China Oil And Gas Group Limited (603) Earnings Call Transcript & Summary

Ladies and gentlemen, on behalf of China Oil and Gas Group, it will be a pleasure for me to welcome you all to our 2021 annual results conference call. Today, our Executive Director, Sophia Xu will present the group's 2021 annual results. And myself will answer any questions you have after the presentation. Our presentation material for today has been upload to our official website at www.hk603.hk under Investor Relations and then Roadshow Presentation or you can also assess it through the link attached in our announcement in e-mail from yesterday. We will first talk about the financial highlights, and performance of the group, followed by the operating performance of our core business, natural gas distribution business and then our upstream oil and gas production business in Canada. The presentation will take around 20 minutes, and we will have a Q&A section at the end. Sophia, please go ahead. Thank you.

Thank you, Jenny. Good morning, everyone. Thank you for joining China Oil And Gas Group Limited 2021 Annual Results Conference Call. Let's start with the financial performance. The PowerPoint we send out, Page 3 summarized the major highlights of the group for 2021. The total turnover was HKD 14.342 million, a year-on-year increase of 37%. The main reason was the increase in the group's natural gas sales volume and upside -- sorry, upstream oil prices. Natural gas sales rose 12% year-on-year to 4.852 million cubic meters compared with 4.350 million cubic meters in the last year. Gross profit rose 27%. Profit for the period was HKD 1.514 billion, a year-on-year increase 194%. Profit attributable to company owners was HKD 904 million a year-on-year increase of 3,017%. Earnings per share increased 2,987% to HKD 0.18. On Page 5, after deducting one-off items, profit attributable to company owners increased by 5%. On Page 7, the group's principal activity are divided into 4 segments, namely, sales and distribution of natural gas and other related products; gas pipeline construction and connection; exploitation and production of crude oil and natural gas; and the newly added production and sales of coal gasification and other related products. Revenue was HKD 12.258 billion, HKD 971 million, HKD 511 million and HKD 601 million, respectively, representing an increase of 31%, 27% and 82%, respectively. Gross profit margin of the segment sales and distribution of natural gas and gas pipeline connection and construction services income were similar as last year. Due to the increase in global crude oil prices, the gross profit margin of the exploitation and production of crude oil and natural gas has increased from 7% in last year 13% this year. The group's EBITDA increased 32% to HKD 2.23 billion. On Page 10. The total assets of the group are HKD 22.649 million, an increase of 18% from the HKD 19.27 million at the end of 2020. The net assets are HKD 8.819 million, an increase of 20% from the end of 2020. On June 23, 2021, the group successfully through the additional USD 400 million 5-year senior note with a coupon of 4.7%, to redeemed the USD 350 million senior note during 2022. The group completed the early redemption on August 2, 2021. As of December 31, 2021, the group's total debt, including bank borrowings, other borrowings and senior notes was HKD 8.72 million. Cash and cash equivalents and time deposits were HKD 3.766 million compared with HKD 3.763 million at the end of last year. The group's net debt-to-assets ratio is 21% -- 21.9%. Finance costs, net of capitalization was similar to last year at HKD 344 million. The weighted average cost of all debt of the group was 4.44% compared with 5.26% last year. The main reason was that China Petroleum Finance Corporation gave the group an interest discount. At the end of 2021, the group's net cash generated from operating activity was HKD 2.175 million, a 36% year-on-year increase compared with HKD 1.602 million in last year. Now let's talk about operating performance of the group. On Page 12 to 13, the group's total gas sales in 2021 increased by 12% year-on-year. Total gas sales and transmission volume increased by 13%. On Page 14, the preparation -- the proportion of gas sales by various users is relatively stable. Industrial and commercial user accounts for 68% of the gas sales, residential user accounts for 23% and the gas station sales are 9%. On 15 -- #15, the growth of gas sales volume in Shanxi and Jiangsu decreased the proportion of other provinces. On Page 16, the blended dollar margin is CNY 0.44 per cubic meter, consistent with the past year. On the next page. In 2021, the group connected more than 160,000 new residential users, an increase of 10% year-on-year, and the cumulative connections of residential users was reaching 1.8 million, 1,283 million new industrial and commercial users who are connected and the cumulative number of industrial and commercial users connected reached 15,600. During the period, the group managed to land Jixian Industrial Cluster gas connection right project in Linfen, Shanxi Province. The group also added 1 new branch pipeline project in Guizhou Province. In July 2021, the group successfully launched the merger and acquisition of Shandong Shengli -- Shandong Shengli Limited is a company listed by shares established in the PRC and its issued share are listed and traded on the main board of the Shenzhen Stock Exchange in accordance with the regulations. Shengli has extensive business resources in natural gas field, the group intends to corporate in depth with Shengli to promote the sustainable and high-quality development of the group and is in the interest of the company and its shareholders as a whole. As of November 2021, the group has acquired a total of 22.16% of Shengli. Up to now, the group has 71 city-gas concession rights in 16 provinces in China and has 63 L-CNG stations. Now let's go to Page 21 and talk about upstream business. The upstream oil and gas production business achieved an average output of 4,936 barrels oil equivalent per day in 2021. The group achieved an average crude oil price of CAD 78.51 per barrel of oil equivalent, an increase of 80% from last year's CAD 43.66 per barrel of oil equivalent. Operating netback increased by 123% to CAD 35.15 per barrel equivalent. Our Canadian team remains cautious with the drilling plan, drilled 14 wells with a success rate of 100% throughout the year. Thank you, everyone. That's all for my presentation. Please feel free to raise any questions. Thank you.

[Operator Instructions] Our first question comes from Nana from.

My first question is regarding the volume growth. So what is your expectation for volume growth this year? We did acknowledge that our C&I users increased a lot last year. Does it include any one-off effect, which will not be repetitive this year? Happy to hear your thoughts.

Okay. Our expectation for 2022 will be around 15% growth. One-off is not one-off. Actually, we see the corporate lines are getting recovered in China and all of the C&I users are getting more active. So we have expanded our area as well. So we expect our natural gas growth will be around 50% in 2022.

I do realize, a, receivable base actually increased a lot last year. Was it because of the increase in contribution from the C&I users? Or have you observed any delayed payment from end users on the ground?

No delay payment. And we see most of them are from like active C&I users. They will be like a recurring user as well.

But should I expect the receivable days to stay at over 22 days this year?

Yes. around there.

Okay. Second question is regarding the connection fee. Have you seen any trend of the connection fee last year?

Not really. We still have around the same, close to -- I think it's close to RMB 3,000 per user average. And our -- you can see from our -- in our announcement, the gross profit of the connection fees around the same chip.

Yes. Third question is about the Upstream business. So about the operating net back, is it possible for you to give us any number of guidance for this year?

Yes. We expect operating netback will be above the average for 2021. Our operating netback this year is CAD 35.15. And we expect -- because the oil price is still quite high right now, and we expect it will be close to CAD 38 operating netback in 2022.

Okay. Got it. Yes, last question as usual is about CapEx this year.

CapEx. We have like HKD 1.3 billion last year. So it will be around HKD 1.5 billion in 2022.

Okay. Sorry, one more question about the total debt. It increased somewhat last year. Is that because double count of the -- I didn't know they said you borrowed the same loan to replace the senior note. So I just wanted to have an idea of the breakdown there?

Okay. The breakdown for the total debt in 2021 is actually increased from CNG from our PRC operations, CNG and our wholly owned subsidiary as well a little bit. And because we have acquired Shengli last year, so they have increased their buying loan to do the acquisition. And otherwise, for the syndicated loan, we draw down last week actually. So this is after 2021. So we did it in 2022.

Okay. Got it. So what is size of syndicated loan. Is that still USD 350 million?

Actually, the total amount is USD 290 million. And the call back the loan of USD 250 million, the 2023 loan we call the back right now. And then what we are going to do because the premium will do less in half and after July 25. So we will do the remaining part after July 25 to save costs. That's all.

Okay. Is that fair if I assume the total that will stay at the same level this year?

Pardon me.

It's fair for me to assume that the total debt will stay at the current level for 2022?

Yes. Right. Right.

Our next question comes from Mr. Tim Yu from HSBC. So I guess, I question -- can you withstand the cash level, like the print your JV and also at the holdco level?

Okay. Total cash and cash equivalents on hand. In Hong Kong holdco level, we have around 15%, and the remaining 85% around 80% is from CCNG and 20% is from future, our wholly owned subsidiary.

Okay. So it seem to stand at the holdco, and then the remaining is like how much of them are in the JV or?

80-20, 80% in the JV and 20% in our wholly owned subsidiary.

And then can you talk a little bit more about the rationale of like purchasing some -- it sounds as restocks and what is the future plan basis like are you planning to further increase their stake, and then and also that -- and you also confirm that you say and the requirement from the Shenzhen Stock Exchange in that you have to -- general offset with new cost in the [indiscernible] of shareholding.

Okay. For Shengli, we actually acquired because we have a win-win situation. We have 2 platform right now. We have the Hong Kong Stock Exchange, and we have the Shenzhen Stock Exchange. So for natural gas business, the valuation in China is actually way higher in Hong Kong right now. So when we are doing more acquisitions in the future, we can use Shengli as a guideline for the valuation, right? And also because of Shengli, we expand our area as well. And in Shengli -- this company, they may lead some gas resources, which EOG can help to talk to PetroChina or Sinopec so that we can have a lower gas cost for Shengli, and at the same time, we can have share our resources in different areas.

Yes. Okay. So far, some is not consolidated in the financial result.

Is only our associate company. We own 22.16%.

Well, any plan to consolidate?

Well, if we have to consolidate the day we may need to hold up to, say, 40% to 50% for sure. And I don't think it's necessarily for now.

Okay, sure. And then you mentioned just a few minutes as I go back is like you showed the investment platform, [indiscernible] loan, against the purchase of some of the shares. So like when you talk about like what is the size and tenor and also any security of it?

Sorry, I didn't quite get your question. You mean when we did the acquisition?

Because I think you just mentioned that it's like your onshore investment pipeline. You guys talked about a loan to purchase their some of the shares -- stock side? Can you talk about like what is the size of the loan and the tenor and also in that.

Okay. Okay. The size of the loan actually is from our PRC company. So the size of the loan is around, I think, less than RMB 1 billion, but it's from a different bank. They have like different banks to perform that. But I think the total we draw down is only around RMB 300 million sorry. Yes, RMB 300 million.

So this obviously some share of pledge to the loan?

Pledge to the loan. No, I don't think so. No, I don't think so. Yes, but I have to check. I don't think so.

Our next question comes from [ Joslyn from Amundi]

I wanted to clarify on the keypad. I think in FY '21, you have HKD 1.3 billion of CapEx. Can you break this down for me into the PRC gas distribution business and the LNG business -- and from the CapEx guidance that I think was it HKD 1.5 billion for FY '22, what is the breakdown for the 2 as well?

Okay. For the upstream is around HKD 300 million remaining from PRC.

That was last year, right?

Pardon me.

HKD 1.2 billion last year, oh, it's HKD 1.3 billion in FY '21...

No, no, no. In 2021, the upstream business, the CapEx constituted around HKD 300 million. And the remaining around HKD 1 billion is from our PRC operations.

Okay. And the CapEx guidance of HKD 1.5 billion this year, can you break it down into the 2 -- performance as well?

Around last 3.5 sorry, HKD 350 million will be from upstream and the remaining is for PRC.

Okay. So this CapEx that looks a bit higher for the oil and gas business. Can you guide like are you increasing the production level in the oil and gas business this year?

Yes, because oil price is quite good right now. So we target that we will drill more wells in 2022. So when you -- yes, when you go back to a few years ago, when the oil price was really low, we actually drill like 3 or 4 wells per year. And the guideline for this year, we will drill around 11 to 12 wells for now. And we will change -- will depends on the oil price, and we may add or we may deduct from our budget.

Okay. But the CapEx for the oil and gas business will be fully supported by the own site and without any support from the holdco rate?

Yes.

Okay. And further, is there any like annual production per day that you can guide us for this year?

Sorry, what was production?

I think that was an average daily production that you have about [indiscernible] plus 6,000?

You mean the production per day?

Yes.

Okay. The production per day is around 5,100 average. 5,100 to 5,200 in average for 2022.

Okay. Is there any from the LNG business or oil and gas business, right? Do you expect -- what kind of like dividend or interest income that you're expecting from this business? Can you remind us?

Yes. They actually gave us HKD 13 million last year. For the interest expense. Because when we do the acquisition, we have 60% as [ stock ] of that and 40% as equity. So on the 60%, they have an interest. I think it's around 8-point something percent per year. so they have to pay us the interest per year, and it's around HKD 13 million, oh sorry, CAD 13 million. And outside of this interest income that -- I mean, do they actually give you any dividend yet? We don't acquire is to give us dividend because dividend has 30% withholding tax, as I remember. And for interest income is only constitute around 10% of withholding tax. So because of the tax purpose, we rather get interest income instead of dividend. We can do that if we need to.

Understood. So is there an increase -- I mean, expectation on whether or not there will be an increase in this dividend income that is coming from them?

We can do that anytime because we hold it 100%. We can even ask them to repay the loan.

I see. Is there any expectation for that this year given the rise in the...

For sure, we will get the interest income, CAD 13 million for sure. And then we would to tie during this anymore from that.

And the next one is on the gas sales volume growth. I think if I look into the gas sales volume growth, it seems like last year, there has been a little bit of dip in the second half because of the, I guess, C&I growth, maybe you can like comment whether this is the right observation. And you also mentioned that you're expecting 15% year-on-year growth this year. So I'm just trying to understand whether -- how achievable is given general slowing macro and all that. So just to hear a comment on that side.

I think it's just the timing of the growth. In the first half of 2021, when we compare to the first half of 2020 everywhere is lockdown in China in 2020 because of COVID-19. So the growth is like 20% compare half year to half year, right? For the full year, when everything gets back to normal, for sure, the second half, the growth rate will not be as much as the first half. That's why yes. So for 2022, we expect that because 2021 is a year that is quite stable, and we have more concession rights in 2022 to start with. So our growth rate will be from organic growth mostly and we may have new concession rate to constitute a 15% growth in 2022.

So just you mentioned about the concession growth in the CapEx guidance for the HKD 1.5 billion of each about HKD 1.2 billion is for the PRC rate. So have you included like acquisition for new concessions there? Or this is only the maintenance for the existing concession?

It's just the expansion of our natural gas pipeline. We don't -- we didn't include anything for acquisitions. We don't expect much acquisition because for concession rate, we usually just deal with the local customers. We sell them, [indiscernible] we acquire them.

Yes. Right. So the HKD 1.2 billion of CapEx for the PRC business that is really to do with like ongoing maintenance and maybe small expansion in the adjacent or in existing location.

Right. Yes. Yes.

Okay. sorry, on the concession fee -- connection fee, sorry. I'm not sure if I missed this earlier, what is the average concession -- connection fee, sorry, for FY '21 that you have achieved?

Around RMB 3,000.

And what is the expectation for this year?

Around the same?

Around the same. And what is the connection household that you expect to connect this year?

Yes, I think we will have around the same figure for 2022. 150,000.

And on the dividend from CCNG, right, in FY '21, can you maybe mention what is the number here since the annual report is not available yet and the expected dividend in FY '22?

We have reserved RMB 100 million around that, and we will have the same in 2022.

Okay. Okay. Sorry, on the level of -- I mean, the cash that you mentioned earlier that was cap onshore, offshore and all that rate. What is your expected level of cash that you want to maintain a -- now you have that [ HKD 3.8 billion ], right? I think -- so it is the level of cash that we would like to maintain on balance sheet as well as 15%, 85% ratio that you mentioned here?

Yes. We intend to remain this kind of structure. So we always have cash on hand just to be conservative, yes.

Okay. And on the 2023 bonds, right, I think I hear you were saying something about syndicated loans that you have taken up. Can you update a little bit more on that? I mean I have missed the update, have you like drawn down this already? And when is the intention -- your intention, I guess, is to do a cost [indiscernible] ?

We draw down the syndicate loan last Friday on March 25, we draw down USD 290 million, and we already call, call our loan -- sorry, call it the U.S. dollar bond for January 2023, we call back USD 250 million for now. And then we will wait until July 25, after July 25 because the premium will cut into half. So we'll just to save cost to -- when we do the call back for the remaining USD 100 million.

Can I understand the interest cost that you got from the interest [indiscernible] that you call upsell?

Yes. The all-in cost is around [ 3 6% ]

Sorry, come again. I missed that. Can you come again?