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

Hello, and welcome, everyone. My name is Ahmed, I am Investor Relations Manager of OQGN. Thank you for joining us today to discuss our Q2 2025 performance and results. Before we start, I will give a brief in Arabic. [Foreign Language] Thank you again for joining us today. And I would like to introduce the executive management team, Engineer Mansoor Al Abdali, the company's CEO; Engineer Saif Al Hosni, Chief Business Development and Commercial; Engineer Khalifa Al Makhmari, Chief Project -- Chief Operations; and Mr. Khaled Al-Qassabi, Chief Financial Officer. So the presentation will start with an overview of the achievement followed by an aspiration and future growth, and Khaled will take you and deep dive on the financials. And we will finalize the presentation by opening the Q&A session. So to begin, I will hand it to Engineer Mansoor.

So thank you very much for joining us in this session where it was stated by our Investor Relations manager that we will give overview of company and company performance for the first half of 2025. Move on to the next slide, please, Ahmed? Okay. And just a reminder that OQGN is the exclusive owner and operator of the gas transportation network in Oman, a network of more than 4,000 kilometers that extends from the far northern part of the country to the far South. We have more than 130 connected parties and the network has a capacity -- a total capacity of almost more than 70 billion. And however, there is still usage of further utilization. On the financial performance, we'll be talking about it very shortly. But also in a nutshell, OQGN has been realized in the energy transition ecosystem in the country as a national infrastructure provider for hydrogen and CO2. As we speak, we are working closely with key policymakers and stakeholders in the country to venture into this new business and to determine what will be the role of OQGN. We operate within a long-term concession up to the year 2070 signed directly with the Government of Oman. We have ownership responsible for the community in the facility that's integrated gas company. This is a 100% owned -- government-owned entity established in the year 2022 to oversee the development in terms of procurement and sale of natural gas. If we move on to the next slide. And as you can see here, the network coverage, the graphical spread, very proudly to say since end of last year until now, we have commissioned almost 3 major projects in -- or added 3 major assets to our network, and that is the 117 kilometer towards the southern part of the country as well as we have recently commissioned the 48-inch 65-kilometer long, Rich And Lean Project towards the Oman LNG stream. And the idea of this project beside creating a capacity, it also allow us to maneuver the rich molecules of gas towards the stream that creates the highest value. And in addition, we also are working closely with Duqm Authority, which is a newly established -- which is a free zone, promoting investment in the country. And now we have commissioned a 17-kilometer pipeline as we speak. Also, we are considerate of other connectivity to make sure the area is fully energy sourced. And then a key project we are also working on is a 42-inch by 190-kilometer pipeline, and that's to add further capacity into the stream moving towards Sohar Industrial area, and that will also be supporting the Total bunker project, which, as we speak, is already under construction. Just again to remind ourselves OQGN is owned by OQ, which is 100% owned by the Oman Investment Authority in Oman. The rest of the shares is listed on the Muscat Stock Exchange and we do have 3 important anchor investors, and that's Saudi Investment fund owning almost 5%, then we have Falcon, which is the entity representing Qatar Investment Authority and also strategically partnering with Fluxys, who are very proudly saying they are a similar business to OQGN in Belgium. And we're very happy to have them as an investor holding their shares since the time of listing in 2023 until now and collaborating with us in several fronts, especially in the alternative energies. The rest of the shares are in the Muscat Stock Exchange, either owned by institutions or retailers. Moving on high level on statistics on HSE performance. As you can see, we are very proud of our HSE performance. And it's -- this demonstrate resilience of company business and commitment to HSE. And this, you can see it well addressed in this graph. Of course, we can talk about it more if there is an interest from any of the attendees. Very quickly, big-ticket items for the first half, 100% availability of the network. We also are proud to have scored on our satisfaction survey high score amongst our connected parties. We have delivered more than 20 billion cubic meters of gas in the various industries. As I mentioned earlier, commissioning of a major project of 48-inch, but also connection projects, especially to some investors in Sohar and of course, the acquisition of an NGLE asset supplying the NGLE stream in Fahud or connecting NGLE plant in Fahud to our network. In terms of financial performance, I don't want to -- I think I will leave it to Khaled, when it comes to the performance, what we also see very impressive results. And in sustainability, we are a key player in sustainability. We've been honored to receive the silver award for sustainability, and we have issued our sustainability report already in the first half of this year. We do have a collaboration agreement with Fluxys, especially in the transportation or specifically the transportation or the development of a common used infrastructure for hydrogen. And of course, we are also working out to support a national agenda, especially in the decarbonization, where we are working with key stakeholders and policymakers on a project or a pilot project to decarbonize Sohar, but also to secure an offtake for the community for enhancement of oil recovery. So this is in a nutshell, very proud results for us in first half of the year. Now we can move on to more in-depth on growth and aspiration before we land into the financial performance of the company.

Thank you, Mansoor. So when it comes to growth in our gas regulated business, we continue expanding our network as stipulated in our plans in price control #3, which started in 2024 and ends by the end of 2027. The main clusters are focused within this Price Control and as was mentioned by the CEO previously, is a major 193-kilometer 42-inch pipeline from Fahud to Sohar, which has been recently awarded and is under execution. The mechanical completion -- substantial completion of the 65-kilometer, 48-inch in Sohar has been already completed. And we continue growing in Duqm, especially towards the port, to support the growing industry in the port area, which requires gas. And we are working closely to sanction a couple of these projects, which will be announced soon and in due time. And we hopefully target to achieve or to cross 4,300 kilometers of pipeline by the end of this year. When it comes to the growth in our nongas business, starting with our efforts to support the government in decarbonization efforts and also to expand and diversify our portfolio, we've concluded supporting MEM in the National CCUS and regulatory and policy framework where OQGN was leading the transportation task force, and that framework came up with several principles. Most importantly, for OQGN is that OQGN was recognized as the CO2 transporter in the country, eventually owning, operating and maintaining CO2 networks and pipelines across Oman. And another update is that we are now converging and focusing on a particular opportunity towards the northern part of Oman, which is to support an EOR project with Oxy, where the idea is to try to support them and conceptualizing how CO2 can be stably rooted from emission sites, like Sohar and Ibri all the way to a block in the north of Oman operated by Oxy for enhanced oil recovery. And both teams with the support of the policymaker are converging towards a feasibility for a concept realization of this opportunity. When it comes to hydrogen, we continue supporting the policymaker and the orchestrator hydro in achieving the first milestone of the country, which is by 2030. The routing in both Duqm and Sohar has been concluded with the pre-FEEDs and overall designs ready and the -- and what's importantly, a new development here is that OQGN Fluxys signed a cooperation agreement to jointly develop the hydrogen infrastructure in the country, where risks and costs will be shared between these 2 companies and furthermore utilization of the expertise from Fluxys' story and developments within this sector. And with that, I give the mic to my colleague, Khaled, to continue.

Thank you, everyone. So let's get some refresher on the regulatory frameworks. It's a well-defined RAB framework in place since 2018 allowing lower risk and more predictable returns. The revenue buildup in the regulatory financial start with the regulated or allowed return on capital, which is basically a multiplication of the average RAB assets into the WACC or the agreed WACC, which is currently in this Price Control at 7.79%. Added into that the depreciation allowance and allowed OpEx plus some allowed pass-through, which has to do with the operational need for our network. And if there is any tax allowance -- if there is any tax payments to the tax authority will be also compensated as part of allowance by the regulator. So this framework does not have any effect on the gas prices or the volumes, has been mentioned before, and it's well predictable throughout the Price Control period, which is ending for this Price Control period at 2027, as I said, with a WACC currently set at 7.79%. On the financial part, the left-hand side, it shows a top line of our financial, which is revenue. And the revenue, as you can see in the slide, has grown 11% compared to the similar to last year for the first half and basically driven by the construction revenue, and you would see also a revenue mix. Having said a slightly lower net profit because the revenue that was there in last year, as a one-off was the allowance of the previous price control. comes with 100% fall-through in the net profit. And that's why you see net profit for this half, slightly lower. And without this one-off, we would have been in a better position in terms of net profit. On the right-hand side, you will also see that our RAB assets have grown for the first half of almost -- by almost 1.7%, which is in line in our promises earlier that our RAB asset will keep and continue on average of 3% or probably potentially more than the 3% for this year to cater for whatever is slipped from the previous year. So you also see the mix also concession receivable and contract assets. Usually, what is classified as the contract asset is an asset that hasn't yet been in operation or not capitalized. So it does not entail any cash inflow as a depreciation from the APSR. So our cash flow will be improved because of the amount of the capitalized asset that we have in the portfolio currently. So you see that the difference between last year and this year is almost OMR 116 million wasn't capitalized last year, similar half to OMR 77 million only for this year. So that will entail more cash to come in because this investment that was put in before will start to generate revenue as a depreciation. Moving on to the next slide. The top graph shows -- is actually showing the construction cost, which has a similar replica in the construction revenue as we saw in the previous slide. So the cost has increased as an effect also has increased the revenue in the previous slide. The bottom side, it shows the OpEx and admin expenditure, slight also increase on the employee-related costs is to do or to meet with headcount capacity to align with optimum business needs and slight increase on the merits expenditure. But the total recovery out of this total asset is almost similar to last year's first half of 96.5%. So we have recovered most of this cost through our OpEx allowance. The cash generation for the first half is we've generated almost 51%, which is in line with our forecast that our cash generation will always be between the 40% to 50% conversion. So this is in line to our forecast and a bit better than the first half of last year. On the capital structure, the slide also depicts we are still having this headroom for future growth. And compared to our peers, we reasonably better and lower geared lower than our average industry at 4x when it comes to a net debt to adjusted EBITDA, but also a net debt to RAB at 30% or 33% compared to the peers or 50% or the condition in our financial facility which allows 70% of our RAB to come as part of financial facility. So we're in a very healthy capital structure that allows not just a growth, but a sustainable dividend distribution if needed to sustain. This is the normal slide as well, which shows the difference between the IFRS financial to the regulatory financial statement. We have said earlier in earlier calls that our regulatory financial statement shows more closer cash flow position of the company in comparison to the IFRS financial, which follows IFRS 12. And the reason is, we are recognizing the construction costs and the construction revenue as a part of our financial income statement where that noises or accounting noises is eliminated in regulatory financial statements. So the actual adjusted EBITDA is adding back the depreciation part and makes it more healthier, I would say, EBITDA than the IFRS financing. And this slide shows just a comparison also removing the noises -- or not the noises, but the one-off comparison or the one-off entries that we have because of the allowances for the previous price control where the regulator has allowed OMR 5.3 million to compensate us for whatever losses was incurred for the previous price control and that's why our total income at 2024 was at OMR 81 million for the first half. Without that, we would have been at OMR 76 million, but because we had a better construction revenue and project delivery, we actually incurred a better revenue of OMR 14-plus million makes us ending the quarter -- ending the first half at a total of OMR 90 million for the first half. At the bottom also shows the net profit. As I said earlier, the OMR 5.3 million have shown or have better position last year with a net profit of OMR 28 million, whereas it should have been without this one-off entry at OMR 22 million compared to this year of OMR 25 million. So a growth of almost 13% in the net profit. This is also a slide we came up with last conference call where we have tried to eliminate the construction revenue and construction costs from our financials. The left-hand side shows the real IFRS financial that you normally see in our website and MSX platform. But the one in the right eliminating the noises of the construction revenue and construction costs, you will see our revenue in the top right-hand side, our revenue would have actually stayed stable when they grew steady growth. Even in the first half compared to the last year first half, similarly to do with the OpEx, actually, the OpEx increases only pertain to the ERC, where in 2024 and 2023, the regulator have not allowed for the project delivery ERC to be capitalized, but is part of the OpEx expenditure. And that's the last slide we have on the financial. We open up for any questions if you have.

Thank you, Mansoor, Saif and Khaled. As Khaled said, now we will move to the question-and-answer session. [Operator Instructions] Yes, we have a question from Bishen.

Congratulations on a good set of numbers. Just a few queries. Just for my understanding, you have a rate that you've decided with the government, which is 7.79% from 2024 to 2027 on your RAB base, correct? But the finance cost is what is market determined. So in a declining interest rate environment, your actual cash outflow will reduce as interest rates drop, while the 7.79% remains constant. Is that correct?

Yes, that's correct.

Okay, great. Now second query with regards to the treasury shares. And I would imagine that, that is the portion allocated to the liquidity provider that comes in your balance sheet in Q2 at net numbers, approximately OMR 290,000. What's the number of shares that have been allotted to the liquidity provider? Is it 2.5 million?

Yes. As end of June, it was 2.9 million shares, if I am not mistaken.

Yes, 7,035 million shares.

Okay. Fine. And next query is with regards to the dividend that we discussed, and I think the observation or the comment last time was that the management is working on it, and we should see some sort of announcement. Was it in Q3 of '25? What's the time line for the future dividend announcement?

So there was a proposal already discussed with the Board at the last Board meeting, but we are firming up the dividends. And hopefully, in the next Board meeting, we have a decision by the Board, and then we can have a revised dividend policy also published in a similar manner because we have the current one in our website. So the new one would also be placed in our website, but it will also be followed by announcement. But it will happen very soon.

Good to hear. Now one of the observations around that was, I remember during the last call, you had mentioned that there's a certain dividend policy that has been committed for 3 years and the company stuck to that. And going forward, I just wanted to understand these would be based on net profit or cash flows. And the reason I'll just build on that is we've seen a tremendous movement in the stock price. And as of Q2, if you look at the markets, your existing third year dividend, if I look at it as a function of market price is approximately 6%. Again, I understand there's a Board meeting, there's a process to be followed over here. But if I look at the current yield, it's close to 6%. Now one of the observations was that you would be prudent in declaring a dividend which is at a premium to the market. And I think the number, again, it's something we'll wait and watch, but was close to 6%, 6.5%. Given the surge in the recent stock price, would that also be taken into consideration? Or is it just a ballpark fixed number that would then determine what the backward yield is? Any comments on that, please?

It's a very good question. Actually, when we were reviewing this with the Board, all these factors have been considered. So we have considered the yield, we've considered the net profit, a consideration also in the benchmark and MSX. So the idea is not to have a complete difference from what MSX today is offering. In fact, we are offering probably a little bit more than the average of what's in the MSX. So how it's going to be drafted, it's probably in the performance, but there will be also based on some minimum earnings per share -- or let's say dividend per share.

Interesting.

Actually, the management is considerate of all of those, okay, to make sure we have a good presentation of the dividends to our shareholders.

Noted. I'll not take too much time. Last query from my side is with regards to this whole talk about Oman leading the initiative on green hydrogen, and we've spoken in the past on that with regards to sort of what capital structure the company would be targeting. With regards to that, any sort of -- any updates on that? Or is it too early to speak about it?

So I think our main focus across these few months was to try to derisk this opportunity to make it within the appetite of OQGN in our normal business. It's still work in progress. The government is supporting the sector, and it's part of 2040 vision. The details of this support or this derisking is, I mean, we are supposed to converge towards the end of this year, beginning of next year on how that capital structure looks like and what type of government support or guarantees or subsidies would be provided to derisk the opportunity. However, we're very wary of this, and we are trying to ensure that whatever we venture into still fits the appetite risk profile of the company.

And the reason I brought up this question is as more of a request or observation as a market participant, whilst we understand a capital structure change, it could be highly value accretive in the long term. In the short term, it could lead to probably some volatility or some sort of lack of understanding from our side because we are not technical experts. Some handholding would be highly appreciated. That's it from my side. Wish you all the best.

Thank you so much. We have a question from Hiba Al Marseli, please?

Congratulations on the great set of numbers. I have a couple of questions. The first question is about your CapEx. I wanted to ask why it increased? And is there any plan for how much your CapEx would be in the future?

When you say increase from relative to what?

From H1 '24?

So if you can ask the other question, so we will answer them both together.

Okay. I also want to ask about the project for OQGN and Fluxys. When will it come live? And by how much would the incremental increase will be in the top line and bottom line?

I will go the first question. On the CapEx side, the total regulated asset base has increased because, as I said, that the bilevel of what was supposed to be delivered last year, it will deliver partially this year. So we had a catch-up with last year and this year. But also because of the normal growth in our approved price control, where it's also been enhanced by better allowances when they have approved the loopline from Fahud to Sohar. So today, we're expecting a bit more than what it was approved in the price control because of the loopline, but natural, the RAB is expected or the regulated asset base is expected to grow almost 18% from the end of low loss price control to the end of this price control.

And maybe just to add, Hiba, for us, CapEx is usually the actual asset base. So higher the CapEx is better for our revenue stream.

And so what was signed earlier this year in May between us and Fluxys is more of a cooperation agreement. So Fluxys is a very similar company to OQGN, who operate in Europe, in Belgium, Germany, Switzerland, et cetera. And they are also venturing into hydrogen. So they are before us, and they are, in fact, already constructing a hydrogen pipeline. So we partnered with them, and we've signed a cooperation agreement to take advantage of their experience, technical, strategic, financial and the regulatory experience they have. It's too soon to see the impact on the bottom line. However, we did agree on a cost sharing type of mechanism. So any cost in studies or upward development would be shared between us and them. And hopefully, if developments happen and the JV is created, they also are entitled to be a party to that JV.

We have a question also from Muhammad Al Abri.

I think Muhammad Al Abri was saying his mic is in mute. He has a question on the chat bot. He said, so what about the new Fahud-Sohar project that costs more than OMR 100 million. What is the company's financial position to finance the cost? Did the company finalized its banking terms or rate? So to answer the question, as we said, or probably shown in the capital structure, we still have that headroom to go and tap into the financial facilities if needed. But the current facility that we have in one hand still have some balance to finance this project, plus there will be a discussion on funding gap with the Board if there is a need for extra funding requirement in the future. But the recent update in the financial facility, it has been repriced with a much favorable costing element. That was done in June this year. And I think it's also been shown in our financial statement as a disclosure.

[Operator Instructions] Manna Thomas, please.

I just have a few questions. One, regarding the power project, will it be -- after the transfer, will it be added to the RAB assets? And what is the value of these assets?

It will be part of the RAB asset. So whatever expenditure happens in that project will add into the RAB and will have a similar retain as of the other RAB assets.

Okay. Also, I have a question. What was the work in progress asset addition from the Sohar loopline during this quarter? And what's the entire OMR 23 million construction cost in this quarter is from the loop line project. Could you please clarify on that?

So part of the increase in our RAB assets is actually the inventory of the line pipe, but the actual execution of the project is happening as we speak.

Actually, we already -- as you -- as we have shared to you, we have awarded the EPC contract to Petrojet, and we have received recently the approved schedule, just aligned on the work schedule, which by this year, we expect to achieve around 15% progress. And that's the current status as of now. We have placed on items as well. Pipeline is the main one, which has already started arriving to Oman from Jindal. So that's the progress plan.

Since there are no more questions, we would like to thank you all for joining us today in this conference call to discuss our Q2 2025 results. For more updates, we recommend you to visit our IR -- We have a followup question coming from Bishen.

I just wanted to check, if I look at the cash flows over the last couple of years, could you just give us some insights in terms of dividend payment as a function of cash flows. Now I understand you present a net cash flow, but the standard model to look at it is operating cash flows less CapEx being a free cash flow to firm and then you have your financing decision, and that leads to a free cash flow to equity. So if you could just tell us in the last 2 financial years, the cash flow and the dividend payment. And I would imagine the cash flow generated would be lower than the dividend paid. And that is because the dividend that was committed was paid as a percentage of net profit and available cash in the balance sheet. If you could just confirm that understanding?

So I would say otherwise, actually, the dividend rate in the first year when we were listed, the firm number was OMR 44 million. And I think it's a bit more than the cash generated. But it's because for that particular year, because we have a better return, and we are not linking the dividend payout of the last dividends under the net profit because if you see in the first year, I think the dividend payout was almost 70%. But the second year, it was almost 100% of our net profit and the third year, for this year, will be almost a similar rate. So it's not comparable to the net profit. It's more into how much we have as the cash and how much is good because it's very predictable cash flow that we have. We know how much cash is generated. So we can -- also what I wanted to say probably the dividend policy that we're going to publish very soon, it will only be for 2 years because that's what we have already published. It will be for the price control rate, and it will be reevaluated again once the price control is -- or the WACC is determined and price control for is also determined.

Noted. So would that also imply that there's a dividend policy announced and there's excess cash remaining over that number, that would also be considered as a moving part.

I will park that question until the next quarter because there are a lots of discussion with the Board. So I don't want to give any comment. But there is a consideration in the cash balance as well as for the Board direction.

Thank you all again for joining us tody. As I was saying, if you would like to have more updates, we'll recommend you to visit our IR page on the company website. Thank you, and have a good day.