OCI N.V. Reports Q2 2019 Results

August 30 2019


OCI N.V. Q2 2019 Results Report vF.pdf

Highlights:

  • Revenues increased by 20% to $954 million and adjusted EBITDA by 35% to a quarterly record of $275 million in Q2 2019 compared to Q2 2018. This reflects increased sales, partially as a result of volume deferrals in the first quarter, which were offset by one-off negative effects of $35 million mostly from an unplanned shutdown at OCI Beaumont. We utilized the downtime to accelerate the debottlenecking of the plant, which is currently running above 110% of its previous capacity
  • OCI-produced volumes sold increased 25% in Q2 2019 versus Q2 2018 to a record of 3.1 million metric tons, in a positive market environment for fertilizers versus 2018. Our H1 2019 volumes increased 3% versus H1 2018, reflecting annual capacity increases partially offset by significantly more planned turnarounds than last year and the OCIB shutdown
  • Adjusted net income improved from $3 million in Q2 2018 to $37 million in Q2 2019
  • Free cash flow of $151 million resulted in a continuation of our deleveraging with a decrease in net debt of $110 million during Q2 2019
  • BioMCN’s second line and expansion at OCI Beaumont successfully started production during the summer, increasing OCI’s proportionate methanol capacity by 27% to 2.95 mtpa. The work to achieve the capacity increase at OCI Beaumont was brought forward to coincide with the unplanned outage in June. With the start-up of these two new capacities, we have reached the end of our capex program and have no further commitments for growth capex for the remainder of 2019 or in 2020
  • In June, OCI announced a strategic partnership with Abu Dhabi National Oil Company (ADNOC) which will see the combination of ADNOC’s fertilizer business into our nitrogen fertilizer platform in the MENA region, further consolidating the nitrogen fertilizer industry; closing of the transaction is on track
  • OCI has mandated J.P. Morgan to assist with the evaluation of strategic options for the methanol group, including the sale, merger or spin-off to shareholders. A final decision is expected early 2020

Statement from the Chief Executive Officer – Nassef Sawiris:

“As we executed our commercial strategy to hold back sales until demand kicked in, our nitrogen business performed well during the second quarter. We benefited from strong sales volumes across our platform, low natural gas prices and robust production performance of our nitrogen facilities. We experienced weaker methanol prices and an unplanned shutdown of our Beaumont facility in the latter part of the quarter. These results highlight the strength of our diversified business portfolio and confirm the merits of our commercial strategy. We also continued our path of deleveraging on the back of strong free cash flow performance during the quarter.

Demand for nitrogen fertilizer was generally healthy across our markets during the second quarter, and in comparison to the second quarter of 2018 prices for our products increased, with the exception of ammonia. Urea prices in particular followed a positive trajectory as a result of strong demand across regions and tightening supply, and summer season prices have been higher year-on-year for the third time in a row. Ammonia prices were weak during the quarter, as new production capacity was absorbed in the market.

Despite flooding and wet conditions in the US Midwest, IFCo achieved a record quarter, benefiting from our unique in-region location in the Upper Midwest and record DEF volumes. In Europe, we benefited from strong demand and lower natural gas prices. We shipped record volumes of CAN during the second quarter, which were significantly above the volumes in the first quarter, leveraging our robust logistical organization and proximity to key end markets. As a result, both those operations reported a significantly higher result versus a year ago.

This resulted in an adjusted EBITDA for our combined nitrogen businesses in Q2 2019 of more than 50% above the level of Q2 2018, and up in the high single-digits in H1 2019 compared to H1 2018. This was despite planned turnarounds of both ammonia lines at Sorfert, one in the first quarter and the other starting towards the end of the second quarter.

Methanol markets were weaker in the second quarter of 2019 compared to both the first quarter this year and the same quarter last year. In addition, the longer-than-expected unplanned shutdown of the methanol plant at OCI Beaumont from the end of May until early July had a negative impact on EBITDA. Nevertheless, our methanol group reported higher adjusted EBITDA for the second quarter of 2019 compared to the first quarter of 2019, as Natgasoline performed well and BioMCN returned to profits during the quarter on the back of higher utilization rates and lower natural gas prices.

We expect to reach our run-rate capacity starting the fourth quarter this year now that we have most major turnarounds behind us and have recently completed our growth projects. Several of OCI’s nitrogen plants have finalized their planned turnarounds during the summer months, which should result in higher utilization rates going forward at Sorfert, IFCo and OCI Nitrogen. For example, the turnaround of Sorfert’s ammonia line in Q1 2019 has allowed the plant to reach utilization rates close to its maximum design capacity. The second line restarted recently and is in the process of ramping up, already achieving levels above 92%. This compares to significantly lower levels before these major turnarounds.

We are also on track to close the recently announced joint venture with ADNOC. This partnership will add an additional capacity of 2.1 million metric tons per annum (mtpa) on a consolidated basis to our current net nitrogen fertilizer capacity of 10 mtpa and has significant potential for future growth and value creation. We are pleased to create this JV with a likeminded and strong partner with a clear strategy to unlock value in the industry.”

Outlook

We continue to focus on free cash flow generation and remain committed to our financial policy to prioritise expected strong free cash flows for deleveraging towards 2x through the cycle. Our financial outlook for the remainder of the year and previous guidance is subject to pricing of our key commodities.

New Strategic Partnership with Abu Dhabi National Oil Company (ADNOC)

In June, we announced a new strategic partnership with ADNOC to combine ADNOC’s fertilizers business into OCI’s nitrogen fertilizer platform in the MENA region. OCI and ADNOC will own a 58% and 42% stake in the JV respectively, and OCI will fully consolidate the JV.

The transaction offers a number of advantages:

  • It will have significant scale. The JV will become the largest seaborne export-focused nitrogen fertilizer platform globally, and the largest producer in the MENA region with a production capacity of 5 million tons of urea and 1.5 million tons of sellable ammonia.
  • Substantial synergies. The JV is projected to create substantial value through unlocking of operational, supply chain, marketing and trading synergies of $60-$75m, mostly achievable within 12-18 months from closing.
  • Strong financial profile. The JV will operate a young, state-of-the-art asset base with low maintenance costs, low finance costs and strong free cash flow generation. As a result, it will be well-positioned to pay its shareholders attractive dividends and to fund future organic and inorganic growth opportunities.

Nitrogen Products

Our diversified portfolio of nitrogen products consists of fertilizer, diesel exhaust fluid (DEF) and melamine:

  • We expect to continue to benefit from attractive natural gas feedstock costs
  • Shorter term, the demand outlook in the US should benefit from an increase in forecasted corn acreage next spring, and distributors wanting adequate product on hand versus delaying purchases until next season.
  • We continue to expect a positive industry outlook through a tightening of the global supply and demand balance with expected demand growth to be higher than limited new capacity additions and low exports from China.
  • Ammonia prices were weak in the first half of 2019 and have lagged urea due to a weak US season and new supply starting up earlier this year. However, there are no further major new merchant ammonia supply additions expected until at least 2021 and demand is expected to strengthen.
  • OCI is well-positioned to benefit following completion of a significant number of planned turnarounds across most of our group companies during the third quarter this year and the closing of the ADNOC Fertilizers joint venture.
  • Melamine selling prices remain at healthy levels and the product remains a cornerstone of our Dutch operations. We expect to continue to benefit from healthy melamine market conditions, supported by continued demand growth and low natural gas prices in Europe.
  • The outlook for the DEF market in the US remains positive and is expected to grow at rates of 15% to 20% per annum in the coming years. DEF has been one of our fastest-growing products in 2019 so far and we are on track to achieve a more than doubling of our DEF sold volumes in 2019 compared to 2018.

Methanol

Our methanol business was affected by an unplanned shutdown at OCI Beaumont during the second quarter of 2019, during which time we brought forward work to achieve an expansion in the plant’s methanol capacity of more than 10%. Following the restart of the plant in early July, production normalized at significantly higher levels than before the shutdown. Combined with the start-up of the second line at BioMCN, we have now reached our annual production capacity run-rate.

Methanol prices have weakened in 2019 due to a number of factors including falling crude oil prices, MTO affordability as well as exports from sanctioned countries to Asian markets being offered at heavily discounted prices.

Recently, methanol prices have shown some recovery from their lows, as spot prices had fallen below the global industry cost curve and MTO utilization rates have stabilized with positive production margins. Underlying long-term fundamentals of methanol markets are encouraging with limited new capacity additions and expected continued demand growth, supported by traditional and new applications, and by the addition of multiple new MTO facilities in China going forward.

Gas Markets

We expect to continue to benefit from materially lower gas prices in both Europe and the United States.

In recent months, European gas prices have remained substantially below those seen in recent years. We believe there has been a structural shift in the European gas markets this year and expect prices to remain within a bandwidth of $3 – 5 per MMBtu until the end of 2019 at least, bar any surprise weather shocks, as a result of high liquidity in LNG markets in competition with Russian imports into Europe.

In the US, similarly the Henry Hub decreased to very competitive prices that are significantly below the levels of last year. The forward curve suggests this will remain for the foreseeable future, which will continue to keep our US operations at the very low end of the global cost curve.

 

A conference call for investors and analysts will be hosted on Friday 30th August 2019 at 4:00 PM CEST (3:00 PM BST, 10:00 AM ET) by Nassef Sawiris, Chief Executive Officer, and Hassan Badrawi, Chief Financial Officer.

Investors can access the call by dialing:

Standard International:                +44 (0) 20 3009 5710
United Kingdom FreeCall:           0800 376 7425
Netherlands LocalCall:                +31 (0) 20 715 7366
United States FreeCall:               1 (866) 869 2321

Conference ID:                           7494518

A conference call replay will be available until 30th September 2019. The replay access numbers are:

Standard International:                +44 (0) 333 300 9785
Netherlands:                                 +31 (0) 20 713 2967
United States:                              1 (866) 331-1332

Conference ID:                           7494518

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