SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Romgaz conference call for discussing the preliminary results for 2019. After introducing the speakers, Mr. Robert Chirca, Deputy CEO, will make an opening speech. Thereafter, the Q&A session will take place. Please be advised that this conference is being recorded for internal purposes. On behalf of the company, the following speakers attend this conference: Mr. Robert Chirca, Deputy CEO in-charge with development; Mr. Nelu Paraschiv, Drilling Department Director, Mr. Andrei Bobar, Finance Director; Mr. Marius Veza, Accounting Director; Mr. Cristian Cioban, Head of Gas Trading Department; Mrs. Gabriela Tranbitas, Head of Financial Reporting and Accounting Methodologies; Mrs. Manuela Ogrinja, Head of Investor Relations. Now I would like to give the floor over to Mr. Robert Chirca, Deputy CEO, who will open the conference call with an opening speech.

Good afternoon, ladies and gentlemen. Hello to everybody. I would like to say, welcome to our conference call for the discussion of the preliminary results of -- recorded in 2019. As you may know, this morning, we released our preliminary consolidated annual report on the economical and financial activity of Romgaz Group. Also, on the Investor Relations section of our website, we made available a presentation of Romgaz Group, updated with the 2019 preliminary results. We would like to take this opportunity to address certain aspects regarding to the market context and to highlight the operational and financial performance of our group. In full year 2019, important factor has mixed outcomes on our group performance as follow. We estimate that the natural gas consumption in Romania after 1 digit decrease in the first 9 months recorded as a step therefore of 14% in Q4 compared with the same period of the previous year, mostly as we see due to the warmer weather. As a result, for the full year 2019, we estimate a 6% to 7% overall decrease in the domestic gas consumption, with imports almost doubling with compared to 2018. Gas trade on the Romanian Commodities Exchange showed supportive price in 2019, but remember that only a part of the volume supplied to the industry consumers in Romania were concluded on this market. CEGH Front Market Index plunged till September and then has recovered to some extent in the last 3 months of 2019. Regarding the 2019 legal environment, please recall the main provision of the gas and electricity market that were enforced by the governmental Emergency Ordinance no. 114 issued in December 2018 and amend in March 2019. Price of the gas sold by a procedure from internal production to householders and assimilated consumers kept it at the level of RON 68 per megawatt hour, starting with 1st May 2019. And gas and electricity producers were charged 2% fee on revenues with certain deduction. Those aspects are presented at the Page #6, 7 and 9 of Romgaz Group presentation available on our website in the Investor Relations sections. Regarding to our operational and financial performance achieved in 2019, we can mention the followings. Natural gas production stood at 5.27 bcm that was lower by 1.06% compared to the previous year and accounting -- accounted for almost 99% of the budget figures, 99%. We continued our rehabilitation program in the main major fields, the work over and special operation programs for our wells, and we have also improved our productivity of certain gas reservoirs. We maintain our good position in the market, accounting for around 44% of total gas deliveries in Romania according to our estimations. Also, we estimate that Romgaz market share, considering only domestical producer gas, has increased to 56%. Total gas volumes supply from internal production to the market [indiscernible] by 30% year-to-year, while the total volume delivered to the third parties, including total purchase gas decreased by 6%. On the revenue side, we succeed to rise gas revenue from [ our ] production by 8% and total gas revenues by over 4% compared to 2018. Also we continue efforts to improve the commercial strategy and our gas value chain. Our revenues from storage services rose by 11% with the capacity reservation services having the largest contribution. Revenues from electricity above it due to the ongoing construction work on the new power plant at the Iernut that will be fully replace with the -- that will fully replace the older power plant. Overall, we succeed to increase our top line revenues by 1.5% in 2019. That means to RON 5.08 billion. Regarding the main 3 tax expense that are included in the other expenditure items in P&L, we can mention an overall increase of 15% drive by windfall profit tax, higher by 30% on the back of the higher gas selling price. And UGS royalties lower by 23% based on the lower gas reference price. And the 2% contribution due for 2019. We also recorded certain expense with unfavorable impact on our profit and losses as follow. Net assets impairment of RON 391 million related to the abandonment of certain investment projects in wells and of certain other projects and a net impairment following a gas impairment test conducted in December 2019. Impairment losses of receivables of RON 117 million based on the risk of noncollected of receivables from insolvent customers considering captive by the insolvency law. All in all, EBITDA rose by 14%, and we report a net profit of RON 1.43 billion, higher by 4.6% compared with the previous year. All main profitability margins have improved in 2019, with EBITDA margin at 50.4%, and net profit margin at over 28%. In the fourth quarter alone, we reported a net profit of RON 243 million on our revenues, lower by 17%, triggered by warm weather and lower energy sales. Those aspects are presented on the Page #16 to 25 at Romgaz group presentation available on our website. Regarding CapEx, we invest in total RON 892 million in 2019, which account for 65% of our consolidated budget. CapEx were related to works in the new power plant Iernut, around 35% of total amount invested by the group; geological exploration for the discovery of the new gas reserve around 32% of total; underground gas storage at 3% wet; and the 31 balance was related to the exploitation of -- and drilling works, equipment modernization and other investments. Maintaining a strong portfolio of gas reserve and resource remains a priority. The development works in Caragele area are ongoing and will contribute to the sustainable development of production. As we already informed the market in January this year, we started production in the deep reservoir of Caragele field through the well 77 Rosetti, which has a production potential over than 1,500 BOEs per day. Other 2 wells were put in production in the medium depth Caragele field with an average flow of 1,000 BOE daily jointly. Those results reward of our significant efforts to improve our current production and perspectives. Additionally, our strategy is to enhance efficiency of our gas production and consolidate our position on the energy supply markets as well as develop of our business by approaching new internal and new international markets. With respect to 2020 perspective, we can mention that governmental Emergency Ordinance #1 from January 2020 has an end to the GEO no. 111 from 2018, among others, by starting -- stating new deadlines for deregulation of gas and electricity price for producers. And by taking out the 2% fee imposed on our revenues. We will publish our 2020 budget proposal and [ card ] shareholders' meeting for approval in a short time. With this, we are closing our presentation, and we would like to thank you for our attention.

Thank you for the speech. Now the line is open to take the questions, and we received the first question addressed by Mrs. Daniela Mandru. Please let us know the gas quantities sold at regulated prices in financial year 2019. Also could you help us with the estimates for dividends distributions out of 2019 profit?

To be very short on the first part of the question, it's 16 terawatt hour, more precisely 15.905 terawatt hour for 2019 at regulated prices.

Regarding the second part of the question. As you already know, in accordance with the Emergency Ordinance No. 64 from 2001, all the state-controlled companies and state-owned companies are obliged to distribute minimum 50% from their net profit. In the previous years, Romanian government has issued memorandum in order for the state-controlled companies and state-owned companies to distribute 90% from their net profit. Currently, we have no such memorandum issued by the government. And the management is analyzing the figures to perform the proposal, but it will be minimum 50%.

Mr. Catalin Diaconu, you may ask the question.

Yes, actually. So I have actually 3 questions. So the first one will be, if you can tell us what were the one-offs in the -- just in the fourth quarter of 2019 because I don't see exactly what was -- what were the levels for impairments and also for adjustments for receivables? The second one would be, if you can give us the split on segments for earnings before taxes? And the third one would be, if you can give us a bit more color on the decision from the fiscal authority regarding potential special dividend or something like that because it was a bit unclear what they really meant to -- for Romgaz to do?

Mr. Diaconu, can you please repeat the first question, you will receive your answer and then continue with the other 2 questions, please?

So the first one would be, if you can tell us what were the one-offs from the fourth quarter? So just in the fourth quarter, talking about impairments and adjustments for receivables.

In the fourth quarter of 2019, we recorded additional impairment on property, plant and equipment of RON 192 million and for trade receivables, RON 85 million.

The second question, please. Can you please repeat the second question Mr. Diaconu?

So could you tell me the split of earnings before taxes and segments because you did not disclose it this time?

Do you mean the fourth quarter or full year?

For the fourth quarter.

Okay. For the fourth quarter. On the Upstream segment, RON 320 million of profit before tax. For the storage activity, RON 34 million, for electricity RON 7 million.

Understood. And the third one would be related to the -- to what the fiscal authority asked from Romgaz as a special dividend related to Emergency Ordinance 114? What's that about? And if Romgaz would challenge the decision?

Yes. Regarding the fiscal, the economic and financial inspection from the Nationally Authority for Fiscal Administration (sic) [ National Agency for Fiscal Administration ] because it was not a fiscal control. It was an economic and financial control. Practically, they assessed how we calculated the amount that we paid in accordance with Article 43 from the Emergency Ordinance 114. And in their view, practically, they said that we should have added to the distributable dividend also the reserves that were allocated after the shareholders' meeting in April 25 of 2019. So if we read the Article 43, practically we are -- we were talking about all the existing reserves. But the December 31, 2018, that we're not engaged in CapEx, and we're also existing in our treasury accounts. So practically, we will contest this conclusion, this report, and we will perform all the legal requirements in order to see -- to have a final opinion because we believe that we have distributed the correct amount and not less.

I would like to remind you that you may use the option to raise the hand or to address a written question. We received a written question from Irina Railean. Could you please provide us more details on the reasons for import increases on the market?

2019 imports increased or almost doubled, but this was caused mainly by the decrease of domestic production as you may have heard from other sources, including the regulator. And also in some -- to some extent, given the situation in Ukraine and the transit through the Ukraine, most of the players chose to store some additional quantities.

We like to remind you that we answer the questions in the order we receive them. The next one is from [ Mariana Chitraga ]. Could you give us some guidance on the 2020 Capex? How do you see gas prices evolving so far into 2020?

In terms of CapEx volume for -- planned for 2020. We have, in our plan, RON 1.3 billion for this year.

And the second part of the question. As you know, current price trend is on a decrease curve, but please remember that Romgaz already sold a greater part of its production for 2020 in 2019 on a gas year basis at significantly better prices than the current one.

Next question addressed by Irina Railean. What are your expectations regarding the gas price evolution after the market like liberalization?

We expect -- we don't expect increase in prices, generally speaking. So there will be some uniformization between wholesale consumer prices and industry prices. That's all we can state right now.

We continue a question -- with a question from Mr. Tamas Pletser. Can you please tell us about the reasons of the gas price decline of the unregulated market and the potential impact on Romgaz, meaning that in January 2020 the price of natural gas fell in Romania?

Gas price in Romania is following the same trend as the regional market. As you know, the regional market is also on a decreasing trend. And as for the impact on Romgaz, I already answered these questions by my previous answer.

Another question from [ Mrs. Juliana Chopraga ], what were the volumes sold in Q4 at regulated prices? We will come back with an answer for this question in a few minutes. Until then, we will answer the other question from [ Juliana Chopraga ] RON 1.3 billion includes potential Exxon transaction.

RON 1.3 billion is not including the potential Exxon transaction.

The following question is from Mr. [ Victor ] [indiscernible]. It's in Romania, and it will be translated into English. Will there be any dividend distributions from reserves of 2019, 35%? What could the amount be?

The Article 43 from the Emergency Ordinance 114 was only applicable to the financial statements existing at the end of 2018. So the 35% was only applicable at that time.

We received another written question from [ Juliana Chopraga ]. There is a limited visibility in the market, what is the current level of the gas price?