OCI Partners' (OCIP) CEO Ahmed El-Hoshy on Q1 2018 Results - Earnings Call Transcript

OCI Partners LP (NYSE:OCIP) Q1 2018 Earnings Conference Call May 7, 2018 10:00 AM ET

Executives

Hans Zayed – Director-Investor Relations

Ahmed El-Hoshy – President, Chief Executive Officer and Director-General Partner

Beshoy Guirguis – Chief Financial Officer, Vice President-General Partner

Analysts

Hassan Ahmed – Alembic Global

Operator

Good morning. My name is Adam, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the OCI Partners LP 2018 First Quarter Results Conference Call. [Operator Instructions] Thank you.

Hans Zayed, Director, Investor Relations of OCI Partners LP, you may begin your conference.

Hans Zayed

Thank you, Adam. And good morning, everyone, and thank you for joining us on our First Quarter 2018 Results Conference Call.

May I remind you that we will provide certain forward-looking statements on the partnership’s outlook. 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 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.

With me today are Ahmed El-Hoshy, OCIP’s President and CEO, who will start off by providing an update on our business; and Beshoy Guirguis, since March 15, our new CFO, who will provide an overview of the financial highlights for the quarter. At the end of the call, we will host the question-and-answer session.

I would now like to turn over the call to Ahmed.

Ahmed El-Hoshy

Thank you, Hans, and thank you all for joining us today. I’m very pleased with our achievements and milestones during the quarter. First of all, and most importantly, we continued our excellent safety track record and had a great start to the year with no OSHA recordables or lost time incidents in Q1, continuing our no recordables in LPI’s for all of 2017. I’d like to thank all of our employees for their continued support to maintaining a safe and healthy working environment.

Secondly, we also successfully closed the new credit facilities resulting in longer maturities, significant reductions in our financing costs as well as additional flexibility as a partnership, and Beshoy will discuss that in more detail.

And finally, we had a robust financial performance during the quarter, where we benefited from excellent operational performance of our methanol unit and continuation of very healthy methanol markets. Our methanol production unit operated efficiently and experienced no downtime during the quarter, resulting in 99% capacity utilization and record high quarterly methanol volumes sold.

The ammonia production unit experienced 17 days of unplanned downtime during the quarter, due to an issue with the steam generator, it subsequently required repairs for the pressure swing absorption unit feed gas cooler, both of which were addressed by the team during the outage and were taken care of. This resulted in a capacity utilization of 84% for the ammonia unit compared to 102% in the first quarter of last year.

Our EBITDA for the quarter improved significantly. The higher methanol sales volumes and higher realized selling prices for both methanol and ammonia were the main driver drivers for this performance. Our average realized methanol price was $401 per metric ton in the first quarter, an increase of 14% from the $353 per metric ton in the same quarter last year. And prices continue to be supported by the solid demand and global outages keeping the market tight.

Ammonia prices also increased and our average realized ammonia price was $317 per metric ton in the quarter, up 28% from $247 per metric ton in the same quarter of last year.

Looking forward to the second quarter of 2018, methanol prices have remained at a steady level throughout the quarter so far. The U.S. weighted average methanol contract price in both April and May was maintained at $495 per metric ton, compared to $490 per metric ton on average in the first quarter of 2018. We’re happy with the recent performance of methanol which has been supported by continued strong demand and several global outages. We continue to monitor the markets as it absorbs new methanol supply additions this year and believe the outlook for methanol remains positive with strong visibility into the next few years where we expect limited new major capacity additions come to market relative to the increase in demand primarily driven by MTO, fuel applications and core derivatives.

Ammonia prices have come down due to the restart of supply in those previously shutdown in some exporting regions including Trinidad and North Africa. The recent start-up of new U.S. Gulf capacity in the last couple of months for ammonia, as well as the delay in the spring application season in North America which was a result of cold weather and wet weather that extended the winter and caused limited time ability for ammonia applications before planting.

The monthly Tampa CFR ammonia contract price decreased from $305 per metric ton in March to $275 in April and further dropped $20 to $255 in May. Despite the near-term weakness, partially driven by the recent supply, demand dynamics and seasonality general nitrogen fertilizer markets are trending positively with the supply/demand growth outlook for downstream fertilizers looking favorable.

Finally, I’d like to highlight that we are contemplating a shutdown to address certain operational deficits of our SCR units, our selective catalytic reduction unit at some point in the coming six months. This will allow us to achieve nameplate capacity, again, because we’ve been running slightly below that. The shutdown is expected to last approximately two weeks and the team is actively working to finalize the scope of this shutdown with the goal of minimizing impact on both our operations and financial performance.

This concludes our business update. I’d like to hand it over to Beshoy, who will to provide a review of our financial performance and a brief overview of the refinancing.

Beshoy Guirguis

Thank you, Ahmed. Let me start by highlighting the successful, recent refinancing. Our new $450 million term loan and $40 million revolving credit facility will allow us to markedly reduce our financing costs and extend maturities. Recall, we’ve already seen – we closed this transaction successfully in March shortly after our last results conference call. We are pleased with the support from the capital markets for this transaction and I would like to thank our investors for their confidence in our business.

We use the net proceeds of the Term Loan Facility primarily to repay in full the$232 million previous term loan B facility, and the $200 million outstanding intercompany loans from and other payables due to OCI N.V. The term loan facility was priced at LIBOR plus 425 basis points and matures in 2025. The revolving credit facility was priced at LIBOR plus 375 bps, with a maturity in 2020. Both facilities include a leverage-based pricing stepdown provisions, we have already achieved a step down of 25 basis points due to the higher EBITDA in the first quarter of this year driving down our leverage ratios.

As Ahmed mentioned earlier, we are pleased with our solid results during the first quarter of 2018. We reported consolidated revenues of $117 million, which is a 26% increase over the same period last year. The increase was driven by higher revenues for both our businesses.

Methanol revenues went up by approximately 31% to $94 million. Our realized methanol selling prices were on average $48 per metric ton, higher than in the first quarter last year. Methanol sales volumes increased by 16% to approximately 235,000 metric tons.

Ammonia revenues also increased by 10% to approximately $23 million for the quarter. Our realized ammonia selling prices were on average $70 per metric ton, higher than in the first quarter of last year. Due to the ammonia shutdown experienced during the quarter, ammonia sales volumes decreased by 15% to approximately 73,000 metric tons. Despite slightly higher average natural cost of $3.30 per MMBtu, the combination of these higher revenues and our continued focus on cost management resulted in a significant results for the quarter. This included an EBITDA increase of 48% to $59 million, compared to $40 million in the first quarter of 2017. We also had net income of $30 million up from $14 million in the first quarter of 2017.

With respect to distributions, after almost three years of not updating the run rate cash distribution sensitivities, we have reviewed the assumptions underlying the calculation. We have done this not only to reflect recent realized commodity prices, but also to reflect our revised capital structure following the refinancing, as well our stronger competitive cost positioning achieved through the hard work of the team to reduce non-financing costs among other factors. As a result our cash distribution run-rate calculation is now based on an assumed average methanol selling price of $350 per metric ton, an assumed average ammonia selling price of $250 per metric ton, and assumed average cost of natural gas of $3.00 per MMBtu. These assumptions result in a run-rate distribution of $1.40 per year. I would like to point out, however, that the run-rate commodity prices are not a reflection of management’s expectations for commodity prices, but are intended as benchmarks to help investors in estimating potential future distributions.

To assist investors with estimating potential future distributions, we provide a sensitivity analysis assuming base 94% capacity utilization: a $0.50 per MMBtu change in annual average natural gas prices would result in an impact of approximately $0.24 on annual distributions per common unit; a $10 per metric ton change in annual average methanol prices would result in an impact of approximately $0.10 on annual distributions per common unit; and $10 per metric ton change in annual average ammonia prices would result in an impact of approximately $0.04 on annual distributions per common unit.

In addition to the impact of commodity prices, our distributions are subject to fluctuations in capacity utilization, 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 would like to refer to the forward-looking statements in the press.

In the three months ended March 31, 2018, the Board of Directors of the general partner of the Partnership has approved a cash distribution of [indiscernible] per common unit or approximately [indiscernible] million in the aggregate. This distribution [indiscernible] an average realized methanol price of $401 per metric ton, an average realized ammonia price of $317 per metric ton and an average natural gas price of $3.30 per MMBtu.

In addition, the $0.38 distribution reflects one-time cash debt costs incurred during the first quarter of 2018, in connection with the refinancing, which will allow the partnership to benefit from lower financing costs going forward. As reflected in the new run rate quarterly distribution sensitivity that we discussed. The cash distribution will be paid on June 8, this year to unitholders of record at the close of business on May 23, this year.

Thank you, again, for joining us. We are now opened for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Hassan Ahmed with Alembic Global. Your line is open.

Hassan Ahmed

Good morning gentlemen. The question around the sort of supply-demand snugness in methanol, obviously, prices have rebounded quite nicely. But at least in my mind, one other things that’s been going on is that there has been a series of outages. It’s my understanding that in Saudi, in particular, there are two facilities that have been offline for a while.

So just would love to hear your views on the supply side of the situation, particularly, keeping these outages in mind. I mean, do you expect some of these, be it, the Saudi facilities obviously, there has been some curtailments in China as well. So if you could just give me your commentary about how these outages are impacting supply-demand? Whether some of this capacity indeed is coming back online? Or should we consider it sort of semi-permanently shuted?

Ahmed El-Hoshy

Yes. Thanks, Hassan, it’s a good question. So definitely we’ve been seeing that there has been a disproportionate amount of shutdowns in the last kind of month or two, that have helped support the markets, and that’s been helpful to kind of tighten where the cash cost curve is, because supply has kind of left the market at a time where you see some of the feed stock costs, for example, in China coming off of elevated prices in Q1 and elevated demands in Q1 have come down a little bit.

So that’s been a good counterbalance to keep some supply off the market. Some will eventually return, we think a lot of it would eventually return, as these plants’ turnaround go through, but you’ll notice that some of the shutdown show kind of a consistent track record with – of the overall industry not only operating at high capacity utilization rates, some of these are gas supply issues in certain markets that have been continuing and others are just old inefficient plants that will have – would be a two or three week shutdown extend to four, five weeks and sometimes 45, 50 days.

So the takeaway is that – it’s important to recognize that the industry doesn’t always run at full capacity utilization. We see that for all the plants across the industry. But we have to be cognizant of the fact that there should be some supply coming back after these turnarounds, right now, and a few supply additions over the course of this year, that the market will have to absorb and what’s helpful is that we continue to see very strong demand in the core markets and core derivative markets in methanol year-over-year and a lot of the major consuming markets as well as continued growth in the energy-related related derivatives, including MTO, which – some of which are going through turnarounds, right now, and will be over the next few months.

Hassan Ahmed

Understood. Very helpful. Now as a follow-up, taking a look at your nat-gas prices in Q1, $3.70 per million Btu was the weighted average. And again, maybe I’m nitpicking here, but if I were to take a look at the average Henry Hub price during the same period, it was around $2.85. So just wanted to understand the delta between the two?

Ahmed El-Hoshy

So sometimes with kind of looking at just the simple average, it’s going to be a combination of factors. One of the big ones is that gas, we purchased off the Houston Ship Channel and we pay a transportation fee to get it delivered to our site. So it’s not going to always go and lock that with how Henry Hub moves. Houston Ship Channel usually prices taking the winter months at a slight discount to Henry Hub, but then we have to pay kind of this fixed transportation fee to deliver it to our site. Probably – that’s probably not a big explainer of the difference, but a bigger explainer would probably be, whether we purchase gas daily or for the month ahead in the market, and that actually when you average it out, if you end up paying a fixed gas price at the end of December for the month of January versus daily for all of January, some months that we’re seeing a benefit and some months that we’re against you.

So it could be a combination of those two factors and few others that could lead to those differences, and it’s something that we obviously continue to focus on to stay competitive in the market.

Hassan Ahmed

Understood. Very helpful. Thanks so much.

Operator

[Operator Instructions] And at this time there are no further questions. I’ll turn the call back over the presenters.

Ahmed El-Hoshy

Alright, thank you. Thank you very much. I appreciate everybody joining this conference call, and we look forward to speaking next quarter.

Operator

And that concludes today’s conference call you may now disconnect.