OQ Gas Networks SAOG (OQGN) Earnings Call Transcript & Summary

[Foreign Language] Can someone confirm if we are audible, please? Can you hear us? [Foreign Language] Okay. So we are audible. Thank you. [Foreign Language] Hello, and welcome to OQGN Q3 2024 Performance and Results Conference Call. So hello, and welcome to OGN Q3 2024 Performance and Results Conference Call. My name is Ahmed, and I'm handling Investor Relations. Before we begin, I would like to provide a brief in Arabic. [Foreign Language] Welcome once again, and I am pleased to introduce the executive management team, our CEO, Mr. Mansoor Al Abdali; our Vice President Finance, Mr. Khalid Al Qassabi; and our Vice President, Business Development and Commercial, Saif Al Hosni. The structure of the presentation, Mr. Mansoor will begin by highlighting the key statistics and the achievement for the 9 months of the year and followed by Saif, who will discuss the growth and future aspiration. Finally, Khalid will take you through the company financial performance for the 9 months of the year. And after that, we will open the Q&A session. So to begin, I will hand it to Mansoor.

[Foreign Language] We would like to welcome all investors and people interested on OQGN business. And here, we'll be sharing with you the performance of the company. We'll be focusing on the financial performance, but also we'll give a reflection on OQGN in general business and aspiration for growth. So if we move to the next -- so just to remind each other, OQGN, as you see it in the map of the Sultanate of Oman is owning a large network of high-pressure transmission pipelines. They extend all the way from the far north of the country connected to the Dolphin at the border of UAE and all the way to the Southern part of the country, where we are also supplying critical power plants and industries in the area -- in the region of Salalah. The company, as we all know, is the exclusive owner and operator of the gas network in Oman, and we have signed a concession agreement for 50 years expiring the year 2070. We leverage on a steady financial performance as well as on a steady growth programs. We are a regulated entity with an independent regulator, APSR, the Authority for Public Services Regulations. And we're very proud also to maintain certain standards where to demonstrate capability of the organization in various elements of the business. So if we move on to the next slide, you can see our network, more than 4,200 kilometers of high pressure network -- of high-pressure gas transmissions. We have a large -- well, a reasonably qualified and dedicated team. our -- the number of [ POs ] almost 500. We have almost -- not really -- we have more than 130 connected parties, and they are scattered along the entire industries and power sectors of the country. And we're very proud of maintaining a very high standard of network availability of 99.99%. For the 3 quarters of this year, we have already transported 32 billion cubic meters of [indiscernible] almost 6% compared to the same period last year. I would now request Saif to give a reflection on growth and future aspirations.

Thank you, Mansoor. So we start with the growth in the natural gas business. So we continue to expand our asset base through delivering growth projects, either greenfield or brownfield in addition to sustaining CapEx projects, which focus on the operation and maintenance and reliability of our infrastructure across the entirety of the country, as can be depicted from the figure shown on the screen in order to ultimately achieve the forecasted target of growth in the network, hence, resulting in the growth in the entire capacity of the infrastructure. And the focus of the growth, as can be seen from the map is at least during this price control towards the South, Duqm and the Sur areas. We now move to growth aspirations when it comes to alternative energy or energy transition and starting with hydrogen. So OQGN, as the national champions for hydrogen transportation, continues to support the policymaker and the green hydrogen orchestrator, Hydrom, as part of their technical commercial analysis on how to make the green hydrogen ecosystem feasible for all, either the developers, the infrastructure providers or even for the market. But at the same time, OQGN is conducting its own internal strategy study, which focuses on commercializing and deployment of a common use infrastructure that can cater all the hydrogen ecosystem and supporting Hydrom and the developers as well. And as in line with Hydrom's plans, the focus areas of the studies are towards [ Stockholm ] and Salalah, at least for the first milestone, which is about 2030. Moving on to the next chapter of -- or the next area of focus in our [ non-rap ] growth, which is transportation of CO2. Similarly, OQGN is committed to supporting the policymaker and it is advising the Ministry of Energy and Minerals on a regulatory and technical commercial framework, which would serve the CO2 or the CCUS ecosystem and where OQGN comes into play is an enabler to link sources of emissions to potential things, either for utilization or for storage. And we're also supporting Trailblazer Project. So these are advanced projects for prime movers when it comes to CCUS projects, namely towards the Duqm area with the [ Shell 2 Horizon ] project and towards the north where OQGN is working with the Sohar Industrial Estate, Sohar port and free zones and obviously as well to conceptualize a potential project that would involve long CO2 transportation pipelines from sources to sink. And these are still in early phases. And hopefully, we can get details by Q2 of next year. And with that, we move to the [ Q3 ] performance.

Okay. So I'll make -- this slide here is giving a reflection on the [ HSE ] performance of the company. We're very proud to have completed more than 13 million LTI-free man hours across all our operations. Okay. And also, we're very proud of the number of kilometers that was driven within our operations of more than 21 million kilometers, which was incident free. You can see also some of the statistics. It's unfortunate also to report a process safety incident occurred at the end of our last month in our operations, where a third party without complying with company procedures drilled into one of our pipelines, resulting in a minor incident to our -- minor damage to one of our assets, but this was contained immediately. However, we reported a spill or venting higher than our targets. So this is in general, company performance. We will now focus on the financial performance of the company, and Khalid will be taking us through that. So Khal, please? Let's skip this slide.

Probably we will be skipping some of the slides. They are already there in the website. You can refer to them. You can ask questions. You have the channel where you ask the questions, but very, very high level in the income side of the financial, you see our revenue has dropped almost 11%, but the revenue mix stayed solid. The main contributor to the drop in the revenue is actually the one-off that is now happening as a termination of the hedge of OMR 9 million or OMR 8.8 million. But also, when I say the revenue mix is the main contributor to this is in construction revenue, where we have a lower construction revenue that always attributes to also a higher cost. So we will also have a similar drop in the OpEx side when it comes to the cost. But the good thing is we have a better revenue when it comes to OpEx allowance that comes with a higher profit, but also on the finance income because of the revision in the WACC and a growth in the RAB assets. So yes, there is a drop, but also the revenue mix have changed to a better revenue -- to a better profit-making revenue. Moving on to the next slide, probably we'll skip the next slide because this slide will be more elaborated as we go on in the financial slide. But the asset evolution, slight behind when it comes to construction, as I said, in the revenue side, but there is already a mitigation plan to reform the position of the company to have more assets coming in or more construction coming in this quarter. Now when it comes to the growth, it's actually more intense on the sustaining CapEx that is already happening. But also on the growth, we have a revision of prior year value of [ WACC done ] happened during this year of OMR 3 million. Plus there was also withholding amount that was supposed to be -- which was also withhold to one of the suppliers that was accrued previously as the value of [ WACC done ] in the growth, but it was disallowed as a payment to one of the vendors and closed out with a better cost for the project. But there is still a target of close to 3% incremental year-on-year when it comes to RAB asset. Moving on the OpEx side. Construction, as we said, construction have a bit of differences between -- not a bit of -- but there is a difference between last year and this year, similar period. But as I said, there is a formation coming on in this quarter. But the bottom side is the other elements of the OpEx, the circle percentage represent how much of our cost is getting recovered out of the OpEx allowances. So compared to last year, or the last price control, we have a better OpEx allowances recovered -- we have better OpEx expenditure recovered through OpEx allowances at 98% of our costs being recovered from the OpEx allowance to 92.6%. Now the main contributor to the growth or to the increase in the OpEx side is in employee cost and employee-related costs and that because of the change in the accounting, we used to capitalize the project delivery cost and now we get an expense out. But also one of the elements is last year, we have accrued for variable pay toward the end of the year, while this year, we also have slight normalization of the cost when it comes to the variable pay. Overall, this should more or less be closer to last year OpEx side, except for the accounting change when it comes to project delivery cost. Moving on. On the cash generation, we are at 47.2%. We have less spend on the capital, and that's why we are sitting currently in good cash, but it will be going back to the 30 levels as the cash conversion once we finalize the Q4 with the spend on the asset growth. This is also a normal slide, so I won't elaborate more. It's actually a similar size of what we have seen last quarter. We're still maintaining the same level of adjusted net debt to regulated EBITDA at 2.9x and adjusted net debt to RAB at 0.34x. The increase on the debt to RAB is because we have withdrawn of the loan during the year. Moving on, probably also this is a similar slide of what we have promised last time is the bridge from IFRS accounts to a regulated financial statement. Net profit in regulated or net adjusted EBITDA at 76% compared to IFRS at 55.4%. I will probably move to the next slide where we elaborate more on the changes that has happened between Q or last year and this year when it comes to top line and also Q-on-Q. So we want to elaborate more on what has happened in revenue, basically to normalize the revenue. In the far left stack bar, you will see that the total income as 2023 was enhanced by the OMR 9 million that was a one-off accounting as of the termination of the hedge. So to normalize last year top line revenue, it would have been at OMR 121 million. There is additional to that when it comes to this year of OMR 5 million transmission revenue, that's higher allowances on the OpEx side by the regulator, but also we have a better finance income because of a higher RAB value and a better WACC. The setback is that what the company is going to try to recover as of Q4 is the construction revenue, which I said is also coming with a higher cost with a very little margin, but that's actually the main contributor to the revenue drop in Q3 2024 compared to Q3 2023. But also, we have a one-off that has attributed to an increase in revenue of this year is the allowance of last price control. So the allowance of the last price control is a reimbursement that the regulator have agreed to give to the company as a compensation for what they have disallowed from the last price control. That's the OMR 5 million. And that will actually lead us to the quarter year-to-date revenue of OMR 115 million of 2024, but this shows the top line. If we go to the next slide, in the net profit in a similar manner, you will see the net profit of last year, year-to-date September was at OMR 44.8 million, but that was enhanced by a one-off accounting of the termination of the hedge, as I said earlier in the revenue, so OMR 8.8 million or OMR 9 million. But also, there was also interest waiver on the shareholder loans that we have previously, and we have refinanced that shareholder loan to OQ SAOC, and that represents OMR 5.4 million. The profit of last year, similar quarter year-to-date would have been OMR 30.6 million. Waterfall to 2024, there is additional in transmission revenue. Finance income has increased a bit of more OpEx, mainly to do with employee-related costs, as I said, the change in accounting. That would have leaved us with OMR 32 million or almost OMR 33 million net profit compared to OMR 30 million last year. So there is an incremental of OMR 2.2 million in the net profit if there have been no one-off accounting increase that happened last year. In addition to that, this year, we have also one-off that is the allowance of the last price controller for OMR 5 million that also have enhanced the profitability of this year at OMR 38.1 million. Next, I'll probably give more comparison to the quarter. I get also question why there was a drop in the quarter profitability. Last quarter, we have landed into OMR 14 million profitability -- sorry, quarter 1 have landed at OMR 14 million. Adding to that, the OpEx allowance of OMR 3 million, we have a higher cost of OMR 2 million. But also in Q2, we have landed in a similar quarter profitability. Now what's the difference between Q2 and Q4? Last quarter, we have recognized a full reimbursement of the Price Control 2. you wouldn't expect that to come also in Q3 because it was recognized in full in the first half of the year. So removing that, that has an impact of OMR 4 million. But we have also spent lower in the OpEx and slightly in other costs and other costs mainly attributes to the drop on the construction revenue, which I said is going to be also relooked and try to catch it up with the 3% incremental year-on-year. So we're still in the target when it comes to the RAB asset, but I would say with the current net -- with the current interest rate, the normalized for the year profitability will be in the average of OMR 11 to OMR 12 million. But hopefully, with a better interest rate, we would be aiming for more. I think this would be the last slide in our presentation today. So we'll open up for any questions.

Thank you, Khalid, Saif and Mansoor, for the presentation. Now as Khalid said, we will open for the questions. [Operator Instructions] We have a question coming from Sashank Lanka.

I just have 2 questions. First is on the construction revenue. Can you just elaborate on the reason why it was weak in the third quarter and why you expect it to pick up in Q4? And just in line with that, I think my second question is also on your RAB increase. You said 3% year-on-year for '24 versus '23. But in the first 9 months, you're broadly flat. So do you expect such a substantial increase in Q4?

Okay. A similar question was asked last quarter. So usually, in the first year of the price control, you tend to wait for regulator to see what it's allowed in the price control. The first year is actually when we start to put down some [ POs ] for any growth potential with the company, especially if those growth are not carried forward from the subsequent years. But a major drop in the construction comes in sustaining CapEx. I mean I don't want to announce how much is for October already, but we have spent reforming -- some reforming action to actually expedite the sustaining CapEx, and it's coming online to what we have said closer to 3%. But also some of the contribution to the drop is actually over accrual in the construction revenue last year was reversed in beginning of this year. And there was also some withholding amount as a payment to one of the vendors for disputed work that was potentially -- that was finally get agreed not to pay, and it was also accrued as part of the project cost that was reversed also of last month. But as I said, quarter 4 is showing a potential of revision on spend in the CapEx. We're still targeting still around the 3%. So the 3% means an investment of around OMR 25 million on the CapEx on the fourth quarter.

In general, we expect our net profit to be even better from last year, isn't it?

And excluding the one-off, yes, it will be better. It will be better, yes.

We're primarily affected by this -- the one-off...

Exactly.

cases hit us last year and even -- we benefited although this year by the regulator compensating us for what was trimmed during price control.

I hope it's clear, Sashank.

Yes. Just a follow-up. So I think you mentioned the net profit you expect around OMR 11 million to OMR 12 million on average. So I think Q1 you did OMR 14 million, Q2 around OMR 14 million again, Q3 was OMR 10 million. So broadly, I think the average is around OMR 13 million. So we should assume that it's going to be a similar number, around OMR 13 million, OMR 14 million in Q4. Any guidance you can give there?

I'm saying year-to-date normalized would be from OMR 11 million to OMR 12 million. But of course, excluding the one-off of OMR 5 million on the first quarter. Now there is a little of a margin that comes along with construction revenue usually at 7.79% of the construction revenue comes as a margin as well as the profitability. And that's what would make us up to around the OMR 12 million. Of course, now with the better financing costs, hopefully, will turn out to a good fall-through also on the net profit.

Thank you, Sashank. We have a question from [ Akresh Kumar ].

Congratulations on your results. Two questions from my end. First is, can you elaborate more on the employee cost accounting change that you referred to? So will this be -- would that mean that throughout the year annually, it should be the same? Or is it we are going to see higher revenues? First question is that. And second is, so when you say -- when you strip out the PC2 OpEx allowance that you have got, is it completely out of the picture? Or can we see it in next quarter as well? These 2 questions, please.

Yes. Okay. In the employee cost, as I said, the previous price controls, the first and the second price control, there was an allowance by the regulator to have this capitalized as part of the growth. The third, price control. It was actually allowed but part of the OpEx allowance. So that's why we thought maybe we have a similar -- we will have to be captured as a cost since it comes as a revenue as part of the OpEx allowance. So it is a normal rate. You should not be seeing a major change year-on-year when it comes to employee-related costs going forward because that accounting change this year. So -- and the other question you said -- so the PC2 allowance, yes, there was a PC2 allowance of OMR 5 million, OMR 5.3 million. That was all absorbed in the first half of the year. It would actually have been captured the first month of the year. And since it's already allowed by the regulator as per auditor recommendation to have that recorded in the first quarter. So there is no -- nothing left from the Price Control 2 is to be captured in the future. It has already been captured in the first half of the year.

Just if I can just ask one more question. So you mentioned that given the decrease in interest rates, you should be benefiting from that finance cost. So when the regulator sets the WACC for you, they would take into consideration all this. So are you allowed to reap the benefit of declining interest rate or there might be a clawback that regulator might take? How does the framework work?

Yes. The WACC is set for the 4 years price control. So there will be no revision on the WACC setting, except in the extreme scenarios where we would have to place a representation to the regulator if the WACC -- if the cost of debt goes in the other direction where it hurts companies financially. But it allows for representation to the regulator. You go back and revise it upward, I would say. But -- yes, Mansoor?