A Refined Choice

With the submission period closing early September for the long-anticipated privatisation of Turkey's state petroleum refineries, the sell off looks to be on schedule for an exciting conclusion later this month.



Submissions for the Turkish Petroleum Refineries Corporation (Tupras) came to a close on September 2, with four joint groups qualifying for the 51% block sale.



Dropping out at this point were OMW from Austria, ENI from Italy, Repsol from Spain, Hungary's MOL Joint Stock Company, Turkey's Oyak and Enerji Joint Group as well as the Anadolu Transportation Joint Group.



In contrast, Zorlu Holding, which partnered up with Russian oil company Tatneft for an unsuccessful tender attempt for Tupras in 2004, remains on the list. This time the Turkish giant has linked up with Polish refineries company PKN Orlen - known for owning the largest oil refinery in Central Europe.



This partnership will have to face some stiff competition from the united front posed by Koc Holding, Turkey's Aygaz, Opet and global oil heavyweight Shell, in the form of the Shell Company of Turkey and Turkey-Shell Overseas Investment Joint Enterprise Group. Also in the running is the Indian Oil Corp-Calik Energy Joint Enterprise Group, and the Tupras Acquisition Consortium-Petrol Ofisi Joint Enterprise.



This level of local and foreign interest is promising enough, although investors remember all to well how Turkey's Privatisation Administration (OIB) was once before blocked from handing over a share of Tupras to the private sector.



The decision to cancel the tender back in November 2004, which Zorlu Group and Tatneft had won with a bid worth $1.3bn for 65.76% of the company, came from the Council of State. Concerns had been raised about selling a "strategic" industry abroad, particularly to a consortium involving Tatneft, which had been the main partner in the bid.



However, observers are far more optimistic about the prospects of success this time round. Partly this is because the OIB is more experienced in pushing privatisation through, with Turk Telekom an obvious recent success story.



"The Privatisation Administration is better prepared and we expect to see less conflict," Ilgin Erdogan, Energy and Telecoms analyst at AK Securities recently told OBG. The sale of a 15% stake of the company to foreign-based companies in February 2005 has also helped prepare the way for the larger sale.



Still, protests from workers in Aliaga, Kirikkale, Kocaeli and Batman were reported on September 2. The company's 4332 employees are anxious over potential job cuts in a privatised entity.



Meanwhile, contrary to initial expectations, Tupras did not suffer from a law introduced to liberalise the fuel market earlier this year. The law ended restrictions on imports, effectively removing the previous requirement that local companies buy 60% of their annual requirements from Tupras.



Yet in December 2004, Tupras General Manager Husamettin Danis commented that distributors had in fact raised their orders by 3-4% for the start of 2005 compared to the beginning of 2004. The implication was that local companies still preferred to buy much of their fuel locally, rather than import from abroad, with the former option often more practical.



"The storage capacity of distributors is limited," says Ilgin Erdogan, "so they still have to buy from Tupras."



Investors in the meantime cannot wait to get their hands on a piece of the pie given the financial health of the company. Tupras recorded a net profit of $219m in first half 2005, representing a 78% increase from the same period last year. This is thanks to improved refinery margins, the high price of crude oil, robust global demand and a tight supply of refined products.



This tight refining capacity in the global market is unlikely to be challenged either in the near term, with a minimum of three years required for the construction of new refinery complexes.



All this means that Tupras is largely buffered from the business cycles of the Turkish economy, with global factors of far greater consequence to its business success. Promisingly, the sales volume of the company increased by 7% for the first half of 2005 compared with the same period in 2004.



Privatisation in the meantime is expected to bring extra benefits. The transformation could enhance operating margins from the 1.5-2% range, and spike the value by 8%, according to a report produced by Yatirim Finansman Securities in August 2005. This surge could be ensured should Tupras enter the retail business with downstream activities. Indeed, the activity is likely to be considered now that the company's articles of association have been changed accordingly.



The fact that the company has long enjoyed a strong financial position, with a cash flow of approximately $143m a year in the past five years, has not gone unnoticed either. Bidders need little reminder of this company's credentials.