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Raffinerie Heide’s sponsor Klesch will still charge a separate management fee for running the Kalundborg refinery which it recently added into Heide’s bondholder restricted group, and the business faces a surge in EU Allowances (EUA) carbon credit prices that could reduce upside potential. But the German refinery group’s guided 4Q21 earnings improved sequentially while expected climbing crack spreads could sustain momentum, leaving three buysiders open to betting on an eventual refinancing, with two other buysiders unconvinced.
The company held its Klesch Energy-branded non-deal investor update call on Tuesday (8 March) and group meetings on Wednesday (9 March) through Credit Suisse. Management guided that Raffinerie Heide and the Danish Kalundborg refinery, acquired by sponsor Klesch and added into its restricted group, could deliver a combined illustrative EBITDA of EUR 170m, as reported.
The Heide refinery delivered an adjusted EBITDA of EUR 41m for FY21 while Kalundborg made a FY21 adjusted EBITDA of EUR 29m. The former generated EUR 32m in reported EBITDA at FY21 while Kalundborg’s FY21 reported EBITDA climbed to EUR 124m when adding an inventory revaluation gain of EUR 96m.
Some investor concerns have however emerged from the group meetings held on Wednesday. Sponsor Klesch paid just USD 48m (cEUR 44m) for the Kalundborg refinery and associated terminals and infrastructure, according to the 4Q21 financial report of seller, Norwegian-headquartered petroleum refining company Equinor.
The purchase price for Kalundborg was met by Klesch with a 50% upfront payment and a 50% deferred payment, according to one buysider. Additionally, the sponsor will extract an annual management fee for running the Kalundborg refinery.
In recent years, sponsor Klesch has been receiving annual management fees for running the Heide refinery, including a EUR 19m annual fee in 2020 as part of its Klesch Services agreement. On top of that, Klesch has already taken out a whopping EUR 359m of dividends since the start of 2016, including EUR 94m of dividends in FY16, a mammoth EUR 235m of dividends in 2017 through the bond issuance, and a further EUR 30m dividend in 2018, as reported.
“They [the sponsor] bought Kalundborg for USD 48m but 50% was in cash and 50% was a deferred payment,” the first buysider said. “He put down USD 24m but he gets a management fee for Kalundborg similar to the Heide refinery so he will get [his] investment back within one year and all the risk is with bondholders.”
A second buysider countered that despite concerns that the sponsor could be aggressive, it showed support by adding Kalundborg. Moreover, though Klesh bought it cheaply, he likely thinks it is worth more.
“Klesch could waive the management fee for Kalundborg if bondholders push back or the fee could be kept if Klesch agrees to certain covenants [on dividends for example],” a third buysider added.
Carbon mountain to climb
Another risk the group faces is the earnings sensitivities that emerged from the investor presentation. The combined group of the Heide and Kalundborg refineries gets a EUR 13m EBITDA hit for every EUR 20/MT rise in EU Allowances carbon credit prices (see chart from investor presentation below).
Carbon credit prices have surged in the past year and could mean a large earnings headwind for the combined group. EU carbon permits were indicated on 10 March up around EUR 75 versus around EUR 25 at the start of 2021, according to website Trading Economics. The company had previously hedged itself at lower prices against such movements.
The business will need to generate at least EUR 108m group EBITDA to generate free cashflow, the first buysider estimated. This estimate is based on a similar EUR 58m combined FY21 capex, EUR 25m outflow for off-balance sheet inventory and receivables facilities and possible EUR 25m interest expenses on the back a hypothetical 10% coupon on a EUR 250m new issue.
“This will be tricky to refinance and previously they disclosed hedges but now they don’t say, and they are not at an earnings level to generate positive free cashflow,” the buysider pointed out. “Unless the owner puts in more economics, it is hard to see how this gets refinanced.”
“We thought the update was a positive outcome. We now know what the Kalundborg EBITDA generation is and one can finally put a number to it,” a fourth buysider countered. “It is a nice addition and less energy intensive. Gas and oil prices are high but crack spreads are very strong.”
Rolling the diesel dice
FY21 earnings of EUR 70m for the combined entity remains a long way off the EUR 170m guided illustrative EBITDA. In the short-term, earnings momentum can continue with current reference crack spreads, which are the pricing differential between a barrel of oil and the petroleum products refined from it, some way below the amounts implied on forward curves. Crack spreads should improve given they were at relatively historic low levels in recent years as demand for jet fuel subsided given people travelled less during the pandemic.
Crack spreads could also receive a further boost since a large amount of diesel production comes from Russia and Belarus. Sanctions against the countries could restrict global supply and produce a spike in diesel prices that can benefit other refineries like Heide and Kalundborg.
The company is also taking steps to improve its liquidity with the adoption of a new inventory financing program with Saudi petroleum company Aramco and a receivables discounting facility with listed French credit insurer Coface.
“I’m constructive. Diesel spreads reduced in covid as jet demand suffered but the high levels in recent weeks have not been seen before,” the second buysider said. “Higher oil prices mean higher costs but they can also pass through and the risk is on the likes of Aramco with the off-balance sheet facilities.”
The second buysider argued that spreads are moving in their favour and he models the Heide refinery alone hitting EUR 150m EBITDA in 2027 and EUR 100m sooner. The combined group could hit over EUR 250m at one point in the next five years, he argued.
Raffinerie Heide remains focused on its three ESG decarbonisation plans that could also be a sweetener in any potential refinancing. Its three green projects include the Westkuste100 hydrogen production plan, Kerosyn100 synthetic aviation fuel plan and Hyscale100 synthetic chemicals plan.
“The assets are good, management made a good impression and the sponsor is not crazy and can contribute expertise and infrastructure into hydrogen and potentially wind projects,” the second buysider said. “There is decent upside on energy transition.”
“Nothing would ever entice us to Heide. It’s not a name even here on the radar screen,” a fifth buysider countered.
Assessing refi odds
Raffinerie Heide’s Caa2/CCC+ rated EUR 250m 6.375% senior secured 2022s are indicated at 87.75-mid with a 26.3% yield to worst on Markit. The bonds were indicated up at 91-mid at the start of the year and 95-mid on 10 January before gradually drifting to lows of around 80-mid last week.
Bondholders have collateral pledges over the shares and partnership interests in the issuer, Heide Logistics GmbH and Raffinerie Heide Assets GmbH & Co. KG. They also have security interest over certain real property located in Germany of Raffinerie Heide Assets GmbH & Co. KG, security interests over certain insurance receivables of the issuer, and security interests over certain installations, machines and other business equipment of the issuer, Heide Logistics GmbH and Raffinerie Heide Assets GmbH & Co. KG, according to the company bond prospectus.
“They need to produce more details on how they got through the first two months of the year given the volatility,” the fourth buysider said. “If the assets come with the full security of the whole refining kits then there is a price for this. There is a price for everything and they can refinance at par.”
If a refinancing comes with stricter covenants, then it should be achievable, according to the third buysider. “Initially we were scared by the non-deal presentation announcement but bond prices are bouncing back.”
Raffinerie Heide was 12.7x net levered at 3Q21 with adjusted leverage including off-balance-sheet debt up at 23x, according to Debtwire’s analyst calculations.
The first buysider noted that Klesch can play hardball if this goes bad. “It is a German company and if they can’t refinance, it is a hard process and is not good,” he said. “There is large off-balance sheet super senior debt ahead of you [in a restructuring].”
“We don't think refi is going to get done,” an advisor said. “The bonds are in the 80s even after they announced they're going to inject Kalundborg into the group. If a refi gets up, it's basically the existing bondholders recommitting.”
