Saudi Aramco Base Oil Company - Luberef (2223) Earnings Call Transcript & Summary

Hello, everyone. I'm Saleh Alghamdi from the Investor Relations Department at Luberef. It is my pleasure to welcome you in today's audio webcast, where we will be discussing our performance for the third quarter of the year 2025. I'm also pleased to be joined today by our Chief Executive Officer, Mr. Samer Al-Hokail; and our Chief Financial Officer, Mr. Saud Kamakhi. Our session will begin with a presentation highlighting Luberef's Q3 2025 performance, followed by a Q&A session. Please note, this webcast is being recorded for future reference. Before we dive into the presentation, I would like to draw your attention to our cautionary statements. During today's presentation, we may make forward-looking statements that refer to estimates, plans and expectations. Actual results and outcomes may differ materially due to factors stated in this slide. With that out of the way, I will now hand over the call to our CEO, Mr. Samer Al-Hokail.

Thank you, Saleh and good day, everyone. Welcome to Luberef's Third Quarter 2025 Earnings Call and thank you for joining us. In Q3, our unwavering commitment to safety and operational excellence have led to an exceptional performance results. We have achieved a total of 41.1 million safe man hours without a lost time injury, maintained a 0 total recordable incident rate, TRIR, reached a year-to-date mechanical availability of 98.9% and we maintained a 0.93 million standard cubic feet of greenhouse gas emissions, underscoring our focus on efficient performance. During the quarter, we expanded our customer base through a new ultra-low sulfur diesel sales agreement with Saudi Aramco. This initiative aimed to enhance our byproduct crack margins and to manage market volatility while maintaining operational resilience. We strengthened our partnership with Bahri chemicals and shipping company through a new contract for shipments, a step that will further optimize our logistics and deliver meaningful reductions in our freight costs. This collaboration reinforces Luberef's competitive position in the industry, enhances cost stability and ensures our sustained operational excellence. Building on the successes achieved in HVGO this year, we are now working to extend this optimization approach further by scaling up and evaluating other intermediate streams. Luberef has launched the Group III base oil slating program, marking another important step in expanding our range of products. This program is underway, aiming to secure commercial readiness for producing Group III. This initiative represents a key milestone in our ambition to diversify our portfolio, increase market presence and align with the evolving needs of customers. The Group III+ technical study has entered a crucial stage, marking a step forward in our broader efforts to diversify our products. It is undergoing a pilot configuration to verify product quality. The results of these tests are expected in the fourth quarter. If the results are aligned with our long-term growth strategy, we will carry the project to the next phase. The Growth II expansion project continues to progress with overall completion reaching 60%. Despite some procurement delays that extended into this quarter, our focused recovery plan measures have pushed the procurement phase to an advanced stage. During Q4, both procurement and construction activities are planned to accelerate, pushing the project completion rate to approximately 70% to 75% by year-end. We continue to work to mitigate delays and add resources to complete the project as early as possible in 2026. Further details and confirmations will be shared in the 2025 annual call. Our capital allocation continues to support the Growth II project. Though spending was lower than planned due to an ongoing procurement delays, as of September 2025, total CapEx reached SAR 138 million. We expect spending to increase as procurement progress and construction activities intensify in the upcoming quarters. As we look ahead, we are fully prepared for the upcoming scheduled turnaround, which represents a pivotal step in upholding and strengthening our operational excellence. This turnaround will include a series of planned maintenance activities and strategic construction work under the Growth II project aimed at reinforcing our operational reliability and safety records. In the first 9 months of this year, our base oil crack margins reached SAR 1,884 per metric ton, reflecting a significant increase of 9% compared to the same period in 2024 and exceeding the historical 10-year average by 5%. Building on our strong operational foundation and a focus on efficiency, we continue to enhance our market position and deliver sustainable growth. Our commitment to strategic initiatives, asset optimization and new opportunities is laying the groundwork for accelerated expansion and long-term value creation. With that, I will hand over to our CFO, Saud Kamakhi, to walk you through the financial performance of the company.

Thank you, Mr. Samer. It's a pleasure to welcome everyone and I'm pleased to walk you through our Q3 2025 financial results and share our outlook for the remainder of the fiscal year. We sustained a strong financial performance, supported by higher crack margins despite a decline in base oil sales. Although our net income in the first half of 2025 was below last year's record level, performance improved notably in the third quarter with net income rising 14% quarter-on-quarter. Our continued operational improvements and business execution have narrowed the gap significantly, reducing the year-over-year difference to just 2%. During this period, our free cash flow declined by around 43% compared to the same period last year. This reduction was driven by working capital changes as well as increase in our growth CapEx. Additionally, spending across sustaining turnaround and Growth II project has risen relative to last year, reflecting our continued commitment to long-term operational excellence and expansion. Although our cash conversion rate softened during the period, our financial resilience remains robust, supported by an EBITDA of SAR 968 million, free cash flow of SAR 604 million and a healthy cash balance of around SAR 1.2 billion. Combined with our exceptionally low gearing ratio, this highlights our strong liquidity position and ability to fund growth while maintaining financial stability. When we look at our performance over the first 9 months of 2025, our net income recorded a 2% decrease compared to the corresponding period of 2024. This performance was driven by lower byproduct crack margins and a decrease in base oil sales volume despite the increase in base oil crack margins. OpEx decreased slightly during the period, reflecting continued cost discipline, while Zakat expenses rose marginally compared to last year. Turning to our cash position. We began the year with a balance of SAR 1,187 million over the first 9 months. Our operations generated SAR 885 million in cash, highlighting the company's strong underlining ability to convert earnings into liquidity. Our focus on sustainable growth remained solid as we directed SAR 282 million toward capital expenditures aimed at strengthening our assets and expanding our capabilities. At the same time, we reaffirm our commitment to shareholder value to continue distributing dividends, demonstrating our ability to invest for the future while delivering immediate returns. We also recorded total cash outflow of SAR 102 million, mainly related to loan repayments and financing costs. Taking all movements into account, our cash balance at the end of the first 9 months of 2025 stood at SAR 1,170 million, a modest decline of SAR 17 million from the beginning of the year, fully consistent with our strategic spending plans and capital allocation priorities. Moving to the guidance. Our production target remains the same for the rest of the year. However, the CapEx assigned for Growth II has been revised to be from SAR 200 million to SAR 250 million for 2025, reflecting the procurement delays that were previously highlighted by Mr. Samer. Ultimately, in the third quarter of 2025, Luberef continued to demonstrate strong operational momentum, delivering consistent progress in line with our strategic priorities. Through disciplined execution and a clear focus on long-term value, we advanced several key initiatives that are building a solid foundation for sustainable growth and future success. As we're entering the last quarter of 2025, we look back to a year of achievements and we remain confident in our strategic direction that continues to drive our success. The focus is firmly set on positioning Luberef as a recognized leader in the global base oil and specialty lubricants market, guided by disciplined execution and a commitment to long-term value creation. With that, we will move to the Q&A session, which will be moderated by Saleh.

Thank you, Mr. Saud. [Operator Instructions] Mr. Ildar.

Congratulations on the strong set of numbers. Can I just ask to provide some guidance on the potential impact of the new diesel supply? What kind of impact are we talking about depending on the prevailing diesel cracks globally? And secondly, the same on the new freight agreement with Bahri, what kind of impact are we talking about year-on-year potentially? And when exactly that contract becomes operational and active?

So Ildar, thanks for the question. This is Samer, the CEO. These are 2 major agreements we've signed, one with Aramco and the other with Bahri and more to come with shipping. On the latter, which is the Bahri, significant reduction in freight operation costs. So this should hit our operating expenses and our operating costs, OpEx significantly, I mean, positively on that. We're talking about double digits on the freight itself, reduction percentages. On the low -- ultra-low sulfur diesel, that's a big thing. It's pretty much a 20-year agreement, supplying around 6,500 barrels per day and subject for availability. This is going to be marketed all over and above what we used to market the diesel of. This is pretty much low sulfur ppm diesel. In the past that was just sent and sold in the normal diesel ppm. So we should get a premium on that area. And I think guidance will be given further in the -- hopefully, Q4.

So adding to that, that is important for us to find a different outlet. The major reason to do that also is to support our byproduct margins positively in the future.

And do I understand correctly that -- so the amount of diesel volume -- so the diesel volume under this agreement is basically is how much you roughly produce today. With Growth II project completed, you might have actually a higher diesel production volume. So would you expect that additional diesel volume to be also included in this deal or rather not at this point?

So up to 6,500 barrels per day, this is Saud -- the new agreement with Aramco. Even supplying all of that in daily basis on that quantities, there are additional production of diesel of the current operation. With the new operation that there is any new diesel addition that still we have different sources to place that diesel later even after the Growth project.

I think, Ildar, spot on. I don't have a number top of my head with the new project. Definitely, asphalt will be increasing in the new project, Growth II, diesel and naphtha will be increasing because we're going Group III, so it's going to be cracked further. So the expectation, the yield of diesel should be less. I'm just putting my chemical engineering hat here on that. So -- but we'll give the guidance on that.

And maybe lastly, I think you talked about potential UCO supply contract, to be potentially secured with the Growth II project completion. Is there any change in your expectations for that deal? When should we expect this to happen, if it happens?

Are you referring to the UCO supply agreement that coincides with the Growth project itself to reach the [ 65 ]. That should be coming very, very soon. And we don't anticipate any issues, honestly, on that. It's just more of having the process to work with Aramco but we should be getting it hopefully by Q1 or even earlier. Back -- I just want -- a clarification to others. Back to the sulfur diesel. We used to sell that at a 500 ppm. What we produce is almost 10 ppm or even less than 10 ppm. Imagine the difference on that. So we were able to secure a sale agreement to sell it at 10 ppm pricing. And pretty much you could look at Platts and see the difference between the 500 and the 10 ppm and figure out the math there.

We'll turn next to Mr. Fawad Khan.

[Foreign Language] I'll just pick up from where we have left on the ultra-low sulfur diesel oil. One of the comments mentioned that the current agreement -- the new agreement does not cover the production of the current plant or the current configuration. Is my understanding correct? So that means the -- under the current production arrangement or setup, the company is producing more than 6,500 barrels per day of ultralow sulfur diesel oil.

Can you repeat again? Sorry, can you repeat the part about the configuration production?

So apparently, the comments mentioned that the new agreement does not cover the -- even the current production of ultra-low sulfur diesel oil from the 2 plants or from the hydrocracker only. So is my understanding correct that the potential to increase or the potential positive impact from this agreement could be higher once we get into the Growth II project.

It's going to be by volume. So Group II -- first of all, thanks, Fawad, for the question. I'm just trying to maybe better answer, give clarity on that. Currently, what we used to sell, we should be selling at a higher premium given the 6,500 barrels. That's one part, which is the current production on Luberef. Now when Growth II comes, we'll have further guidance. I don't have the exact number or predominant number. But however, it should be more than 6,500 and it's going to be volume game at a higher price. I think this answers your question.

Partly. Let me try to rephrase the question. So the agreement is for 6,500 barrels per day. So the current production is higher than 6,500 barrels per day or it is lower than the current ceiling under the agreement?

If you're referring to the current production, it's a bit more, so it's about 6,500 -- sorry, it's above 6,500 barrels per day. This is just the agreement that was established with Saudi Aramco. So the current contract will exist and any surplus will be sold to other customers, which -- with whom we have other standing agreements.

Okay, sure. And coming to the Growth II project and also tying up with the turnaround. Apparently, the earlier guidance was for the turnaround and the commissioning of the Growth II project to coincide sometime in December. And then you have the new turnaround, which is starting from mid-November. So my question is, would the -- once the Growth II project is about to be commissioned, so we -- should we expect another shutdown of the whole Group II train at the time of the commissioning of the project? Or would it not require any shutdown at that time?

The -- Fawad, good question as well. And that's the clarity we want to give to the market soon, hopefully, by our guidance in the year-end. Ultimately, we don't want to shut down but rather slow down to able to hook up the Growth II pots and pans and all the above on that. That's the ultimate. And that's what we're working hard during the T&I, in the turnaround to be able to install -- pretty much give some feasibility and flexibility whereby and the second, whatever -- when it ever happens, the shutdown or slowdown becomes less impactful from our production point of view. So that's the thinking now. Times and guidance will be given as things are moving. It's a moving target. We are -- took over some of the activities of the contractor pretty much, descoped some of the activities and we are pretty much becoming in the driver's seat on that to hopefully get this project as soon as possible in 2026.