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Edited Transcript of ESSO.BK earnings conference call or presentation 21-May-20 8:00am GMT

Q1 2020 Esso Thailand PCL Earnings Call

Bangkok May 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Esso Thailand PCL earnings conference call or presentation Thursday, May 21, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jutarat Wareechuensuk

Esso (Thailand) Public Company Limited - IR & Planning Manager

* Suchart Phowatthanasathian

Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director

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Conference Call Participants

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* Komsun Suksumrun

Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst

* Suwat Sinsadok

BNP Paribas, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the Esso Thailand's First Quarter 2020 Results Conference Call. (Operator Instructions)

I would like now to hand the call over to Khun Jutarat, Investor Relations and Planning Manager. And I'll be standing by for a Q&A session. Please go ahead. Thank you.

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Jutarat Wareechuensuk, Esso (Thailand) Public Company Limited - IR & Planning Manager [2]

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Good afternoon, and welcome to Esso Thailand's teleconference on our first quarter 2020 financial and operating results. At Esso side, we have the following management representatives with us today: Khun Adisak Jangkamolkulchai, Chairman and Managing Director; Khun Suchart Phowatthanasathian, Director and Refinery Manager; Khun Manoch Munjitjuntra, Director and Retail Sales Manager; Khun Ratrimani Pasiphol, Director and Tax Manager; Khun Pachara Sungkhapan, Director and Controller; Khun Taweesak Bunluesin, Director; Khun Vorraya Kosalathip, Treasurer.

Before starting the presentation, I would like to share with you briefly of what Esso Thailand has done to respond to coronavirus pandemic or COVID-19, which is an unprecedented challenge. Since end January, the company has activated emergency support group and could measure to minimize risk and safeguard our employees, contractors and stakeholders. Most of our office-based employees work at home from middle of March, and we have started returning to the office gradually increased since beginning of this week. So far, there have been no confirmed cases for our staff.

Models on the cover page are examples of donations we made in hospitals, in Bangkok and provinces to fight against COVID-19. The donations are in form of money, personal protective equipment and face shield that are jointly contributed by the company, employees and customers.

To begin the presentation, may I gently remind that the information contained in this presentation is subject to the conditions described in the disclaimer that is shown on Page 2.

Now let's start today's presentation. On Page 3, industry and business environment. In first quarter 2020, Thai economy was hit strongly by COVID-19 outbreak, similar to other countries around the world. GDP growth for the quarter was negative 1.8% as a result of decreases in total exports of goods and services, private and public investments and government expenditure. The office of the National Economic and Social Development Housing revised this year's GDP forecast year-on-year be in the range of minus 3% to minus 5%.

In March 2020, the average Dubai crude oil price was $33.7 per barrel, which was significantly reduced from December 2019 average price by $31.2 per barrel. The crude price collapse was due to global economic concerns caused by COVID-19 impact on demand. In addition to crude oil supply following OPEC and their allies failed to reach agreement on production cut.

The average first quarter industry gross refining margin was $1.2 per barrel, $0.40 per barrel lower than the average in the fourth quarter of 2019. The industry margin was pressured by weakened demand on jet and gasoline during global travel restrictions and countries lockdown. At March year-to-date, Thailand industry fuel demand decreased 7.4% year-on-year.

Moving on to Page 4 for Esso headline results. During COVID-19 pandemic in the first quarter, Esso Thailand managed people, facilities and operation sites safely. Refinery crude intake in the quarter was 122 KBD. The production was adjusted to cope with a drop in product demand, particularly jet fuel.

Average gross refining margin was negative $19.3 per barrel, especially due to unfavorable inventory effects.

Esso retail business continued to expand the network and improve customer experience. A net increase of 3 new sites were added in the first quarter, which brought our total number of Esso service stations to 641. First quarter 2020 net loss was THB 6,307 million.

Let's look into more detail. On Page 5, margins and crude intake. The chart on the top left shows quarterly industry gross refining margin. The average first quarter industry gross refining margin was $1.2 per barrel, a decrease of $0.40 per barrel from the previous quarter mainly due to weakened crack spread of gasoline and middle distillates from COVID-19 impact on demand.

Product crack spreads are shown on the top right chart. The first quarter 2020 UGP crack spread was $6.7 per barrel, which was decreased by $6.2 from the fourth quarter of 2019 because of demand weakness during several countries lockdown. Comparing to the same period of last year, with UGP oversupply globally, the crack spread then improved $3 per barrel. Meanwhile, ADO crack spread was $11.7 per barrel in the first quarter, or $3.1 and $1.8 per barrel lower than the previous quarter and the same period last year, respectively, especially due to a demand decline.

Esso gross refining margin is on the bottom left chart. The first quarter 2020 gross refining margin was negative $19.3 per barrel, a significant decrease from the previous quarter and the same period of last year was primarily driven by unfavorable inventory effects from crude price collapse mentioned earlier.

The bottom right chart shows crude intake. Esso refinery crude intake in the first quarter was 122 KBD, moderately improved when comparing with the previous quarter because of no plant-wide maintenance turnaround. The crude spend was lower than the same period of last year, resulting from power interruption in early quarters and production slowdown in the late quarter (inaudible).

Move on to page 6, crude source and sales channel. On the left chart, Esso refinery continued to capture the benefits of crude diversification to optimize product use and improve refining economics. In the first quarter 2020, we added 3 new opportunistic crudes processed. This was in addition to the 5 new crudes in 2019. While the first quarter saw some geographic shift, it is important to note that we have not changed our approach for crude acquisition. We continue to look for advantaged crudes net optimized in the red at Middle East.

On sales channels, we continue to focus on selling products to high margin channel with our retail and commercial, as shown in the chart on the right. A small percentage increase in product export reflect outlet optimization leading to local demand slow down. On commercial, we would like to highlight that while jet sales volume decreased, our diesel sales volume increased from business growth.

Move on to Page 7. The graph on this page shows refinery yields by type and by product. On the chart of production by type, yields of the first quarter 2020 essentially the same when comparing to the same period of last year, with a slight shift from heavy products to middle distillate. On the right chart, for middle distillate, the production was partially shift from jet to diesel to cope with a sharp drop in jet demand in March, with air travel halt because of COVID-19.

Next on Page 8, petrochemical spreads and production. The graph on the left shows paraxylene price spreads. Industry margins will continually weaken in the first quarter, driven by supply/demand imbalance in the region. Paraxylene UGP price spread was $219 per ton, which was $55 per ton above the previous quarter because of UGP price drop at higher ratio, but the spread was down by 55% versus the same period of last year when the market was favorable. Our paraxylene production in the first quarter 2020 was 53,000 tons, up by 14,000 tons from the previous quarter as the refinery maintenance shutdown was ended. The first 3 months period, production was 47,000 tons, lower than the same period of last year, reflecting production run cut in response to unfavorable market conditions.

Let's move to the marketing business update on Page 9. In the first quarter of 2020, our retail marketing focus on service stations, network expansion, growing retail sales and offerings, while enhancing on-site operations and heightening hygiene standard for a safety of customers and service station staff during COVID-19 pandemic.

The top left chart shows the number of new service station stream. We added 4 new sites in the first quarter of the year, partially offset by divestment of the site that was not conducted. The total number of Esso service stations at March was 641. We have healthy new site pipeline under submitting and construction phase. The construction time line got some impact from COVID-19-related measures. However, we believe it is a short-term impact. We are now expediting the network growth and plan to reach 670 service stations by the year-end. The bottom left chart shows the number of the service station offering the sales of B10, which was growing luckily in the first quarter. As of end March 2020, we had 328 sites, which was about 50% of total sites. It is planned to achieve 100% of total sites by this June.

On the top right, we show the number of service stations offerings Supreme+ Diesel and Supreme+ Gasohol 95. As of end March, we had 426 sites and 259 sites, which were about 56% and 40% of total sites, respectively, the right mix for the plan.

The bottom right chart demonstrates our success in promoting lubricant's branding. As of March 2020, there were 1,648 Mobil signages, an increase of 7 from the 2019 year-end. We plan to have more signage deployed as part of COVID-19 recovery to enhance brand awareness and distribution in the market. The lubes and retail business collaboration show enhance customer experiences and improve branding as well.

Moving to the financial result on Page 10. The top left chart shows our sales revenue. The first quarter revenue of THB 39.4 billion was lower than the same period last year, mainly driven by lower market selling prices following crude price downward trend and lower sales volumes.

On the bottom left chart, first quarter EBITDA was negative at THB 7.3 billion, down by THB 9 billion from the same quarter last year, primarily due to unfavorable inventory impacts and lower paraxylene margins.

The top right chart shows cash generated from operations of THB 1.1 billion for the first quarter of 2020, down from the same period a year ago, reflecting favorable working capital effects partly offset by loss in the period.

Our net profit at the bottom right chart. The first quarter 2020 realized a loss of THB 6.3 billion versus THB 1 billion in profit in the same period of 2019. The decrease was mainly due to the same reasons described earlier about EBITDA.

On Page 11, showing financial position. Our balance sheet indicators, we saw a decrease in total assets, mainly due to lower inventory balance and trade receivables from significant price drop and utilization of prepaid excise tax, partially offset by an increase in noncurrent assets from the adoption of new lease financial reporting standard TFRS 16.

Total debt was THB 26.8 billion as of March 31, 2020, compared with THB 26.9 billion at year-end 2019. Total debt consists of THB 23.3 billion short-term debt and THB 3.5 billion long-term borrowings.

Regarding cash flow, I have already explained cash flow from operations on the prior chart. Cash flow used in investing activities was THB 0.5 billion, reflecting capital investments for refinery efficiency improvement, service station upgrades and payment for right-of-use assets according to the adoption of new lease financial reporting standards, TFRS 16. Cash flow used in financing activities was THB 0.2 billion, reflecting net repayment of borrowings and payment on lease liabilities under TFRS 16.

Next, on Page 12. In summary, the first quarter 2020 was a challenging period due to the unprecedented COVID-19 pandemic and government lockdown measures. We kept our focus on just people and operations. COVID-19 has significantly impacted the demand, resulting in poor supply in the market, thus putting pressure on crude product prices and margins. Esso refinery reduced production owing demand plunge. Our retail sales footprint continue to grow and enhanced customer experiences and branding, partly through a collaboration with new sales.

Looking ahead in the second quarter, we see fuel demand bottoming out in April and we saw a sign of recovery in early May, when the government started relaxing the country lockdown. Esso Thailand is focused on conservative and effective spending while prioritized investment with discipline in high-return assets.

That concludes the presentation. Now we will open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Suwat Sinsadok.

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Suwat Sinsadok, BNP Paribas, Research Division - Analyst [2]

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I have 3 questions. First about the crude. I would like to know what's the reason why the Esso has still use quite a small portion of the Middle East crude despite relatively discount in the -- I think, in the first quarter or in second quarter. Could you explain more that what would be the crude slate change in the second quarter, particularly in form -- in the term of Middle East crudes? And also, could you explain that what the other crude complies in the 30% portion of your other crude? And second question I want to ask about is debt. How low the debt production that you can go according to the -- your first quarter number, it's about 8%. Could you go to, say, low or maybe 5%, things like that? And how flexible that you can do? And the last one about the station. I want to know that in -- because of the COVID, do you still maintain your number of station expansion in 2020? And if so, what would be that number?

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Jutarat Wareechuensuk, Esso (Thailand) Public Company Limited - IR & Planning Manager [3]

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(inaudible)

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [4]

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This is Suchart here. Can you hear me? Because I cannot hear clearly Khun Jutarat. Can Khun Suwat hear me?

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Jutarat Wareechuensuk, Esso (Thailand) Public Company Limited - IR & Planning Manager [5]

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Yes. Yes.

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Suwat Sinsadok, BNP Paribas, Research Division - Analyst [6]

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Yes, yes, yes. I'm hearing you. You're quite clear, Khun Suchart.

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [7]

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Okay. All right. Sure. So Suchart here. So thanks for the question. So I think the first question is along the crude. I think rather than I comment on the premium of the lower -- from the Saudi -- or lower of the Middle East premium, I probably give the overall context of the crude selections. Typically, when we look at the raw material acquisition, we always look at all the crude, not only from the Middle East, but also the crude in this region and also together with the crude from other region, Middle East included. So whenever we look at that, so we look at the landed cost and then we look at the optimize of the crudes that they come to the refinery. And wherever the crudes land that actually economic for us, we will buy those crudes and then leverage the ExxonMobil networks to access into those economic feedstock for the refinery. That's the overall internal raw material acquisitions for their refinery. And yes, when the Middle East is low, everyone is also getting lower as well in terms of gross premium. So it's not only the Middle East regions that actually lower premium at the crude, in other regions also get lower as well. So I think we'll select whatever is economic for us, and then we look at the long term in terms of the crudes that come into the refinery.

Your question about the other crude select in 30%. So we have some of them actually for the Midland sweet from the U.S. as well. So those crudes trade on WTI basis, and then we purchase those crude come into our region as well -- sorry, our refinery as well in the first quarter.

Your second question is along the jet, how low we can go. I think right now, we reduced about 85% already of the typical jet production. We typically produce about 14 KBD, 15 KBD. That's about 8% that you're seeing. And we reduced down to about 90% -- 85% to 90% today. And that a combination of, do a lot of things in the refinery optimizations, to minimize the jet production and together with the marginal land cut that we have, right, that gets down to about 90% -- 85% to 90% reduction that we already completed. And I think we have a few steps to go so that in the next quarter because everyone know that jet demand will not recover soon. If it recover, it will recover very slow compared to diesel and gasoline. That start to recover now. So we have a few steps to go in order to get lower than that because that actually economic as well because the jet crack is not really strong at the moment.

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Jutarat Wareechuensuk, Esso (Thailand) Public Company Limited - IR & Planning Manager [8]

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There is another question up in the one -- on the retail. The question is about the number of service station (inaudible) in first quarter, we have 641. And this year (inaudible) at 670. So I think that probably (inaudible)

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [9]

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Can you hear me?

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Suwat Sinsadok, BNP Paribas, Research Division - Analyst [10]

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Yes. (inaudible)

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [11]

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Okay. Thanks for the question for retail on cap. Our station network outlook by the end of this year is close to the plan. Then the site that we are -- typically, the station takes about 9 to 1 year. So the site in the pipeline, as Khun Jutarat Wareechuensuk mentioned, we still have a strong pipeline that's under permitting and construction at the moment, it's about 50 sites. So the team now expediting those kind of construction. We have some -- a little bit difficulty dealing the COVID to mobilize the contracts. However, it's a short-term period. And we still aiming to get close to the plans, which is probably 670 by year-end, which is the net about 30 sites a year -- by this year. That's it from the retail platform.

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Operator [12]

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Our next question comes from the line of Komsun.

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Komsun Suksumrun, Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst [13]

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I have 3 questions. Number one is the -- I understand that ESPO and Sokol premium discount has narrowed significantly over the last week or so. Is that going to adjust your crude diet? Or is that short-term phenomenon that you think it will go away? And both Sokol and ESPO premium will turn into a discount again? And second question is, did the Far East crude price has dropped at the same level as Middle East crudes, things like Arab Light or it's drop at a slower rate? And the last question is the -- now that the ethanol and biodiesel prices are higher than the crude itself, do you think the government will back down or roll back the biodiesel or bioethanol policy?

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Jutarat Wareechuensuk, Esso (Thailand) Public Company Limited - IR & Planning Manager [14]

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Yes. So the first question is about the ESPO and Sokol crudes that Komsun mentioned that the premium got adjusted for recently. So Khun may I ask -- Khun Suchart for your comments please?

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [15]

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Yes. I'm probably trying to -- Khun Komsun, I would combine the 2 questions together, Khun Komsun. So when you look at the principle, the seller usually look at the premium based on the crack spreads, right, that depending on the clean product crack spreads, either gasoline, diesel or jet, and then that determine the premium as well. And you're seeing double the premium because the crack spread has been quite poor for all 3 products, right, gasoline, diesel, even jet is sometime below the crude. That as a result causing the premium to be lower. And then we saw that for not only ESPO, the Sokol also has been lower as well. And we don't have ESPO in our slate in the past month, right? And then we also enjoy the low premium on the ESPO when the ESPO premium came down.

Your second question along the Far East crude, that quite a number of the Far East crude, but going back to the same principle that I mentioned early on, the seller usually determine -- offset the premium based on the crack spread of the product. And we see for the Far East crude premium came down as well when the product crack spread came down. Some might go -- might come down faster, some might come down slower. So back to the principle that we use in terms of the core acquisitions, when we look at the IMA or raw material acquisition coverage for us, we look all across the whole (inaudible) and then making sure that we look at -- for all regions, right, not only the -- from so-called ESPO from the East of Russia or from the Middle East or for the Far East and look from the landed price standpoint and pick the most economic coming to the refinery.

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Komsun Suksumrun, Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst [16]

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Khun Suchart, I didn't get on what you said on ESPO. Is you do not have ESPO in your crude diet? Or did I miss that?

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [17]

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Literally. Yes, literally. So we have it in the past. But it's not really -- it doesn't mean that we don't want to buy it, right? We always compared economic. And then if it's not economic, we don't buy. We buy the most economic slate coming to us. So the reason we did not having it because we cannot buy it, but because it's not economic for us in the past months. But it could be economic in the future as well. But as I shared, we did not have in the past couple of months for ESPO.

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Komsun Suksumrun, Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst [18]

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Is that because of the Chinese teapot has bidding up price quite a lot?

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [19]

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That part of it is right. I mean, it's not really new. It's actually start -- you see that in the middle of March in the public domain, right? They're also saying that, is actually the buyer -- the Chinese buyers, they keep only solid buying. So that part of it.

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Komsun Suksumrun, Phatra Securities Public Co. Ltd., Research Division - Assistant MD and Energy, Utilities & Petrochemicals Analyst [20]

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And the last one is the government policy regarding the biodiesel and bioethanol because I noticed that the -- right now, both ethanol and B100 prices are higher than the crude itself. Is it possible for the government to -- or the policy to roll back this renewable but lending mandates?

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Suchart Phowatthanasathian, Esso (Thailand) Public Company Limited - Refinery Manager & Executive Director [21]

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Okay, it's on retail, so let me address your question on that one. The government election remain unchanged to push the B10 or E20 which is the par -- of fuel grade. But the enforcement and the implementation probably shifted a little bit further like you can see from the news, right, the B10 is going a lot, the B20 going down. And government have a plan to change the name of the B10 to be a combined diesel to promote B10. And the G91 gasohol 91 phase out to support the E20 as the main grade have been shifted from the third quarter this year to the early of next year. So in a nutshell, we view that the government direction to promote the biofuel still remain unchanged there.

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Operator [22]

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(Operator Instructions) Madam, there is no more question in the line.

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Jutarat Wareechuensuk, Esso (Thailand) Public Company Limited - IR & Planning Manager [23]

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Yes. So no more question. So that concludes today's presentation, and I would like to thank everyone for participation. All lines may disconnect now. Thank you, and goodbye.