Q2 2021 Results
02 August 2021
Financial and Outlook
- Revenues increased 67% to $1.5 billion and adjusted EBITDA increased 144% to a record $535 million in Q2 2021 as compared to Q2 2020
- Revenues increased 53% to $2.6 billion and adjusted EBITDA 139% to $987 million in H1 2021 versus H1 2020
- Adjusted net income was $121 million in Q2 2021 compared to adjusted net loss of $20 million in Q2 2020
- Net debt was $3.0 billion as of 30 June 2021, down $390 million from 31 March 2021 resulting in a total reduction of $697 million since 31 December 2020
- Trailing net debt / adjusted EBITDA was 2.1x as of 30 June 2021; based on the current outlook for volumes and pricing, we expect a drop in net leverage to below our target of 2x through the cycle by year-end 2021
- OCI anticipates being able to return capital to shareholders in 2022 given the current trajectory of product markets and company leverage
ESG and Business Updates
- ESG ratings: OCI has been double upgraded by Sustainalytics and MSCI to Medium and BBB, respectively, to be amongst the best performers in the nitrogen sector
- Fertiglobe has acquired an additional 15% stake in EBIC from a KBR-led consortium for $43 million in cash, bringing Fertiglobe’s stake in EBIC to 75%, and further streamlining the group’s ownership structure in the only world-scale dedicated ammonia export plant in Egypt
- OCI’s current offering of low carbon products continues to expand with the ability to produce up to 365 ktpa blue ammonia in Texas and pursuit of additional near-term blue ammonia opportunities across its platform
- In June, OCI announced that Fertiglobe is joining TA’ZIZ, an ADNOC / ADQ platform, as partner in a 1 mpta world-scale blue ammonia project in Abu Dhabi, with FID in 2022 and start-up targeted for 2025
- FUREC, a partnership with RWE to purchase green and circular hydrogen from mixed waste gasification, was invited amongst the best ranked participants to submit its application for the 2nd stage of the EU Innovation Fund
Statement from the Chief Executive Officer – Ahmed El-Hoshy:
Record earnings, free cash flow accelerating, net debt reduced by a further $390 million
“We are pleased that our markets have recovered from a multi-year downturn at the same time that we have begun to fully benefit from the ramp-up of our state-of-the-art production platform. We have reported another record quarter and our FCF generation has accelerated. As a result, we are rapidly approaching our through-the-cycle target of 2x net leverage.
During the quarter we continued to benefit from our diversified stream of global revenues and our competitive position on the global cost curve, with around half of our total global gas requirement at fixed gas prices. We achieved particularly strong performance improvements at Fertiglobe with a significantly strengthened competitive position, and the methanol group driven by good onstream performance, volume growth of almost 70% YoY in Q2, strong pricing support and access to key European and US markets.
The outlook for OCI and our nitrogen and methanol end markets remains robust for the remainder of this year and beyond, supported by strong underlying demand for nitrogen fertilizers driven by healthy farm economics, and a continued recovery in our industrial markets for ammonia, methanol, melamine and DEF.
We continue to see strong demand for a wide range of downstream products used across various end markets including construction, automotive and textiles. Furthermore, the recovery in transportation applications increasingly bolsters demand for our products, keeping market conditions tight.
Shorter term, we have good visibility into Q3 with a healthy order book across our core markets and are benefiting from further increases in selling prices in Q3 compared to both Q2 2021 and Q3 2020.
Nitrogen markets have reached an inflection point
Nitrogen markets reached an inflection point this year following a five-year downturn, with sustainably higher prices compared to 2020, reflecting healthy farm economics, strong demand and limited new supply. Looking at the remainder of 2021 and 2022, nitrogen fundamentals and farm economics remain healthy, with positive prospects in all major agricultural markets and we expect to remain in a demand-driven pricing environment.
Summer seasonal weakness, which was pronounced in the past five years, has been muted in 2021, with support from very low global inventories for our products across the value chain, robust fertilizer demand, and a strong rebound in industrial demand. UAN summer fill, one of the indicators of the health of the nitrogen markets at this time of the year, was $285/st in mid-July, more than double that of last year, with purchasing incentivised by high grain prices and strong grower economics. Prices have continued to increase strongly since fill was announced several weeks ago.
A rally in crop prices has been a key driver of strong agricultural demand, which is expected to remain supported at least until the end of 2022 by continued high Chinese corn imports, a tightening of the global stocks-to-use ratio and lower corn exports from Brazil due to weather issues together with higher domestic demand for feed and ethanol use. Corn futures are $5-6/bushel and the soy-to-corn ratio favours corn, supporting increased plantings in major corn exporting regions.
The resulting healthy farm economics coincide with a slowdown in new plants commissioning compared to the past five years. In addition, delays in commissioning of these new projects are highly likely as the pandemic has impacted construction globally, and utilization rates are expected to be slow to ramp up. At the same time, urea exports from China are declining, with exports in 2021 expected to be lower than the 5.5 Mt in 2020. Robust agricultural market fundamentals and a strong rebound in industrial end-uses have driven Chinese urea consumption to five-year highs combined with increasing permanent closures of coal-based plants due to stricter environmental regulations.
Globally, higher marginal costs are also providing support to markets, with feedstock prices resetting at higher levels from the low levels in 2020. Low gas storage levels in Europe and higher Asian demand for gas is maintaining high gas prices with TTF futures pointing to c.$14/MMBtu, raising the cost floor, lowering utilisation rates for marginal producers, and providing support for selling prices over the medium-term.
Global recovery to drive significant demand for our industrial products
We are also pleased to see continued improvement in our industrial businesses. Ammonia markets have been buoyed by a structural tightening in the past few months following a rebound in industrial demand, a significant slowdown in capacity additions and lower production from marginal producers in Trinidad and Europe. Merchant ammonia availability is expected to decline, with negligible net additions between 2021 to 2024, whereas merchant demand is expected to grow by more than 5 million metric tons over that same period.
Melamine markets have continued to tighten driven by a rebound in demand from home renovation and construction markets in Europe and the US. Quarterly contract prices increased 23% in Q2 and another 18% in Q3 2021. This has strengthened our global market-leading position and is driving an expected healthy improvement in financial performance for this business in 2021.
OCI’s DEF sales in the US recorded another strong quarter with truck sales up sharply and freight activity broadly recovered to 2019 levels, which, combined with the higher urea sales prices, supports an improving trend for the balance of 2021 and 2022.
Methanol market fundamentals remain positive. US spot prices have been supported by delayed supply additions and unplanned outages. This has supported contract prices in the US with strong demand set to continue, as operating rates for major derivatives segments (both traditional and fuels) are reported to be near maximum rates and provides good visibility on our sales and prices in Q3.
Globally, methanol inventories are low, demand continues to recover robustly, planned and unplanned outages are reducing supply, and new supply has been delayed and is slow to ramp up. We expect demand from Methanol-to Olefins (MTO) plants in China to remain stable through Q3 stemming from higher energy and olefins prices. In the long term, supply and demand fundamentals are tightening with demand growth expected to exceed capacity growth.
Lower interest costs
We continue to significantly benefit from our recent refinancing activities with a reduction in recurring interest expense excluding debt restructuring costs of $29 million in H1 2021 versus H1 2020. The capital structure optimisation activities this year will provide further benefits in recurring interest expense and weighted average cost of debt in H2 2021. In addition, the strong deleveraging achieved in H1 2021 will deliver a 200bps reduction in the margin of our revolving credit facility from Q3 onwards from 3.5% to 1.5%.
ESG – decarbonization initiatives continue
We continue to prioritize high impact initiatives that achieve value enhancing results in a short time, and projects where we reduce carbon intensity of the value chain through long-term strategic partnerships, whilst maintaining a disciplined capital allocation policy. With our current offerings of up to 365 ktpa blue ammonia at OCI Beaumont in Texas and sustainable ammonia at OCI Nitrogen in the Netherlands we already have the ability to materially reduce the carbon intensity of our downstream customers along the value chain and across a wide range of industries spanning food, feedstock, and fuel.
We continue to evaluate blue and green projects across our platform which fit well in our strategy to decarbonize our global and regional platforms and grow our low carbon and clean fuels product offering.
Ammonia is a versatile and clean hydrogen carrier, with many applications across numerous sectors. These initiatives therefore create growth opportunities that will strengthen our market-leading position and help us capitalize on the huge potential that we expect ammonia to offer as part of the accelerated global shift to clean energy and as an enabler for the hydrogen economy.
As an early mover, Fertiglobe is uniquely placed to capitalize on low carbon ammonia opportunities, as it leverages its existing sizeable ammonia business and distribution and trading infrastructure, as well as its strategic location with ample access to low cost solar and wind resources and access to Europe and the Far East.
- OCI and Fertiglobe are pursuing several initiatives to scale up blue ammonia production capabilities and have a pilot project in concept phase to produce green ammonia at EBIC in Egypt using attractively priced wind/solar energy
- This follows closely the recent announcement that Fertiglobe will join TA’ZIZ as partner in a new 1 million metric tons per annum blue ammonia project in Abu Dhabi, the first world-scale blue ammonia facility in the MENA region. The TA’ZIZ project leverages OCI’s and Fertiglobe’s world leading ammonia capabilities and builds on ADNOC’s low carbon fuels leadership and extensive experience in carbon capture and storage. The project benefits from its location in the purpose-built TA’ZIZ Industrial Chemicals Zone, adjacent to the Ruwais Industrial Complex which will supply the project with attractive hydrogen and nitrogen feedstocks. Final Investment Decision is expected in 2022, and start-up is targeted for 2025.