Highlights:
Financial and Outlook
- Q1 2022 revenues increased 108% to $2.3 billion and adjusted EBITDA increased 115% to $970 million
- Q1 2022 adjusted net income increased 246% to $354 million versus $102 million in Q1 2021
- Net debt declined by $960 million during the quarter to $1.26 billion as of 31 March 2022, or net leverage of 0.4x based on an LTM EBITDA of $3.0 billion
- OCI generated free cash flow of $609 million during Q1 2022, despite net working capital outflows of $196 million due to higher inventories ahead of the application season; we expect a typical reversal during Q2 based on executed and committed deliveries
- Positive market outlook until at least 2024 underpinned by favourable farm economics and low global grain stocks, exacerbated by weather-related reduced crop production and geo-political events, giving strong support for prices
- Outlook: based on current visibility for volumes and prices, OCI expects higher EBITDA and FCF in Q2 2022 compared to Q1 2022
- Based on this outlook, the semi-annual cash distribution with respect to H1 2022 is expected to be significantly higher than the €1.45 / share to be paid with respect to the period H2 2021
Corporate Updates
- Following the EGM held 28 March 2022 and subject to a two-month creditor opposition period, OCI expects payment of the announced semi-annual interim distribution for H2 2021 of €1.45 per share in June 2022
- OCI is currently closing a refinancing of IFCo’s debt through an $835 million bond offering with average tenor of 22 years, simplifying the Group’s capital structure and significantly extending OCI NV’s maturity profile
- In April 2022, the credit rating agencies S&P, Moody’s and Fitch upgraded OCI NV’s ratings to investment grade (BBB-, Baa3 and BBB- respectively), recognizing OCI’s strong underlying performance, financial policy and outlook
Ahmed El-Hoshy, CEO of OCI NV commented: “We are pleased with another successful quarter, and we look forward to an even better performance in Q2 as we benefit from strong in-season demand, the phasing of volumes from Q1 into Q2 and higher selling prices. The majority of our volumes are already committed for Q2, which provides good visibility ahead and sets us up for a strong Q3 and Q4 2022.
The outlook for our end markets until at least 2024 continues to be positive, giving strong support for nitrogen prices to remain above historical averages. This is underpinned by decade-high crop price futures and healthy farm economics that drive strong demand for nitrogen fertilizers, high gas price futures in Europe that set a higher price floor for the medium term, and a multi-year structural tightening of supply.
We aim to help address potential grain shortfalls and overall food security concerns by focusing on operational excellence and producing as much product as possible to fill supply gaps that may arise.
We are very pleased with the recent upgrades to Investment Grade by the three credit rating agencies, which follows the significant transformation in our capital structure and consistent deleveraging over the past two years.
We achieved this on the back of healthy free cash flow generation, as we started to reap the rewards of our globally diversified, state-of-the-art platform and competitive business model, which enable us to realize higher margins and convert more to free cash flow through the cycle.
Looking at our longer-term prospects, we continue to make good progress in our efforts to capture value accretive opportunities from emerging demand for clean hydrogen as we aim to become one of the largest producers of clean fuel and feedstock in the world.
As part of that strategy, we are continuously developing and evaluating a variety of decarbonization initiatives including blue and green hydrogen-based projects across our global sites, leveraging our strategic footprint and infrastructure as a major hydrogen player. This could result in higher investment in growth going forward including up to $350 – 450 million growth capex for 2023 (inclusive of previously announced projects), but projects depend on factors such as government policies, incentives and market developments. Any such project is also subject to:
- Our commitment to remain investment grade.
- Meeting our investment return thresholds.
- Our capital allocation policy to ensure consistent distributions to shareholders while pursuing growth opportunities.”
Markets
Nitrogen outlook supported by tight market fundamentals
OCI’s earnings momentum is underpinned by several factors which suggest a structural shift to a multi-year demand driven environment for nitrogen products.
- The global grain stock-to-use ratio is at one of the lowest points in the past 20 years, exacerbated by numerous weather-related crop production issues in Latin America and the conflict in Ukraine.
- As a result, it will take at least until 2024 to replenish stocks to ease food security concerns, providing support for higher crop pricing. Corn futures are above $6/bushel to the end of 2024, incentivizing farmers to increase acres and maximize yields by using more nitrogen.
- The US nitrogen outlook is underpinned by low inventories and higher grain prices driving farm incomes to record levels in 2022.
- In Europe, demand for nitrates is supported by attractive farm margins which combined with low producer inventories is resulting in further tightness in the spring season.
- Farmers in grain exporting regions in the US, Europe and Latin America have been hedging their operating margins by selling forward their new crop at current high forward corn and wheat pricing. At the same time, they are incentivised to purchase nitrogen, secure input costs and lock in margins. This is expected to be supportive of nitrogen demand and pricing over the summer period.
- In India, demand is strong as the government continues to prioritize food security and subsidise nitrogen fertilizer costs for farmers.
- In October last year, the Chinese government implemented measures to curb exports and prioritize domestic supply until July 2022. Recent articles suggest that government discussions are ongoing for export restrictions to stay in place until June 2023, which, combined with tight environmental restrictions, are capping medium term exports below 3 million Mt.
- Nitrogen pricing has support to remain above higher marginal cost floors in Europe and Asia:
- Global input costs to produce nitrogen products are elevated for the medium term. Gas price futures in Europe currently indicate c.$30 / mmBtu for 2022 and $23/MMBtu over 2023/2024, compared to $5 / mmBtu in the 2016 to 2019 period.
Outlook favourable for our industrial products
The ammonia market is structurally tightening over the medium term as demand growth is expected to more than offset limited net new capacity additions , resulting in an estimated supply deficit of 4 million Mt over the medium-term compared to a net surplus of 7 million Mt in the last five years, providing a strong market backdrop for forward ammonia pricing.
Further, over the medium term there is upside for ammonia from expected incremental demand for clean ammonia in new applications across a range of sectors including marine fuel and power, and as a hydrogen carrier.
Melamine markets have been driven by demand from home renovation and construction markets, tight supply and low global inventories across the supply chain.
The recovery in truck sales and freight activity has continued, supporting an improving trend for OCI’s Diesel Exhaust Fluid (DEF) sales in the US for 2022. The higher netbacks for this product enable us to continue to enhance returns for our US nitrogen operations going forward.
Methanol market fundamentals remain healthy. US spot and contract prices in Q1 2022 have been supported by a continued recovery in demand, low global inventories, and the higher oil prices whereas there is no new major supply expected to come onstream in 2022.
Operating rates for several major derivatives segments are reported to be at healthy rates in the US and Europe. Methanol-to-Olefins (MTO) operating rates in China have recovered to more than 80% in Q1 2022 and are expected to remain healthy in the quarters ahead with affordability of methanol currently at attractive levels. A new 1.8 mtpa MTO facility is starting up in China later this year which should provide a further boost to demand.
Over the period 2022 through 2026, we continue to expect tighter methanol market fundamentals with incremental demand expected to exceed new supply by ~8 million Mt. This does not consider the meaningful additional upside from hydrogen fuel demand, notably for road and marine fuel applications.
Gas markets
OCI’s nitrogen and methanol assets are favourably positioned on the global cost curve, and we are a net beneficiary of a higher global gas price environment, despite our production platform in Europe which remains partially shut as a result of the high gas prices. A portion of our supplies in the U.S. is covered by long-term collars and gas hedges. Fertiglobe has a significant competitive advantage with favourable gas price supply agreements which represent more than half of our total natural gas requirement.
Dividends / capital allocation
In February, OCI announced a semi-annual distribution for the period H2 2021 of €1.45 per share (c.$320 million in total at current exchange rates). OCI convened an extraordinary shareholder meeting on 28 March 2022 at which time the distribution was approved through a repayment of capital or, at the election of shareholders, as a regular dividend.
The ex-dividend and record date for the distribution will be confirmed following a statutory two-month creditor opposition period, which lapses on 30 May 2022. In case of no objections, the ex-dividend date will be 6 June, and the record date 7 June, and payment in the week commencing 20 June following an election period – offering shareholders who do not wish to receive the distribution as a capital repayment the option to elect to receive a dividend instead.
Distributions will be made twice per year, and based on the current outlook for OCI, the cash distribution with respect to H1 2022 is expected to be significantly higher than the €1.45 / share to be paid with respect to the period H2 2021.
Separately, Fertiglobe, which is 50% owned by OCI and fully consolidated, announced today that based on the continued favourable market dynamics and resulting free cash flows, and in line with the company’s dividend policy of distributing excess free cash flows to its shareholders, Fertiglobe now expects a cash distribution of at least $700 million for H1 2022 (payable in October 2022), compared to the previous guidance of at least $200 million. The exact dividend amount will be announced with the Q2 2022 results in August 2022.
