Highlights:
Financial and Outlook
- Q2 2022 revenues increased 95% to $2.9 billion and adjusted EBITDA increased 141% to $1.3 billion compared to the same period a year ago
- Q2 2022 adjusted net income increased 322% to $528 million versus $125 million in Q2 2021
- H1 2022 revenues were $5.2 billion, adjusted EBITDA $2.3 billion and adjusted net income $882 million
- OCI generated free cash flow of $928 million during Q2 2022 and $1.5 billion during H1 2022
- Net debt declined by $553 million during Q2 to $708 million as of 30 June 2022 after cash distributions to OCI and Fertiglobe shareholders (combined $490 million), or net leverage of 0.2x based on an LTM EBITDA of $3.8 billion
- OCI distributed cash to shareholders of €1.45 / share ($320 million) in June and proposes €3.55 / share (c.$765 million) to be paid in October, bringing the total cash return to shareholders in 2022 to €5.0 / share (c.$1.1 billion)
- Favourable farm economics and low global grain stocks, combined with high gas prices in Europe, provide support for nitrogen selling prices to remain above historical averages
Corporate Updates
- OCI has locked in c.50% of its US gas requirement for the 2023 – 2029 period at a WAP of $4.3 / mmBtu, giving – together with Fertiglobe’s gas supply contracts – visibility on more than 90% of OCI’s long-term gas requirement
Ahmed El-Hoshy, CEO of OCI N.V. commented:
“We are pleased with these financial results that have enabled us to accelerate our shareholder cash returns to almost $1.1 billion this year, while also substantially reducing gross debt and further lowering leverage to well within our investment grade financial policy parameters. This also positions us favorably to selectively pursue value-creative growth opportunities including organic expansions below replacement cost.
The outlook for the fundamentals of our nitrogen end markets continues to be underpinned by tight supply, healthy farm economics and decades low grain stocks globally that incentivize the use of nitrogen fertilizers. Forward curves imply that natural gas prices in Europe will remain at elevated levels through at least 2023, setting ammonia, urea and nitrates breakeven pricing well above historical averages.
Many European producers cannot recover cash costs due to high gas prices, especially those that cannot import ammonia. We benefit from our leading position in global ammonia markets and our flexibility to replace locally produced ammonia with imported ammonia shipped from our operations in North Africa and the US through our Rotterdam terminal.
We are now running our ammonia production platform in Europe at c.40% of capacity because of the high gas prices, but are able to operate our downstream production profitably with support from our imported ammonia. As a result, we remain able to satisfy the demand of our agricultural and industrial customers in Europe.
With the reduced ammonia production in Europe and as our methanol facility in the Netherlands remains shut due to the high gas prices, our European operations accounted for only 9% of our global natural gas consumption, but the nitrogen business in Europe represented c.24% of our total revenues during H1 2022. Our overall European business also benefits from the sale of excess EUAs, including $88 million recorded during the second quarter as part of adjusted EBITDA.
We continue to strengthen our competitive position in Europe: earlier this year we increased throughput capacity of our ammonia import terminal in Rotterdam to c.400,000 tons and are on track to expand to 1.2 million tons during 2023. We can leverage this unique supply chain in the future by importing low and no carbon hydrogen in the form of ammonia and methanol, which can help decarbonize the EU and reduce its reliance on imported natural gas.
In addition, with the prospect of increasing LNG exports from the US in coming years, we have hedged c.50% of our gas requirements in the US for the period 2023 – 2029 at a weighted average of $4.3 / mmBtu. For the period August – December 2022 we are hedged c.60% at a weighted average price of c.$5.3 / mmBtu, which compares to the Henry Hub US benchmark of on average $8.1 / mmBtu in Q2 2022.
As a result, we now have price visibility on more than 90% of our global natural gas requirements as a result of favourable gas supply agreements at Fertiglobe and the hedge position in the United States. With less than 10% of our natural gas supply exposed to market fluctuations in Europe, we have further enhanced our cost resiliency.
Separately, we are pleased that OCI was included in the MSCI World Index and STOXX 600 Index, some of the world’s leading global equity indices, in June 2022.
Finally, we aim to help address potential grain shortfalls and food security concerns by focusing on operational excellence and producing as much product as possible to fill supply gaps that may arise. I would like to thank the whole team for their efforts to make this happen and their focus on safety. We look forward to continuing to create value to all our stakeholders.”
Markets
Nitrogen outlook supported by crop fundamentals and high gas prices in Europe
Nitrogen product prices are supported by several market factors which suggest a structural shift to a multi-year demand driven environment .
- Nitrogen pricing has support to remain significantly above historical averages. European nitrogen producers are currently the marginal producer with the forward curve for natural gas implying elevated input costs for the medium term:
- Gas price futures in Europe currently indicate c.$60 / mmBtu for the balance of 2022 and $36 / mmBtu for 2023 and 2024, compared to $5 / mmBtu in the 2016 to 2020 period.
- At these higher feedstock prices, the costs for marginal producers in Europe imply support levels for ammonia at >$2,000/t for the balance of 2022 and >$1,300/t in 2023 / 2024 (excluding CO2 costs), which is 6-9x higher than the c.$230/t support level during 2016 – 2020.
- This translates into price support of >$1,200 / ton for the balance of 2022 for urea and €800 / ton for CAN (and >$780 / ton and €600 / ton respectively for 2023)
- Prices can drop below such floors particularly during off-season periods, but economics have historically prevailed when margins for producers remain negative for a longer period, triggering shutdowns as has been occurring in Europe over the past 12 months.
- Nitrogen supply is expected to be structurally tighter over 2022 – 2026, resulting in an estimated market deficit of c.7 million tons for urea. In addition:
- In Europe, c.7 million tons of ammonia capacity out of a total 19 million tons is currently shut due to the high gas prices. Given elevated gas price futures and risks related to Russian gas supply, more capacity may be shut down should selling prices remain below gas-based production costs.
- Russian ammonia exports from the Black Sea are limited due to logistical constraints (impacting c.2 million ton ammonia or c.10% of global trade)
- Urea exports from China, needed to balance the markets, are expected to remain low over the medium term, with controls to curb exports in place until H2 2023 at least and prioritization for domestic supply.
- Crop fundamentals remain supportive for nitrogen demand:
- Global grain stock-to-use ratio remains at decade lows and it will take at least until 2024 to replenish stocks
- Grain futures (US average corn futures at $6.0 and wheat at $8.0 / bushel from H2 2022 to the end of 2024) remain at levels that incentivize farmers globally to maximize yields by using more nitrogen
- Disruptions to agricultural supply chains with reduced fertilizer application in some regions, dry weather, and a late US season is expected to defer demand into 2023 given relative inelasticity of nitrogen demand
Methanol fundamentals remain healthy with significant upside in the hydrogen economy
Methanol market fundamentals remain supportive for the medium to longer term with expected continued demand growth and limited supply additions. Methanol is also supported by high oil prices: it is currently significantly cheaper than LNG and gasoline and can be used as a lower cost and cleaner alternative for multiple fuel applications worldwide including heating and transportation.
Over the period 2022 through 2026, we continue to expect tighter methanol market fundamentals with incremental demand expected to exceed new supply by c.8 million Mt, and no new major supply expected to come onstream in 2022. This does not consider the meaningful additional upside from hydrogen fuel demand, notably for road and marine fuel applications.
Dividends / capital allocation
In July, OCI announced a semi-annual distribution for the period H1 2022 of €3.55 per share, or c.$765 million at current exchange rates, consisting of a $200 million base return of capital and a variable element. This will bring the total cash distribution during calendar 2022 to €5.00 per share, or c.$1.1 billion.
OCI has scheduled an extraordinary shareholders meeting (EGM) on 19 August 2022 to request shareholder approval for the H1 2022 distribution through a repayment of capital. The convening notice and other materials can be found on our website at www.oci.nl.
The ex-dividend and record date for the distribution will be confirmed following the statutory two-month creditor opposition period, which lapses on 21 October 2022. In case of no objections, the ex-dividend date will be 26 October, the record date 27 October, and payment date 31 October.
Separately, Fertiglobe, which is 50% owned by OCI and fully consolidated, announced today, in line with its dividend policy of distributing excess free cash flows to its shareholders, a cash distribution of $750 million for H1 2022 payable in October 2022. OCI’s share of the dividend will be $375 million.
Conference call details
A conference call for investors and analysts will be hosted on Tuesday 2nd August at 5:00 PM CET (4:00 PM GMT, 11:00 AM ET) by Ahmed El-Hoshy, Chief Executive Officer and Hassan Badrawi, Chief Financial Officer.
Investors can access the call and ask live questions by dialing one of the following numbers using the code 775571
UK Dial-in: +44 20 3936 2999
USA Dial-in: +1 646 664 1960
Netherlands Dial-in: +31 85 888 7233
UAE Dial-in: +971 800 0357 04553
All other locations: +44 20 3936 2999
Participants may also join via the webcast. Please pre-register and join here.
Please log-in or dial-in at least 10 minutes prior to the start time to ensure a fast connection to the call.
