OMV Petrom S.A. (SNP) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the OMV Petrom's Earnings Call. Today's presentation will last around 20 minutes and will be recorded. By now, you should have received the presentation by e-mail. The slides and this speech are also available online on www.omvpetrom.com in the Investors section. This also includes the cautionary statement regarding forward-looking statements. Now let me hand over to Oana Bucur, Head of Strategic Finance Projects and Investor Relations, who will moderate the event.

Good afternoon, ladies and gentlemen, and thank you for joining us. We will have a presentation of the third quarter results, followed by a Q&A session. Christina Verchere, Chief Executive Officer, will provide the key highlights about the macroeconomic environment, our operational performance and strategy execution. Alina Popa, Chief Financial Officer, will give you more details on our financial performance and a brief outlook. Afterwards, they will be available to answer your questions. [Operator Instructions] I'm now handing over to Christina.

Good afternoon, ladies and gentlemen, and a warm welcome from my side. Thank you for joining our call. I hope you and your families are all safe and healthy. Please let me first draw your attention to our legal disclaimer, which you can read in detail on Slide 2. Let me start with some highlights regarding commodity prices and main currencies in the third quarter of 2021. Brent oil price increased during the quarter by almost 7% and by more than 70% year-on-year. In July and August, the evolution was slightly negative, reflecting concerns about economic growth and weak oil demand linked to rising COVID inflections. However, in September, oil prices increased, supported by the switch of the power producers to oil products, driven by the surge in natural gas prices. On the supply side, production outages caused by Hurricane Ida and high OPEC+ quota compliance also provided support to oil prices. Brent averaged $73.5 per barrel in the third quarter of this year. Euros traded at an average discount to Brent of $2.36 per barrel. The discount reached a 5-year high on a quarterly average basis on lower demand from refineries. In the third quarter of 2021 and on a year-on-year basis, the RON depreciated versus the U.S. dollar by 1% and against the euro by 2%. OMV Petrom's indicator refining margin reached $7.19 per barrel, significantly higher year-on-year as a result of increased product spreads for gasoline and middle distillates following economic recovery. Compared to the second quarter of 2021, it improved by 69%. European gas prices reflected on our graph by SEG, increased significantly in the third quarter to a level of EUR 47.1 per megawatt hour, almost double compared to the previous quarter and more than 5x higher year-on-year. Among the reasons for the spike in European gas prices are strong economic rebound following a long and cold winter that drained stockpiles, tighter than expected gas supply and other weather-related factors, including lower than usual availability of wind energy. The increase was also significant in the gas prices on the Romanian centralized markets, which on a day-ahead basis increased more than 4.5x to EUR 44.9 per megawatt hour. Baseload electricity prices in Romania almost tripled year-on-year and were around 72% higher quarter-on-quarter, marking a record high in the 15 years of the OPCOM's existence. This strong increase reflected in positive spot spreads in the third quarter despite higher gas and CO2 prices. The latter more than doubled year-on-year in the context of reduction in the number of CO2 allowances. Now looking at the Romanian environment. The country is currently facing an unprecedented health crisis in the context of record high numbers of COVID-19 cases, high community transmission of the virus and low vaccination rates. The state of alertness was maintained in the third quarter, and authorities tried to keep the fourth wave under control by implementing local restrictions aimed mainly at non-vaccinated persons. Starting the 25th of October, new measures have been implemented for 30 days and among them the green pass access in public buildings and institutions and in nonessential public places as well as the night lockdown. Being aware of our strategic role in ensuring energy supply for Romania, in OMV Petrom, we reinforced certain safety measures and wherever possible working for home and flexible working hours. Romanian GDP in the second quarter of 2021 increased by 14.4% year-on-year and by 1.9% quarter-on-quarter. For 2021, IMF estimates a GDP growth at 7% year-on-year, higher than the European average of 4.2%. The inflation index in the month of September 2021 versus September 2020 was 6.3% on an upward trend. In October, S&P, Moody's and Fitch, reconfirmed investment-grade for Romania. Moody's also revised its outlook for Romania from negative to stable, expecting solid economic growth, driven by dynamic private sector and utilization of next-generation EU funds. In the third quarter, the Romanian energy market, similar to other European energy markets saw a steep increase in gas and power prices. The authorities announced their intention to issue certain measures aiming to help the consumers to factor the exceptional rise in gas electricity prices projected to last at least through the winter. The law regarding vulnerable consumers was approved in September and will enter into force in November. It provides for various financial and non-financial aids aimed at vulnerable customers' categories defined based on income level, health reasons or living in remote or isolated areas. We welcome this law and consider that everyone should have access to energy to benefit from economic development and increased standard of living. On Wednesday, Parliament approved and today the President promulgated certain temporary measures regarding high gas and power invoices. These are applicable from the 1st of November 2021 to the 31st of March 2022 and include compensations to households and small and medium enterprises and other small users for the increase in gas and power prices. The small and medium enterprises, there are exemptions from the payment of regulated tariffs, such as transportation, distribution system services as well as from the payment of green certificates, the contribution for higher efficiency co-generation and the excise duty. For households in other categories such as hospitals, schools or social service providers, gas and power prices are capped. The amounts granted as compensation are recovered by the suppliers from the state budget. The law also allows -- the law also includes windfall tax on power producers of 80% for the revenues in excess of RON 450 per megawatt hour, but electricity producers using fossil fuels are exempted from this overtax. We are still assessing the impact of this law as it was just announced. However, at this stage, we do not see a significant impact. Looking at the energy sector in the third quarter of 2021, the Romanian demand for our products recovered to pre-crisis levels. Total demand for fuel, mainly gasoline and diesel, increased by 6.3% year-on-year and was 4.7% above the third quarter of 2019. Demand for retail fuels increased by around 8% when compared to both year-on-year and the third quarter of 2019. Non-retail demand was 2.4% up year-on-year, but 2.8% below the third quarter of 2019. Jet demand jumped 77% year-on-year from a very low base due to partial recovery in flights but remained 31% below the level of the same period in 2019. Gas demand decreased by an estimated 13% in the third quarter from a very high demand in the third quarter of last year, which was enabled by the unusually low gas price environment. Power demand was up 3%, while domestic power production remained flat year-on-year, Romania being a next importer of power in the third quarter, the same as last year. Nuclear had a higher contribution to the generation mix, while production from hydro renewables decreased year-on-year. Both gas and power demands were above the levels registered in the third quarter of 2019. On Slide 5, we present the key highlights for the quarter. At the group level, clean CCS operating result was the highest quarterly result since the fourth quarter of 2018 at RON 1.3 billion, more than 2x higher year-on-year. Our operating cash flow increased by 35% year-on-year to RON 2.3 billion, while clean CCS return on average capital employed reached 9.5 percentage points. In Downstream oil, clean CCS operating result was the highest quarterly result ever, reflecting the highest product sales and the excellent refinery utilization rate of 100%. In Downstream gas, the Brent power plant had higher production year-on-year, covering 10% of the Romanian power generation. In Upstream, we continued our drilling and workover program, still the group production was lower than expected due to the steep natural decline of our mature fields, the divestment of production assets in Kazakhstan in the second quarter of 2021, as well as planned and unplanned operational maintenance activities. In the third quarter, we continued our strategic focus on preparing OMV Petrom for capturing energy transition opportunities. In the context of steep natural decline in the domestic gas production, we see Black Sea gas as a solution for securing Romania's energy independence. Encouraging steps have been made through the finalization of negotiations between Romgaz and ExxonMobil. As already announced, after completion of the Romgaz Exxon deal, OMV Petrom will be the operator of the block. However, offshore oil amendment by year-end is critical for the next [indiscernible] gas to be extracted. In Downstream oil, the integration of MyAuchan proximity shopping stores into the modernized Petrom branded filling stations continued. To the 60 stores operational at the end of June, we added 31 in the third quarter of 2021, with a target to open in total 100 new stores by the end of this year. In June, we announced our entry into the LNG distribution market. And in September, we had our first delivery. Natural gas has multiple applications in power production, transportation and industry and can also contribute to reducing emissions and strengthening energy security, and LNG can represent a cleaner solution for the mobility sector. In May, we announced an electric mobility partnership with Renovatio to install at least 40 fast and ultrafast charging -- recharging stations in OMV and Petrom filling stations in Romania by the end of 2022. Considering also the partnership with Enel X and Eldrive signed in 2020, this can lead to a total of at least 80 EV recharging points to be in-store by the end of next year. At the end of September 2021, we had 15 EVs installed, of which 9 were done in the third quarter. On HSC, the total recordable injury rate on a 12-month rolling average basis was 0.47, and we further pursued our initiatives to reduce carbon emissions and the GHG intensity continued to decrease year-on-year. We take this opportunity to inform you that on the 7th of December, we will share our strategy 2030 and provide more details, including our approach to the energy transition for OMV Petrom. On Slide 6, I would like to present the operational performance, and I will start with Upstream. High department production decreased by 9% year-on-year in Romania, mainly due to natural decline in the main fields as well as operational maintenance activities, and by 13% in group levels due to prior mentioned quarters as well as the divestment of production assets in Kazakhstan in the second quarter of 2021. OpEx per barrel of oil equivalent increased by 17% year-on-year to a level of $13.19. This was driven mainly by the lower production available for sale and increased expenses, mainly from operational maintenance and other production support activities. In Downstream oil, we had an excellent refining utilization rate, supported by the economic recovery in the third quarter, which led to higher fuel demand. This compares favorably to the 86% utilization rate from the previous year, impacted by the plant shutdown in July 2020 and also the European average for the third quarter of 2021 of around 80%. A 10% increase in the retail sales volumes is an indication of a return to pre-crisis activity levels reflected by the solid fuel demand. Total refined product sales volumes recorded an 11% year-on-year increase, driven by robust demand in trading from the aviation business. In Downstream gas, total gas volumes decreased by 9% year-on-year, driven by lower equity production and weaker demand. Our gas sales volumes covered approximately 60% of the remaining gas demand as per our estimations. Net electrical output was 5% higher than in the third quarter of 2020 in the full context of full availability of the power plant and a low or a positive spot spreads derived from the record high price environment for power gas and CO2. The Brent power plant made an important role in the balancing ancillary services market, enabled by its high technical flexibility. Moving now to Slide 7. Total CapEx amounted to RON 1.6 billion in the first 9 months of 2021, 23% lower year-on-year. The majority was directed Upstream, where we finalized the drilling of 29 new wells and sidetracks and performed around 530 workover jobs. In Downstream oil, most of the investments were rooted to on growth projects in the tank farm area and to preliminary works related to coke drums replacement at Petrobrazi Refinery. At group level for 2021, we maintain our guidance for investments, excluding acquisitions of about RON 2.9 billion. In 2021, we expect exploration expenditures to be about RON 0.2 billion, similar to the 2020 level. In October, we started a new exploration well and started a new onshore 3D seismic campaign. The planned activities for the rest of the year include the continuation of the size of data processing for Bulgaria and the preparations for an offshore 3D seismic data collection campaign in Georgia. Please let me now hand over to Alina, who will go into the financials and outlook in detail.

Thank you, Christina, and good afternoon also from my side. I will continue the presentation on Slide 9, starting with some highlights from the income statement, we focus on the development of the third quarter of 2021 versus the similar period of 2020. Sales increased by 37% year-on-year, reflecting the higher sales of petroleum products in terms of both prices and volumes as well as the higher natural gas prices. These were partially offset by lower sales volumes of natural gas and electricity. Upstream clean operating results increased to a RON 442 million profit from a loss of RON 46 million last year in the context of higher commodity prices. Downstream gas, clean CCS operating result increased by 56% year-on-year, reflecting the significant improvement of the Downstream oil result, partially offset by the weaker result in Downstream gas. The clean consolidation line of RON 42 million on in the third quarter of this year reflects mainly the lower quantities of crude oil and petroleum products in stock. Consequently, the group clean CCS operating result increased year-on-year by more than 2x to RON 1.3 billion. For the third quarter of 2021, we recorded inventory holding gains of RON 102 million due to the increase of crude prices over the quarter. For comparison, in the third quarter of the previous year, we recorded inventory holding losses in amount of RON 53 million. Special items of minus RON 465 million, mainly referred to the forward contracts in Downstream gas. For comparison, the third quarter of last year included a net special charge of RON 562 million, mainly related to net impairments booked in Upstream as a result of the revision of the long-term oil price assumptions and offset by reversal of impairment for Brazi gas-fired power plant. The clean CCS net income attributable to stockholders more than doubled year-on-year to almost RON 1 billion. It increased year-on-year to a lower extent than the CCCS operating results that in the third quarter of 2021, the financial results reflected higher interest expenses in relation to the discounting of receivables. The reported net income attributable to stockholders was RON 696 million from a loss of RON 41 million in the third quarter of last year. Let me go on to Slide 10, which shows the major building blocks for the development of the clean CCS operating results in the third quarter of 2021. I will start in Upstream, where clean operating results switched from a loss to a profit. The positive market effect deviation of RON 771 million was triggered mainly by steep increase in oil price. Jet market prices also recorded a high increase, but this is largely offset by gas supplementary taxes and the effect of taxation being partly based on tax that was significantly higher than realized price. The negative volume deviation of RON 202 million is due to the 10% lower hydrocarbon sales. Clean exploration expenses increased by RON 3 million, and asset deviations include mainly higher production costs, driven by lower production volumes, cost inflation and higher depreciation charges due to impairments. Looking at the lower chart, the clean CCS operating result of Downstream increased by 56% compared to the third quarter of 2020, due to excellent results in Downstream oil, partly offset by the weaker results in Downstream gas. The positive market effect reflects the increasing refining margins as a result of higher product spreads for both gasoline and middle distillates. Operational effects in Downstream oil reflect the higher year-on-year volumes for refined products as well as the better operational performance. Last year's results also reflected a positive effect of around RON 60 million from refining hedging. While in the third quarter of this year, the impact was rather narrower. In Downstream gas, the power business result was affected by lower contribution of forward contracts in the context of increasing electricity prices, partly compensated by the positive impact from balancing and ancillary services, while the gas business had a good contribution. On Slide 11, I would like to continue with the highlights of our cash flow statement. In the third quarter of 2021, we achieved an operating cash flow of RON 2.3 billion, 35% higher year-on-year, reflecting the positive trend of the operating results and the positive net working capital changes. Regarding the evolution of the net working capital, in the third quarter of 2021, we recorded a cash inflow of RON 136 million compared to a cash inflow of RON 366 million in the third quarter of 2020. The inflow in the third quarter of 2021 was mainly due to higher trade payables in relation to the acquisition of crude oil and petroleum products due to improved demand and quotation. This was partly counterbalanced by the increase in inventories due to improved quotations as well as by the increase in receivables, triggered by higher volumes of petroleum products and higher selling prices for petroleum products, gas and electricity. Our net payments for investments amounted RON 0.55 billion in the third quarter of 2021 versus RON 0.66 billion in the third quarter of 2020. The net cash position increased to RON 8.2 billion at the end of the third quarter of 2021 versus RON 5.8 billion at the end of the third quarter of 2020. Let me conclude our presentation with the outlook on Slide 12. We expect Brent oil price in 2021 to be around $70 per barrel, reflecting latest developments. Regarding production, the slightly higher natural decline of our main producing fields as well as onetime effect of unplanned maintenance works in Romania has led to a change in our forecast. We aim to contain the year-on-year hydrocarbon production decline, excluding portfolio optimization was around 7%, and we expect a lower decline for oil than for gas. Starting the second quarter of 2021, we witnessed an upward trend in cost for electricity, fuel and certain materials, coupled with fading supplier discounts based on oil price recovery, leading to higher rates. Therefore, we currently see OpEx around $13 per barrel for oil equivalent in 2021. In Downstream oil, we have increased our estimates regarding 2021 refining margins to around $5 per barrel, given the evolution in the latest month, while we have maintained our expectations in terms of refinery utilization rate. With regard to organic free cash flow after dividends, we expect it to be positive. In terms of demand, oil products and power are expected to be above 2020, while gas to be brought dissimilar to 2020. Our total refined product sales and net electrical output are forecasted to be higher than in 2020, while total gas sales volumes are estimated to be lower due to regulatory requirements in 2020 and lower supply. We currently do not expect new full lockdown. But if this is the case, we have a good track record in managing our operations. With regards to our guidance for the year 2022 to 2023, we currently do not have changes to our previous estimates. We take this opportunity to also inform you that starting 1st of January 2022, OMV Petrom business segment will be renamed as follows: Upstream to Exploration and Production, Downstream oil to Refining and Marketing and Downstream gas to Gas and Power. With this, I close our presentation, and thank you for your attention. We are now available for your questions.

[Operator Instructions] We will now take the first question from Tamas Pletser from Erste Group Research. Tamas?

I got 2 questions. First of all, based on this last slide you showed that -- you mentioned the 5% decline rate and the RON 3.8 billion CapEx. Would it make sense -- I suppose you did your math. But would it make sense to increase the CapEx in order to arrest the decline rate or you don't really see this kind of an investment to be feasible going forward? That would be my first question. So can you just elaborate about the deposition of your current production? Why is the high decline rate? And can you somehow arrest it? And my second question regarding what you said Christina, in the beginning about this new Romanian subsidy system. It was not really clear for me why the impact is minimum on your activity. That's what somehow I understood what you said.

Okay. Thanks, Tamas. Nice to hear from you. So I think with regards to this new law, I think the 2 assets -- and I think we're going to be fair, we are just analyzing it. Obviously, we've got it on Wednesday, it got promulgated today, but maybe the 2 things that I would just highlight. One, for the power business, the price gap does not include fossil fuels. Therefore, it doesn't include Brazi. So this is -- we don't see an impact, therefore, to our power business for this. And with regards to the gas price cap it's for households, and we don't have many households in our customer base. And this is why we think it has little impact with regards to our numbers. But we are still analyzing it. But that will be the basic rationale, Tamas, as to why we don't see it having too much impact to us overall. With regard to -- yes, with regards to production, I think maybe I'll start with saying, okay, first of all, last time, we told you that we were going from 5% to 6%. This was in part to steeper decline that we were seeing. I think in part because we had actually -- if you recall, our CapEx had gone lower in 2020 and 2021, just because of the unknown volatility of what was going on with prices with regards to the COVID and the implications on energy prices. For this quarter, what we saw is actually some -- ultimately some unplanned shutdowns and maintenance activities that took us to the 7% of that. So -- and what we see going forward is -- and why we hold to the 5% is actually, we do anticipate in 2022 -- and obviously, we'll go into this more detail when we open the year with you next year, increasing our CapEx levels into Upstream and therefore, being able to mitigate a higher degree of the decline as we go forward, that there will be a little bit of a lag impact. So 2022 might be different than 2023 on that. But this is why we do that. So to your point, we anticipate increasing our spend into Upstream going forward into 2022.

We will now go to the next question from Philippe Dubois, Societe Generale.

Just one quick follow-up on gas prices. Can you give us an update on the renegotiation of bilateral contracts? And if you could remind us as well, what percentage of your sales are those bilateral contracts?

Alina, do you want to?

Yes. Hello, Philippe, from my side. So how we do is, every year for our bilateral contract, we start negotiation for the new gas year. And the gas year starts in October to September following the year. So partly, we have negotiated new contracts with our customers, and there are also some going on right now as we speak. So with regards to the impact of that, indeed, you should expect in Q4 to see some increase in our gas prices versus Q3, which in Q3, most of our contracts were coming from the previous year that's why it's at lower level. But important to note is that to consider the impact of taxation on the gas -- our results, because gas prices -- gas sales are significantly impacted by the taxation in 2 dimensions. One is about the supplementary taxation, which grows to 80% above RON 85 per megawatt. And then the second is this impact of the reference price, you might remember reference prices related to sales, which is higher than our realized price, and this also impacts quite significantly the realized gas prices for Petrom.

[Operator Instructions] We will now go to the next question from Irina Railean.

I'd like to ask regarding the OpEx, if you could provide us more details. What can we expect from the OpEx per BOE in the Upstream next 3, 4 quarters, considering the recent increases that we saw? And the second question is related to the gas prices, which you could detail a little bit to what can we expect in the following quarters. Why did gas prices in Romania surge so much? And if the level that we can see now on the Romanian commodity exchange, are they indicative to what can really happen in the next quarter? And my last question relates to the potential expected impact from the divestment to Dacian Petroleum, what this can be seen in terms of million BOEs for production.

Okay. I'll take your OpEx per BOE and Alina will do the gas prices, and then I'll come back to that Dacian, if that's okay. On the OpEx of BOE, I think what we were indicating is we are definitely seeing 2 aspects. I think one is upward pressure on the absolute costs, driven by the environment, electricity, CO2, inflation in general that's going on. Combined by, as we said, slightly steeper decline. In our prediction that we -- I think we're saying is that we will see us going to about $13 per barrel over the next couple of years for that. So we are seeing the upward pressure.

With regards to the gas price, we see indeed -- I mean, we all see gas prices quite at a high level to continue in Q4 and most likely in Q1 next year until we would see at European level new supply possible and also we could see [ Northeast ] too coming on still. So gas prices now, we will continue to remain at a high level until the Q2 next year where we could see some softening of gas prices. With regards to the impact on our side, I mentioned in the previous question, I don't know if you need further details, please, please tell me.

No, okay. Seems pretty clear.

Okay.

And then on Dacian, this is actually sort of come back to our strategy of consolidation and focus on our core assets and removing the smaller ones that don't attract as much investment after our portfolio. It's actually 40 fields, so quite a large number of fields, but actually quite a small amount of production, accounts to about 1% of our production, about 1,300 barrels a day. So a small but important divestment for us. We're still working on finalizing the completion of that, having signed it. So just working through the regulatory process to get that closed.

So far, no additional participants has registered for the Q&A session. [Operator Instructions] We have another question from Jonathan Lamb. Thank you for your questions.

You've increased the number of MyAuchan stores quite a lot in the quarter. And I'm wondering what kind of uptick in sales, both the fuels and nonfuels you're seeing as you add these stores to your fore costs? Is that having a visible impact on fuel, for example?

Yes. We don't disclose that level of granularity with regards to it. But I think what we can say is that we are very happy with it. It is proving to be, we believe, very successful for us, and we're also very pleased with the progress of which we're managing to get them all upgraded to that. But Jonathan, at this point in time, we don't disclose that level of granularity. But it's going well, that's what I would say. It's going really well, and we believe that it offers a really distinctive customer service for those people which used come into our petrol stations.

Do you have any targets for where you're going to be this time next year or the end of next year? Or...

Yes. The basic goal is that we -- our goal is to do 400, roughly 100 a year. And I would say right now, we're slightly ahead of that. So we're going to take 4 years to do the Petrom set of filling stations that we've got. So 400 of 4 years, and we're ahead of target.

Another question on the Bulgarian business. Very little has been said about that business. And you were saying in the presentation you're looking at new drilling targets. What kind of timetable do you see for the development of that -- the offshore in Bulgaria?

Okay. So for Bulgaria, what we've been doing actually since we bought into it is reprocessing the seismic. Just as a reminder, we bought into the block. Total is the operator. We are there with them, and we've been processing the seismic to decide on what the next drill option is. We're looking at that but the potential either to drill a well in 2022 or 2023. So -- and this is a reminder to everybody, that's the block that sits in the Bulgarian waters totally adjacent to the Neptun block. So this is why we believe we understand the geology well because, obviously, we understand majority of the Neptun block there. Hope that answers that for you, Jonathan, yes?

I guess so. I'm just wondering if everything went to plan, when would you be thinking that, that could be producing if it ever does?

On the basis, obviously, commercial discovery and then appraisal wells after that, you're probably will be looking -- and then the development plan, probably this amount of time trying to get towards the end of the decade.

As there are no more questions, I want to thank you again for taking part in our conference call. For further information, please do not hesitate to contact our Investor Relations team. Until our next meeting, we wish you all the best. Thank you, and stay safe.

That concludes today's conference call. Thank you for participation. Ladies and gentlemen, you may now disconnect.