THE COMPANY: Turkey plays a key role connecting oil-producing countries in the Middle East and the Caspian region with consumers in Europe. Not a major oil producer itself, most of Turkey’s crude oil consumption is fed by imports, especially from Iran, Russia, Saudi Arabia and Kazakhstan. Refining is dominated by Tüpraş, which has a total processing capacity of 28.1m tonnes of crude and meets 85% of domestic demand. The company owns four refineries: in Izmir and Izmit – with 11m tonnes per annum (tpa) capacity each – Kırıkkale (5m tpa) and Batman (1.1m tpa). All are located close to major consumption areas to cater to the domestic market. Tüpraş has activities in production, distribution and shipping. On the fuel distribution side, Tüpraş owns 40% of Opet, which has a market share of 18%. Tüpraş has extended its services to cover the whole country, utilising Opet’s terminal facilities and storage capacity in areas where it does not have any refineries. Shipping subsidiary DITAS Marine and Tanker Operations, which is 80% owned by Tüpraş, is responsible for domestic and overseas shipping of the company’s crude oil and petroleum products. Its refineries can crack heavy crude and have benefitted from the widening spread between heavy and light crude. Around 70% of the company’s processed crude is heavy, which affects margins favourably. On the back of cheaper crude slate, higher white product yields and its monopolistic position in the domestic market, Tüpraş should continue to outpace the med-complex margin. We believe Tüpraş’ capacity utilisation rate will reach 82% in 2012. We do not foresee major fluctuation in demand or crude oil prices, and estimate an average price of $110/bbl in 2012. As of March 2012, Tüpraş has decided to cut their purchases of Iranian crude oil by 20%. Tüpraş obtained a total of 9.75m tonnes of Iranian crude oil in 2011 and initially, the company was planning to obtain a total of 9.2m tonnes of Iranian crude oil in 2012. The firm plans to replace the reduced amount (1.95m tonnes) from other resources such as 1m tonnes from Libya and the rest from Saudi Arabia and other countries. After the reduced amount, Tüpraş will get a total of 7.25m tons of Iranian crude oil. The impact of the cut on 2012E refining margin is expected to be some $0.05-0.06/bbl. In our valuation for Tüpraş, we assume a gross refining margin of $10.4/bbl for 2012. Tüpraş has completed the long-awaited financing of its Residuum Upgrade project, which will convert 3.2m tonnes of fuel oil and asphalt into 2.56m tonnes of value-added white products. Construction began in 2011 and is expected to be complete by 2015. The project continues on track and a total of $705m has been spent so far. Only a mere 2% of the construction work has been completed by the end of March 2012 and the company management emphasised that the construction will speed up in the summer. The company targets to spend $1bn in 2012, while the equity portion of it will be around $50m. We estimate the project will generate $480m in additional earnings annually, before interest, taxes, depreciation and amortisation, based on an average crude price assumption of $115/bbl.
A generous dividend policy is one of the major triggers for the stock. We expect high dividends to continue in upcoming years. Considering parent’s $220m annual debt redemptions during 2012-2015, the company is expected to at least pay annual dividends of $448m during 2012-2015. Tüpraş trades at respective 12E enterprise value/earnings before interest, taxes, depreciation and amortisation and price/earnings multiples of 6.5x and 7.9x respectively, versus peers’ median multiples of 5.4x and 9.2x respectively. It is hard to find an exact peer, because similar firms have upstream activities, while Tüpraş has operations only in refining and distribution. We maintain our outperform recommendation for Tüpraş based on 48% upside potential to our target share price of TL48.71 (€20.70) per share.
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