Turkey - TUPRS - Main Takeaways from our Call with TUPRS Management

This analysis by GLOBAL Securities is presented to you by Raiffeisen Centrobank AG. Raiffeisen Centrobank AG acts solely as a distribu

TUPRS - Main Takeaways from our Call with TUPRS Management

Operating an unfriendly refining environment (brent is down by 61% y-t-d, sqeezing refining margins, contracting demand due to covid-19 thread), TUPRS share prices are down by 45% y-t-d and its Mcap declined to USD2.6bn recently.

Thus, we talked to the TUPRS executives in order to get an update for 1Q20 and the outlook.

 TUPRS may book USD400-500mn inventory loss in 1Q20 (according to our ballpark estimates) if the brent keep its existing price until the quarter end. We incorporate the sharp drop in brent oil prices (from ~65 USD/bbl at YE19 to ~25 USD/bbl levels recently) in our calculations.

 The diesel, gasoline and jet fuel corresponds to 2/3 of total sales volume of TUPRS. Diesel product cracks are hovering flattish y-t-d. But the product cracks for jet fuel and gasoline are shrinking. Due to the contraction in global air traffic as a result of covid-19 thread, the jet fuel consumption declined sharply and it also led to a drop in jet fuel cracks. On gasoline front, due to the lockdowns in Europe, the gasoline consumption sharply declined as well.

 On the other hand, the heavy oil (which is the key raw material of TUPRS) is more available now after the dispute between Saudi Arabia and Russia. This leads to expansion in crude differentials in favour of Tupras, as well.

 For the time being, there is no decision on halting refining operations due to weakness in demand.

 Key risks for Tuprs: contiunation of declining product cracks, extension of lockdown in European countries, a possible production halt
 Key catalysts for Tuprs: further expansion in crude differentials, sharp recovery in brent oil prices.

All in all, we expect Tuprs to post a weak quarterly results in 1Q20, while the outlook of 2Q20 and onwards will be mostly related to the course of the pandemic. At that point, we maintain our neutral view on Tuprs for the time being, although its share price declined sharply recently and its mcap contracted to eye-catching level.