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

Good afternoon, good morning, ladies and gentlemen. Welcome to the conference call. Chloe Piece is being called in, I'll be standing by. Thank you.

Thank you, operator. Ladies and gentlemen, on behalf of China Oil and Gas Group, it is a pleasure for me to welcome you all to our 2022 interim results conference call. Today, our Executive Director, Ms. Sophia Xu will represent the group's 2022 interim results, and our Chief Financial Officer, Ms. Jenny Law will answer any questions you may have after the presentation. Our presentation material for today has been uploaded to our official website at www.hk603.com under Investor Relations and the road show presentation. Or you can also access it through the link attached in our announcement 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 session at the end.

Thank you, Chloe. Hi, everyone. Thank you for joining China Oil and Gas Limited 2022 Half Year Results Conference Call. Let's start with financial performance. Page 3, 4 are summaries of the group's key performance for the first half of the year. During the period, the total turnover was HKD 8.18 billion, a year-on-year increase of 18%. This was mainly attributable to the increase of the group's natural gas sales volume and upstream oil prices. Natural gas sales rose 5% year-on-year to 2.551 billion cubic meters compared with 2.45 billion cubic meters in the same period last year. Profit for the period was HKD 885 million, representing a year-on-year increase of 33%. Profit attributable to the company owners was HKD 553 million, a year-on-year increase of 78%. Earnings per share rose 82% to HKD 0.1097. On Page 5, excluding one-off items, profit attributable to company owners also increased by 39%. On Page 6 and 7, the turnover is 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 four, newly added last year, the production and sales of [ co-divide ] clean energy and other-related products were HKD 7.469 billion, HKD 299 million, HKD 412 million and HKD 0 million, all in Hong Kong dollars, up 25%, down 30% and up 85%, respectively. The [ co-divide ] clean energy business was in the trial phase last year and suspended production in the first half of this year to prepare for normal operations in the future. In July 2022, it was officially put into operation again. The gross profit margin of the sales of distribution of natural gas and other related products was approximately the same as last year. The gross profit margin of gas pipeline construction and connection business segment remained at the same level of 41% as the previous year. The price of crude oil and natural gas rose due to the tight global supply, and the gross profit margin of exploitation and production of crude oil and natural gas increased from 50% in the same period last year to 60% this year. On Page 8, selling and distribution costs and administrative expenses decreased by 15% to only 3% of total revenue compared to the same period last year. On Page 9, the group's EBITDA as at June 30, 2022, was HKD 1.618 billion, an increase of 30% year-on-year. On Page 10, the group's total assets were HKD 22.73 billion, an increase of 0.4% from the end of 2021 of HKD 22.649 billion. The net asset were HKD 9.128 billion, an increase of 4% from the end of 2021. On December 30, 2021, the company successfully signed an agreement with 7 banks to enter the syndicated loan market for the first time. The main reason is that the interest rate is relatively low. With the current interest rate hike, the syndicated loan interest rate is still less than 4%. On March 25, 2022, the company drew a syndicated loan of USD 290 million to repay the part of the USD 320 million, 5.5% senior notes due in 2023. It directly saved the company approximate of $5.4 million in interest expense at the current state per year. The group's net debt to asset ratio was 21%. Finance expenses net of capitalization were $163 million. The weighted average cost of all the group's debt was [ 4.4% ] , about the same level as last year. For the first 6 months of 2022, the group's net cash generated from operating activities was HKD 990 million compared with HKD 640 million for the same period last year, representing a year-on-year increase of 55%. Capital expenditure in the first half of the year was HKD 771 million, an increase of 5% year-on-year. The company remains in a state of net cash flow. In the first half of the year, the group's total sales and gas transmission volume increased by 12% year-on-year. Residential gas consumption increased by 3%. Industrial and commercial users gas consumption increased by 7%, gas sales at gas station increased by 2%. On Page 14, the proportion of gas sales to various types of users is relatively stable. With industrial and commercial users accounting for 67%, residential users accounting for 25% and gas station sales accounting for 8%. On the next page, the gas sales volume of the group in Shanxi and Hubei recorded a significant increase of 500%, 12% and 12%, respectively. Next page. The blended dollar margin was RMB 0.44 per cubic meter, a decrease of RMB 0.01 from 2021. On Page 17. In the first half of the year, the group added roughly 95,000 residential users, a year-on-year increase of 12% and accumulated 1.86 million residential users. There were 457 new industrial and commercial users and the cumulative number of industrial and commercial users reached more than 16,000. On Page 18, the group successfully obtained 3 new projects during the period, 1 in Hubei province and 2 in Qinghai province. Up to now, the group has 73 city gas concession rights in 16 provinces of the country and 63 LCNG stations. On Page 21, we can now move on to our upstream business in Canada. The upstream oil and gas production business achieved an average output of 5,570 barrels of oil equivalent per day for the period. The group achieved an average crude oil price of CAD 125.92 per barrel of oil equivalent, an increase of 74% from the previous year's CAD 72.28 per barrel of oil equivalent. Net operating netback rose 86% to CAD 55.07 per barrel of equivalent. Okay. Thank you very much, everyone. That's all for my presentation. Please feel free to raise any questions. Thank you.

Thank you. We will now poll for questions. If you, our first question comes from Chad Lau from China Citi.

[Foreign Language].

[Foreign Language].

Our next question comes from Nana from T. Rowe Price.

Can you hear me?

Yes.

Hi, Jenny. Hi, Sophia. I just want to go through the [indiscernible] of the offshore company. So I see there are over $3 billion cash interim results. Just wonder how much does that stay as offshore company?

Your question is like how much cash is offshore and onshore, right?

That's correct.

Okay. We have about 80% cash onshore in PRC and the remaining in our Hong Kong headquarters.

So that's roughly HKD 600 million?

HKD 600 million, yes.

Can you remind us how much dividend upstream usually you get from onshore opco?

Usually, it's around RMB 120 million for sure. And then we have other companies, other subsidiaries that we are collecting their dividend this year, too. Because like most of them are 100% owned subsidiary, and we haven't required them to pay a dividend before, but we will do it this year. And we are actually registering for the Hong Kong residential identity, so we can save some tax in -- for the onshore dividend payout, too.

Yes. But if I look at the majority of your debt actually sit at holdco. So currently, you have the same loan and you have 2 bonds. And that generates -- yes. Can you just -- if you don't mind, can you just walk me through the liquidity position, like how much interest payments and overhead you need to pay at holdco level?

Other than the onshore dividend payout, we also have dividend from Canada. And actually, we have an intercompany loan to Canada business, and we can always ask them to return our loan -- our long-term loan from Canada. So we have no problem on our cash flow. And for the interest that we are paying out is actually the bonds and the syndicated loan, that's all.

Could you remind us how much is intercompany loan to Canadian subsidiary?

For the Canada subsidiary?

Yes.

I remember it's around CAD 120 million. I can give you the exact number -- yes.

And how much dividend do you receive from upstream business every year?

CAD 12 million per year.

Okay. Got it. Yes, I guess, just in the January 2023 will be due, which is USD 100. So at current stage, what is your plan to refi that?

Yes, we have cash on hand, and we also have a still syndicate banks that want to lend us money. And we are still in the process of discussing. And we'll probably have more syndicated loans during the second half of 2022, and we have dividend payout from our onshore company, our PRC company. And the Canadian company will grant us more dividend for the same half, so we are good to go for the USD 100 million to repay on 2023 January.

Okay. Got it. Yes. Just one more question regarding the offshore -- sorry, the onshore dividend upstream. Is that always capped at $120 million level or is it 50% to withholding tax?

No. Really depends on which subsidiaries paying us. The $120 million is from CCNG, they usually pay out around 50% of their profit per year and is around RMB 120 million.

Yes. But in the history, actually, CCNG is only a subsidiary that pays the upstream dividends, so all other subsidiaries didn't pay at all?

Yes, because the other subsidiaries are our wholly owned subsidiary, we didn't require them to pay a dividend. And we have, if we want them to pay a dividend, we have to register for our Hong Kong resident identity to minimize our tax payout. That's why we want to do it all at once. Despite the 10 different...

Got it. Yes. But if we include those subsidiaries this year, how much would that be paid on top of those -- on top of that RMB 120 million?

Around RMB 100 million to RMB 200 million.

Our next question comes from Chen Wei May from Bank of Singapore.

The finance cost has increased. So why is it so given that the both the debt level and also the average cost of financing has not increased. That's one. Second, you mentioned that there's significant growth in Shanxi, Jiangsu and Hubei, is there any particular reason, that's all.

I didn't get the second question. What's...

The second question is the gas film. I think you mentioned that there's significant growth in Shanxi, Jiangsu and Hubei. Yes, I just want to know why.

Okay. The first question, because the interest rate increase as you may know. So most of our loans, we have to pay a little bit more interest. That's the answer. Second one, Shanxi, you can look back to our -- the past few years. We have acquired and we have got more concession right in that province. I think we have more than 6 new concession rights for the past few years. That's why the sales volume growth go up.

So mainly attributed to increase of concession rights, right, in all the provinces that you mentioned?

Yes.

Okay. And what's the average cost of financing?

4%.

Our next question comes from Xiaobao from Bank of -- BOA.

I have two questions. One is on the 2023 bonds. I remember that you have mentioned you might call back the 2023 bond earlier, given the incremental syndicated loans and the cash on hand. Is it still the plan? Or you will wait on June next year to repay it at maturity? And my second question is on the dollar margin trend. Your dollar margin is relatively stable, while some of your competitors was down a lot. Can you share the reason and share your view on the dollar margin trend in the second half?

Okay. For 2023 bonds, yes, we can call. The call, we have paid a premium, and that's why we are doing some calculation, see which one is more, can save more cost for the company. If I pay it like on the due day, I don't have to pay for the premium, but I have to pay extra interest, right? So we are doing some calculation, and we may call or may not call. We haven't decided. And for a dollar margin, because you can see our group, usually, we have more sales in Qinghai, and Qinghai is actually decreasing for the percentage of the sales of natural gas. And we -- you can see we have like 500% increase in Shanxi province for our sales volume. And Shanxi, we are mostly not just using natural gas. We have coalbed methane and the cost is a little bit different over there. And because we have long-term contracts with PetroChina, we don't have to rely on the LNG for extra supply of natural gas. That's why our margin is like more stable than other companies. On the company, they may not have the asset to like a long-term contract with PetroChina, they may need to get extra LNG. And as you may know, LNG prices rise a lot for the -- in 2021 and 2022. So we target that our dollar margin will be stable for the rest of the year.

Can I confirm that 100% of your natural gas is both from PetroChina? Or there is some small portion from other third parties?

Yes, around 90%, I think, around almost 90% from PetroChina and we have natural gas from [indiscernible] and Sinopec, and we also have a little portion of LNG.

Our next question comes from Mr. Timmy from HSBC.

Jenny, just a quick question because I think the company also take on loans to acquire Shengli, can you kind of share with us the amortization schedule and the size of it? And also that like maybe you'd be helpful if you can by talk with us just like how the synergy going after purchasing the controlling stake on Shengli?

For the guarantee of the loan of Shengli is just because the original single large shareholder, they did the same thing. So the bank requires when we change hands on the single largest shareholders, we have to do the same in fee. That's all. And for Shengli, you can look at their financial statements. They have performed very good during the first half of 2022. So we don't really have to worry about that. And [indiscernible].

I was referring to the loans that like the company took on onshore to acquire the equity stake?

Onshore to acquire...

Yes.

Yes, because they have a long-term bank loan. Is it like I said...

No, not the loans, I mean maybe I ask it the other way is, how did the company finance the acquisition?

It's only like -- I think it's only how much of it is not actually expenses. We use our own cash.

Okay. So the company did not take on any loan to purchase their stock?

No, we did afterwards. We did it because we have -- we can find a very good contract with the bank. We can't have like every sector loan. We didn't do a lot for acquisition. We don't have to.

So that's why is my, that's how my question is like, so can you share with us like the amortization schedule of this loan that you take on later on and the size of it?

I don't get your question. We just guided for our daily operations. What do you mean by amortization?

Yes. So it's a repayment schedule then. I thought you just said that you would take on...

[indiscernible] 7 years.

Sorry. Can you repeat it again? I'm sorry.

We didn't even draw down the loan, but we signed a contract with the bank. If we want after acquisition loan, it will be 7 years loan, and it will be a 4% on that. And we haven't -- okay.

[Operator Instructions] Our next question comes from Jocelyn from Moody's.

I wanted to check on the gross sales growth volume for the year, sorry, if I missed it earlier. So for the first half, there is a slowdown in growth, maybe just your comment on that? And what is the expectation for second half of this year and the overall expectation on the sales growth volume for the year?

Okay. We have 5% sales volume growth in the first half of 2022. And it's just compared with China, the whole country, the growth rate is around the same. So we expect the second half will be quite stable and with modulus growth. But we expect we have high single digit for the overall in 2022.

Okay. And I think I saw in the P&L, there is this other income of about HKD 56 million, which is probably part of your EBITDA. What is the nature of this other income?

One of our subsidiary sold a pipeline, and we have gained on the sales of fixed assets for around HKD 55 million.

Right. And I saw in the -- I think in first half, there is a lower connection fee income as well as segment profit for the segment. What is the reason behind it? And further to that, can you comment on the outlook for second half 2022? What is the expectation for the connected household? You have done 90,000, I think, in first half. Previously, we were guiding for 160,000 additional connection of stable fees. So maybe your comment on this.

Are you asking the construction income?

Yes.

Okay. Construction income revenue decreased a little bit because the cost in China decreased, but we maintain our margins for that part. And for the connection of residential user, it will be around the same with the first half of 2022 in the second half.

Sorry. Can you repeat that again? I missed that.

Repeat which part?

The expectation for 2022.

Our expectations, the second half connection will be around the same with the first half.

So that will bring us to 180,000 per year for the year?

Yes.

So, does it mean that in terms of the average fee per household, is there a downward revision to this? [indiscernible].

I couldn't hear you, can you speak up a little bit? Sorry.

Sorry. Yes. So I'm talking about the connection fee per household. What -- is there a lower fee per household now in line with the lower connection?

No. Actually, the C&I portion get lower. For residential is still around RMB 2,800 per household, around that. Yes.

Okay. I see, right? Okay. The next one is on the CapEx. For the CapEx that you have spent in the first half 2022, $770 million what is the breakup of this between PRC CapEx and oil and gas CapEx?

Around 80-20. 80% on PRC, 20% on Canadian.

Right. Okay. And then for the guidance, previous CapEx guidance was $1.5 billion for the full year, of which $1.2 million is for PRC. Does this still stand?

Yes, still the same.

Okay. And do you have any expectation in terms of inorganic CapEx at this point in time?