OCI Partners' (OCIP) CEO Frank Bakker on Q2 2016 Results - Earnings Call Transcript

| About: OCI Partners, (OCIP)

OCI Partners LP (NYSE:OCIP)

Q2 2016 Earnings Conference Call

August 05, 2016 11:00 AM ET

Executives

Frank Bakker - Chief Executive Officer

Fady Kiama - Chief Financial Officer

Omar Darwazah - Investor Relations

Analysts

Daniel Jester - Citi

Hassan Ahmed - Alembic Global

Operator

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Frank Bakker, President and CEO of OCI Partners, you may begin your conference sir.

Frank Bakker

Okay, thank you. Good morning everyone and thank you for joining us on our 2016 second quarter earnings call. I'll start off by providing an update on our business, our CFO, Fady Kiama, will provide an overview of the financial highlights for the quarter and Omar Darwazah, our Investor Relations Director, will then follow with an update on the global methanol and ammonia markets.

Today we will provide certain forward-looking statements on the Partnership's outlook for the future. In this regard, we direct you to the risk factors and other cautionary statements set forth in the Partnership's most recent reports and other filings with the SEC. As you review the press release posted on the Investor Relations section of our website, at www.ocipartnerslp.com, and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by Federal Securities laws. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed in our press release and from time to time in the Company's SEC filings. These forward-looking statements are made as of today, and the Company assumes no obligation to update any forward-looking statements. We will also include references to some certain non-GAAP financial measures, such as EBITDA. The non-GAAP financial measures section of our earnings press release reconciles EBITDA to the most directly comparable GAAP financial measure.

Let me start with an update on the business. As usual, I will provide commentary on the four factors that directly affect our financial results; our capacity utilization, our sales volumes, our selling prices of ammonia and methanol, and natural gas prices. From an operations point of view, we had some challenges. During the quarter, an underground cooling water line leakage caused unplanned downtime of approximately five days in ammonia production unit and approximately 8.5 days in the methanol production unit. We also took our methanol production units offline for approximately 8.5 days in order to make repairs to our reformer. As a result of the downtime, our ammonia and methanol production units were in operation for 86 days and 74 days, generating capacity utilization rates of 91% and 77%, respectively.

On the commercial side, we realized the following during the quarter. Our average methanol price decreased by 47%, declining to $192 per metric ton in the second quarter of 2016 compared to $363 per metric ton in second quarter of 2015. We sold approximately 183,274 metric tons of produced methanol compared to 158,970 metric tons during the same period last year, representing a 15% increase in methanol sales volumes. Our average ammonia sales price decreased 33%, declining to $301 per metric ton in the second quarter of 2016, compared to $447 per metric ton in second quarter of 2015. We sold approximately 69,905 metric tons of ammonia, compared to 49,437 metric tons during the same period last year. This represents a 42% increase in ammonia sales volumes.

On the cost side, our purchase price for natural gas decreased to an average of $2.13 per MMBtu during the second quarter of 2016 as compared to an average of $2.87 per MMBtu during the same period last year, representing a decrease of 26%.

This concludes our business updates. I will now hand over to Fady, who will provide a review of our financial performance.

Fady Kiama

Thank you Frank, and good morning everyone. During the second quarter of 2016, we had consolidated revenues of $56 million, representing a 29% decrease over the same period last year. We had EBITDA of $10 million, representing a 64% decrease over the same period last year. We had net loss of $15 million compared to net income of $13 million during the same period last year. EBITDA and net income margins were 18% and minus 27% respectively, compared to 35% and 17%, respectively during the same period in 2015. As of June 30, 2016, our total principal debt outstanding was $464 million.

Moving on to distributions, based on the results of the three months ended June 30, 2016, the Board of Directors of the general of the partner of the Partnership has not approved any cash distribution. The amount of any subsequent quarterly cash distributions will vary depending on our future earnings, as well as our cash requirements for working capital, capital expenditures, debt service and other contractual obligations, and the reserves for future operating or capital needs. If we move on to run-rate quarterly distribution guidance, the decision to forgo our cash distribution for the three months ended June 30, 2016 reflects, an average realized methanol price of $192 per metric ton, an average realized ammonia price of $301 per metric ton, and an average natural gas price of $2.15 per MMBtu and the fact that our ammonia and methanol production units were in operation for 86 days and 74 days generating capacity utilization rates of 91% and 77% respectively.

To assist investors in making the linkage between these prices and potential future distribution, we provide the following sensitivity analysis. A $0.50 per MMBtu change in natural gas prices results in an approximately $0.23 impact on annual distributions. A $10 per metric ton change in methanol prices results in an approximately $0.10 impact on annual distributions. A $10 per metric ton change in ammonia prices results in an approximately $0.04 impact on annual distributions.

It is our intention to continue making distributions consistent with our run-rate guidance, but there can be no assurance we would be able to do so. In addition to the impact of commodity prices, our distributions are subject to fluctuations in capacity utilization as it happened this quarter, working capital, capital expenditures, debt service and other contractual obligations, reserves for future operating or capital needs and other factors, including overall business, regulatory and financial considerations that may affect the availability of cash to distribute.

I will now turn over to Omar, who would provide you an update on the global ammonia and methanol markets.

Omar Darwazah

Thank you, Frank and Fady, and thank you all for joining us today. I will now provide an update on the global ammonia and methanol markets, as well as provide some color on our expectations for pricing in the short to medium term.

During the quarter, our average realized methanol price was $192 per metric ton. Methanol prices in the U.S. on the contract markets increased $17 to $266 per metric ton. The contract price for the month of August rolled over for the third consecutive month at the same price. Our average realized methanol price during the quarter did not reflect the contract price increase as a result of a pricing lag in our sales contracts. The pricing increase will be reflected during the third quarter. Finally, spot prices have come off their lows during the second quarter, eliminating some of the wide spread that existed earlier in the year. At present, however, spot prices remain trading lower than discount-adjusted contract prices.

During the quarter, our average realized ammonia price was $301 per metric ton. Ammonia prices decreased during the quarter and settled at $270 per metric ton for the month of August. The price decline was anticipated as the seasonal buying for the spring application season was complete. Finally, spot natural gas prices traded at an average of $2.13 per MMBtu during the quarter. Looking forward, higher crude oil prices, persistent production issues in Venezuela and Egypt, rolling natural gas curtailments in Trinidad, strong and improving Methanol-to-Olefin margins, as well as new MTO capacities commissioning in China should support methanol prices in the next 12 months. We are also witnessing strong global MTBE demand and expect to see improved demand in the more traditional methanol derivative sectors on the back of an improved crude oil pricing environment.

Moving on to China, despite a rise in methanol coastal inventories and weaker demand in formaldehyde as a result of the rainy season, methanol spot prices have remained stable at around $216 to $220 per metric ton. Moving forward, MTO related demand is expected to continue to grow for the remainder of the year and into 2017. Strong and improved MTO margins have encouraged Chinese MTO operators to accelerate commissioning of their new facilities. At present in China today, there are a total of 14 completed MTO/MTP plants that have the capacity to consume up to 14 million metric tons of methanol. We expect an additional three MTO plants to be completed in 2016, which are expected to add an additional 5 million metric tons of merchant methanol demand.

We are already witnessing the commissioning of one facility earlier this year in April. And at present, despite unfavorable weather conditions and technical issues in China, overall operating rates for MTO plants remain strong at approximately 78%. Methanol demand for MTO is expected to be around 10 million metric tons by 2020 in China, representing around 40% to 50% of total Chinese methanol demand.

And finally, the ammonia market in the United States today is entering a seasonal lull as the spring application season has ended. In the meantime, however, natural gas curtailments for ammonia producers in Trinidad are currently at 20%, which should help reduce exports to the U.S., which should in turn help offset the new ammonia capacity that's expected to commission during the fourth quarter.

Thank you again for joining us today and we are now open for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Daniel Jester. Please state your company name. Your line is open.

Daniel Jester

Hi guys, this is Dane Jester from Citi. Can you comment on the plant operation so far in third quarter? Please.

Frank Bakker

Hi, morning Dan. Yes, I can do that. So, so far in the third quarter, plants run really stable. So we only had, it's like, 18 hours of downtime on one of the units. And if you look at our on-stream, it's good to look at is over a longer period. So if you look at year-to-date for the ammonia units, we ran on-stream of 97.4%. And if you look for the methanol units' year-to-date, we ran on-stream of 91.8%. So, if we take the average of those two, it's close to 95% and that's also what we put in our projections to have at least 95% on-stream.

Daniel Jester

And do you have any planned maintenance outages for the remainder of the year?

Frank Bakker

No, our first big turnaround is planned for 2018.

Daniel Jester

Okay. And then maybe just a couple of questions on financial, SG&A has really grown substantially, I think in the quarter it's was 31% compared to last year. Can you comment as to kind of what's driving that increase? And given where we are in this cycle, are you doing anything on the cost side to kind of streamline the operations?

Frank Bakker

Yes, what we…

Fady Kiama

Go ahead, Frank.

Frank Bakker

Yes, let me start Fady and you can add on to that. So what we're doing is, we're looking really at our, expanding [ph] on SG&A spending. So we're really trying to control this and so actions are ongoing to minimize that spending and Fady you can add on to that.

Fady Kiama

Yes, as to the part of comparing SG&A 2016 to earlier in 2015, you have two main factors here. One, if you have insurance, that insurance have gone up, insurance costs have gone up late 2015 and early 2016 as a result of the debottlenecking project. So we have a bigger fixed asset base and a bigger capacity, so in terms of business interruptions and so on, the implications are different. And also property tax has gone up significantly 2016 versus 2015. Those are the two main drivers behind the increase initially in SG&A, but then we are working on, as Frank has said, on different measures to mitigate that and bring SG&A back in line with previous year.

Daniel Jester

Okay, that's very helpful. Thank you. And then can you just update where you stand regarding debt your covenants and how do you see that playing out for the rest of the year?

Frank Bakker

Okay. Sure. So, as was previously announced in March 2016, we amended our term loan B credit facility and the revolving credit facility to among other things provide more covenant flexibility through the quarter ending March 31, 2017. So, through the first quarter of next year only, but as disclosed in our Form 10-K that we have just filed earlier today, mainly due to weak ammonia and methanol prices, we believe that we may not be in compliance with certain covenants under our credit facility as of September 2016. And we will likely not be in compliance with certain covenants under our facilities as of December 31, 2016. Therefore, we're currently exploring multiple options to prevent or mitigate fraction on compliance, including financing the credit facility, seeking waivers or amendment to the credit facility. Further details will be announced in due course.

Daniel Jester

Okay. And then maybe just one last one from me. I think you commented that discount in the spot market relative to contract prices in the U.S. are still pretty substantial just kind of how do you see that evolving from here. And maybe also kind talk about where you see Atlantic Basin methanol prices relative to Asia? Thanks guys.

Omar Darwazah

Sure. Hi, Dan, this is Omar. So, what we've tended to see over the course of this year is actually quite particular. Typically, if you look at methanol prices over a 10 years period and compare contract prices with spot prices, typically what has happened is, you've had contract prices ultimately dictate where spot prices should be trading. But over the course of last year, as I'm sure you know, the pressure that we've witnessed from crude oil pricing has actually reversed that trend. So we've seen in many occasions contract prices sort of give an indication -- as spot prices -- I apologize, give an indication of where contract prices should start to settle. And for the longest time the spreads were so big, right, it was around 50%, if not more and that spread has shrunk over the last three months, four months as sort of the methanol contract market stabilize and as the market improved in general.

But today, if you take the 266 and you take a typical discount of 15%, 20%, that will get you down to the low 200. We're seeing spot prices still trading below that level. And again, it's just a function of time until spot prices start trading similar to where contract -- discount-adjusted contract prices should be. So I think it's a function of sort of the market coming back and closing that spread. We've already seen that spread close over the last three months, four months, I believe there's still more room for that spread to close. And my expectation is that that will probably once we start to see higher buying of methanol in the U.S. during the summer months, because of another high demand and construction spending, we should start to see more spot sales reflect the contract adjusted prices in the next several months.

Daniel Jester

Great, thank you very much.

Operator

[Operator Instructions] Your next question comes from line of Hassan Ahmed with Alembic Global.

Hassan Ahmed

It's Alembic Global. Just wanted to go back on the pricing side of things. I take a look at the realized price for methanol around $192 a ton, the Methanex non-discounted prices for Q2 was around 255 a ton. So obviously that implies a pretty large discount of around 25%. Now, if I do a compare and contrast with sort of what sort of discount Methanex reported in the quarter that was around 14%. So I'm just trying to reconcile why the discount was so large, was that sort of a mix staying, just any color around that would be appreciated.

Fady Kiama

Hassan I think -- Frank, go ahead.

Frank Bakker

Yes, so I think there are two items, the Methanex price is a low price [indiscernible], so that is a combination of European --.

Hassan Ahmed

No, no, the $255 was the U.S. price I'm quoting. The U.S. non-discounted for Q2.

Frank Bakker

Okay. Now, what you see there is that we have -- our sales contracts are also based on -- a part of sales contracts are based on previous months. So that means that sales for April are based on March pricing.

Hassan Ahmed

So, essentially got it right, because obviously Q1 was weaker than Q2.

Frank Bakker

Yes, so the difference is paid in quarter two.

Hassan Ahmed

Now just sticking to this whole pricing sort of debate, obviously barring the last couple of weeks, since the start of the year we've seen a nice healthy rebound in oil prices, right. And typically with a tiny lag you start seeing sort of upward mobility in methanol prices in line with oil prices, which we really haven't seen to a large extent that far. And what kind of confuses me a bit more is, again going back to what Methanex was talking about in its Q2 call, they were talking about demand growth year-on-year being up 8%. So it seems that, demand seems to have normalized, yet this catch up with the oil prices still hasn't happened. So what's your thoughts around that?

Frank Bakker

Omar, you can comment.

Omar Darwazah

Yes, sure. Hassan, this is Omar. I mean, I think, we're seeing several things going in the market. One, you've got obviously oil price sort of in world of their own. And what higher crude oil prices have done recently is that they've actually pushed propylene and ethylene prices to levels where MTO producers in China are actually making great margins. A few weeks ago, I actually presented at a conference in Shanghai and based on information from MTO producers, today they're making about $200 a ton in margin.

Hassan Ahmed

That makes sense.

Omar Darwazah

What has happened is, one, methanol prices didn't yet rebound in China and even in the U.S. as fast as everybody would like to see them rebound that's one. Secondly, the uptick in crudes from a low of $25 to a steady state level today of mid $40s let's say has actually had a profound impact on propylene and ethylene prices. So what has happened is that these guys who were, let's say, four months, five months ago barely making any margin is only the naphtha based producers of olefins were actually making margins. Now, that sort of situation have changed. So, I once saw many, many MTO producers very interested in buying our methanol at Beaumont. And obviously for obvious reasons we are not willing to enter into any of these commercial agreements, because they're expecting prices that are lower than what we are selling in the U.S. Gulf Coast, right. The mentality --.

Hassan Ahmed

So, presumably there is some sort of a lag between demand normalizing and obviously supply-demand will tighten on the back of that and probably you'll start seeing some pricing appreciation thereafter.

Omar Darwazah

Sure, no, no, I agree with you. I think, one, we are seeing a lag. We saw crude oil rebound quickly along with the rebounded olefins, which is great for methanol. But then we need that demand pull, right. And that demand pull is happening now. Like I said, a lot of these MTO guys that are in China are now much more eager to commission their facilities. They want to accelerate commissioning the facility, given this large spread that they're witnessing in the market. Secondly, they feel comfortable now that a $45 - $50 oil, their margins should be consistent in nature.

So, really all eyes are now on methanol prices sort of seeing a commensurate rebound to where $45, $50 oil or $600, $700 olefin price. So, I agree with you. I think we are at a point now where crude has rebounded, olefins have rebounded and now olefin prices are about to pull methanol prices from a demand perspective, specifically in China, at least in a territory that's not simply around the marginal cost of production. But -- you've been in fact looking at this market a lot longer than we have and you know very well that these are a lot of the fundamentals that we're discussing, but the market is much more complicated in nature. Other things to keep in mind --.

Hassan Ahmed

Particularly with this whole MTO thing thrown into the mix, because it's not just about oil then, you have to start seeing sort of appreciation in ethylene pricing and the like as well, which clearly we've been seeing now.

Omar Darwazah

Exactly, I think the MTO stories still remains in the spotlight as this is still the biggest demand driver, the biggest new demand driver for methanol for the foreseeable future. I think what we need to take a look at in general is coal prices, you and I both know that coal prices or a weak coal environment, pricing environment for the several years has not helped too much with the marginal cost of production for methanol in China, right, so higher coal will definitely help with a higher marginal cost of production.

And then, hopefully, once we see that demand pull, we're expecting another 5 million new metric tons of methanol to come into the markets from the MTO story this year in China. Then that again is a good 2%, 3% additional growth on the global market, right. So if that actually materializes then I'm hoping that we should come out of that to $220, $230 troughs, a marginal cost of production sort of levels that we're seeing in China today.

Hassan Ahmed

Very thorough. One final one, if I may sneak it in. Any sort of color on the inventory side of things. Again, the pricing commentary seems favorable, it seems pricing has troughed out. Are you beginning to see, I would imagine that a lot of the buyers out there are expecting now pricing to pick up. So, are you seeing more sort of inventory build happening? Obviously you build inventory in a rising pricing environment rather than a declining one.

Frank Bakker

Absolutely, absolutely. No, no, Hassan, you're absolutely right. I think actually one of the topics that we've discussed thoroughly at this event that I attended was that costal inventories for methanol are actually building up, right, and had been building up for quite some time. So the concern there of course is that costal inventories build up, prices has start to come up, these guys start to flood the markets for product, right. So, but it's only really happening in China, we're not really seeing that in the U.S. In general, as you know, you need storage capacity to store methanol. When you produce methanol at least for us at OCI Beaumont, once we do produce methanol, we are very eager to really sell it, so that we can continue running the facility. So that there is always sort of an opportunity cost.

If you're going to be an inventory builder of methanol, as a producer of the product, then you're not going to be able to run your plants thereafter, because you don't have infinite capacity to store methanol. So at this point in time, I think we're at a critical point, I think there is a significant inventory buildup on the cost in China. But now with the MTO story really coming to fruition, olefin prices increasing, MTO producers commissioning the facility, MTO producers looking out as far as the U.S. to try get products, this is again a testament to the fact that there is still a supply deficit of methanol, a reliable supply source of methanol in China.

So, I guess, the long sort of answer to this question is that yes, there is an inventory buildup, but because there is a rebounds in olefin prices, a lot of that inventory should be pushed into the system quickly and shouldn't really have detriment on prices. And then in the U.S. that for us is really a non-issue, inventory buildup in U.S. has never really been an issue in affecting prices detrimentally or sort of in a negative way just because all this supply is pent up on the sideline.

Hassan Ahmed

Superb. Thank you so much.

Omar Darwazah

Thank you.

Operator

[Operator Instructions] There are no other questions in the queue.

Frank Bakker

Okay, I would like to thank everyone for joining today's call and their interest in our Company. I look forward to speaking with you again during our next earnings conference call. And have a good weekend. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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