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

Hello, everyone. Good afternoon. My name is Saleh Alghamdi, I'm the Investor Relations Manager at Luberef. It is my pleasure to welcome you in today's audio webcast, where we will be discussing our performance for the first half of 2026. I'm also pleased to be joined virtually by our President and Chief Executive Officer, Mr. Samer Hokail. And here with me in Jedda, our Chief Financial Officer, Mr. Sayou'd Kamakhi. Our session will begin with a presentation highlighting Luberef's performance for H1 2026, 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 statement. 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 the slide. With that out of the way, I will now hand over the call to our President and CEO, Mr. Samer Hokail.

Okay, everyone, [Foreign Language]. Welcome to Luberef's second earning call for 2026, and thank you for joining. We value your participation today and look forward to sharing an overview of our business highlights, strategic progress and financial results. This year marks a significant milestone for Luberef as we celebrate our 50th anniversary. Over the past 5 decades, the company has built a strong track record of operational excellence, safe and reliable operations and disciplined execution. As we celebrate this milestone, we remain focused on building on that legacy, keeping the world in motion and positioning Luberef for its next phase of growth. Building on this strong foundation, the second quarter recorded another notable milestone for Luberef as we delivered one of the highest net income and crack margins in the company's history. This achievement reflects strong operational performance and our ability to capitalize on favorable market conditions. Safety remains our highest priority throughout. The quarter, we sustained a total recordable incident rate of 0 and surpassed 44.4 million manhours without a lost-time engine, while maintaining mechanical availability of 100%. These results underscore the strength of our safety first culture and disciplined execution of our operating model. The company advanced its localization effort by signing an agreement with our Power Industries Middle East Limited to supply base oil for its manufacturing operations within the Lube hub value Park in Yanbu. The agreement represents an important step in enabling of our power manufacturing transformer oils and a broad portfolio of specialty oils within the Kingdom. Reinforcing the Lube hub position as a catalyst of downstream industrial development while contributing to local value creation and strengthening the Kingdom's industrial ecosystem. Building on that commitment to enhancing local content in the Kingdom, we launched asasa program, which is the name of the program, which aims to promote local sourcing, strengthening the supply ecosystem and develop national capabilities across our operations. The program embedded local content as a strategic pillar across Luberef's value chain, advancing Saudi localization agenda while fostering long-term partnerships within the Kingdom suppliers, reinforcing our contribution to the Kingdom's Vision 2030. Furthermore, we signed a memorandum of understanding to explore carbon-related initiatives supporting carbon market development and emissions reduction in line with the sustainability ambition of Saudi green initiative. We continue to optimize the value chain of export through ongoing logistic initiatives. These efforts enhance supply chain efficiencies strengthened our competitive cost position and contribute to improved profitability. As a result, our Board of Directors has approved an interim dividend of SAR 4 per share for the first half of 2026, in line with Luberef's dividend policy, reflecting the company's strong financial performance and commitment to delivering shareholder returns. Our commitment to transparency and corporate excellence was recognized during the quarter as Luberef received the Investor Relation Program of the Year 2025 mid-cap awards for the second consecutive year. This achievement is a testament of our continued focus on maintaining the highest standards of investor relations and fostering open and consistent engagement with the investor community. We remain confident in Luberef's strategy and our ability to execute it while fortifying the company's long-term competitive position. Growth to reached 73% overall completion, building on this progress procurement activities accelerated during the quarter to sustain the project execution phase. The current favorable pricing environment and feedstock supplier presented an opportunity to create additional value. Accordingly, we scheduled the planned shutdown to October, enabling us to extend production during a period of strong base oil pricing and market dynamics. During the fourth quarter, both shut down and ongoing activities are expected to increase the project's progress by 10%, driving the total percentage to 83%. Construction scope, related to vacuum distillation unit will be subject to completion in the first half of 2021, followed by the project commissioning. Our base oil crack margins for the first half of 2026 reached SAR 2,732 per metric ton, the highest level in Luberef's history. This reflects an exceptionally strong market environment with crack margins increasing by 49% compared with the same period last year and standing 52% above the 10-year historical average. Supported by strong performance and disciplined execution, these healthy market conditions enable us to deliver record financial results during the period. With that, I will now hand it over to our CFO, who will be walking us through the financial performance, and I'm looking forward for the Q&A session.

Thank you, Mr. Samer. I extend the warm welcome to you all, and I'm delighted to guide you through our H1 2026 financial results and provide insight into the guidance for remaining financial year. During the first half of 2026, the company delivered an exceptional financial performance supported by a favorable market environment and strong pricing dynamics. This strong performance was underpinned by a record high base oil crack margin of SAR 2,320 per metric ton, representing an increase of 49% compared with the same period last year. The significant expansion in margins provided a solid foundation for the company's earnings growth during the period. As a result, EBITDA reached to SAR 1,184 million, representing an increase of 94% year-over-year while net income amounted to SAR 992 million, with an increase of 113% compared to the same period last year. These results demonstrate our ability to capture value different market conditions and reflect the resilience and strength of our operating model. Our capital program continues to focus on supporting the company's strategic growth priorities, with total spend of SAR 302 million, of which [indiscernible] SAR 190 million was allocated to the Growth 2 projects, while turnaround commitments contributed to SAR 133 million. Despite this continued investment, the company generated strong cash flows during the period, supported by favorable working capital movement, free cash flow increased by SAR 346 million compared with the same period last year, further reinforcing the company's strong financial position and financial flexibility. Supported by this strong cash generation, the company closed the first half with a robust financial position, maintaining a negative gearing ratio of 20% while delivering a 33% in watch.[indiscernible] Together, these metrics reflect the efficient utilization of our asset base a disciplined capital structure and a resilient balance sheet that provides a solid foundation for future growth. Net income for the first half of 2026 reached to SAR 992 million compared to SAR 467 million for the same period last year, representing the 113% year-on-year increase and the highest value in the company's history for a 6 months period. The strong performance was primarily driven by a higher base oil crack margin as Luberef successfully capitalized on market conditions through effective operational management and strong safety and reliability performance. enabling the company to benefit from the higher market prices and strong track margins. Turning to our cash position. We began the year with a cash balance of approximately SAR 1,373 million and generated SAR 1 billion in free cash flow during the first half, reflecting the strength of our operating performance and disciplined working capital management. During the period, we invested SAR 302 million in capital expenditures to support our strategic growth initiatives while returning SAR 589 million to shareholders through dividends for the second half of 2025. As a result, we closed the first half of 2026 with a cash balance of SAR 1,750 million, maintaining a strong liquidity position and the financial flexibility to support both our growth strategy and shareholder retails. As we move forward, base oil production for the year is still projected at 1.15 million metric ton of base and in line with the recent development in Babinet, export sales have been diverted to alternative routes and growth to shutdown is rescheduled to October in order to capture the current attractive business environment. While the range of CapEx guidance remains the same, reflecting our strong financial performance and healthy cash generation, our Board of Directors has approved an interim dividend of SAR 4 per share for the first half of 2026 according to the Luberef's dividends policy. Our guidance factors stated in the slide remain valid, including premiums and prices indices. This quarter demonstrated the resilience of our business and the strength of our financial and operational performance. Despite the evolving regional environment, we remain confident in our ability to adapt, execute our strategy with discipline and capitalize on opportunities. We are all positioned to sustain strong profitability, maintain a healthy balance sheet and continue investing in our long-term growth priorities. With that, we move to the Q&A session that will be moderated by Saleh.

Thank you, Saud. [Operator Instructions] I see Mr. Rao Lam from SNB Capital.

First of all, congratulations on the very strong results. I have 2 questions. The first one is regarding the current situation of Babel mend and how things are -- I know things are still evolving, and it's not very clear. And you mentioned so that there is a rerouting to other destinations. So I just want to understand how is the picture of -- or the ability to export volumes. The second question is about the byproduct margins. Last quarter, it was really strong. But apparently, this quarter, it was a drag on the earnings. So how should we think about it? And what was the reason behind the weak numbers in Q2.

Yes. Maybe if I may take Saleh this on Beeline -- thanks for the question. On Bavla, it still remains very continuous in terms of aim heightened and regional tensions. But we do have several alternatives. It is part of our enterprise risk management that we review on a monthly basis and alternatives are different routes, some of which are the Cape of good Hope, which are in action as we speak. We would actually truck even more locally and sell locally. -- and this should offset it now. Nevertheless, ships are moving through the pavement. Our ships are being nominated and accepted as well in the recent few days, but it is fluid, and it evolves as we speak. On the second question, I think maybe Saud can handle please.

Thank you, a, first of all, for your attendance. And yes, I think from my product perspective and second quarter, it was lower. And as you know, that those are related also to the fuel prices and the drop also that happened during our feedstock and crude which our byproducts such as diesel also follow the same trend. So therefore, yes, we enjoyed high margin during quarter 1. But quarter 2, maybe we came back to the regular situation in normal years where we have lower overall margin index by product. So that is -- have 1 impact in our margin, but not that much impact compared to any final the results.

If I jump in Hilo you mentioned how do you want to think about it. I think the way is the effect of crude oil prices and fuel oil prices to buy products as much quicker and faster and let's say, a linear relationship in a way in the market near base oil. So the base oils tend to lag. And if those prices are reduced, then the byproducts are swinging as.

Appreciate it. Thank you, at. I see next on the table, Mr. Ricardo from Morgan Stanley.

Could you lay step forward? A couple of questions, if I may, more on the marketing side of things. When you mentioned some of the logistics issues that are facing it now, could we expect any changes on the end markets that you're selling to, so a change on the exports on the destinations and also on the usual mix between domestic and exports. And then the second one, just given the current base oil prices. When we look at the normal premium that you can sell your products at the domestic market, have you seen any changes on the second quarter and in July, meaning because of prices being much higher than the usual prices, are you charging a lower premium compared to that $150 through the cycle?

So I will repeat the questions. The first 1 is related to any change in the destinations we are selling to, basically, the split between the destination and export Yes. The second question is related to the premium that we apply locally. Okay. Ricardo good to have you always and good questions as well. On the split, we try to maximize local given what's happening -- but as you are aware, local has just a cap of demand as long as we can create demand, then that's there. So we're kind of fill that bucket as much as we can, then we try to export. Yes, we are always in search for new destinations, for destinations as well, be it Europe or even the Americas. But our usual suspect destinations are in the Far East and the AG, some of which are going through the keep of good hope, which requires maybe a working capital kind of arrangement with the customers, some of which have offered to pick up actually the extra freight on that and some we can negotiate in between. And this is the nature of the industry. On the premiums, maybe I'll have this with the CFO. And let me know if I answered the question fully Ricardo.

For the second question, Ricardo, what mentioned by our President and CEO right now is keeping that mix as a continuous target for Lora. We're going to maximize the local. And with that, we are also within the range of our premium that we always share. We did not see any major changes within that premium despite the prices may be higher during that backup comparing to the previous one. But the premium is within that range where we are trying to also ensure that our product ability for our local customers is debt. And we are keeping and maintaining also the mix of 70-30% during the period.

That was super clear. If I may just follow up on 1 other point about the Keep of Good Hope. What would be the incremental cost per ton on shipping via there versus just a normal red route?

I don't have it on top of my head, but maybe as CFO, but definitely, it is higher given what's happening now. I'm just looking at even freight rates and crude oil. It just went tremendously high, not only in double but even more than that, but in our case, I'll have a CFO to answer.

Yes. As mentioned before that there is an extra charge on that. We are looking at rates that maybe started 100-plus on the freight rate per metric ton. Depends on its destination and other logistic factors. However, that is being now good at with the customers and we will see how that will impact maybe a delay in reaching to the customer 30 days or so. But at the end, we will try to ensure -- activate all our mitigation process that we already have in place to reach to our customer anyone channel.

Next, we have Mr. Mohammad Al Genes. Apologies if I mispronounce the name.

Congratulations for the great results. If you could please shed some light on the Jazan projects, leases? I know it's still a initial phase. But -- and I would really appreciate if you can just give us an update on that. Also, -- and second question that they have on dividend distribution, Masala profitability has been very strong and historically, and the profitability of the company, Luberef has been strong. And as you showed and gearing is negative 20% right now. You have a lot of cash, you have a very strong, I would say, an excess capital, giving any assets like, any test model that you have compared to and other normal or prepared refineries. So this year, and it gives you some room to increase 3D payout and increase dividend somehow to make capital more efficient and also increase retail. The as [Foreign Language] you grow on earnings, you will have a lot of accumulated capital which could push us returns lower -- and at the end of the day, I'm sure they would be really happy to finance growth plans at very decent spread.

Thank you, Mohammad. I'm just going to make sure I repeat the questions for the sake of our audience. So the first question was related to the status of project Jazan, which is to produce growth 3s. I believe this will be assumed by the President best be answered by the President and CEO. The second question is related to the why -- or what dictates the range of payout in relation with the dividend policy. Mr. President, would you like to step forward?

Yes. Sure. Thank you, Saleh you, thank you Mohammad for the question and the convincing argument you're putting through on the dividends, which will be hopefully entertained through this Q&A. We have an MOU signed with Aramco to study the facility of -- and producing Group 3 plus in Jezan. The unconverted oil that is the feed going for that facility. And it will upgrade a low-value product to a very high value product. This whole thing is expected to have an FID sometime in 2027, first half in 2027, not sometime, but definitely the first half of 2027. Currently, we are in the pre-FEED, which is the pre-engineering capability. We're looking at not only the economics, we're looking at utilities. We're looking at -- we've done the feasibility of locations -- but then the nature of these projects, which are quite intensive in engineering, front ended, it takes 6 months for that to be done then maybe another year after the FID for it to be engineered, then perhaps 1.5 years for construction and procurement. If all is okay and Babeau's good and everything is in a good shape. But of course, given what's happening geopolitically, things do kind of delay, but it should not delay on the engineering side. So the expectation is first half of 2027, and we will provide guidance on that. On your second question, I agree with you. Yes, there is a good gearing, good movement of cash. Cash conversion is high and what have you. But the policy is from 60% to 80%. We could always give more, but also you need to manage expectations and also the CapEx that will be spent in the future on those projects. We could also leave it up. So it gives us optionality on that ability. And I'll have maybe Saud can even elaborate more on that.

Yes. What you have mentioned, Sir President is right, and thank you, for that question. And this is something -- 1 of the things that we always evaluating angiography. Future project is also important to consider because they play a role as we have low gearing right now. opportunities are always there. And with the moving of a future project, those projects will be assessed on -- to be an equity debt-to-equity basis based on the environment and interest rate and all of the other factors that will help us with a low gearing ratio. We have a room debt to leverage. And we're always going to keep you posted once we have more information about that and moving forward to that direction. But yes, we have that opportunity so far due to our challenged robust balance sheet.

Thank you, Mohammed. We have 2 questions that are being tied, I will take them right now. The first 1 from Mr. Ahmad from Basrow Germany. Actually Ahmad has 2 questions. I will speak them out loud. One, you called it record crack margin and investors seeing a record would assume it cannot last. And eventually, the share base will follow what would you want them to understand. Second, you moved the growth to shut down to October, so you could keep selling at those margins. If margins are still strong in October, would you look at that timing again?

Maybe I can take the third question or about the on. So for the first question, Ahmad, yes, we mentioned that is a record crack margin because it is -- this is the current environment. However, we always refer back to the historic crack margin that we have. I think the share price, this is something that will be determined by the market. It's not by the company. So I think here, here we do not advise to any direction here on our share sales. But this is all that shares will be evaluated not only due to this current market environment, but also for our future project that we are looking to invest in and expect it in the future. So this is what we want to maybe answer this question by that. Well, the second question of moving the shutdown to October on if this margin keep maybe as you want to take that?

Yes. So I'll do back to the margins, mat thanks for the question. I think, yes, it's always the case when margins are low, they're not going to be always low. I mean they're not going to be always at the high side they will go down. And if they went down and the lowest they would -- the market would turn at some point. What's important here is management involvement to keep the facility up and running and reliable and safe. So we can enjoy good margins when the market turns, but also sustained cash flow even if the margins are low. The share price is always just a byproduct of that activity. On the whether we are able to -- or whether we kind of think of delaying the shutdown in October. I think part of that is being an agile organization by creating value and capturing value during volatile markets and volatile conditions. And I think we've demonstrated doing that. And if the opportunity presents itself, to do so. I think part of the agility and to move fast as an organization, we've demonstrated that, that we -- that might be an option on the table. But it will be on the expense of something else. So we'll have to weigh it and analyze it and make a strategic decision. I will have to make that decision going forward via consensus with the management team. And of course, our customers and we have obligations with our customers, with their nominations, with their orders. So we'll have to put all that into consideration.

Thank you, Mr. President. There is another tight question from Mr. Nav Bene. Congrats on a strong quarter. I have a question on the turnaround. Aramco go through with their land shutdown and you see room to move the turnaround to 2027. The second question is what drove the decline and grow. I assume if you're referring to growth was 1 compared to group 2 prices, given that during the crisis, they were closely aligned. So question number 1 is about the turnaround schedule 1. The second 1 is related to the market dynamics. Mr. President, would you like to...

You can take this Saleh.

Okay. So thank you, Mr. President. So now to answer your question, we are not in a place to speak on behalf of Aramco in regards to this whether they change the schedule or not. But do we see more -- do we see room to move the turnaround to 2027. I believe this is repeated for Mr. Anat from Wassa and the President cohort. Moving to your question related to the market dynamics. If we take a step back in Q1, both groups were closely aligned line due to the fact that the whole markets suffer from shortage in base oil and supply -- but as we moved further into quarter 2, some normalization happened and Group 1. Group 2, on the other hand, is mostly still strong. The demand is strong there due to the fact that it is partially compensating for the shortage, the severe shortage in Group 3 and mainly that is what is keeping the group 2 prices relatively stronger during the period, while Group 1 started to normalize. I hope I answered your question. Now moving again to the live participants, Mr. Paha Javed.

Thank you so much, management. So a couple of questions. One was around this group 2 related shutdown in October or whenever you feel it's more seasonal. But just the time of it, how long -- how many days will the shutdown last? -- and the remaining CapEx that will go into this? I think in the slide you showed SAR 300 million to SAR 350 million, is the remaining CapEx that is left regarding the expansion?

Okay. So the question number 1 is -- number 1 is a straight forward. So the shutdown duration is a 1-month period [Foreign Language] the same duration that was moved from August to October. Coming to the CapEx question.

So for your CapEx, Mr. Javier, as we mentioned, that we spent during the -- by the end of around SAR 190 million allocated for this project. That will bring the total CapEx amount during -- since we began at around SAR 38 million -- so as you know, the budget for that project is around 750. And what we saw in the slide earlier that the guidance for this year is around between SAR 300 million to SAR 350 million where we are expecting to be within that guidance during the next period. So we are talking about remaining in the second half from SAR 180 million to SAR 230 million, that would close that additional amount. Maybe we're left with maybe around SAR 100 million to SAR 150 million for the next year. I hope that answers your question.

It does. Just on the byproduct, obviously, Q2, I guess that declined a lot. So what are the trends for July because diesel prices are up a lot in the recent month, if you can just guide you a little bit on how you see byproducts for Q3.

Could you please repeat the questions?

My apologies. So just wanted to know like byproducts margins, I think like borders pricing for Q2 was on the lower side. So I mean trends that you're seeing for Q3, like July, I think these are at least is up a lot recent prices. So how do you see Q3 by orders pricing moving forward?

Yes. If we look at it in general, Mr. Sherritt -- this is a very volatile market, especially on those type of byproducts. Given with the direction of expectation is -- it's not an easy way to do it right now. However, we see that movement of those byproducts usually grow the oil prices, where there's a lot of relationship between them. we see some volatility on that. But for future perspective, maybe it's not our role here to give that at this point. this is at least how do we see it in the next quarter.

Moving to Mr. Naval Anesi. Mr. Nowal, please step forward. Okay. I will come back to you later. Moving to Mr. Dasi, HSBC, Mr. Elga.

Yes. Congratulations on very strong numbers. I have a question about the volatility of the H4 prices. In the past, when we have seen this happening in the market. you have reported revaluation, inventory revaluation gains and losses. Can you tell us whether there have been anything like this in 1Q and 2Q? And if yes, could you possibly quantify those gains and losses?

Mr. Rose, I believe you are referring to the inventory valuation in the financial statements. So I will leave to Mr. Mafi to answer this.

thank you for your great question. Yes, we have been noticed during -- as you know, that during end of quarter 1 feedstock prices have increased dramatically during March after all the geopolitical events that happened starting 28th of February. And that -- during second quarter, we have noticed also the dramatic normalization of that feed prices during Q2. So comparing between 2 quarters, yes, there will be -- there have been already impact from our -- from the inventory action because of the drop of that feedstock. I don't have a current figure right now in front of me exactly, but we expect that between $40 million to $50 million, maybe impact and that's where you can see a little bit difference that -- from a net income perspective comparing to our sales.

And should I assume that there was a similar opposite impact in 1Q of a similar magnitude.

There was an impact, but maybe not that with the same value, but there was an impact.

Mr. Adelei Mr. Adella please step forward.

I have 2 questions on my side. The first 1 is regarding the relating from Bubble -- do you expect this to affect your volumes sold in the second half? And how much do you expect this -- how much do you expect the adjusting costs to affect your crack margin. Second is, it would be really informative if you could give us some color on the crack margin of Group II and how much it differs from your current portfolio be oil. I mean for the last 5 or 10 years would be -- be this would be really important to understand how much Group 3 differs in terms of profitability -- that's my question.