Description

OCI N.V. (OCI NA)

Thesis

• OCI N.V. (“OCI”) is in the midst of a transformative business transition; over the past couple of months it has announced deals to sell assets that account for ~75% of its current consolidated EBITDA; once consummated, the remaining business will be a more focused operator set to benefit from energy transition tailwinds in a meaningful net cash position trading at a very cheap multiple of normalized EBITDA (i.e. 2-3x)
• In early 2023 OCI initiated an extensive strategic alternatives assessment
  • Strategic alternatives assessment was initiated in large part due to pressure from Inclusive Capital, Jeffrey Uben’s post-ValueAct ESG fund
    • OCI is/was Inclusive’s largest, or one of its largest, positions at US$250-$300mm
    • Inclusive had pushed for an assessment of potential asset sales, public listing of additional assets, and/or relisting to US
    • Inclusive is now in the process of winding down its fund (victim of ESG burnout)
• The strategic alternatives process concluded in December with the announcement of two transformative deals
  • Sale of the company’s 50% interest in publicly-traded Fertiglobe (an Abu Dhabi-based nitrogen producer) to ADNOC, its minority partner, for consideration of $3.62bn; deal requires regulatory and anti-trust approvals; close expected sometime in 2024; OCI retains Fertiglobe cash flow thru deal close, and is entitled to the 2023 2H Fertiglobe dividend regardless of deal close date
  • Sale of company’s North American Nitrogen business to Koch for $3.6bn gross proceeds; deal requires US antitrust approval; close expected sometime in 2024; net of $850mm of debt and deal expenses OCI expects to net $2.5-$2.6bn
• Pro forma for the aforementioned sales, OCI will have three primary businesses/assets
  • Global methanol business
  • European nitrogen/fertilizer business
  • Texas blue ammonia plant
  • Further details are included below under “Business” section
• Methanol business
  • 60% of productive capacity (100% of current online productive capacity) is in feedstock-advantaged North American market
  • OCI’s methanol assets are in the bottom quartile of the global cost curve
  • Methanol is currently in a downcycle but earnings should improve markedly going forward; spot pricing is up 25% (China spot) to 45% (US spot) from the trough in 2023
  • Favorable multi-year supply outlook; only 9-10mm incremental metric tons of firm capacity currently in the pipeline thru 2028; represents 9-10% aggregate growth in current capacity or ~2%/annum increase, below the expected global GDP + 1% expected growth in demand
    • Note that this demand assumption excludes potential incremental demand from green methanol
    • Green methanol is rapidly emerging as credible replacement for historically dirty high sulfur marine fuel oil
      • Solid order book growth for methanol-capable vessels; expect >200 vessels by 2027/28
      • Potential to drive 5-6mm MT of additional demand, which would be an additional 5-6% demand tailwind

• • 5-7 year lead time for new capacity implies that supply situation is unlikely to improve/expand meaningfully
  • Global methanol utilization levels are likely to begin pushing against upper bound of practicality by 2026
    • 60% of global methanol production capacity is in China (45%) and Iran (15%): structural market factors lead to average utilization rates of 55-65% for these two countries in aggregate (required 2-3mo/yr downtime in China as a result of coal-fired plants with only one gasifier requiring extensive maintenance; diversion of NatGas for heating in both locations during winter months)
    • Global utilization levels above 68-70% are impractical; given current pipeline are likely to hit these levels by 2026, pushing prices higher

• • OCI’s NA footprint should lead to premium valn for methanol assets vs Methanex
• Solid ESG angle
  • Public markets are currently in a backlash phase to many things “ESG”; however, energy transition is happening now and will continue to accelerate going forward
  • Methanol is a key fuel in the transition to low carbon alternatives
  • Company is largest global provider of green methanol and the only global commercial scale supplier
  • Texas blue ammonia project is expected to be online in 2025; will be the first greenfield blue ammonia facility of scale both US and globally
• PF capital structure
  • Cash roll-forward assumptions
    • $3.62bn proceeds for Fertiglobe stake
    • $3.6bn gross proceeds for NA Nitrogen, $2.5-$2.6bn net of $850mm debt and deal expenses
    • No tax leakage (per management)
    • $2.4bn net debt @ 2023 3Q (parent level, excluding Fertiglobe debt and cash)
    • $650mm remaining Texas Blue Ammonia capex
    • $150mm 2023 2H dividend from Fertiglobe
  • Yields $4.2bn (€3.9bn) net cash PF for all transactions and remaining Texas Blue Ammonia spend
  • Market cap today = €5.5bn = $6.0bn
    • Implies EV net of cash = €1.6bn = $1.7bn
• Valuation
  • Management has guided to a normalized $600-$700mm of EBITDA PF for the announced divestitures
    • We assume $400mm of this is attributable to the methanol and nitrogen businesses (vast majority methanol)
    • Remaining $200mm is attributable to Texas Blue Ammonia
  • So trading at 2.6x normalized EBITDA
  • Target price
    • We use a 7x EV/EBITDA multiple for methanol/nitrogen
      • 7x is inline with global competitor Methanex, and a discount to longer-term averages (~8x)
      • Implies $2.8bn value for methanol/nitrogen
        • There were credible reports that Saudi-based SABIC made an approach in 2019 (pre-Russia/Ukraine) for the global methanol business with a bid of $4.0bn
        • A 15% stake in the global methanol business was sold in Feb 2022 to ADQ and Alpha Dhabi Holding at an implied valuation of $2.5bn
    • We use an 8x EV/EBITDA multiple for Texas Blue Ammonia
      • Management’s current assumptions assume no premium for blue ammonia; realistically blue ammonia is likely to garner a premium going forward as energy transition accelerates
      • Implies $1.6bn value for Texas Blue Ammonia
    • $4.2bn cash + $2.8bn methanol/nitrogen + $1.6bn Texas Blue Ammonia = $8.6bn = €7.9bn = €37.60/shr
• Management expects to return cash to shareholders following closure of the two announced deals; we expect this to take the form of a substantial dividend; any dividend obviously reduces cost basis and enhances the potential upside

Business

• Remaining business PF for the sale of both the Fertiglobe stake and NA nitrogen
  • Methanol
    • #5 producer globally
    • US: 1.9mm MT of capacity
    • EU: 1.3mm MT of capacity
      • Production facility (BioMCN) is currently offline (since mid-2021) due to unattractive economics as a result of elevated feedstock prices post-Russia/Ukraine
      • OCI Fuels: primarily a trading business that generates a spread
  • Nitrogen
    • EU: 2.9mm MT of capacity
  • Texas blue ammonia plant
    • Greenfield plant currently under construction; all long lead time equipment has been ordered; project is on schedule and on budget
    • Linde is the feedstock supplier, Exxon is doing the CO₂ sequestration
    • 1.1mm tons/annum
    • Estimate have spent ~$400mm to-date of total $1.05bn capital cost

Upside/Downside

Risks

• Announced transactions do not close or are renegotiated
• Methanol downcycle more persistent than expected
• TX blue ammonia plant suffers from construction delays
• Cash return smaller than market is expecting
• Ill-advised acquisition activity

Catalyst

Closure of announced transactions. Cash dividend. Normalization of methanol trading environment.