01.14 02.14 03.14 04.14 05.14 06.14 07.14 08.14 09.14 10.14 11.14 12.14 01.15 02.15 23 February, 2015 Market Perform (Maintained) Turkey - Equity - Oil & Gas Company Update Never mind 4Q, look at the RUP benefits 4Q results due on March 2, will be hit by FX and inventory losses as reflected in tax financials. The hydrocracker project is now on-stream, yet the fall in oil prices, and lower spreads remain major threats to the Company s profitability. We maintain our Market Perform recommendation with a 12-month price target of TL62.50, implying 17% upside potential. The stock trades at a 2015E EV/EBITDA multiple of 7.5x - at a premium over the 6.0x average multiple of its global regional peers. Last Price TL 53.30TL 12-month Target Price TL 62.50TL Potential Return TL 17% Current Mcap (TLmn) 13,347 Current EV (TLmn) Current Mcap (US$mn) 17,385 5,441 Price Performance (TL) Expect a weak 4Q amid inventory and FX losses Oil prices continued their downward trajectory with the Brent price falling by 39% from $94/bbl at the beginning of the quarter to $57.50/ bbl by the end. Although Med margins have remained strong, the reported US$204mn inventory loss (higher than our US$150mn expectation) will have eaten up most of the operating profitability. Tax results point to a no dividend yet we forecast a tiny TL50mn to be distributed from reserves. The deferred tax income will be the saviour for the bottom line in the IFRS results. Note that tax financials included the Competition Board fine of TL309mn recorded at 2013- end. We revised down our 4Q net income from TL192 to TL146mn. RUP now operational, but full impact to be seen later his year Although the opening ceremony took place in December, the RUP is still in the testing phase and will become fully operational by 2Q15. Low crude prices, along with slimmer diesel/fuel-oil spreads, could erode profitability in the short term; yet once we observe some stabilization in demand and pricing, will reap the rewards of higher profitability. expects the RUP to generate an additional US$550mn in annual EBITDA and expects the hydrocracker to provide the Company with more flexibility in a changing demand environment. Tax fine puts some pressure on the share price After the tax investigation for the 2009-2013 period, the Tax Office fined a total of TL160mn (TL65.6mn original tax + TL94.4mn tax related fines) plus overdue interest for the related period. Although stated that it would exercise all of its legal rights regarding the tax fine, we believe a settlement option is more likely for the resolution. The Company has not yet set aside any provision for the fine. Bloomberg/Reuters: 1 mth 3 mth 12mth 1% 1% 6% 32.3 YTD TL Return: -4% 250 Free Float (%): 49 Financials and Ratios 2013 2014E 2015E 2016E Research Analyst: Onur Marşan Net Sales (TLmn) 41,078 40,389 34,764 45,577 +90 (212) 384 1125 EBITDA (TLmn) 1,014 1,013 2,015 2,346 omarsan@garanti.com.tr Net Profit (TLmn) 1,197 1,392 1,174 1,312 EBITDA Margin 2.5% 2.5% 5.8% 5.1% Sales Contact: P/E (x) 11.1 9.6 11.4 10.2 +90 (212) 384 1155-58 EV/EBITDA (x) 17.1 17.2 8.6 7.4 icm@garanti.com.tr EV/Sales (x) 0.42 0.43 0.50 0.38 EPS (TL) 4.78 5.56 4.69 5.24 DPS (TL) 1.58 0.20 1.20 0.80 60.00 54.00 48.00 42.00 36.00 30.00 Stock Market Data Relative Performance: TUPRS TUPRS.TI / TUPRS.IS 52 Week Range (TL): 37.2 / 56.9 Average Daily Vol (US$mn) 3 mth: Shares Outstanding (mn): Foreign Ow nership in Free Float (%): BIST-100 86% 1
The Company in Brief Founded in 1983, and privatized in 2006, (Turkish Petroleum Refineries Co) is an integrated petroleum company engaged in the oil refining and distribution sector in Turkey. Based in Kocaeli, is Turkey s sole refiner with a refining capacity of 28.1mn tonnes and a nelson complexity of 7.3. The Company also owns 40% of OPET, Turkey s third largest petroleum retailer. Shareholders Enerji Yatirimlari (SPV) 51%, Free Float 49% Enerji Yatirimlari (SPV) shareholding Structure: Koc Holding 77%; Aygaz 20%, OPET 3%. TUPRS Rating Company Rating Date Current Rating Fitch Ratings 12.01.15 BBB- (stable) Moodys 18.10.12 Ba1 (stable) SUMMARY FINANCIALS Income Statement 2013 2014E 2015E 2016E 2014E/2013 Net Sales 41,078 40,389 34,764 45,577-2% Cost Of Sales -39,605-39,311-32,347-42,815-1% Gross Profit (Loss) 1,473 1,078 2,417 2,762-27% Operating Expenses -700-427 -791-857 -39% Operating Profit 774 650 1,626 1,904-16% Consolidated EBITDA 1,014 1,013 2,015 2,346 0% Net Other Income/ Expense -732-273 -237-236 -63% Net financial Income/ Expense -110-175 -144-200 59% Profit (Loss) before Tax 13 202 1,245 1,468 1447% Tax 1,186 1,203-62 -146 1% Minority Interests 2 13 10 10 561% Net Income 1,197 1,392 1,174 1,312 16% Ratios Gross Profit Margin 3.6% 2.7% 7.0% 6.1% -0.9 pp EBIT Margin 1.9% 1.6% 4.7% 4.2% -0.3 pp EBITDA Margin 2.5% 2.5% 5.8% 5.1% 0 pp Net Income Margin 2.9% 3.4% 3.4% 2.9% 0.5 pp Balance Sheet 2013 2014E 2015E 2016E 2014E/2013 Current Assets 9,765 10,715 10,515 10,832 10% Cash and Cash Equivalents 3,663 4,000 2,669 2,836 9% Short-Term Trade Receivables 1,957 2,082 2,360 2,475 6% Inventories 3,456 3,750 4,631 4,633 9% Other Current Assets 688 882 857 888 28% Long Term Assets 11,375 11,350 11,768 12,190 0% Total Assets 21,139 22,064 22,284 23,023 4% Short Term Liabilities 10,396 9,529 9,452 9,850-8% Short-Term Financial Loans 1,075 900 850 650-16% Short-Term Trade Payables 6,794 6,445 6,302 6,358-5% Other Short-Term Liabilities 2,528 2,184 2,300 2,842-14% Long Term Liabilities 5,604 6,401 5,923 5,352 14% Long-Term Financial Loans 5,447 6,221 5,723 5,151 14% Other Long-Term Liabilities 157 180 200 201 15% Shareholders Equity 5,139 6,135 6,908 7,821 19% T. Liabilities & S.holders Equity 21,139 22,064 22,284 23,023 4% 2
Jan.13 Feb.13 Mar.13 Apr.13 May.13 Jun.13 Jul.13 Aug.13 Sep.13 Oct.13 Nov.13 Dec.13 Jan.14 Feb.14 Mar.14 Apr.14 May.14 Jun.14 Jul.14 Aug.14 Sep.14 Oct.14 Nov.14 Dec.14 February 23, 2015 INVESTMENT THESIS We change our 12 month target price for from TL55.30 to TL62.50 per share, implying 17% upside potential. The steep fall in crude oil prices led to some hefty one-off inventory losses, as reported US$204mn in the 4Q14 financial statements due on March 2, yet the strong refining margins could compensate some of these massive losses in 4Q14. We welcome the recent upward trend in crude oil prices in 1Q15 that could pave the way for inventory gains, while the appreciation in the US$ will have a positive impact on operation profitability. All in all, we maintain our Market Perform recommendation for. We deem the Company s business prospects are solid following the completion of the RUP Project, yet we will await better entry points for the stock. Higher refining margins thanks to lower oil prices Brent prices declined for a sixth consecutive month in December, with the average price falling by a further $17/barrel (bbl) on the month to $62/bbl, the lowest since May 2009. Overall, crude oil prices have tumbled by 56% since June, with no indication that the decline will stop there. There have even been market rumours of a $40/bbl price, with authorities in Saudi Arabia declaring that they would be comfortable even if prices fell as low as $20/bbl. The price of oil continued to collapse into January as rising supplies coincided with weak demand growth, with OPEC maintaining its commitment not to cut production. Despite lower prices, lowest level seen as US$45.5 per barrel seen on January 13, within the growth in global demand is only forecasted to accelerate to 0.9mb/d in 2015. The weakness in oil prices so far manifested itself in the form of higher gross refining margins thanks to the increase in product price spreads. Although winter is known as a low margin season, we have seen very strong Med region refining margins reaching 6$/bbl on a daily basis. However, it should also be borne in mind that this strong margin environment should be a temporary phenomenon, and once there is some stabilization in crude prices we would expect refining margins to come down sharply as demand dynamics suggest. The combination of abundant supply from U.S. oil production and strong global supply, combined with a weakening outlook for the global economy and oil demand growth, could be listed as the main reasons behind the fall. Refining Margins ($/bbl) 8.00 6.00 4.00 2.00 - Source: IEA Brent Cracking Urals (Cracking) 3
1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 February 23, 2015 Refining margins unlikely to improve in the coming years Once crude prices bottom out and stabilise, we would expect product spreads to plunge from their current high levels, leading to lower refining margins. Under such conditions, we would also expect margins to decline, although the Company will have the capacity to switch to more profitable products now that the fuel-oil conversion (RUP) unit is up and running - although this may not be sufficient to maintain strong profitability, unless we see a strong recovery in the demand composition. We believe the most bountiful years for refining margins are now behind us, while we do not expect the global refining market to return to its precrisis levels for the foreseeable future, with refining margins likely to come under pressure in the coming years. Crude differentials are likely to remain below their historical averages, while expanding refining capacity will lead to an even more competitive market amid a lack of sufficient growth drivers in the coming period. In this context, the completion of the RUP project will prove vital in sustaining profitability. We would also note that although has welcomed Socar s entry into the market as a second player from 2018 and beyond with its STAR refinery that is planned to be operational by 2017-end, we believe the intensified competition will undoubtedly squeeze margins, despite the strong local growth. The STAR refinery will have a refining capacity of 10mn tonnes, mainly focused on the production of naphtha, a feedstock for Petkim. Even then, the new diesel capacities will still not be sufficient to meet local demand. Med -TUPRS Margins versus Brent Prices 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00-1.00 140 120 100 80 60 40 20 0 Med Margins TUPRS margins Brent Prices (rhs) Source:, Reuters We expect to close 2014 with a net refining margin of US$2.75/ bbl. For 2015 and beyond, we expect refining margins to hover at around US$4-5/bbl, thanks to the addition of the RUP. 4
1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 (US$mn) February 23, 2015 Despite being a one-off, we expect inventory losses to take their toll on the share price At tax financilas, the inventory loss came at US$204mn in the 4th quarter on the back of a steep 39% fall in oil prices. After the beginning of the year, prices continued their downtrend and had plunged by another 16% as of January 16, hitting $48 per barrel levels. We assume that the FX losses will have a one-off impact. Recently, we observed the crude prices climbing back to US$55-60 per barrel levels paving for inventory gains in 1Q15. Inventory Inventory Impact effect versus change in Brent prices 300 200 100 - (100) (200) (300) (400) Product inv. (US$mn) Crude inv. (US$mn) Change in Brent price (rhs) 0.40 0.30 0.20 0.10 - (0.10) (0.20) (0.30) (0.40) (0.50) (0.60) Source:, Reuters Residual Fuel Oil Conversion (RUP) project to bring strong flexibility Work on the project got underway in 2008, and was completed with a capex investment of around US$2.9bn. The project will enable the refinery to process 4.2mn tonnes of high sulphur fuel oil - where there is a surplus in Turkey - and produce approximately 3.5mn tonnes of high quality diesel/jet fuel, gasoline and LPG to Euro-V standards. It also enables the production of 690,000 tonnes of petroleum coke and 86,000 tonnes of sulphur. Following the completion of the RUP, the Nelson Complexity Index of the Izmit refinery increased from the current 7.78 to 14.5 (based on design capacity). Source: 5
We calculate that the RUP will contribute around US$500mn in annual EBITDA, a figure lower than the Company s expectations at the current product price ratios. We incorporated the RUP product yields announced by into our valuation. We would expect product price ratios to remain depressed in the second half of 2015 on the back of low oil prices, decreasing the profitability of the project. Nevertheless, we still calculate that the project will be able to create a minimum of US$350-400mn in additional EBITDA going forward. to still be a dominant player by the end of 2017 existing four refineries account for 100% of Turkey s domestic production. Even after the RUP project, there will still be room for additional refining capacity. In this context, we welcome the addition of the Socar-Turcas Refinery (STAR), which will come on stream by the end of 2017 with the completion of the US$5.5bn investment., as Turkey s sole refiner, will continue to enjoy its dominant position (60% market share, with the rest imported) in the next 3 years. The STAR refinery will have a refining capacity of 10mn tonnes, mainly focused on the production of naphtha, a feedstock for Petkim. Even then, the new diesel capacities will still not be sufficient to meet local demand. Demand still buoyant in Turkey Oil has long been one of the key sources of energy in Turkey, accounting for some 28% of the country s Total Primary Energy Supply (TPES). Turkey s demand for oil increased slightly from 29mn tonnes in 2003 to 35mn tonnes in 2013, chalking up a 10 year CAGR of 2%. The transport sector accounted for almost half of total oil consumption in 2013. We expect the current demand composition to be maintained going forward with an increasing contribution from the transport sector. The airline sector is projected to grow at a rate double that of GDP, with automotive sales on course to grow at a rate at least 1-2 percentage points in excess of GDP growth over the next decade. Oil products consumption in Turkey (000 tonnes) 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Other Asphalt Lube Oil Fuel Oil Diesel Jet Fuel Gasoline Naphtha LPG Source: 6
EIA continuously revising its assumptions downwards Contrary to what we had been accustomed to, the EIA has revised its crude oil price assumptions for 2015 downward three times since October 2014, in line with the falling trend in oil prices and OPEC s decision not to cut production. The EIA now forecasts that Brent crude oil prices will average $58/bbl in 2015 and $75/bbl in 2016. The current values for futures and options contracts suggest a very high level of uncertainty for the pricing outlook. We do not expect a major change in crude assumptions in the next reports, now that Brent prices have started to level out at around US$55 per barrel. EIA Assumptions 2013 2014 2015E 2016E WTI Crude Oil ($/bbl) 97.91 93.26 54.58 71.00 Brent Crude Oil ($/bbl) 108.64 99.02 57.58 75.00 Source: EIA Will there be a production cut in 2015? OPEC is resolute that it will not cut production and maintains its production at 28.8mn barrels a day. OPEC notes that if the recent price trend continues, the long-term sustainability of capacity expansion plans and investment projects may be put at risk. OPEC is of the view that a lack of investment may lead to a supply shortage in the long run, leading to excessive pricing as seen in 2008. The 12-member Organization of the Petroleum Exporting Countries pumps about a third of the world's oil. OPEC states that any oil supply cut would lead to spare production capacity, a lack of investment and an eventual shortage and price spike that could exceed that seen in 2008, when oil hit a record high of over $147 a barrel. Meanwhile, non-opec oil producers are expected to increase output in 2015 at a slower rate than previously forecasted, aiding a recovery in crude prices. The slowdown in non-opec output is intended to lead to a rebalancing of the currently over-supplied global markets in the second half of 2015, reviving prices, according to International Energy Agency (IEA). OPEC appears to be closely following how the markets will respond at the end of 1H15 before considering some concrete moves towards production cut. Who says falling oil prices do not affect American production? About 4,000 workers at nine plants, including seven refineries accounting for 10% of U.S. refining capacity, went on strike on February 2nd, immediately sending oil prices up by $3 per barrel. The strike ended on February 5, with the strikers demands met. Since bargaining first started on January 21, the union has rejected five offers and demanded for an annual pay rise of 6%. Meanwhile, executives stated that raising pay could prove highly challenging that now crude prices have tumbled by 60% since June 2014, eroding profits. We now are seeing more reports that U.S. oil production may stop growing in the second half of 2015 and could fall in 2016, as low oil prices render the majority of oil wells uneconomical to run. The oversupply of oil has forced a slowdown in drilling and put the brakes on a five-year boom that pushed U.S. production to record highs. The slowdown has largely been driven by the economics of drilling. 7
More than half U.S. oil wells drilled in 2014 were uneconomical below $60/ bbl and 30% per cent of new wells had break even levels of $81 or higher, according to a HIS article. A slowdown in over production could have economic impacts as well. Breakevens for US shale plays Source: Wood & MacKenzie, EIA Will Iraqi oil support margins? The bitter dispute between Baghdad and Erbil, which became an international issue, has now finally reached a breakthrough agreement. The central government and the KRG signed a temporary agreement to settle the oil dispute in November 2014. With the announcement of this agreement, has finally declared that it will be able to pump Iraqi oil from storage at the Mediterranean port of Ceyhan to the central Turkish city of Kirikkale for processing. has not purchased crude from SOMO (Iraq s State Oil Marketing Organization) since March 2014. Kirkuk oil is highly suitable for the Kirikkale refinery in terms of complexity. Source: 8
Lower foreign exchange risks and bond issue The loans for ' RUP project are US$ denominated. Any depreciation of the TL against the US$ worsens credit ratios, especially in the event of a sudden depreciation in the TL towards the end of its financial year. We forecast a $/TL exchange rate of 2.45 at the end of 2015 and 2.54 in 2016-end. We believe ' currency risk will be lower once the output from RUP is realized. also plans to increase its TL denominated debt exposure by issuing up to TL1bn of bonds and hedging its foreign exchange exposure with forward and swap contracts. The first TL200mn tranche of this TL1bn bond was released on January 19. The bond has a 2 year maturity carrying 6 monthly coupons and a fixed interest rate of 8.99%, with principal payment and interest to be paid on maturity. The bond issue will help diversify its loan portfolio as well as its investor base. Tax fine represents another threat to profitability The tax office levied a TL160mn (U$69mn) tax fine on after an 18- month investigation. The tax demand for TL65.6mn and related fines of TL94.4mn is for 2009-2013 period; announced that it would exercise all of its legal rights, including negotiations. We believe will use its negotiation option, as it has in the past. Recall that, the Competition Board had issued a TL412mn fine to back in 2012 for abusing its dominant position in pricing and contracts. In 2010, the Company had also faced a total of TL605mn in tax fines for the 2005-2009 period (tax and related fines), which negotiated down to TL153mn. Although, we see no significant risk surrounding the tax fine, the provision to be set aside for the fine will have a direct impact on the tax financials, pressurising the dividend payment. Dividend issue will be difficult from 2014 distributable net income With the low EBITDA generation due to high inventory losses and the Competition Board s fine that may impact 2014 dividend, we revised down our dividend estimate to TL50mn to be distributed from reserves. We also note that the increase in cash-flow from RUP will lead to higher dividend in 2016 and onwards. Tax Financials were disappointing announced TL856mn net loss in its 2014 tax financials versus TL337mn before tax net profit recorded a year ago. Operational results point to a US$204mn inventory loss in 4Q14, totalling US$236mn inventory loss for 2014. paid the TL309mn Competition Board fine in its tax results. The sharp and continuous fall in crude prices led to higher refining margins and recorded as US$4.56/bbl in 4Q14 (4Q13: US$2.03/bbl). The capacity utilization rate was recorded as 74.9% in 2014 down 5.3% YoY. 9
12-09 03-10 06-10 09-10 12-10 03-11 06-11 09-11 12-11 03-12 06-12 09-12 12-12 03-13 06-13 09-13 12-13 03-14 06-14 09-14 12-14 12-09 02-10 04-10 06-10 08-10 10-10 12-10 02-11 04-11 06-11 08-11 10-11 12-11 02-12 04-12 06-12 08-12 10-12 12-12 02-13 04-13 06-13 08-13 10-13 12-13 02-14 04-14 06-14 08-14 10-14 12-14 February 23, 2015 Market Perform maintained We maintain our Market Perform recommendation despite the upward revision to our target price: We appoint equal weight to DCF method (5.5% risk-free rate in $ terms, 5.5% equity risk premium, 1x beta, 6.5% cost of debt($) and 3.0% terminal value) and to peer comparison to value. The Company trades at a premium compared to specifically its Mediterranean peers yet we believe this premium is justified given the expected positive free cash flow expectations, thanks to the contribution from the RUP project. In this report, we raise our 12-M target share price by %13 from TL55.30 to TL62.5. The key drivers behind the revision to our target price are: i) lower crude oil price and higher refining margin forecasts ii) a higher expected contribution from the RUP compared to our previous assumptions starting from 2015E. As our revised target price implies 17% upside potential, we maintain our Market Perform recommendation for the Company. We believe global risks on product prices and increasing global refining capacity, fluctuations on $/TL rates and tax issues represent the most significant risks for. Trading above its historical average multiples trailing trading multiples in the last 2 years have been confusing as the P/E multiple looked cheap as a result of the deferred tax income. As Bloomberg combines 2014 and 2015 forecasts for EBITDA and net income proportionately, the EV/EBITDA multiple declines with the higher contribution of 2015 EBITDA forecast. We deem 10x P/E multiple and 7x EV/EBITDA is the fair multiple for, trading slightly above its global peers. 1 year Forward Looking P/E 13x 12x 11x 10x 9x 8x 7x 6x 1 year Forward Looking EV/EBITDA 12x 11x 10x 9x 8x 7x 6x 5x 4x 3x 2x P/E Average +1s -1s +2s -2s EV/EBITDA Average +1s -1s +2s -2s Source: Bloomberg 10
REVISIONS TO FORECASTS With this report, we have revised our assumptions, mainly based on the fall in oil prices and revised $/TL exchange rate assumptions. We believe the slowdown in global economies will be partially reflected to the refining outlook, and is more likely to pull refining margins lower after a stabilization in oil prices. We expect the deferred tax income to continue to have a positive impact on the bottom line in 4Q. OLD NEW Difference (TLmn) 2014E 2015E 2014E 2015E 2014E 2015E Net Sales 43,031 37,022 40,389 34,764-6% -6% EBITDA 950 1,864 1,013 2,015 7% 8% Net Profit 1,439 1,024 1,392 1,174-3% 15% EBITDA Margin 2.2% 5.0% 2.5% 5.8% 0.3 pp 0.8 pp Net Profit Margin 3.3% 2.8% 3.4% 3.4% 0.1 pp 0.6 pp Target Share Price 55.30 62.50 13% Bloomberg vs. Garanti Forecasts Our target price of TL62.50 is slightly above the Bloomberg consensus of TL58.0. Bloomberg Garanti Securities Difference (TLmn) 2014E 2015E 2014E 2015E 2014E 2015E Net Sales 40,407 37,433 40,389 34,764 0% -7% EBITDA 964 2,253 1,013 2,015 5% -11% Net Profit 1,150 1,246 1,392 1,174 21% -6% EBITDA Margin 2.4% 6.0% 2.5% 5.8% 0.1 pp -0.2 pp Net Income Margin 2.8% 3.3% 3.4% 3.4% 0.6 pp 0 pp Target Share Price 58.02 62.50 8% Source: Bloomberg, Garanti Securities 11
VALUATION Our 12-month target Mcap of US$6.4bn (TL15.6bn) for is derived from an equally weighted average of DCF analysis and international peer group comparison. Valuation (US$mn) Value Weight in Valuation Value DCF 7,633 50% 3,816 Multiples 5,144 50% 2,572 Est M. Cap of 6,388 Current M. Cap 5,441 12M - Target Share Price (TL) 62.50 Current Share Price (TL) 53.30 Upside potential (TL) 17% DCF Valuation We calculated a target value of US$7.4bn for based on DCF analysis, assuming a 1.5% terminal growth rate in our DCF model. We applied the yield on the 10-year Eurobond as the risk free rate while assuming a market risk premium of 5.5% in calculating the cost of equity. Accordingly, we assume a 9% WACC for cash flows. Assumptions and Results (US$mn) - 12M Weight of equity 65% PV of FCF 3,782 Cost of Equity 11.0% PV of Terminal Value 5,504 Beta 1.0 Implied Firm Value 9,286 Risk free rate ($) 5.5% Net Cash (9M14, tax fine inc.) -1,654 Market Risk Premium 5.5% Target Mcap 7,633 Cost of Debt 6.0% Tax rate 20.0% WACC 9.0% Terminal Value Growth 3% 12
Peer Group Comparison We also carried out a peer comparison to arrive at a fair value for. We compared the Company with global peers in the region. We took both 2015E and 2016E P/E and EV/EBITDA multiples into consideration with equal weighting in our comparative analysis, driving a fair value of US$5.14bn from the peer group comparison. Company Name European Refiners Country P/E* 2014 P/E 2015 P/E 2016 EV/ EBITDA* 2014 EV/ EBITDA 2015 EV/ EBITDA 2016 EV/ SALES* 2014 EV/ SALES 2015 EV/ SALES 2016 Hellenic Petroleum SA GREECE - 15.2 7.8 10.6 6.9 5.7 0.3 0.3 0.3 Polski Koncern Naftowy Orlen SA POLAND 15.0 12.4 11.5 6.5 6.3 6.0 0.3 0.4 0.3 Neste Oil OYJ FINLAND 15.6 14.5-9.7 8.1 7.7 0.5 0.6 0.5 MOL Hungarian Oil & Gas PLC HUNGARY 12.6 12.3 9.0 5.0 5.1 4.2 0.5 0.6 0.5 OMV AG AUSTRIA 8.8 14.3 9.3 3.8 4.3 3.4 0.4 0.5 0.5 Total SA FRANCE 10.1 15.5 11.9 4.6 6.1 5.0 0.7 0.9 0.8 Average (1) 12.4 14.0 9.9 6.7 6.1 5.3 0.5 0.5 0.5 Asian Refiners Indian Oil Corp Ltd INDIA 13.7 12.9 9.0 9.7 9.7 7.6 0.3 0.3 0.3 SK Innovation Co Ltd S. KOREA - 13.0 10.2 22.6 9.7 8.5 0.3 0.4 0.3 Bharat Petroleum Corp Ltd INDIA 24.2 15.8 12.5 11.5 10.3 8.8 0.3 0.3 0.3 S-Oil Corp S. KOREA - 16.1 - - 9.9 8.9 0.4 0.5 0.4 GS Holdings Corp S. KOREA - 12.3 9.9 32.5 14.7 12.6 1.0 0.9 0.9 Thai Oil PCL THAILAND - 12.3 10.7 23.1 7.6 6.9 0.4 0.4 0.4 Hindustan Petroleum Corp Ltd INDIA 21.7 13.0 9.9 12.1 9.9 9.0 0.3 0.3 0.3 Average (2) 19.9 13.6 10.4 18.6 10.2 8.9 0.4 0.4 0.4 American Refiners Marathon Petroleum Corp USA 13.9 12.6 10.9 7.2 6.6 6.2 0.4 0.4 0.4 Phillips 66 USA 12.1 12.3 10.5 6.7 7.2 6.3 0.3 0.4 0.3 Tesoro Corp USA 11.8 13.2 11.7 5.7 5.8 5.3 0.3 0.4 0.4 Valero Energy Corp USA 9.6 10.7 9.7 4.8 5.3 5.0 0.3 0.4 0.3 Delek US Holdings Inc USA 10.4-12.1 4.9 6.0 5.5 0.3 0.3 0.3 Western Refining Inc USA 9.2 12.4 11.7 5.1 6.3 7.8 0.4 0.5 0.4 Average (3) 11.2 12.2 11.1 5.7 6.2 6.0 0.3 0.4 0.4 Arithmetic Average (1-2-3) 14.5 13.3 10.5 10.3 7.5 6.7 0.4 0.5 0.4 Average 5,144 * 2014 figures are for information purposes only Source: Bloomberg, Garanti Securities 13
Total Sa Exxon Mobil Royal Dutch Shell Agip Petroli SPA 876 854 709 613 521 BP Repsol YPF Petroplus CEPSA Ineos Omv ERG Group Conoco Philips Hellenic Petroleum Neste Oil Statoil Galp Energia Saras Petroleos Valero February 23, 2015 at a glance controls Turkey s entire refining capacity of 28.1mn tonnes and qualifies as the seventh largest refiner in Europe overall, with a 5% share in total capacity. The refiner meets 60-65% of Turkey s entire demand for petroleum products. also owns all of Turkey s crude oil storage and around 45% of the country s product storage capacity. European refiners by capacity Crude Capacity (b/cd) 1984 1681 1197 427 403 399 396 350 313 311 304 304 300 295 210 Source: Oil and Gas Journal has four main refineries in Turkey with a total refining capacity of 28.1mn tonnes. Tonnes (mn) Capacity N.C: Nelson Complexity N.C. Before RUP N.C. After RUP Sales (2013) (mn tonnes) Personnel (2013) Izmit 11 7.78 14.5* 10.7 1,763 Izmir 11 7.66 7.66 8.8 1,267 Kirikkale 5 6.32 6.32 3.8 872 Batman 1.1 1.83 1.83 0.2 463 Total 28.1 7.25 9.9 23.5 4,365 Source: 14
OPET - Fuel Distribution holds a 40% stake in Opet, which has 1,388 filling stations (961 of the OPET brand and 427 of the Sunpet brand) and 1.1mn cubic metres of storage capacity. OPET Terminals Storage Capacity (000 m3) Marmara 721,000 Mersin 240,000 Aliaga 54,506 Giresun 43,130 Körfez 37,165 Antalya 19,392 Total 1,115,193 Source. Opet is engaged in retail, commercial and industrial sales, storage operations and the international trade of petroleum products. The Company also operates in the lubricating oil and jet fuel categories through its subsidiaries. Opet commands a number two position in the distribution business with a 19.1% market share in white products. The Company also ranks second after Petrol Ofisi in the black products segment. Opet recorded total EBITDA of US$290mn in 2013, with an operating profit margin of 2.3%. DITAS - Marine Transportation DİTAS is Turkey s leading tanker and maritime trade company. owns almost 80% of the shares in the company. Providing services for tanker management, brokerage/chartering, piloting, tugging, audit and agency services, Ditaş undertakes crude oil transport operations in line with s needs, and the transport of petroleum products in accordance with the needs of both and other suppliers. The Company uses its own tankers as well as tankers it charters based on the time or line. Total revenues reached US$103.1mn in 2013 with an operating profit of US$25.2mn. A total of 4.4mn tonnes of crude oil and 3.1mn tonnes of product was transported by the company. Ditaş Tankers M/T Cumhuriyet M/T T.Sevgi M/T T. Gonul M/T T. Suna M/T T. Leyla M/T T. Esra Tanker Type Crude Oil Oil/Chem. Oil/Chem. Oil/Chem. Oil/Chem. Oil/Asphalt Year built 2001 2008 2009 2012 2011 2014 Slop Tank Cap. (m3) 4,443 406.4 413.4 1,019.36 141.4 - Cargo Tank Cap. (m3) 173,759 12,247 12,224 52,925 7,209 16,940 DWT (tonnes) 164,859 10,983 10,983 51,532 6,297 19,968 GRT (tonnes) 84,476 7,318 7,318 29,754 4,225 15,674 Net Tonnage (tonnes) 53,710 3,651 3,651 14,116 2,047 4,702 Length mt 274.18 131.85 131.85 183.31 121.62 156.5 Source: 15
Crude Oil Purchases Turkey is conveniently located at the heart of the World s key oil producing regions, enabling to diversify its crude sources. In fact, Turkey's importance in global energy markets has been growing, both as a regional energy transit hub and as a growing consumer. Turkey's demand for energy has increased rapidly over the past few years, and is likely to sustain its growth in the future. One of strongest capabilities is the use of its geographical advantage in diversifying its sources of crude oil. The Company purchases 18 different types of crude oil from ten countries, with specific gravities ranging between 19-48 API. Crude Oil Suppliers (mn tonnes) 2009 2010 2011 2012 2013 Domestic 2.3 2.5 2.4 2.3 2.4 Iran 3.2 7.4 9.7 7.2 5.1 Russia 5.5 2.9 2.1 2.0 1.5 Saudi Arabia 2.1 1.8 2.0 2.8 2.9 Iraq 1.8 2.1 3.1 3.8 6.1 Kazakhstan 0.6 2.2 1.1 2.5 1.5 Italy 0.2 0.1 0.1 0.3 0.3 Libya 0.0 0.0 0.0 1.0 0.7 Others 0.7 0.4 0.3 0.6 0.6 TOTAL 16.4 19.4 20.8 22.5 21.1 Source: - Crude Suppliers breakdown (2013) Iran 24% Russia 7% Domestic 11% S. Arabia 14% Others 3% Source: Libya 3% Italy 1% Kazakhstan 7% Iraq 29% imports c. 90% of its crude oil need from international suppliers. 16
Discount (US$/bbl)Title February 23, 2015 Until the imposition of the sanctions on Iran, Iran had supplied as much as 50% of total crude needs. After that, started to reduce its purchases from Iran to comply with the US sanctions, replacing its supplies from Iran with Iraqi and Saudi oil. There is a significant prospect that the sanctions imposed against Iran may be eased in 2016 or 2017, yet the situation remains unclear. On November 24th, 2014, Iran and six powers extended the nuclear talks with Iran by a further 7 months. If Iran complies with the Geneva Interim agreement, there is a possibility that the sanctions could be eased. Still, our assumptions do not incorporate any easing in sanctions in 2015 or beyond. Any positive surprise on this front would serve as a positive trigger for. Turkey will be one of the direct beneficiaries of any possible relaxation in the oil-embargo on Iran imposed by the West. enjoys a cost advantage on Iranian heavy crude, which generally sells at a discount to Brent crude. However, this margin has narrowed as oil prices have fallen. Brent versus Iran and Ural crude oil discount (average) 0.00 IRAN HEAVY IRAN LIGHT URAL -1.00-2.00-3.00-4.00-5.00-6.00 2009 2010 2011 2012 2013 2014 Source: versus Med Refining Margins Margins $/bbl $/bbl 10.00 8.00 6.00 4.00 2.00 0.00 (2.00) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2010 2011 2012 2013 2014 (4.00) Difference Med. Ural Source: 17
RUP project now up and running Work on the project got underway in 2008 and was completed with a capex investment of around US$2.9bn. The project enables the refinery to process 4.2mn tonnes of high sulphur fuel oil - of which there is a surplus in Turkey - and produce approximately 3.5mn tonnes of high quality diesel/jet fuel, gasoline and LPG to Euro-V standards. The unit will also enable the production of 690,000 tonnes of petroleum coke and 86,000 tonnes of sulphur. Following the completion of the RUP, the Nelson Complexity Index of the Izmit refinery increased from the current 7.78 currently to 14.5 (based on design capacity). RUP started with test operations and will be fully operational by 2Q15. calculates the project to bring in US$550mn of additional EBITDA, through higher white product yields. Total Charge (000 tonnes) White Products (000 tonnes) Atm. Dip 3,036 LPG 69 Vacuum Dip 1,214 Gasoline 522 Natural Gas 246 Diesel 2,883 Sulphur 86 Total 4,496 Petcoke 696 Natural Gas (fuel) 112 Total 4,256 Source: We anticipate that s total production volume will increase from 21.6mn tonnes in 2012 to 25mn tonnes by 2016. Our calculation for the RUP is more conservative, expecting US$500mn in additional EBITDA. While we concur that the RUP project will provide the Company with more flexibility in periods of volatility, the spread between diesel and fuel oil will be the main determinant of the RUP s profitability. However, we still believe the prospective improvement in EBITDA that the project will bring, has been almost fully priced-in. RUP flowchart Source: 18
The financing of the project has generally been a success with attractive terms and conditions. RUP Financing Loan (US$ mn) Tenor Terms CESCE 1,110 4+8 Libor +3.05% SACE 624 4+8 Libor +3.10% Commerical* (10 banks) 359 4+3 Libor +2.85% Total 2,093 Source: * The 10 banks are Banco Bilbao Vizcaya Argentaria, S.A., The Bank Of Tokyo-Mitsubishi Ufj, Ltd., BNP Paribas, Crédit Agricole Corporate And Investment Bank, Deutsche Bank AG- London Branch, HSBC Bank Plc, Banco Santander, S.A., Sumitomo Mitsui Banking Corporation Europe Limited, Societe Generale, WestLB AG- London Branch Investments has now completed much of its master plan capex with the completion of the RUP. The Company s master plan for the years 2006-2015 totalled US$5.4bn; much of which has been completed. We expect the Company to spend a further US$250mn on various energy efficiency and operational excellence investments in 2015. Investments Master Plan US$5,400mn US$1,950mn US$1,389mn 1989-2005 2006-2010 2006-2015 Capex (US$ mn) 1,201 974 959 628 274 355 395 188 177 250 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E Source: 19
Dividend has been a continuous dividend payer with attractive yields. This situation is unlikely to change. generally pays out 90% of its net profit or 100% of distributable income, or the maximum allowed. The remaining US$248mn debt of the parent Company, Enerji Yatirimları (SPV) is expected to be paid in a two year horizon. We still believe there will be a tiny TL50mn dividend to be paid from the reserves 0.2TL DPS from 2014 figures. : DPS & Dividend Yield (2003-2013 5.00 18.0% 4.00 4.19 3.93 3.85 16.0% 14.0% 3.00 2.00 1.42 2.12 1.94 2.63 2.31 2.50 2.98 1.58 12.0% 10.0% 8.0% 6.0% 1.00 4.0% 2.0% 0.00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0.0% Source: Matriks DPS Dividend Yield - rhs Date TUPRAS Ref. Margins Med.Ural Ref. Margin Diff. 2Q 2.63 2.52 0.11 3Q 4.13 1.05 3.08 4Q 2.03 0.30 1.73 1Q 2.41 0.44 1.97 2Q (0.28) 0.06 (0.34) 3Q 5.53 3.45 2.09 4Q 4.56 3.84 0.73 2013 2.45 1.67 0.78 2014 3.21 1.95 1.26 4Q14 expectations Falling oil prices will saddle with more inventory losses in 4Q, although is working on minimum inventory to avoid bulky losses and these have been mitigated by plump Med margins so far. Therefore, negative sentiment caused by falling oil prices may be partly balanced by strong margins. Meanwhile, clement weather will be supportive of demand. We expect to record TL214mn of EBITDA implying a 2.8% EBITDA margin in 4Q. The benefits of improvement in the refinery margins are negatively impacted by large inventory losses owing to crude price decline. We believe there is downside to our EBITDA expectation depending on the inventory losses recorded in the quarter. Looking at refining EBITDA in the past decade, we believe that 2014E will most likely be one of the worst years. Source: 2014 Tax Results Inventory Effect (U$mn) 2014 Crude Product Total 1.Q 11.8 38.1 49.9 2.Q -9.9-0.9-10.8 3.Q -22.6-49.0-71.6 4.Q -60.8-143.5-204.3 2014 Total -81.5-155.4-236.8 Source: 2014 Tax Results 20
Turkey Demand Assumptions TURKEY oil products demand (000 tons) 2009 2010 2011 2012 2013 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E LPG 3,620 3,659 3,746 3,706 3,777 3,844 3,911 3,978 4,045 4,045 4,045 4,045 Naphta 1,688 1,650 1,700 1,750 1,760 1,778 1,800 1,800 1,800 1,800 1,800 1,800 Gasoline 2,187 2,075 1,979 1,848 1,854 1,880 1,899 1,908 1,918 1,927 1,937 1,947 Jet Fuel 2,665 2,920 3,288 3,757 3,981 4,316 4,445 4,570 4,700 4,834 4,971 5,113 Diesel 13,942 14,090 14,934 15,786 16,922 17,262 17,626 18,148 18,687 19,241 19,812 20,400 Black Products 4,734 4,503 4,495 4,565 4,846 3,767 3,943 4,171 4,220 4,255 4,280 4,240 Fuel Oil 2,736 1,726 1,499 1,630 1,564 1,474 1,330 1,221 1,190 1,165 1,150 1,070 Asphalt 1,998 2,777 2,996 2,935 3,282 2,292 2,613 2,950 3,030 3,090 3,130 3,170 Other 1,528 2,218 2,467 1,915 1,819 1,829 1,846 1,816 1,821 1,831 1,834 1,836 Lube Oil 314 451 531 409 312 322 339 309 314 324 327 329 Other 1,214 1,766 1,936 1,506 1,506 1,506 1,506 1,506 1,506 1,506 1,506 1,506 Total 30,364 31,116 32,608 33,327 34,959 34,675 35,469 36,392 37,190 37,933 38,679 39,380 TURKEY DEMAND (growth) LPG 1% 2% -1% 2% 2% 2% 2% 2% 0% 0% 0% Naphta -2% 3% 3% 1% 1% 1% 0% 0% 0% 0% 0% Gasoline -5% -5% -7% 0% 1% 1% 0% 0% 0% 0% 0% Jet Fuel 10% 13% 14% 6% 8% 3% 3% 3% 3% 3% 3% Diesel 1% 6% 6% 7% 2% 2% 3% 3% 3% 3% 3% Black Products -5% 0% 2% 6% -22% 5% 6% 1% 1% 1% -1% Fuel Oil -37% -13% 9% -4% -6% -10% -8% -3% -2% -1% -7% Asphalt 39% 8% -2% 12% -30% 14% 13% 3% 2% 1% 1% Other 45% 11% -22% -5% 1% 1% -2% 0% 1% 0% 0% Lube Oil 44% 18% -23% -24% 3% 5% -9% 2% 3% 1% 1% Other 46% 10% -22% 0% 0% 0% 0% 0% 0% 0% 0% Total 2.5% 4.8% 2.2% 4.9% -0.8% 2.3% 2.6% 2.2% 2.0% 2.0% 1.8% Demand composition LPG 11.9% 11.8% 11.5% 11.1% 10.8% 11.1% 11.0% 10.9% 10.9% 10.7% 10.5% 10.3% Naphta 5.6% 5.3% 5.2% 5.3% 5.0% 5.1% 5.1% 4.9% 4.8% 4.7% 4.7% 4.6% Gasoline 7.2% 6.7% 6.1% 5.5% 5.3% 5.4% 5.4% 5.2% 5.2% 5.1% 5.0% 4.9% Jet Fuel 8.8% 9.4% 10.1% 11.3% 11.4% 12.4% 12.5% 12.6% 12.6% 12.7% 12.9% 13.0% Diesel 45.9% 45.3% 45.8% 47.4% 48.4% 49.8% 49.7% 49.9% 50.2% 50.7% 51.2% 51.8% Black Products 15.6% 14.5% 13.8% 13.7% 13.9% 10.9% 11.1% 11.5% 11.3% 11.2% 11.1% 10.8% Fuel Oil 9.0% 5.5% 4.6% 4.9% 4.5% 4.3% 3.7% 3.4% 3.2% 3.1% 3.0% 2.7% Asphalt 6.6% 8.9% 9.2% 8.8% 9.4% 6.6% 7.4% 8.1% 8.1% 8.1% 8.1% 8.0% Other 5.0% 7.1% 7.6% 5.7% 5.2% 5.3% 5.2% 5.0% 4.9% 4.8% 4.7% 4.7% Lube Oil 1.0% 1.5% 1.6% 1.2% 0.9% 0.9% 1.0% 0.8% 0.8% 0.9% 0.8% 0.8% Other 4.0% 5.7% 5.9% 4.5% 4.3% 4.3% 4.2% 4.1% 4.1% 4.0% 3.9% 3.8% Source: 21
Sales Volume Assumptions Dom. Sales from prod. (0000 tons) 2010 2011 2012 2013 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E LPG 701 817 827 803 803 900 915 930 930 930 930 Naphta 523 168 239 107 92 564 564 564 564 564 564 Gasoline 1,784 1,810 1,782 1,817 1,833 1,861 1,870 1,879 1,831 1,840 1,849 Jet Fuel 2,484 2,720 3,215 3,414 3,686 3,750 3,853 3,959 4,067 4,184 4,152 Gas Oils 4,637 4,961 6,959 5,303 4,350 7,344 8,539 8,712 9,045 9,189 9,536 Black Products 3,843 3,779 3,792 3,718 2,565 2,870 3,038 2,983 2,974 2,933 2,894 Fuel Oil 1,097 828 983 792 1,192 1,124 1,024 995 972 958 884 Asphalt 2,746 2,951 2,809 2,926 1,945 2,352 2,655 2,666 2,719 2,692 2,726 Others 316 380 266 162 234 282 266 269 274 276 277 Total (000 tons) 14,289 14,635 17,081 15,325 13,562 17,571 19,045 19,296 19,685 19,917 20,202 Import Volume LPG 125 66 25 0 0 0 0 0 0 0 0 Naphta 30 34 30 30 30 30 30 30 30 30 Gasoline Jet Fuel 156 94 118 133 146 1613 169 177 186 190 194 Gas Oils 2,076 2,910 1,609 2,809 2,350 2,350 2,350 2,500 2,500 2,500 2,500 Black Products 522 533 438 640 672 706 741 778 817 817 817 Fuel Oil 522 533 438 640 672 706 741 778 817 817 817 Asphalt Others 1,023 420 60 80 100 100 100 100 100 100 100 Total (000 tons) 3,902 4,053 2,283 3,693 3,298 3,347 3,390 3,585 3,633 3,637 3,641 T. Dom. Sales imp+prod (tons) LPG 826 883 852 803 803 900 915 930 930 930 930 Naphta 523 198 273 138 122 594 594 594 594 594 594 Gasoline 1,784 1,810 1,782 1,817 1,833 1,861 1,870 1,879 1,831 1,840 1,849 Jet Fuel 2,640 2,815 3,332 3,547 3,832 3,911 4,022 4,136 4,254 4,375 4,346 Gas Oils 6,713 7,871 8,568 8,113 6,700 9,694 10,889 11,212 11,545 11,689 12,036 Black Products 4,365 4,312 4,230 4,358 3,237 3,575 3,779 3,761 3,791 3,750 3,711 Fuel Oil 1,619 1,361 1,421 1,432 1,292 1,224 1,124 1,095 1,072 1,058 984 Asphalt 2,746 2,951 2,809 2,926 1,945 2,352 2,655 2,666 2,719 2,692 2,726 Others 755 857 543 463 334 382 366 369 374 376 377 Total 17,606 18,745 19,581 19,239 16,861 20,917 22,435 22,882 23,319 23,554 23,843 Export Sales (000 tons) LPG 20 23 25 22 23 0 0 0 0 0 0 Naphta 168 14 17 15 0 0 0 0 0 0 Gasoline 2,010 2,420 2,859 2,772 2,493 3,095 3,184 3,327 3,479 3,576 3,675 Jet Fuel 110 230 119 127 29 752 874 863 851 783 865 Gas Oils 318 163 195 131 100 160 0 0 0 0 0 Black Products 2,330 2,148 2,511 1,725 2,670 3,153 3,045 2,917 2,749 2,619 2,492 Others 7 137 50 4 219 261 284 306 334 363 Total 4,795 5,152 5,860 4,844 5,333 7,379 7,364 7,391 7,386 7,311 7,395 Source: 22
Production Assumptions Capacity 2010 2011 2012 2013 2014 E 2015 E 2016 E 2017 E 2018 E 2019 E 2020 E Total Capacity (000 tons) 28,100 28,100 28,100 28,100 28,100 28,100 28,100 28,100 28,100 28,100 28,101 Crude Oil Processed (000 tons) 19,552 20,896 22,118 21,568 20,044 24,370 25,133 25,474 25,784 25,897 26,020 CUR % 70% 74% 79% 77% 71% 87% 89.4% 90.7% 91.8% 92.2% 92.6% Total Sales (000 tons) 23,265 24,401 26,319 25,051 23,152 29,137 30,557 30,999 31,402 31,548 31,846 Output (000 tonnes) LPG 685 760 783 794 702 785 800 816 833 849 866 Naphta 795 532 303 146 100 100 100 100 100 100 100 Gasoline 3,809 4,292 4,571 4,573 4,346 4,955 5,055 5,206 5,310 5,416 5,525 Jet Fuel 2,621 2,875 3,293 3,545 3,550 4,502 4,727 4,822 4,918 4,967 5,017 Gas Oils 4,947 5,310 5,560 5,643 5,307 7,504 7,842 8,077 8,320 8,403 8,487 Black Products 5,197 6,172 6,287 5,645 5,403 6,023 6,083 5,900 5,723 5,552 5,385 Others 2,713 826 863 653 482 501 526 553 580 609 640 Total 20,768 20,767 21,661 21,001 19,890 24,370 25,133 25,474 25,784 25,897 26,020 Growth in output LPG 10.7% 10.8% 3.1% 1.5% -11.7% 11.8% 2.0% 2.0% 2.0% 2.0% 2.0% Naphta 555.2% -33.0% -43.1% -51.6% -31.9% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Gasoline -4.9% 12.7% 6.5% 0.0% -4.9% 14.0% 2.0% 3.0% 2.0% 2.0% 2.0% Jet Fuel 30.8% 9.7% 14.6% 7.6% 0.1% 26.8% 5.0% 2.0% 2.0% 1.0% 1.0% Gas Oils 4.9% 7.4% 4.7% 1.5% -6.0% 41.4% 4.5% 3.0% 3.0% 1.0% 1.0% Black Products 27.2% 18.8% 1.9% -10.2% -4.3% 11.5% 1.0% -3.0% -3.0% -3.0% -3.0% Others -8.7% -69.5% 4.4% -24.3% -26.2% 4.0% 5.0% 5.0% 5.0% 5.0% 5.0% Yield LPG 3.3% 3.7% 3.6% 3.8% 3.5% 3.2% 3.2% 3.2% 3.2% 3.3% 3.3% Naphta 3.8% 2.6% 1.4% 0.7% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% Gasoline 18.3% 20.7% 21.1% 21.8% 21.9% 20.3% 20.1% 20.4% 20.6% 20.9% 21.2% Jet Fuel 12.6% 13.8% 15.2% 16.9% 17.8% 18.5% 18.8% 18.9% 19.1% 19.2% 19.3% Gas Oils 23.8% 25.6% 25.7% 26.9% 26.7% 30.8% 31.2% 31.7% 32.3% 32.4% 32.6% Black Products 25.0% 29.7% 29.0% 26.9% 27.2% 24.7% 24.2% 23.2% 22.2% 21.4% 20.7% Others 13.1% 4.0% 4.0% 3.1% 2.4% 2.1% 2.1% 2.2% 2.3% 2.4% 2.5% Source: 23
Key Operating Assumptions 2010 2011 2012 2013 2014 E 2015 E 2016 2017 2018 2019 2020 Crude Oil Price (Brent) $/bbl 79.47 111.27 111.58 108.66 98.99 58.00 75.00 70.00 70.00 70.00 75.00 Urals $/bbl 78.01 109.59 110.65 108.28 98.09 57.36 74.18 69.23 69.23 69.23 74.18 Crude Oil Price Discount 1.46 1.68 0.93 0.38 0.90 0.64 0.83 0.77 0.77 0.77 0.83 Refining Margin 5.87 5.48 5.11 5.27 3.21 5.04 5.22 5.28 5.28 5.37 5.31 Tons (000 tonnes) Production 20,768 20,767 21,661 21,001 19,890 24,370 25,133 25,474 25,784 25,897 26,020 Total Domestic Sales 17,606 18,745 19,581 19,239 16,861 20,917 22,435 22,882 23,319 23,554 23,843 Sales From Production 13,704 14,692 17,298 15,546 13,562 17,571 19,045 19,296 19,685 19,917 20,202 Imports 3,902 4,053 2,283 3,693 3,298 3,347 3,390 3,585 3,633 3,637 3,641 Exports 2,886 4,147 5,083 4,149 3,920 3,075 3,992 4,045 4,089 4,338 4,434 Revenue (US$ mn) Sales from production (US$mn) 13,696 18,450 19,731 19,045 15,967 12,870 16,200 15,580 15,796 15,890 16,905 Salesfrom imports (US$mn) 2,513 3,442 1,963 3,166 2,493 1,660 2,049 2,052 2,078 2,080 2,201 Total Sales (US$mn) 16,209 21,891 21,694 22,212 18,460 14,530 18,249 17,632 17,874 17,970 19,107 Core Production Cost (US$ mn) 12,653 17,389 18,626 17,981 15,212 11,670 14,962 14,323 14,521 14,608 15,615 Raw Material Cost 12,424 17,156 18,374 17,738 14,981 11,387 14,670 14,026 14,221 14,305 15,310 Raw Material 78.71 106.90 109.09 109.37 97.48 60.36 75.35 70.94 70.94 70.94 75.45 Crude Cost 76.2 104.4 106.6 106.9 94.8 57.7 72.7 68.2 68.2 68.2 72.8 Others 2.5 2.5 2.5 2.5 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Other Production Cost (US$mn) 228.9 232.7 252.7 243.3 230.5 283.0 292.0 296.6 300.7 302.5 304.4 Other production cost (US$/bbl) 1.45 1.45 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Sales from imports Import volume (000 bbl) 28,963 29,938 16,757 26,965 23,996 24,329 24,621 26,044 26,366 26,395 26,425 Sales (US$mn) 2,513 3,442 1,963 3,166 2,493 1,660 2,049 2,052 2,078 2,080 2,201 Mark-up for imported goods 5% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% COGS 15,283 21,012 20,834 21,357 17,967 13,579 17,233 16,588 16,815 16,887 18,029 Core production cost (US$ mn) 12,653 17,389 18,626 17,981 15,212 11,670 14,962 14,323 14,521 14,608 15,615 Cost of import (US$ mn) 2,387 3,338 1,904 3,087 2,423 1,618 1,998 2,001 2,026 2,028 2,146 Depreciation 113 153 152 133 166 160 164 159 161 144 153 Other Costs 130 131 152 155 166 131 109 106 107 108 115 Gross profit 926 879 860 854 493 951 1,016 1,044 1,059 1,083 1,078 Refining Margin 5.87 5.48 5.11 5.27 3.21 5.04 5.22 5.28 5.28 5.37 5.31 24
APPENDIX 3Q14 Results - Solid 3Q, positive margins Summary Financials (mn TL) 3Q13 4Q13 1Q14 2Q14 3Q14 9M13 9M14 3Q14/3Q13 Change 3Q14/2Q14 9M14/9M13 Net Sales 12,167 10,596 9,276 9,598 11,812 30,482 30,686-3% 23% 1% Gross Profit 661 335 409 28 600 1,139 1,037-9% 2018% -9% Operating Profit 493 125 251-127 423 649 547-14% n.m. -16% EBITDA 553 185 313-64 488 829 737-12% n.m. -11% Net Other Income/Expense -121-446 21 107-273 -287-144 n.m. n.m. n.m. Financial Inc./ Exp. (net) -1-15 -63-69 -36-95 -169 n.m. n.m. n.m. Tax 404 437 281 444 249 749 975-38% -44% 30% Tax on Income (Expenses) -5 0-4 2-1 -6-3 n.m. n.m. n.m. Inc. (Exp.) of Deferred Tax 409 438 285 442 250 755 977-39% -43% 29% Minority Interests 1-2 2 3 2 4 7 60% -39% 98% Net Income 818 114 511 358 377 1,084 1,246-54% 6% 15% Net Cash -2,563-2,859-4,367-3,969-3,642-2,563-3,642 Working Capital -813-1,381-552 -1,808-2,646-813 -2,646 Shareholders Equity 5,016 5,139 5,258 5,616 5,998 5,016 5,998 Ratios Gross Margin 5.4% 3.2% 4.4% 0.3% 5.1% 3.7% 3.4% -0.4 pp 4.8 pp -0.4 pp Operating Margin 4.1% 1.2% 2.7% n.m. 3.6% 2.1% 1.8% -0.5 pp n.m. -0.3 pp EBITDA Margin 4.5% 1.7% 3.4% n.m. 4.1% 2.7% 2.4% -0.4 pp n.m. -0.3 pp Net Profit Margin 6.7% 1.1% 5.5% 3.7% 3.2% 3.6% 4.1% -3.5 pp -0.5 pp 0.5 pp 2014 Tax Financials announced TL85mn net loss in its 2014 tax financials versus TL337mn net profit recorded a year ago. Operational results point to a US$204mn FX loss in 4Q14 totaling US$236mn FX loss for the whole year. Refining margin came in as US$4.56 versus US$2.03/bbl refining margin in 4Q13. 2014 2013 Change Sales (TL mn) 39,817.0 41,199.7-3.4% EBIT (TL mn) 859.3 842.348 2.0% Net Income (before tax) (TL mn) -81.66 336.8 n.m. Net Income (TL mn) 85.24 - - Refining Margin ($/bbl) 4.56 2.03 2.53 Med Refining Margin ($/bbl) 3.84 0.30 3.54 CUR (%) 74.9% 79.1% -4.2 pp Inventory Gain/(Loss) (US$ mn) (236.80) 93.84 n.m. 25
Disclaimer Recommendation History Source: Garanti Securities Definition of Stock Ratings OUTPERFORM (OP) MARKET PERFORM (MP) The stock's return is expected to exceed the return of the BIST100 in 12 months. The stock's return is expected to be in line with the BIST100 in 12 months. UNDERPERFORM (UP) The stock's return is expected to fall below the return of the BIST100 in 12 months. 26
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