Motor Oil (Hellas) Corinth Refineries S.A. (MOH) Earnings Call Transcript & Summary

Thank you for standing by, ladies and gentlemen, and welcome to the Motor Oil Conference Call on the Third Quarter and 9 Months 2020 Financial Results. We have with us Mr. Petros Tzannetakis, Deputy Managing Director and Chief Financial Officer; and Ms. Mary Psyllaki, IR Officer of the company. [Operator Instructions] I must advise you that this conference call is recorded today. We now pass the floor to your speaker today, Mr. Petros Tzannetakis. Please go ahead, sir.

Difficult, I know every time, my name is difficult to pronounce still. Hello to all of you. Good morning, good afternoon, good evening. Another conference call in a difficult period for the Q3 and 9 months results. During this last quarter, the particularly adverse refining environment with negative benchmark margins continued. Weak product cracks with significant inventory overhang affected the markets. The reduced OPEC+ supply and the sour grades availability at this period was quite tight. And at times, the price was higher than Brent, which obviously creates problems. Travel and tourism resumed in the local market but significantly lower year-on-year. Air traffic was down by about 50% in Q3. As we have moved in the fourth quarter, margins have recovered a little bit, but they're still at low level. Fragile recovery in Europe. This was interrupted by the new COVID infections and the outbreak and the new lockdown measures that have been adopted by many countries. As we can see on Page 2, I will not linger on the other numbers but just one, that 9 months EBITDA turned positive at EUR 37 million for the group, which is a pleasant development, particularly after one remembers Q1 and Q2 with the large inventory losses. So even on a reported basis, the number starts improving, which gives us hope for the future. And clearly, the magnitude of 9.1 million tons of sales is satisfactory, even though it is lower. Crude prices and product prices moved quite a bit during this quarter, from about $42 down to $36 for the -- per barrel for the crude. Gasoline moved from about $3.75, went down to $3.65, up to $4.18 to close at $3.92. Fuel oil, same thing, to 3.5% from about $2.10, went as far up at $2.45 to close at about $2.28. What we generally saw during this quarter is an increase during July and August and a sudden drop in September, which, for a number of refiners, has caused some inventory losses. But it's a difficult one to call, losses or gains, during this quarter. So it's very much what each individual refiner has done for themselves. Of course, when these dollar numbers are translated into euros, this gives a slightly different picture because the euro was particularly strong during this period. It was the highest euro/dollar-denominated parity over the last 2 years. So we moved from about $1.12 at the end of June, up to $1.19 at the end of August, down to $1.17 roughly in September, hovering at around $1.18, $1.19 now. So clearly, a stronger euro eats up part of the refinery margin, and we have to deal with that. Greek macros during the period were good as far as credit is concerned, and it's something we will see later with Motor Oil, the credit story of Motor Oil, the availability of borrowing, et cetera. So on this front, liquidity was really, really abundant, and it worked well. But as far as real growth and real GDP growth during this period, clearly, they were subdued. And even though the government did a lot of -- took a lot of measures to encourage tourism, the tourist season was much weaker than we were used to. Clearly, this influenced the domestic demand, which picked up a little bit on some products. I mean, I'll give you the automotive fuels, for example. It was still down compared to a year ago. Obviously, tourists were much, much lower than a year ago. So automotive fuels for Q3 were minus 7.8%. But if you compare this with the minus 24% of Q2, clearly, it is an improvement, bringing the 12 -- the 9 months automotive fuel reduction to 12.1%, so year-to-date reduction of 12.1%. The breakdown between gasoline and gas oil is a little bit in favor of gas oil because of diesel because it is helped by transportation fuels. And mainly, this actually may be -- I wouldn't say shipping at this point because we are talking about the automotive gasoline. Don't forget that heating was particularly strong during Q2, which affected the numbers in Q2. So without the numbers of heating, Q2 -- demand in Q2 would have been much lower. And actually, they were minus 18%, while automotive gas oil for Q3 was minus 9%. So we see a slight improvement there. A little bit an update of where things are now. Because of the new measures and the new lockdown, we are down to about 70% in gasoline and about 89% in automotive diesel. So for -- this is for the month of November. So this is just to bring you a picture of where we stand today. As far as the Motor Oil itself during this period, it was again a period of managing the crisis. It's different. First, it was the lockdown. Then it was the lower tourist season. Clearly, demand for bunker fuel for the tourist ships was lower. The islands had much lower demand than they had during previous summer, and we had to manage that. Health and safety for all employees was one of the big priorities and, of course, the uninterrupted operations of the refinery with increasing -- gradually increasing of the yearly throughput, which we will see in a little bit. The market supply obviously continued very satisfactory. We have no hiccups and no problems. And as I said, liquidity was at peak levels. The picture on Slide 3 shows us a little bit the crude differentials, which clearly were a bit strange as far as the Urals was concerned. But you will see in the next slide that we took no Urals whatsoever during this quarter. And the Basrah Light with Brent was also quite -- at times during the third quarter was at parity with Brent, which is not something we like. The product cracks, we had very strong fuel oil -- high sulfur fuel oil, very strong negative track, but it was at minus 5.8%, clearly, an improvement to the previous year -- to the previous 2 quarters. And for gasoline and diesel, okay, they were weak, but they were there. To see a little bit on Slide 4, the feedstock of Basrah and Kirkuk and Basrah Light. They accounted for this period for 81% of the total compared to the previous quarter, which was at 77% and the first quarter, which was 69%. So again, a gradual increase in the heavy sour mix vis-à-vis the light sweet mix. The particular difference that you will see in this quarter was the drastic increase in Kirkuk. Kirkuk increased from 19% and 18% in the first 2 quarters to 40% in this quarter. So clearly, there must have been something there which helped us in our results, in our performance. Feedstock. The processed volume still lags compared to a year ago because we are talking about the 9-month period but clearly has increased compared to the other 2 quarters. Total feedstock for this quarter was at 3.144 million metric tons compared to just under 3 million in Q2 and just under 2.5 million in Q1. Of course, Q1 has to be taken into account in conjunction with the shutting -- shutdown of the hydrocracker. This 3.1 million includes larger quantities of crude, so crude again was higher than it was in Q1 and Q2; a slightly lower gas oil blending, desulfurizing actually; and a slightly higher fuel oil. Actually, we imported this feedstock, slightly more fuel oil than we did in the previous quarters, which is quite interesting. But obviously, it had an influence on the numbers. Go a little bit on the sales. And yes, just not to forget, since we are still on the crude topic, the throughput has, for Q3, risen to 180,000 barrels per day. And the overall yearly average is at about 168,000. So a very weak Q1 is gradually being made up by the following quarters. Let's look at the sales -- at the production first and then at the sales. Clearly, production was, I guess, the very strong points of this quarter. And I'm talking about the mix of production, how things -- how it changed. We see a steady performance of gasoline, standing at about 17% for the quarter and 17% for the 9 months. Jet fuel went even further down. So jet fuel was at 6% for the quarter compared to 9% for Q2 and 13% for Q1, giving a 9% overall for the 9 months. Diesels, gas oils, as we put them together, show a slight increase. But if one really goes into the detail and analyzes and breaks in -- them up between heating oil and automotive, during Q2, we had large quantities of heating oil, while during Q2, Q3, we had large quantities of diesel for automotive. So remember that heating gives you a much smaller margin than automotive, and this was another -- one of the reasons why Q3 was so strong with our margin. Special products, including naphtha and others, went up to 14% during this quarter from 11% during Q2 and 10% during Q1, giving us a 12% overall, again, a very, very strong performance. And fuel oil, down at 9%, numbers I didn't even imagine we can manage. But obviously, we can just improve from quarter-to-quarter from 13% in Q1 to 11% in Q2, down to 9% in Q3, giving an 11% overall. So clearly, this mix of our production has influenced the mix of our sales. Which if we go straight to Slide 7, you can see that in Q3, domestic market, marginally lower than in Q2 and in Q1. But if one considers that domestic market has both heating and auto from Q1 and Q2 while only auto for Q3, actually, if one breaks up the numbers, auto sales in the domestic market were higher in Q3 compared to all other quarters. And strong exports. So exports are continuously narrowing the gap from the beginning of the year. We're, I think, down to about 4%, 4.5% minus compared to full year -- to -- for the full year numbers today. So exports are doing well. And with bunkering and aviation, of course, not doing well, as one expects, being down by about 53% year-to-date. But it is something that we have to manage, and this explains also why our jet production was so much reduced. Moving on to the volumes between trading and refining, shows you that even though refining was down by about 1 million metric tons, we managed to still do some trading on top of it. And so the total number was 9.1 million. The result of all the above is on Page 9, which shows you that our margin for the 9 months stood at 49.6%. And this, of course, is assuming no inventory effect for the Q4 -- for the Q3 and the inventory effect that we had in the previous quarters. And reported numbers, of course, take into account the inventory effects of the previous 2 quarters and 0 effect for Q3. Clearly, what one can see is a very strong outperformance, overperformance, whatever you want to call it, of -- over the benchmark. And this significant overperformance can only be explained by the mixture of the products that we finally produced compared to previous quarters. I guess then, there is -- now the conclusion of this picture here is that motor oil, once again, demonstrated how flexibility can mitigate negative market movements, generating extra margins up to a point, of course. Looking at the numbers, current Q3, Slide 10. EBITDA, positive at EUR 62 million. Earnings before tax, at [ EUR 638 million ], after tax at EUR 29 million. Let's go to the adjusted, which is the same, and more importantly go to the group, which shows you that -- why the EBITDA at the parent was EUR 62 million. Slide 12, the group was EUR 100 million. So a very good performance by the sum of our subsidiaries, helping the overall number reach more satisfactory level and having for this quarter EUR 44 million after-tax as a result. Of course, next week, you can see the adjusted numbers, which you all know. Let's not spend time on that. CapEx. CapEx guidance, slightly reduced from EUR 210 million to EUR 180 million. This has nothing to do with delays in the projects. The project -- the main one, the reformer is on schedule, on budget, exactly as it was. It is simply that the way money is absorbed gives us a lower estimate for the full year, and we hope it will stay on that. A slight increase in net debt, mainly because of the dividend having paid during the quarter and working capital not being particularly strong, the working capital change, during the quarter. On Page 15, we see the debt maturity profile. Clearly, a change from what we presented in the last quarter, in the last conference call. And we have no debt payments in 2021. The first one comes in 2022. And of course, it is the bond which matures in April of EUR 345 million and some bank debt. And as we said last time, we are moving forward all the loan maturity profile -- the loan maturity for 5 days, and we're renegotiating the interest rates. And this is an ongoing process. I don't have anything particularly new to give you at this conference call, but it is an ongoing process. And I'm sure by the end of the year, more of this -- more will be done on this front. We think it is a very good, very opportune time to proceed with that. I think I will stop at this point and let you come back with the questions, which I think are going to be many.

[Operator Instructions] We will now take our first question.

Henri Patricot from UBS. I've got a couple of questions, all for you. So the first one, just the refining result was particularly impressive this quarter given the macro condition and especially one of the charts that you showed with the crude differentials, Basrah effectively moving against you by about $7 per barrel quarter-on-quarter. I think some of the other crudes was not as extreme. But still, you should have lost maybe close to $4 per barrel sequentially from crude differentials, I would estimate. And yet, you delivered pretty similar gross margin sequentially. So I was wondering if you can give us a little bit more of a breakdown of where you managed to make up for these much tighter crude differentials. You mentioned that Kirkuk was helpful. But if you can give us here a sense of the moving parts there? And then the second one is on the CapEx guidance. You mentioned there's no delay. These are all cost savings. I remember that last year, you also had a lower CapEx guidance for the year, with some CapEx slipping into 2020. Is this something similar this year with some payments slipping into 2021? And more broadly, perhaps can you give us a sense of your level of maintenance CapEx you have now?

Yes. I start with the second one. It's more straightforward. Maintenance CapEx, I don't remember these numbers. But it's the usual one. I think it's between -- up to EUR 20 million. I don't think it is more. But I have to check to tell you what was for the 9 months because it might be a bit higher in -- because we had the hydrocracker shutdown. But okay, let me check. I'll come back on this because I don't have it off the top of my head. But you remember, there is a range always. There is a range within which we move, depending if we have a major shutdown or not. And as each year, we have a shutdown of one of the main units. This unit was a hydrocracker. The year before it was the FCC and the reformer. Each year, we have something. So the high one was in the first quarter this year. But I'll check and come back to you, okay? Mary will come back to you with the number. Otherwise, there isn't any slippage. But sometimes, the way we present the budget, maybe we are a little bit more aggressive as far as the absorbing of the money is concerned. And then it takes longer. It doesn't mean that the projects are being slower or anything, and you know this. You've known us so many years on that front. Now on the first one, it's a very difficult one to explain with one main reasoning. It is a combination of facts. As you saw, there was 0 Ural, some CPC and a lot of Kirkuk at the expense of Basrah. Clearly, this way of operation helps the output because the choice of crudes is very much dictated by the yields or the product yields that we want to produce. So when we want to produce more special products or less jet or more gasoline, different crudes give you different yields. And therefore, this -- the yield of the products is the one which, to a large extent, designs -- decide and defines the crudes we are going to choose. Of course, we try new crudes every time, as you remember. And we did try some new crudes this year as well. And there is this opportunity because we have a big number of suppliers. So this is the only answer. There isn't anything else.

Okay. So there's no particular one-off such as contango trades or some hedging which you would have been doing?

Contango, yes. I -- [ talk the current breakdown or talking annually ]? No, we don't have -- we did some contango transactions, but it is not in the third quarter. What we saw, we have already seen in the first -- in the second quarter.

[Operator Instructions] We will now take our next question.

It's [ Nick Kaftas ] from the [ Pallas Investing Services ]. I'm truly sorry if there is some [indiscernible] on the line. It's not a very, very good line. I was -- one thing I would like to ask about the dividend concerning year '20. Are we going to have any changes there, severe changes? [indiscernible] environment?

Okay. Dividends, if you go back to the history, you will see that we are a steady, consistent dividend payer. And clearly, you know that. But if you see the difficult years, and you go back to our long presentation, which we don't use today, you'll see page -- it's on Page 25, I think you have it from different [indiscernible]. You see in 2014, with the losses because of inventory losses at the time with the drop of prices, we did not pay any dividends. As far as this year is concerned, the only thing we can say at this point of time is that we will not pay an interim dividend because the interim dividend can only be paid from existing reported profits, not from adjusted profits, from reported profits for the half year or for the 9 months or for the 10 months. So obviously, there is no room to pay an interim dividend. Your next question obviously is, "Okay. What will you do with the dividend remainder, which has to be decided later in next year?" The answer is I don't know because it will depend on what will happen at the beginning of the year. How will the year close? How would the first quarter go? Will things pick up? Will margins pick up? Will prices go up? Will we have inventory gains against inventory losses we had this year? So the answers to these questions are going to guide us by March hopefully to decide if there is room to give some smaller, of course, dividend in June.

We will now take our next question.

It's [ Luca Orsini ]. Petros, my question was on the dividend. So I'll just make a kind of follow-up. Besides the criteria...

[ Luca ], how many years have you known us?

15.

Yes. So you know if we pay dividends or not.

No, I know. I know. No, but do you -- what do you look at in terms of, do you -- of course, you look at the environment and the present -- the environment at the time in which you have to think about it. And it's far too early now. But I'm more looking at what is your main criteria? Is that the reported number or the adjusted number that matters on the dividend for you? In the way -- in terms of -- because these 2 numbers can differ. But which one is the one closest to reality as it comes to dividend?

The reported.

The reported, okay.

But it's what I said to the gentleman before. But we are talking about the dividend that is going to be paid out of the profits of 2020. So if, in March, things have improved and '21 looks good, we might decide to give a dividend for 2020, even though the reported numbers were not good.

Okay. So the most important thing in reality is how the world will look at. And so how confident you are in taking money out of the company and giving it to shareholders as opposed to retaining it to...

You know us well. Thank you. Yes, exactly.

Okay. Perfect. That's correct -- that's a nice way of looking at things. Yes, that's the right way. Okay.

We will now take our next question.

This is Victor from Piraeus Securities. I had a question regarding crude differentials and what is the trend in the fourth quarter, especially considering the recent turmoil with OPEC and the U.A.E. wanting to leave. I'm wondering if that would have an impact on crude differentials.

Yes. Let's see. Let's look to my papers. Q4, October was good. There was some widening. And November, there was some narrowing. Today, they look better. So we are in a volatile quarter. I would say, if it can be compared to Q3, very difficult at this point of time because in Q3, we had 2 good months, July and August, and a very weak month in September. Now we had -- seems to have a good month from a margin point of view in October, slightly weak in October from an inventory point of view, inventory loss, because prices dropped. November, slightly narrower margins. It's a very difficult question. One cannot forecast exactly what's going to happen, but we'll have to wait for another month and see if things strengthen towards the end of the year or not, okay? So it's all right, but it's nothing phenomenal.