Highlights:
Financial and Outlook
- Q3 2022 revenues increased 52% to $2.3 billion and adjusted EBITDA increased 92% to $962 million compared to the same period a year ago
- Q3 2022 adjusted net profit increased 352% to $257 million from $57 million in Q3 2021, and reported net profit increased to $316 million from $31 million
- 9M 2022 revenues were $7.5 billion, adjusted EBITDA $3.2 billion and adjusted net profit $1.1 billion
- OCI generated free cash flow of $392 million during Q3 2022 and $1.9 billion during 9M 2022
- Net debt declined by $377 million during Q3 to $331 million as of 30 September 2022 after distributions to minorities of $383 million, or consolidated net leverage of 0.08x based on an LTM adjusted EBITDA of $4.3 billion
- OCI plans to distribute a semi-annual cash return to shareholders of €3.5 per share (c.$730 million, including a $200 million base) with respect to the period H2 2022, payable in April 2023. This follows total cash distributions of €5.0 per share during calendar 2022
- Separately, Fertiglobe (50% owned by OCI) announced today guidance for dividends at a minimum of $700 million for the period H2 2022, payable in April 2023
Corporate Updates
- Our 1.1 mtpa blue ammonia plant in Texas is well underway with preliminary site preparation work to be completed before the end of the year
- IFCo achieved 56% growth in own-produced Diesel Exhaust Fluid (DEF) sales (663kt) and a total of 992kt including third-party sales through its N-7 joint venture during the first 9 months of 2022
- OCI is expanding its product offering in Europe and intends to start production of DEF under the AdBlue® brand at its nitrogen facilities in the Netherlands in Q1 2024
Ahmed El-Hoshy, CEO of OCI N.V. commented:
“Our financial performance YTD has allowed us to make substantial distributions to shareholders and also reduce our net debt to just over $300 million. The remaining gross debt has a weighted average cost of c.4.6%, with a majority at fixed rates, and weighted average maturity of c.8 years. We are therefore well positioned to execute on our value-creative growth opportunities such as the recently announced blue ammonia project in Texas, as well as continue to offer attractive cash returns to our shareholders.
We are very pleased with the performance of our nitrogen operations in the United States in particular. IFCo is on a trajectory to demonstrate its potential with an LTM adjusted EBITDA of c.$700 million and one of the highest cash conversions in the Group, benefiting from its positioning in the US Midwest premium market with a state-of-the-art plant and logistics.
Our US DEF business is an important factor in this performance. The business continues to grow: it currently represents more than 40% of IFCo’s sales volumes, and our joint venture N-7 is now number two in the US DEF market. We have successfully grown our contract volumes in 2022 of this product that offers environmental benefits and fuel-efficiency to our customers. We have also started decoupling DEF contract pricing from NOLA urea pricing given the product is not related to the fertilizer markets, as a result of which we can provide reliable and consistent supply to our customers. The adjusted price mechanism, together with our long-term gas hedging, should give our US nitrogen operations more stable returns going forward.
Our versatile European nitrogen operations continue to show resilience in a difficult operating environment. In the third quarter, we operated our ammonia facilities at a utilization rate of around 40% and we continued to import ammonia through our Rotterdam terminal as a more cost-effective alternative to producing ammonia locally in Europe. As a result, we ran our downstream production profitably. We are currently maximising ammonia and downstream production in Europe, and our flexible business model enables us to continue to adapt to changing market conditions.
Our downstream products include nitrate fertilizers and melamine, and we have made a final investment decision to expand our product offering in Europe with the addition of DEF production and logistics beginning Q1 2024. In October 2022, OCI started to market DEF in Europe given tight market fundamentals, with trial shipments from our Fertiglobe facilities in Egypt.
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, all of which incentivize the use of nitrogen fertilizers. Forward curves continue to imply that natural gas prices in Europe will remain at elevated levels through at least 2024, setting ammonia, urea and nitrates breakeven pricing well above historical averages.”
Growth projects
We have a number of growth initiatives to grow our volumes and returns through the cycle, both through new capacity expansions and improving our existing platform. All these investments are aligned with our sustainability goals that help decarbonize our carbon footprint and those of our customers, and include:
- We recently announced the start of construction of a 1.1 mtpa blue ammonia facility in Texas with key infrastructure designed to double capacity to 2.2 mtpa in the future. The project is well underway with the EP contract awarded in March 2022 and long-lead equipment ordered. Preliminary site preparation work is expected to be completed before the end of the year.
- We continue to progress our Manufacturing Excellence Program to further improve capacity utilization across our platform to achieve the full potential from our existing young asset base.
Markets
Nitrogen outlook supported by crop fundamentals and tight supply dynamics
Prices are supported by several market factors which suggest a structural shift to a multi-year demand driven environment.
- Crop fundamentals have strengthened further, supportive of nitrogen demand to increase grain stocks:
- Global grain stock-to-use ratios are at the lowest levels since 2011/12 and it will likely take at least until 2024 to replenish stocks.
- Disruptions to agricultural supply chains with droughts in the Northern Hemisphere are extending the tightness in the agricultural cycle, and supportive of demand given relative nitrogen inelasticity. In the US, yields in the 21/22 season have been low, with the USDA estimating corn carry out at 1.2 billion bushels, 30% below the ten-year average.
- Farmer sentiment across grain exporting countries remains positive as input costs have been offset by higher crop prices, incentivizing farmers to plant more acres across all crops, but particularly corn.
- Higher forward grain prices (US corn futures at $6.5 from Q4 2022 to the end of 2024 compared to $3.5 / bushel in the last five years) are supportive of sustaining farm incomes and incentivising demand until at least 2024 to help build grain stocks.
- Nitrogen supply is expected to be structurally tighter over 2023 – 2026, resulting in an estimated market deficit of c.7 million tons for urea and the merchant ammonia market is also structurally short:
- There is good visibility on new supply additions as it takes four to five years to build a greenfield plant from design to commissioning. Further, increased environmental focus is a barrier to entry limiting grey capacity additions. Also of note, replacement values are higher than in the last cycle of capacity additions due to inflationary pressures.
- In Western Europe, given high gas costs, production curtailments so far this season resulted in c.20% y-o-y reduction in CAN and UAN production and larger declines for urea. At the same time, nitrogen demand destruction was minimal in the 21/22 season (<5%) resulting in low inventories across the system. European farmers are underserved and will be reliant on imports even if majority of European nitrogen production restarts.
- Russian urea, UAN and grain exports year-to-date are higher year-over-year and trade flows have been redirected to other markets, normalising the impact from the Ukraine conflict. Russian ammonia exports, however, are limited due to logistical constraints and exports are down c.50% compared to last year.
- 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 at least until H2 2023 to prioritize for domestic supply.
- Feedstock pricing is expected to remain volatile in the short-term given weather and regulatory intervention, and are expected to remain well 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 futures in Europe indicate c.$38 / mmBtu for 2023 (6% higher y-o-y) and c.$30 / mmBtu in 2024/25, compared to $5 / mmBtu in the 2016 to 2020 period.
- European winter 22/23 gas balances appear manageable given sufficient storage and based on expectations of warm weather. Nonetheless, European gas fundamentals are expected to be tighter in 2023 compared to 2022 given limited Russian gas flows which cannot be made up with incremental LNG volumes, government intervention incentivising gas consumption and higher Asian imports combined with high coal pricing setting a floor.
- At these higher feedstock prices, marginal costs imply ammonia support levels at >$1,300/t in 2023 and $950/t in 2024/25 (excluding CO2 costs), which is 4-6x higher than the c.$230/t support level during 2016 – 2020.
- 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.
- Further upside is expected from incremental demand for clean ammonia in new applications across a range of sectors including power and marine fuels, and as a hydrogen carrier.
Significant upside for methanol in the hydrogen economy
Methanol pricing has been range-bound, but market fundamentals remain supportive for the medium to longer term with expected continued demand growth and limited supply additions, especially in North America and Europe. Methanol is historically supported by high oil prices, and it is currently 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.
There is no new major supply expected to come onstream in the near term and we continue to expect tighter methanol market fundamentals over the period 2023 through 2027, with incremental demand expected to exceed new supply by c.9 million tons.
This does not take into account potential meaningful upside from hydrogen fuel demand, notably for road and marine fuel applications. Methanol continues to gain traction as a shipping fuel, and demand for methanol could start taking off as early as 2024.
Dividends
In October, OCI distributed €3.55 per share (c.$740 million) in cash in the form of a capital repayment. Combined with a €1.45 per share (c.$320 million) distribution in June 2022, this brings the total cash return to shareholders to €5.00 per share (c.$1.1 billion) during calendar year 2022.
OCI plans to distribute a semi-annual cash return to shareholders of €3.5 per share (c.$730 million at current FX rates, including a $200 million base) with respect to the period H2 2022, payable in April 2023. OCI will schedule an extraordinary shareholders meeting (EGM) in early 2023 to request shareholder approval for the H2 2022 distribution of €3.5 per share through a repayment of capital.
Separately, Fertiglobe (50% owned by OCI and fully consolidated) announced today guidance for cash dividends at a minimum of $700 million for the period H2 2022, payable in April 2023. The exact amount of the H2 2022 dividend will be announced in February 2023 with the Q4 2022 results. During calendar year 2022, Fertiglobe paid cash dividends of $1.1 billion, of which 50% to OCI.
Conference call details
A conference call for investors and analysts will be hosted on Thursday, 03 November 2022 at 5:00 PM CET (4:00 PM GMT, 12:00 PM 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 773137
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.
A replay of the webcast will be available through OCI N.V.’s corporate website at www.oci.nl.
