenses and recorded a positive contribution compared to last year's same period from net interest expenses, which were included in the other item. All in all, the fourth quarter of 2021 profit before taxes materialized at TRY 669 million.

Now taking a look at the 2021 as a whole. We have converted near TRY 4 billion of loss at the PBT level to TRY 2.2 billion positive profit before tax in 2021. In details, we observed the following developments: Due to sharp depreciation in Turkish lira, we have recorded near TRY 8.5 billion of FX losses, and we have successfully counterbalanced this with our FX-based pricing mechanism, producing strong inventory gains. This proactive financing decisions taken in late 2020, our interest expenses fell by near TRY 600 million. Strong recovery in cracks resulted in TRY 3.5 billion of contribution to the profit before tax.

Gradual production cut reductions by OPEC+ also translated in gradual widening in differentials, which supported our PBT by around TRY 450 million. While remaining much lower compared to our peers, natural gas hikes resulted in an increase in our production costs in the fourth quarter and negatively impacted our PBT by around TRY 1.3 billion. Material increase in sales following the improved demand in all products in 2021 have led to almost TRY 2 billion positive contribution to our full year profit before tax. All in all, our 2021 profit before taxes materialized as TRY 2.2 billion.

Now let us take a look at the financial highlights. In the fourth quarter of 2021, our EBITDA generation was very strong with TRY 7.3 billion, sizeable year-on-year increased largely due to better operational performance of the fourth quarter of 2021. Thus, EBITDA of the 12 months summed up to TRY 13.7 billion. Accordingly, we have recorded TRY 1.4 billion net profit in the fourth quarter of 2021, and this brings our total net profit for 2021 to TRY 3.3 billion.

We started to observe the recovery in the third and fourth quarter of 2021, and the performance of refining started to converge to pre-COVID period. Therefore, we no longer need adjustments to our operational profitability has left previously applied adjustments behind and presenting the performance without them.

Our net-debt-to-EBITDA materialized at 0.8x as of 2021 year-end with normalization of operational performance. This is the lowest level since the third quarter of 2017. The current ratio is still at 1x, which is in line with the last couple of years. And on the bottom right panel, we have the return on equity. As you can see, we have recorded 19% return on average equity as of the end of 2021.

Let's continue with the details of our balance sheet. Cash and cash equivalents and financial liabilities at the end of the fourth quarter was TRY 15.8 billion and plus TRY 1.2 billion, respectively. Our net debt declined quarter-over-quarter in dollar terms stood at USD 845 million as of the end of the fourth quarter. On the working capital side, our payable base continue to remain sizably above our receivable and inventory base, creating a material operational funding source. While near-term debt looks other way as weighted cost of TRY portion of this debt is only 12.6% and 18.5% for TRY bonds against the weighted average deposit rate of 28.5%, and this allows us to create a positive carry out of our position. We also have around TRY 16 billion of cash, which can easily cover short-term portion of our debt, if there's a need.

Regarding our FX exposure management, we ended the fourth quarter with USD 2 million loan position. Following the ongoing increase in Brent prices, our inventory amount is registered at USD 1.8 billion as of the end of fourth quarter of 2021. Hard currency cash position was standing at a very strong level with USD 853 million, while lower quarter-over-quarter basis, we continue to manage a sizable portion of our FX assets with forward. 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 1.4 billion in total. We continue to employ strict effective exposure management policies which targets the square position at the period end.

Now looking at the maintenance calendar for 2022. Batman has 2 seasonal maintenance scheduled in the first and the fourth quarter of 2021. The one in the first quarter has already started and is ongoing. In Izmir, we have nearly completed Vacuum and Lube Complex maintenances in the first quarter. As maybe recalled, we have postponed these maintenances in 2021 to 2022. We also have maintenances in some of the units of Izmir in the fourth quarter. We have some maintenances in Izmir in the first quarter as well as at the end of the third quarter. There is no maintenance activity planned for our Kirikkale refinery in 2022.

On this slide, we have our expectations for 2022. Taking a look at the details. We expect Med complex refining margin for 2022 will be within the range of $2 to $3 per barrel. Our Tupras net refining margin expectation is between $4 to $5 per barrel in '22 as refining environment is expected to improve further with petro cracks. For this year, we assume the financials would be flat against 2021.

Regarding operations, we expect 26 million to 27 million tons of production and 28 million to 29 million tons of sales while we expect capacity utilization to be between a range of 90% to 95%. Our consolidated CapEx target for 2022 is USD 300 million. We will spend 45% of that on sustainably focused energy efficiency and environmental projects. Out of USD 300 million, USD 80 million will be spent for our logistics investments in our subsidiaries.

On this slide, we would like to sum up some key figures for 2021 and compare them with our year-end guidance for the same year. We had a net refining margin of $5.7 per barrel in 2021, which is above our full year guidance range of $4.5 to $5 per barrel, largely driven with robust crack performance in the fourth quarter as well as inventory gains throughout the year.

Net refining margin was at $1.6 per barrel in 2021, which is within our guidance range of $1.5 to $2 per barrel. Capacity utilization was managed at 88% with better utilization rate recorded especially within the last 9 months of 2021, and it is within our guidance range of 85% to 90%. In 2021, we produced 25.1 million tons and sold 27.6 million tons, which is in line with our guidance.

We have spent USD 152 million for total investment in 2021, which came below of our revised guidance of USD 175 million. We have spent about 55% of our CapEx in sustainably focused investments, higher than our target of 40% for the whole year.

Before opening our session for the Q&A on the next slide, I'd like to give you a recent update of our strategic transition plan, which was announced back in late November. In sustainable refining, we are working on 2 main areas. First, we have signed basic engineering agreement for alkylation project in our Izmir refinery. Also, we are finalizing basic engineering design for a high-priority, high-margin polymer-grade propylene project in Izmir refinery. With the projects that we have completed, our energy intensity improved materially in 2021, down to 93.5% from 99.1%.

In sustainable aviation fuel, we have 3 updates. We are in talks with feedstock suppliers for long term and steady procurement of Generation 2 feedstocks. We have also begun evaluating our sites for terminals and place products and a pretreatment unit. We are also at the final stage of basic engineering design for a 400,000 processing unit. In zero carbon electricity, we have made applications for license amendment in our Izmir, Kirikkale and Batman refineries. We have selected the equipment as well as installation sites as well. We are also aiming to initiate solar photovoltaic panels installations in all of our 4 refineries in 2022.

In the green hydrogen, we are finalizing the test site selection of 20 megawatt green hydrogen electrolyzer investment, and this will also include adjacent renewables as well as additional facilities. We are in contact with global main manufacturers for equipment and configuration on this path. This now concludes our presentation for the fourth quarter of 2021, and we can take the questions.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I would now like to turn the conference over to management for any closing comments. Thank you.

[Dogan Korkmaz, executive]

Thank you once again for joining us this evening for the final quarterly call of 2021. Let me make a few closing remarks before we conclude. Today, our results clearly demonstrate that our operational performance has reached to pre-COVID levels. Our core profitability improved significantly in '21 while all 3 main products, gasoline, diesel and jet fuel cracks are all back to or above the past 5-year averages.

Strong crack margin performance continues in February so far as well hovering around pre-COVID averages again. Demand in Turkey also remained strong during the year '21 and we recorded historically high fourth quarter sales in diesel and gasoline. I can comfortably say that we have begun to see negative effects of pandemic leading to picture and '22 presents a better outlook for refining industry.

Having said that, elevated natural gas prices are going to be a key area to observe in the near term as it has the potential to elevate refining costs, obviously. As we budgeted for the year, we have assumed a conservative profitability outlook for '22 owing to this dynamic. Still, as mentioned during our presentation, these increases continue to be passed through and are supportive for refining cracks.

As you all know, we announced our strategic transition plan in late November and shared the latest steps that we have taken in today's presentation. We will continue to keep you all updated as more developments occur.

Finally, as always, we are available for your questions related to the company, business and also our new business areas. Looking forward to meet you all in person, until then we hope that everyone would remain safe and sound. Have a good night.