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1Q net loss parallel with estimates on the back of inventory hit
Tupras reported TL-2.26bn net loss in 1Q, broadly in line with consensus estimate of TL-2.27bn. EBITDA of TL-1.18bn also matched market expectation of TL-1.17bn. The company incurred an inventory loss of TL-2.02bn as a result of sharp drop in crude oil prices during the first quarter. EBITDA CCS (adjusted for inventory impact) was TL725mn, up from TL550mn a year ago but slightly lower than TL827mn in previous quarter as product margins remained under pressure. The company also reported an increase in leverage with net debt climbing to TL12.2bn (USD1.9bn) from TL8.4bn (USD1.4bn) at 2019-end driven by operating working capital.
Strength becomes weakness as mid-distillate margins drop sharply
TUPRS enjoyed superior profit margins than Med complex averages thanks to its high mid-distillate product yields and a robust domestic market for diesel and jet fuel. Going into this year, this looked as a strength for TUPRS as IMO 2020 further supported margin outlook for mid-distillates. With the Covid-19, however, diesel and jet fuel margins took the largest hit and this occurred while TUPRS further increased its mid-distillate product yields in 1Q. Share of gasoil in total product yield increased to 43% from 33% last year and 39% in 1Q despite diesel cracks performed weaker than expected (USD11.3 in 1Q from USD15.4 a year ago and USD14.5 in 4Q). Similarly, Jet fuel crack margin was also off to USD8.1 in 1Q from USD13.8 last year and USD13.1 in 4Q. Jet margins continued to deteriorate so far in 2Q and went into negative territory as of April amid the slump in global air traffic. Management indicated that they are cutting jet product yield towards 10% from 17% as jet inventories are rising due to weak demand. The glut of jet fuel is likely to keep diesel margins (and refinery run rates) under pressure as most refineries would look to blend jet fuel into diesel. In this environment, management indicated that crack margins are expected to be weaker in 2Q, but they maintained their latest guidance (which was revised downwards in April) that foresees refining margin of USD3-4/bbl.
Crude oil differentials offer some relief, but they are narrowing lately
TUPRS had seen unfavorable impact form heavy crude differentials in 2019 due to supply constraints (Iran-Venezuela sanctions, OPEC+ cuts). In 2020, weaker global demand and IMO driven shift towards lighter crude types resulted in widening of differentials with Ural priced at a discount of around USD-2.0/bbl YTD vs. 2019 average of USD-0.03/bbl. With recent production cuts from oil producing countries, however, differentials appeared to be narrowing in May and Ural is now again priced on par with Brent. Therefore, even though recent recovery in Brent price may help TUPRS recover some of the inventory loss incurred in 1Q, there might be a counterbalancing impact from narrowing differentials on tight supply.
Downgrade to Marketperform with revised TP of TL90.0/share
On our revised estimates, TUPRS trades at 8.7x EV/EBITDA in 2020E and 6.1x in 2021E. We cut our TP from TL110 to TL90 and downgrade our rating to Marketperform as the outlook remains cloudy for refining margins and increased leverage could delay resumption of dividend payments.
SERHAT KAYA, RESEARCH, YF Securities
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