Turkiye Petrol Rafinerileri AS

IST:TUPRS.E

Earnings Call Transcript 2021-Q2

[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 second 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 second quarter of 2021, 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 3 slides, we will provide you with a brief summary of the key highlights regarding the second 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 second quarter 2021. Despite first 2 months of the quarter passed with lockdown measures and nationwide curfews, total product sales in the second quarter managed to reach pre-pandemic levels. Strong recovery and mobility in Turkey, supported by rising vaccination rates, led to historically high gasoline sales in June. Our international sales were also a whopping 53% above last year's same period, with our broader sales capabilities to Tupras trade in the U.K. Tupras core refining profitability further improved with better cracks in particular with gasoline.

On the second chart, our OpEx per barrel improved materially, mainly driven by higher capacity utilization rate in the second quarter of 2021. This has driven our net refining margin, together with improved crack margins and inventory gains.

On the last chart, the increase in Brent prices continued to result in material inventory gains, reaching almost TRY 3 billion year-to-date. We continuously increase our crude hedging levels, along with our policy to provide a protection against downward volatility in Brent prices.

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 part. Brent price continued its steady positive momentum amid mixed signals coming from potential return of Iranian crude during the quarter, combined with uncertainty regarding the OPEC+ meeting. Against this backdrop, Brent reached its peak of the last 33 months at above $77 per barrel in early July. OPEC+ reached an agreement on 18th of July to extend its OPEC cut output cut agreement by reducing 400,000 barrels per day each month between August and December. Despite the increase in production, markets will likely continue to be in a deficit according to demand projections for the second half.

On the top right, we have highlighted the trend of gasoline stocks, which declined sharply in April and May and fell below 5-year averages, which was the main driver of the strong recovery in gasoline cracks.

Now taking a look at the bottom row, Turkish market. On the bottom right chart, we have the Turkish fuel market data for the first 5 months of 2021. Diesel consumption increased by 10% year-on-year in 5 months despite [indiscernible] May while reaching pre-pandemic levels in April. Gasoline consumption also showed a strong ground during the first 2 months of the second quarter, increasing by 13.5% in 5 months compared to the low base of the last year.

Domestic jet fuel demand was 3% higher year-over-year than the last year's first 5 months showing significant improvement during -- especially in April and May. Air traffic in Turkey was the key driver of this, visible on the bottom left side of the slide. Air travel improved especially starting June, while foreign arrivals, which was 13x more than last year's second quarter, started to increase with the ease of restrictions and quarantine-free air travel as tourism season began.

Let's take a look at the crack in comparison to the last year's second quarter on this page. Mid distillate cracks performed limited increase in the second quarter due to ongoing weak jet fuel demand and accompanying high diesel supply in the market. Gasoline cracks, however, continue to improve with increased consumption and largely reached 2019 levels in the second quarter of 2021.

Taking a look at the details. Diesel cracks were down by $1.50 per barrel year-over-year and increased by $0.50 per barrel quarter-over-quarter, averaged at $5 per barrel in the second quarter 2021. Diesel cracks remained under pressure in the second quarter, with refineries applying [indiscernible] cuts, resulting in higher diesel yields. As road fuel demand has started to gain momentum, higher mobility and better PMI readings support the output for cracks. On the other hand, pace of demand recovery in jet fuel and capacity balance in the market will set the direction of the diesel's recovery as well. We observed these underlying trends in August as well, and diesel cracks reaching $6 per barrel in the first 10 days of the month.

Jet fuel cracks averaged at $2.30 per barrel in the second quarter 2021 and posted $4.70 per barrel increase compared to the second quarter of last year. Jet fuel cracks remained weak compared to the 5-year averages and pre-COVID levels, while showing recovery signals starting from June. According to EUROCONTROL data, inactive aircraft across Europe decreased from the levels of initial wave in 2020, which was at 7,000 to a little over 3,500 in mid-June, supports the outlook for the jet cracks during summer as well. We observed these signs of stronger recovery in August, jet fuel cracks reaching $4 per barrel in the first 10 days of the month.

Gasoline cracks were up by $6.70 per barrel compared to last year's same period and averaged at $11 per barrel in the second quarter of 2021. European gasoline stocks continue to go down, especially in June, thanks to strong export dynamics and supportive capacity balance in Europe. Cracks were in double-digit territory during second quarter, which also found support from driving season as well.

This strong trend is still going on, with fast recovery in demand driven by ease of travel restrictions. The first 10 days of August averaged at $16 per barrel for gasoline cracks. Finally, high sulphur fuel and cracks averaged at around minus $12.40 per barrel and continued to go down in the second quarter due to return of capacities and rising inflows from Russia to Med region.

Moving over to the crude price differentials. Widening pattern for crude differentials continued in the second quarter of 2021. The simple leverage main regional heavy-grade differentials widened to minus $2.80 per barrel from minus $1.50 in the first quarter of 2021. This widening trend also continued in July, amid [ the issue ] regarding OPEC+ meeting, which failed to reach an agreement on the 5th of July. On the 18th of July, OPEC+ agreed to ease cuts by 2 million barrels per day between August to December of 2021. This agreement also includes the full reversal of Saudi Arabia's [ own ] production cut of an additional 1 million barrels per day as well.

According to EIA, OPEC production would average nearly 3 million barrels per day more in the second half compared to the first half. Based on various projections by different institutions, markets will likely still remain in deficit in the second half as well.

Looking forward, we continue to believe the outlook for heavy differentials will be difficult to predict. However, meaningful correlation between OPEC+ production, cut reductions and differentials continued in the second quarter of 2021 and may continue further given the agreed production cut removed [ over ] $400,000 per barrel per month until December.

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 second quarter of 2021 was a little over 6.5 million tons. Production of the second quarter was materially higher than last year, as the refinery was shut down due to drop in demand in the second quarter of 2020. In the second quarter of this year, our total crude distillation capacity position was 86%, and the other feedstock capacity utilization was at 5%, reaching to 91% for the whole system.

Moving over to the sales. Let's start with the chart on the left-hand side. In the second quarter of 2021, our domestic sales and international sales reached to 5.1 million and 1.8 million tons, respectively, summing up to 6.9 million tons in total. Despite widespread restrictions, our jet fuel sales nearly reached pre-COVID levels. Due to the decrease in regional bitumen demand, our bitumen sales weakened in the second quarter.

As a result, we stopped production in Batman refinery in June and July to manage our stocks more optimally. This drop and ongoing more demand for bitumen have led us to reduce our production and capacity utilization targets for the whole year marginally. As you can see from the chart on the right, all 3 wide products, diesel, gasoline and jet fuel, posted material growth year-over-year, indicating strong underlying demand for mobility in Turkey.

Now let's move over to the financials. Let me start with the refining margin developments with this slide. During the second quarter of 2021, Mediterranean refining margin improved by $0.90 per barrel compared to the second quarter of last year and settled at positive $0.30 per barrel. Increase in net margin compared to last year's same period is largely a result of better gasoline and jet fuel crack margins. Tupras net refining margin realized at $4.60 per barrel in the second quarter of 2021 increased by $3.70 year-over-year. This was mainly with better operational performance and strong inventory gains stemming from the increase in Brent prices. Diesel, gasoline and jet crack margins supported core refining performance in the second quarter while the financials were narrowed year-over-year due to very wide financials at the beginning of 2020. Our OpEx per barrel improved materially with higher utilization rates in the second quarter, reaching to $1 per barrel below against last year's same period and $2 per barrel below the first quarter of 2021.

Let's take a look at the P&L items in detail for the second quarter of 2021. Revenues more than tripled to around TRY 33.7 billion in the second quarter of 2021. Total product sales were up by 30% in the second quarter versus last year with sales increasing in all major products, excluding bitumen. Near 2.5x higher Brent price was the lead reason behind the growth in the revenues accompanied by 22% depreciation in Turkish lira.

Cost of goods sold also tripled year-over-year as well with higher production amount and higher Brent prices. Gross profit significantly increased with better operational performance and strong inventory gains. Operational expenses increased by 33% year-over-year in the second quarter of 2021 due to 22% depreciation of Turkish lira against U.S. dollar and inflationary adjustments in operational expenses. Due to Turkish lira depreciation at around TRY 0.38 in the quarter, the loss from other operations materialized at TRY 325 million.

Net financial expenses have increased by 28% compared to the second quarter of 2020. In detail, we have recorded TRY 557 million FX losses in the second quarter due to depreciation of Turkish lira. We have recorded lower net interest expenses amounting to TRY 144 million versus TRY 257 million last year. This was achieved with sound financial policies and proactive refinancing that we initiated last year with mostly fixed rates in Turkish lira. Cash, on the other hand, earns higher floating current rates.

As you can observe from the table, we have recorded TRY 1.3 billion of profit before tax in the second quarter of 2021. Below PBT, we recorded TRY 426 million tax income from tax incentive gains. Consequently, bottom line materialized at TRY 1.7 billion net profit for the second quarter of 2021.

Now for the EBITDA. Our EBITDA at CCS materialized at TRY 1.1 billion due to year-over-year better crack margins and lower OpEx per barrel. We recorded TRY 1.4 billion positive in [indiscernible] effect due to increase in Brent price and depreciation in Turkish lira. Consequently, our reported EBITDA materialized at TRY 2.5 billion, which is substantially better compared to the last year's same period.

Now let's take a look at the profit before tax rates. As you can see from the waterfall chart, due to very minimal inventory loss in the second quarter of 2020 and sizable inventory gain in this quarter, the delta between the 2 quarters is sizable with TRY 1.4 billion. As we emphasized earlier, capacity utilization rate was higher this quarter and our sales volume increased by 30%. As a result, there is TRY 633 million positive effect from the increase in sales. Crack margins also improved year-over-year in the second quarter of 2021 and contributed to the bridge positively by near TRY 500 million.

With proactive refinancing actions that we did, we managed to lower interest expenses and recorded a positive contribution compared to last year's same period from net interest expenses with TRY 130 million. We recorded TRY 481 million more FX loss in the second quarter of 2021 due to bigger crude oil inventories and elevated Brent price as well as depreciation of Turkish lira in the second quarter of 2021.

Due to almost $4 per barrel narrower heavy crude differentials year-over-year, we recorded TRY 770 million negative impact. Remembering the differentials were around minus $5.50 per barrel pre OPEC agreement in the second quarter of 2020. All in all, the second quarter of 2021 profit before taxes materialized as TRY 1.3 billion.

Now let's take a look at the financial highlights. In the second quarter of 2021, we have generated TRY 2.5 billion of EBITDA, and the sizably year-on-year increase is largely due to better operational performance and inventory gains. Thus, EBITDA of the first half summed up to TRY 3.7 billion. As a result, also with the contribution of the deferred tax income, we recorded TRY 1.7 billion of net profit in the second quarter of 2021. This brings our net profit for the first half to TRY 939 million.

Distinctive operating environment that began by second quarter of 2020 still continues to dominate our industry in 2021 as well. Historically, weak performance in crack margins go on due to weak demand and elevated stocks triggered by the pandemic. In order to present a more comparable representation of our leverage metrics in the second quarter, we continue to exclude one-offs in relation with historical re-cracks, which have been materially below of its past 5 years average level from our EBITDA calculation.

Within this context, due to elevated stock levels mid distillate cracks have seen record levels in the second half of 2020 and the first half of 2021. Being designed as a supplier for mid distillate [ crack ] country, Tupras has been exposed to historically weak cracks and the weighted average crack margin of Tupras have resulted materially below its past 5-year average level. When adjusted for this gap against the average of the past 5 years, we calculate TRY 3.9 billion of one-off impact on our EBITDA in the second half of 2020 and first half of 2021 together.

Adjusting for this, we calculate around TRY 9 billion adjusted rolling EBITDA from the second quarter of 2020 to second quarter of 2021. Using this as a base, our net debt to adjusted EBITDA materialized at 1.3x as of the end of the second quarter. Unadjusted rolling EBITDA recovered strongly, standing at TRY 5 billion, also shows a much more normalized gearing level with 2.2x 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 of the company. 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 realizes 28% as of the second quarter of 2021.

Let's continue with the details of the balance sheet. Cash and cash equivalents and financial liabilities at the end of the first quarter was TRY 19.4 billion and TRY 30.6 billion, respectively. Net debt EBIT, TRY 11.3 billion as of the end of the second quarter. Apart from this, cash conversion cycle remains very healthy with the underlying drivers such as accelerated collection of receivables and reduced payment base for some of our products, application of early collection mechanisms, consumer financing and factoring.

Among these measures, counterparties for supplier finance increased in second quarter. We have also used factoring to increase cash flow whenever we find better spreads between factoring against deposit rates. The cost of funding for the short-term liabilities are much better compared to current funding costs with proactive financing -- refinancing actions that we did in the second half of 2020. We continue to enjoy positive carryout of our outstanding cash position versus the short-term loans from time to time.

We also continue to refinance our loans when we find suitable rates in TL basis. As discussed above, our working capital improved with higher speed of converting our inventory to sales and receivables management. Going forward, some of our -- some of the improvements that we have employed, such as the effective receivable risk assessment and fully collateralized receivables, should continue to positively contribute to the working capital requirement. However, as we have guided before, ideally, working capital should remain around 0 level, with the underlying operational framework, ensuring the business funds itself.

Regarding our FX exposure management, we ended the second quarter with USD 7 million short position. Following the increase in Brent prices, our inventory amount registered at USD 1.7 billion in the second quarter of 2021. Hard currency cash position was at USD 192 million as swap forward rates were more favorable compared to the U.S. dollar deposit rates. As a result, we have decided to manage the foreign exchange risk through derivative instruments rather than depositing it in hard currency.

Trade payables climbed to USD 3 billion due to continued expansion in our terms and increasing the Brent price. On the liability side, both our short-term and long-term debt decreased totaling to USD 1.9 billion. We continue to employ strict FX exposure management policies, which targets a square position at period end.

Now taking a look at the maintenance calendar for 2021. Our maintenance schedule for 2021 is mainly shaped by ensuring the health and safety of our employees by taking COVID-19-related safety measures and proactive approach on adapting volatile market dynamics in addition to the seasonal norms. Nevertheless, in parallel to initial plans, majority of the activities were completed by the end of the first half of the year.

The revamp at our FCC unit in Izmit is ongoing. It temporarily reduced our gasoline production at around 180,000 tons in total for the whole year, and it will improve our gasoline yield afterwards. Earlier, we had planned for 2 more maintenances in Izmit relating to the lube complex and vacuum units. However, these 2 were postponed to 2022. We added a regular periodic maintenance in Izmit after Q4 to improve production performance. It will last only for 2 weeks. There is no maintenance activity planned for our Kirikkale refinery in 2021. Now on this slide, we have our expectations for 2021. Taking a look at the details. We expect net complex refining margin to average between the range of 0 to $0.50 per barrel in 2021. We expect Tupras net refining margin to materialize somewhere between $2.50 to $3.50 per barrel in 2021. Regarding operations, we now expect 25 million to 26 million tons of production, revising down from 26 million to 27 million, mainly due to lower bitumen production as a consequence of lower demand compared to our initial estimates.

Accordingly, we expect capacity utilization to be between a range of 85% to 90%. Our expectations of sales for the whole year did not change, which is within the range of 26 million to 27 million tons. We target about USD 200 million of consolidated CapEx for the whole year. We will spend 4% of petrol energy efficiency and environmental projects.

In the light of our revised guidance for 2021, we would like to sum up some of the key figures in the first half and compare them with our latest expectations. We had a net refining margin of $3.30 per barrel in the first half, which is in the range of our full year guidance range of $2.50 to $3.50 per barrel. Net refining margin was at $0 per barrel in the first half. That is the low end of our guidance range of $0.0 to $0.50 per barrel. Capacity utilization increased to 78% in the first half, with plant and capacity utilization rate in the second half. It is below the full year guidance range of 85% to 90%, mainly due to maintenance shutdown in Izmit in the first quarter. We continue to expect better utilization rates for the remaining quarters of the year.

In the second quarter, we produced 6.5 million tons and sold 6.9 million tons. Accordingly, first half production and sales summed up to 11.1 million tons and 11.8 million tons, respectively. We have spent sales [indiscernible] in the U.S. sales for total investments in 2020, keeping our guidance at USD 200 million for the whole year. We have spent about 51% of our CapEx in sustainability-focused investments in the first half of 2021, higher than our guidance of 40% for the whole year. This is all from us.