Turkiye Petrol Rafinerileri AS
IST:TUPRS.E
Earnings Call Analysis
Q4-2023 Analysis
Turkiye Petrol Rafinerileri AS
In the backdrop of geopolitical tensions and economic uncertainties, including fluctuations in Brent crude prices peaking at $98, Tüpras navigated the volatile landscape with strategic agility. The market's complexities, heightened by OPEC+ decisions and macroeconomic changes, influenced the Turkish multinational's operations. Notably, mid-distillate crack margins remained strong, and Tüpras seems to have adeptly maintained robust sales exceeding 30 million tons due to surging domestic demand and assertive trading strategies.
Despite the Turkish economy grappling with soaring inflation of 64.77% and aggressive interest rate increases to 42.5%, Tüpras reported an impressive EBITDA of TRY 97.3 billion and net profits amounting to TRY 53.6 billion. The company's adeptness in implementing inflation accounting facilitated reliable comparison with the previous fiscal year, highlighting a disciplined approach to financial management amid economic challenges.
Crack margins for diesel, jet fuel, gasoline, and high sulfur fuel oil showed varied year-over-year changes, yet overall supported Tüpras's profitability. The company benefited from geopolitical conflicts causing rerouting, especially in the Red Sea region, which bolstered crack margins. Production volume reached a notable 25 million tons, and capacity utilization rates impressively stood at 89.5% for crude distillation by year's end.
The company's sales narrative reflected selective success: while domestic sales decreased slightly by 3% year-over-year, gains in gasoline and jet fuel by 16% and 15%, respectively, highlighted Tüpras's capability to capitalize on market opportunities. The nimble and strategic adaptability to market changes continues to be a testament to Tüpras's resilient sales framework.
Tüpras signaled its progressive stance on sustainability through its energy subsidiary, Entek, focusing heavily on hydropower and wind power, which composed 59% and 18% of its generated electricity, respectively. This diversification into zero-carbon electricity fits into the broader industry paradigm shift towards green and sustainable energy sources.
The corporation closed the year with a fortified balance sheet, holding cash equivalents that more than doubled its financial liabilities. The net cash position was a robust TRY 63.7 billion, confirming Tüpras's liquidity and financial health. These figures are strategic advantages as they provide resilience against market volatility and position the company for future investment opportunities.
Looking forward, Tüpras sets its sights on a cash crack margin of around $14 per barrel for 2024. With expected production of approximately 26 million tons and sales around 30 million tons, the company also sets a target capacity utilization of 85% to 90%. A projected consolidated CapEx of $500 million and ongoing maintenance schedules reflect a proactive approach to both operational adeptness and strategic growth.
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Ladies and gentlemen, thank you for standing by. I'm Mina, your Chorus Call operator. Welcome, and thank you for joining the Tüpras conference call and live webcast to present and discuss the fourth quarter 2023 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.
Hi, everyone. First of all, sorry about the delay as we had some issues with the uploading facilities, and 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 of 2023 and the year 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 year of 2023. Then we will go into detail for each subject on the following slides. Let's take a look at 2023 global market and company highlights. Brent crude prices experienced fluctuations due to macroeconomic uncertainties, OPEC+ plus policy choices, continued supply from non-OPEC producers and escalating geopolitical tensions, which stood out as primary factors. Brent crude price reached a high of $98 per barrel in September before easing off and settling at around $78 per barrel at the end of the year. Cracks remained higher than historical averages. Mid-distillate levels kept a high momentum with low inventories in Europe with the change in the trading growth after sanctions imposed on Russian products. Gasoline experienced a boost from the warmer season and improved demand dynamics. High-sulfur fuel oil gained support from OPEC+ cutback decisions. Tüpras completed all essential maintenances in the first half of the year, leading to increased utilization rates in the latter half. This enabled us to capture the advantage of the robust crack margins. We concluded the year with sales exceeding 30 million tons, attributed to a surge in domestic demand and enhanced performance from our trading activities. We had a $16 per barrel net refining margin in 2023, while EBITDA and net profit reached respectively to TRY 97.3 billion and TRY 53.6 billion.
As you know, we covered this section in 2 main components, as developments in global oil markets and developments in Turkish market. Let's start with the top-left box. Beginning with Saudi Arabia and Russia's strategic output cuts and riding on sustained high demand through the end of October, Brent crude prices maintained levels above the average. However, the influence of additional supplies from non-OPEC producers slowed down the potential price surge.
OPEC+ further production cuts in November only mildly lifted prices due to the usual seasonal decrease in demand. The year kicked off amidst heightened tensions in the Red Sea region, which were partially curtailed with the new policies and security measures enforced by United States and European Union, leading to a renewed increase in Brent crude prices entering into January compared to the previous December.
The geopolitical conjuncture also affected the trade routes, and the need for rerouting increased the cargo durations by 30 days. As a result, inventory levels dropped below those of the previous year, which in turn supported the crack margins, as you can see on the top right graph. Now taking a look at the bottom row, Turkish market. This year was marked by a synchronous rise in both prices and interest rates. Inflation soared to 64.77% on a year-over-year basis. In response to these inflationary pressures, Central Bank increased interest rates by 35,000 basis points since the start of the year, bringing them to 42.5% in an effort to control the inflationary path. Sales of automobiles and light vehicles climbed by 40%, which in turn positively influenced the demand in the gasoline market. Additionally, the demand for jet fuel has rebounded to pre-pandemic levels, driven by a significant 15% annual increase in the number of flights. Let's take a look at the cracks for the fourth quarter of 2023 in comparison to last year's and last -- past 5 years average on this page. In the fourth quarter, diesel cracks averaged at $27.2 per barrel, which was lower due to the high base of the previous year. Together with a period of seasonally weak demand and restart of several French refineries following strike-induced outages, the diesel crack narrowed on a quarter-on-quarter basis. Jet fuel cracks averaged at $27.9 per barrel in the fourth quarter, a decrease influenced by the comparably high average figures from the prior year. Jet fuel supply was increased as European refineries started to shift more from the diesel due to the stronger economics for aviation fuel. On the other hand, the increase in supply balanced out with higher commercial flights as European air traffic is catching up with the pre-pandemic levels. Gasoline cracks averaged at $12.2 per barrel in the fourth quarter, which were lower quarter-on-quarter with weaker demand year-on-year due to the switching into winter grade. High sulfur fuel oil cracks averaged around minus $18.6 per barrel in the fourth quarter, up by $14 per barrel, showing improvement year-on-year. OPEC's production cut decision played a significant role in supporting high sulfur fuel oil cracks. As non-OPEC production increases, we see a lower crack margin compared to the previous quarter. Overall, the shift by refineries to sweeter crude price supported the HSFO crack margins throughout the year. In the first months of 2024, mid-distillates were positively impacted by Red Sea conflict as the rerouting caused them extra 30 days of cargo duration. Diesel cracks have reached to $36 per barrel levels in February and averaged at $30.6 per barrel. Jet rates stayed seasonally pressured compared to diesel cracks ending February at $25.9 per barrel. Gasoline cracks were at $18.9 per barrel, supported by Red Sea conflicts, intensified outages in the U.S. and strong Asian demand. High sulfur fuel cracks improved to minus $14.5 per barrel, kept in tight balance with Red Sea diversion. Moving over to the crude price differentials. Over the year of 2023, with the OPEC+'s cut decision, heavy crude financials continued to narrow in the fourth quarter as a result of low crude supply after OPEC+ November cut decision. In terms of our own slate, the impact has been somewhat muted with the help of wider financials offered by Basrah Heavy in this quarter. Currently, the forecast for heavy crude oil price differentials has been improved by the conflicts in the Red Sea region. This has led to more significant financials at the start of 2024. While this trend might persist, our major maintenance in the group means we won't be able to capture these margins as we had in the previous years. It's worth noting that with the normalization in the region, there is a potential for narrowing down the differentials. Yet the overall market performance will be shaped by the geopolitical landscape, potential further decision on reducing oil production, increased supply from non-OPEC countries and demand dynamics.
Now let's take a look at Tüpras operations, starting with the production volume. On the left side, you'll find details on our production quantities. In the fourth quarter of 2023, we achieved a production output of 7 million tons, bringing the annual total to 25 million tons. The completion of major maintenance in the first half of the year paved the way for enhanced production in the second half. For the total crude distillation, we reached a capacity utilization rate of 89.5%. And for processing other feedstock, the utilization rates stood at 8%, culminating in a system-wide rate of 97% during the fourth quarter of 2023. As a result, the overall annual utilization rate was brought to 77% for crude distillation and 10% for other feedstock with a combined total utilization of 87%.
Moving over to the sales. Let's start with the chart on the left-hand side. In the fourth quarter, our domestic sales and international sales stood at 6.1 million tons and 2 million tons, respectively, summing up to 8.1 million tons in total. Our domestic sales were down by 3% year-over-year, 13% contraction in domestic diesel sales and 8% with weaker bitumen sales, were more than compensated by a strong performance in gasoline and jet fuel that increased by 16% and 15% year-over-year, respectively. Now let's move to the electricity operations. This slide summarizes the electricity production and sales activities of Entek and Tüpras in the year of 2023. In 2023, 59% of the electricity generated was from hydropower, 18% was from wind power and the rest of CCGT and solar. Out of 1,049 gigawatt hours of zero-carbon electricity produced, around 34% was sold to feed in tariff, which is $73 per megawatt hour. The rest was sold to spot market. Entek received preliminary license rights for installations up to 653 megawatts capacity with 11 wind power and storage stations. Clean and green power plants with 50 megawatts was also taken over within the fourth quarter.
Now let's move to the financials. Now let's take a look at the P&L items in detail for the year of 2023. According to the announcements from the Capital Markets Board, all corporations are required to apply inflation accounting methods for the year 2023. Consequently, financial statements from 2022 have been restated using inflation accounting principles to maintain comparability. The financial figures for 2022 have been derived in line with the principles of inflation accounting. Additionally, the numbers have been scaled up by a factor of 1.65 in accordance with 2023 CPI in order to reflect the purchasing power of 2023. With this adjustment, financial figures ended up with year-on-year decline in 2023. Revenues came in at TRY 687 billion, equivalent of almost USD 29 billion in 2023 full year. Cost of goods sold stood at TRY 577 billion, affected by decrease in Brent prices and lower energy costs. Natural gas tariff price for Tüpras in 2023 is 12% lower than the last year's tariff. Gross profit was TRY 110 billion with lower cracks and lower energy costs. Mismatch between Turkish lira depreciation and inflation rate has also ended up with negative impact on our gross profit. Operational expenses were predominantly affected by higher administrative expenses, mostly due to increase in personnel expenses. Loss from other operations was 20% lower than last year. TRY 1 billion income was recorded from equity investments coming predominantly from OPEC. In 2023, TRY 5.2 billion net financial expenses decreased to -- decreased from TRY 13.5 billion as it was an outcome of increase in net cash position. The monetary loss of TRY 12 billion in 2023 primarily stems from adjustments for inflation on retained earnings that have been carried over from 2022. This impact is lessened by the positive influence of cash holdings. As a conclusion of this, we have recorded TRY 57.9 billion of profit before tax in 2023. Below PBT, we have recorded TRY 3.9 billion tax expense, which was lower with higher deferred tax account year-on-year. As a result, we have recorded TRY 53.6 billion of net income in the fourth quarter of 2023.
Now for the EBITDA, our EBITDA CCS materialized at TRY 94 billion. Year-over-year decrease was mainly driven by inflation outpacing the depreciation of Turkish lira. While our hedging methodology helped us to mitigate the Brent pricing risk for approximately 2/3 of our crude oil inventory, we have recorded over TRY 3 billion positive inventory effect, mainly due to depreciation in Turkish lira. Consequently, our reported EBITDA materialized at TRY 97 billion. Now let's take a look at the profit before tax bridge. As you can see from the waterfall chart, TRY 4.3 billion negative impact came from crack margins. Despite crack margins still performing above the average, this reflects a normalization when compared to the higher margins of the previous year. Energy costs were lower with lower natural gas tariffs, and total positive impact from here was TRY 2.2 billion.
Monetary and inflationary effects created a negative TRY 10 billion, mainly due to record monetary loss with the inflationary adjusted retained earnings. The negative impact of monthly loss is partially mitigated with the increase in interest gains. All in all, 2023 profit before taxes materialized at TRY 57.8 billion.
Now let's take a look at the financial highlights. In 2023, we have recorded TRY 97.3 billion of EBITDA, decreasing from TRY 102.9 billion EBITDA in 2022 after inflationary accounting adjustments set strong with high performance. Accordingly, we recorded TRY 53.6 billion of net profit in 2023. We maintained our net cash position with strong EBITDA generation and disciplined working capital management. And with ongoing delevering, our net debt-to-EBITDA materialized at negative 0.6x as of the end of 2023. With strong cash generation, our current ratio stood at 1.3x. And on the bottom right panel, we have net return on equity, which was at 28% as of the end of 2023 and 43% in 2022 after inflationary accounting adjustments.
Previous year's ratios are -- sorry, let's continue with the details of our balance sheet. Cash and cash equivalents and financial liabilities at the end of 2023 was TRY 98 billion and TRY 35 billion, respectively. We ended the year with TRY 63.7 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 to negative TRY 13.1 billion in the -- as of the end of the fourth quarter. We ended the quarter with TRY 98 billion of cash position, more than double of the outstanding debt.
Now looking at the maintenance calendar for 2023. We operated with 97% utilization rate in the fourth quarter as major maintenances were completed within the first half of the year. We have kicked off our maintenance in group on the 1st of March, which was set to last for 92 days, and there is no change in relation to our guidance of USD 196 million of EBITDA loss. On this slide, we have our expectations for 2024. Now looking into the details, we expect to generate around $14 per barrel to push crack margin. Since net refining margin is a metric that is exposed to inflation in order to provide a more stable reference of performance, we decided to go with the cash crack margin from now on.
Regarding production and sales figures, we expect approximately 26 million tons of production and approximately 30 million tons of sales. We expect capacity utilization to be between a range of 85% to 90%, mainly due to planned maintenance shared in detail in our previous slide. Our consolidated CapEx targets for 2024 is USD 500 million. On this slide, we would like to sum up key figures for the last year and compare them with our 2023 guidance. We had a net refining margin of $16 per barrel in 2023, which is above of our full year guidance range, $14 to $15 per barrel, largely driven by robust crack performance. Capacity utilization was at 87.5% in 2023, which is in line with our guidance range of 85% to 90% %. In 2023, we have produced 24.9 million tons and sold 29.5 million tons and came in parallel with our guidance. We have spent USD 354 million of CapEx in 2023, which is slightly above of our $350 million target.
This slide concludes our presentation, and we can now proceed with the Q&A session.
The first question is from the line of Kishmariya, Anna with UBS.
I have several questions, to be honest. And thank you very much for providing the numbers pre the inflation accounting. But could you please give a sense of what would CCS EBITDA look like for full year '23, if excluding this inflation impact.
Also, you again had a very big working capital release, even though I think after third quarter, we were expecting some reversal of release. Should we expect this happening early this year or whether it's new normality and this will stay?
And 2 final questions, one on CapEx, what is driving such an increase in CapEx estimates year-on-year? And finally, on the dividend, should we expect it to be split in 2 halves and -- or whether it will be single payment as before last year?
Let me take the first one Anna. We have actually provided 2 slides on the inflation unadjusted figures at the end of the appendix part -- sorry, at the beginning of the appendix part. The growth that you are going to observe in EBITDA would be similar for EBITDA CCS as well in terms of calculation.
It's Dogan here. Let me move on with the other questions of yours in terms of working capital requirements. Yes, I mean, some kind of normalization should be expected, although the business dynamics hasn't changed much since the previous quarter. Going forward, with especially the effect of increased days during voyages to avoid theft, I would expect a bit of normalization in working capital getting closer to 0 levels. But other than that, there hasn't been a major correction in any items under the working capital requirement. As to the CapEx question, it went up to $500 million for this year, $100 million of which is going to ship purchases of our subsidiary, Ditas. So that's the main difference to what we have achieved this year, together with a couple of investments in electricity new business line in our portfolio. As to the dividend, at the moment, obviously, we're announcing this amount. Anything on the top of that would really depend on the market conditions in Turkey, together with sector-specific performance in the rest of the year. If anything is on the positive side, we would definitely consider a second distribution as we have done last year.
The line cut during your answer for CapEx. Can you please repeat why was the difference, $100 million, if it is okay with you ?
Sure. Sure. $100 million comes from a tanker purchase of our subsidiary, Ditas.
The next question comes from the line of Campos, Gustavo with Jefferies.
Congratulations on the results. I just wanted to quickly check in on the refinancing of the upcoming bonds. How are you planning to address this maturity? How are you planning? Are you planning to potentially refinance it on the Eurobond markets or just pay it off with internal generation and further reduce that back, if you could provide some color on that, that would be great?
So thank you for your question. We will be definitely following the market in terms of the pricing and the success of other Eurobonds being issued from corporations in Turkey and in emerging markets. Having this much cash in hand, we will definitely avoid -- try to avoid negative carry as much as we can. Therefore, we decided to use the time in between and not to issue a Eurobond until today. Going forward, if we see a window of opportunity in the market in the first half, we might squeeze a transaction in between. But realistically, I would expect it to be closer to the maturity of the outstanding bond. If not, after that depending on the overall interest rate environment, I must say, following on Fed's decisions and comments.
I would definitely like to keep that liquidity in the market when it comes to Eurobonds. But we're not in a rush and have that negative carry, I mean, early just to keep that liquidity out in the market. Therefore, if needed, we might pay it back with the cash in hand, and then, waiting on the interest rate developments in the market, we will make a new issue following the maturity either at the end of this year or at the beginning of next year. So it pretty much depends on the interest rate environment at the moment.
Okay. So just to clarify, it would be most likely to be in the second half of this year or beginning of next year, right? And what kind of -- I'm sorry if I misunderstood because the connection kind of glitched for a second. And what kind of maturity and what kind of size would you be considering just refinancing the current amount or potentially upsizing?
Okay. Obviously, when it comes to Eurobonds, it's part of our long-term financing arrangement. And within that portfolio, we would definitely like to match it with our CapEx. Realistically, CapEx maturities in refining would be between 5 to 7 years. The outstanding bond is for that very reason was for 7 years, but it would again depend on the market conditions as well. In ideal conditions, we would definitely try to go for 7 years, but having a benchmark at 5 years maturity would definitely be okay as well.
The next question comes from the line of Khaziev, Ildar with HSBC.
Just a quick technical question. So I have seen 2 numbers for net refining margin in 2023, I think one was $16 per barrel, that's Page 20 of your presentation. And then it's, I think, $12.7 in -- on Page 23. Is this difference due to the impact of the inflation accounting? And if yes, what -- I mean I'm surprised because like in dollar terms, it should be the same. Or is there something else?
In terms of 2023's financial performance, everything is reindexed with the inflationary coefficient. So that's why it's going up in dollar terms. It's not only consisting of cracks or the financials. You need to also factor in the other OpEx, depreciation and source, which are attributable to indexing.
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 once again for joining us this evening for the final quarterly call of 2023. Before we conclude, I'd like to share a few closing remarks. Operationally, it has been another remarkable quarter marked by record high profitability and a robust cash generation. During the first half of the year, we have completed most of our maintenance activities, allowing us to close the second half with higher capacity utilization. Peak utilization helped us capture the most out of the strong crack environment and delivered high profit. Looking ahead into the 2024, the first item in our agenda is group maintenance, which we have started on time and hope for a safe and swift completion. 2024 will also be a year where we will continue to take ambitious steps in our strategic transition plan. We are currently in planning phase of several licenses granted to Entek in 2023. We will also share with you our first integrated annual report, which will include several new disclosures as well as detailing developments on the pledges we have shared so far. I appreciate your time and trust in our company. Thank you all for listening to us this evening.