SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to Romgaz conference call for discussing the results for Q1 2020. After introducing the speakers, Mr. Robert Chirca will make an opening speech. Thereafter, the Q&A session will take place. Please be advised that this conference is being recorded for internal purpose. On behalf of the company, the following speakers attend this conference: Mr. Robert Chirca, Deputy CEO; Mr. Vasile Ciolpan, Energy Trading Director; Mr. Andrei Bobar, Finance Director; Mr. Marius Veza, Accounting Director; Mr. Gabriela Tranbitas, Head of Financial Reporting and Accounting Methodology; and the Investor Relations department. Now I would like to give the floor over to Mr. Robert Chirca, our Deputy CEO, who will open the conference call with an opening speech.

[ Moving on ]. Good afternoon, ladies and gentlemen. I would like to wish you welcome to our conference call for the discussion of the Q1 2020 results. You'll be informed that we released the quarterly report at the end of last week, and this includes the presentation of our economic and operational performance jointly with the interim consolidated financial statements. Also, an overall presentation of the group's performance is available on our website. Let me start please with some headlines on our gas market environment in Q1 2020 as compared to the first few months of the previous year. Considering most of the actual situation, we estimate the natural gas consumption in Romania recorded a decrease of 4% roughly year-on-year, mainly as a result of the significant warm weather during the winter and also based on the effect of the coronavirus pandemic starting with March, as we all know. [ Gas owned ] by natural gas producers to the [ house orders ] and [ assimilate consumers ] remain capped at the maximum level of RON 68 per megawatt hour as enforced by the government's Emergency Ordinance #114 from 2018, as [indiscernible] amended by GEO #19 from March 2019 and GEO #1 from January 2020. Wholesale [indiscernible] gas price on the Romanian Commodities Exchange [indiscernible] and [ for our ] market which will be in the reference [ amount ] were still supportive in Q1 and higher by 2 digits compared to the same period of 2019. We are talking about price for the gas sold by producer to the industrial consumers on the centralized market in Romania. On the other side, gas price on the Central European Gas Hub recorded a significant [ punch ] in Q1 2020. We completed a decrease of around 40% of Central European Gas Hub. [ First of month referrals ] index in the first 3 months of 2020 versus the same period of 2019. Overall, in the first 3 months of 2020, we can emphasize the following operational and financial performance of Romgaz Group. Our natural gas production decreased by 4.7% year-on-year. But compared to the previous quarter, we record an increase of 2.6%. As the [ main develops ], we finalized the connection of the new wells to the production infrastructure, continue the production rehabilitation programs for the mature gas fields and performed a completion operation that will reactivate the same pipe or wells. This is what [ up and new ] innovation. But it is also important to mention the following achievements as of the end of January 2020, we start the production in Caragele Deep, our discovery, through the well 77 Rosetti with a production potential over 1,500 BOE per day and another 2 wells from Caragele commercial fields with a daily production of 1,000 BOE jointly. Nevertheless, the weak consumption in Romania volume supplied by Romgaz from domestic production decreased by 6.7% in Q1 2020 to [ 1.52 ] versus Q1 2019. We maintained a strong market share of 35% of total gas delivery in Romania and the 43% market share considering only the domestical produced gas according to our estimation. All through significant lower than the same period of 2019, those figures represent a good performance considering that the imports weighed around 20% in domestic gas consumption. On the income side, we reported total revenues of RON 1.43 billion, lower by 16.5% year-on-year. Still, compared to Q4 2019, we succeed to increase our top line by 11%. We rose our revenue from storage by almost 35% in Q1 compared with Q1 2009 -- 2019, to RON 110 million due to the higher underground storage capacity. Our electrical power production was higher by almost 52% year-on-year, 170.8 gigawatts. At our end, revenue from electricity increased by almost 12% year-on-year to RON 53 million in Q1. On the book side, we can mention that gas and UGS royalties probably down by 41% year-on-year. And [ wind for ] profit tax also lower by 23% year-on-year in Q1 due to the cumulative effect of lower gas volumes and pricing. In additional, depreciation, amortization and impairment expenses were down by 50% compared with 2019. Overall, despite of the lower revenue but held by thinking expenses, [indiscernible] recorded net profit of RON 572 million in Q1 2020, evaluated by 5.5% compared to the same period of the previous year. We can also underlined the good profitability margins recorded over Q1 2020 well above the level recorded in the previous year. EBITDA margin of 56.1%, EBIT margin of a 46.8% and net profit margin of almost 40%. With respect to our balance sheet, it continues to be strong with 0 in the [ net ]. Also, please recall that the shareholders' meeting held on April 22 approved the distribution of total gross dividends of RON 621 million, representing a gross dividend payout ratio of [ 57% ] from the latest year. On the CapEx side, we invest RON 164 million in Q1 2020, which accounted of RON 83 million of the scheduled amount. CapEx in Q1 were focused on geological explorations, almost 40%. 32% of the works are the new and modern power plant in Iernut, 26% on the upgrade of the production equipment and [ dollar ] expenses and other [indiscernible] balance represent investments in our gas storage. Regarding the strategic development of Romgaz, we remind that we have hold the shareholders' meeting on June 15 to prove the development and the investment strategy of our company for the next year, 2020-2025. Main strategic directions are emphasized by the proposed strategy includes continued geological exploration of the discovery of the new gas reserves, continue to allow the production potential by extending the production capacity in the perimeters in operation, upgrade of the equipment and the sales assessment of the new growth and development opportunities. We intend to maintain a strong portfolio of gas reserves and resources assure gas production stability and its superior use and also focus on the investment diversification. For the mentioned period, 2020-2025, we propose to invest a significant amount of RON 15.7 billion compared to only RON 2.8 billion invested during the previous 3 years, 2017-2019. With respect to the 2020 outlook, we are mainly a third of the domestic gas consumption and pricing. Romania's overall macroeconomic development under COVID pandemic while ensuring safety health measures in the group. With this, we'd like to close our presentation, and we would like to thank you all for your attention. Thank you.

[Operator Instructions] We'll take the question from Catalin Diaconu.

So I have three questions. So the first one would be, what was the share of deliveries on the regulated segment in the first quarter? And I have a second question related to this, what could be the share of regulated deliveries for the total year for this year, also considering the future regularization from July? And the third question, actually, the most important for me would be, what is the outlook for Romgaz, the domestic gas prices outside the regulated markets or for those for corporate clients? And how much did you already cover to [indiscernible] bilateral contracts for deliveries before the health crisis erupted? So will give us also an indication of coverage in contracts for this year.

[Operator Instructions] So can you please repeat the first question? And then you will receive the answers, and so on with the other two questions.

Okay. Understood, understood. So the first one was, what was the share of regulated deliveries in the first quarter?

The quantity, which we have sold under the ANRE order in Q1 is around 8.2 terawatt. And the entire quantity, which was written in the annex of the order was acquired from the clients.

Okay. Thank you.

The second question would be what should we expect or what could be the share of regulated deliveries for the entire year?

The entire quantity for the regulated market, we cannot estimate now because second quarter is earning. And the decision was written 7 terawatt, but the supplier have acquired around half of them because they have rights to acquire just part of the quantity, not all us in first quarter. It's difficult to estimate who is -- how will we close the second quarter.

Understood. And the third question would be, what is the outlook for the price on the liberalized market, so for you, for Romgaz? And so what would be the share to which you already covered to contracts which were already done before the health crisis?

To say a price is a little bit uncertain because we wait in the gas release program, and the scope of the gas release program is to set a market price. How will be evolved? The gas release program will be an indication for the market price for this year and in the future. We can just to show the reference, which is on the Baumgarten can be the first transaction to be around of this price, but it's not sure. Depends on the bid of the supplier. The order is not published. It's just approved. The gas release program is just approving the committed of regulation, but we have not read it. It's not published now. We're waiting for and then we can to estimate what happen in the future.

But outside the gas release program, so for running contracts, what would be the price range for Romgaz right now?

Can you repeat the last question, please?

Yes. So the gas release program would cover up to 20% of the deliveries. But what is the current price range for Romgaz for the running contract, so for outside -- for the deliveries outside the regulated market and also for the potential gas release program?

For the first quarter, an average price of total sales from Romgaz is around RON 79. These include free market exchange and the regulated price, the RON 68, which was in delivery.

So with respect to the first written question from [ Ms. Draluca Bunescu ], I believe you received the answer related to the gas release program just a few seconds ago from Mr. Vasile Ciolpan. We will continue with a question addressed by [ Kalina Mihali ], please. Then shall we try with [ Juliana Chopraga ] with the question?

I had a question regarding production. If you could give us your outlook on production for the rest of the year and also starting -- and also for 2021. The market was quite optimistic after the announcement of the discovery in Caragele Deep, and I was wondering whether we see a stronger impact from -- should we see a stronger impact from Caragele Deep in 2021? Could you just give us some guidance? We already know now your investment plans for the future, but if you could help us with the guidance on production going forward, that would be very helpful.

Thank you. With respect with your question related to the Caragele field, we can kindly inform you that the extra production it's influenced by the market, by the growing of consumption. But we are still continuing to invest in Caragele, which already achieved almost 70% of our total production from that production. And we are doing and dealing their appraisal and development exploration wells.

Can you hear me now? I'm not sure if you can hear me. Yes, you can. But in your budget for 2020 and guidelines for 2021, 2022, there, you're not really expecting production to go up in 2021. And I was wondering why is that. I mean you don't expect such a strong impact from Caragele Deep. Is that the Caragele Deep would just be -- the production from Caragele Deep would just compensate the natural decline? How should we look at production going forward? Production for this year, based on your answer, we should understand that it's influenced by consumption. But how should we look at production going forward then? Can you give us any sort of guidance?

Answer to your question related to Caragele development, yes, indeed, we are focused on covering our natural decline, which are coming from our [ very ] network and oilfields. But this will not go past -- will develop new potential area and to develop on this Caragele field. We have to bear in our mind that we are high connect to the market to the -- as consumption, which is very fair. So to summarize, yes, indeed, we are focused on the major decline in terms of production. Thank you.

So your answer is basically that whatever would come from Caragele Deep would be used to offset the natural decline? You don't really see an upside in production from Caragele Deep? Should I understand it?

Yes. But this is the vision in this moment. Caragele, it is a field with the potential to cover the natural decline, which we have it now in Romgaz, it's the field with potential. But this upside potential, which will come also from other areas, not only from Romgaz.

You mean you're seeing upside from partnerships, from what you include on the partnership? Is this what you're saying?

We are analyzing, yes, in the partnerships with other possible, let's say, operators on the market. And this is reflected in our strategy, which was published at the end of last week.

And a question related to what Mr. Diaconu was asking before, could you tell us how much you already sold forward at the end of March? What is the volume that you already sold volume at the end of March?

Could you repeat the question, please?

Could you tell us how much was already sold forward at the end of March? I mean what bilateral contracts you had already concluded, whatever you sold on the exchange, what -- were you already locking the price is what I'm trying to ask because prices are now lower than even in April. I see that prices have gone down in May. And I was wondering how -- what price -- how -- what volume have you already locked at a certain price going forward, excluding regulated market?

The contracted quantities for the entire year is around half of the -- our planning.

It's 50 -- sorry, but it's 50% plus regulated market? So regulated market is separate, yes? 50%, including regulated market or without?

Included the regulated section and we waiting for the gas release program, the quantities, which will be sold beginning with June.

So it's 50% of volumes, including these 15 terawatts, which would have to be installed to the [indiscernible] market? We have to see whether there will be [indiscernible] for [indiscernible] market, yes? Okay.

Thank you. We continue with the question addressed by Mr. Jonathan Lamb. "When I add up the investments you announced, I get just around RON 12.35 billion. Is there something I am missing?" So in a few seconds, you will receive the answer for the question related to the investments to the total amount. Until then, we go on with another written question from Mr. Jonathan Lamb. "What is the capacity of methanol plants -- of the methanol plant you are considering?"

Regarding the capacity of the methanol plant, the first number was around 350,000 to 400,000 [ tonnes ] per year, but the quantity, which will be establish results from our prefeasibility study and feasibility study, which we have ongoing now.

Related to the question that was put on the table related to the investment strategy, it seems that in the English version, and we're sorry for that, we have a typing mistake, and we will come with the details. The Romanian version of the strategy, all the data, let's say, valid. And we'll come with the note related to the English value. Sorry for that inconvenience.

We continue with another question from Mr. [indiscernible], which is the outlook for the gas selling price in Q2 and Q3?

The gas selling is under the pressure. In Q2 and Q3, we expect to remain the same because the demand is very low. The price now are around RON 30, RON 40. Each of the month, May, maybe June, remain the same. We're waiting in June, the first transaction of gas release program, to have a view for the entire year.

Thank you. We continue with a question from Kalina Mihali. "When will Iernut be operational? What is your main electricity market, [ PCCB ] then balancing market?"

So about the new power plant from Iernut, we expect to have technical approach end of the year or beginning of 2021. And during this time, we expect to be functionally with the oldest but to a lowest level because we need to meet the requirements about the environment.

We continue with a question from Ms. Irina Railean, "What is your overview on the current situation on the natural gas market? How is production and consumption impacted by COVID-19?"

We expect for the next time to remain the demand lowest, which is now in May, June, maybe in the third quarter, to remain the same because the suppliers have not had to sold the quantities away, and they made no new acquisition. And this reason made to have an expectation on sales in -- over the summer -- entire summer.

Thank you. We received another written question from Juliana Chopraga, "Could you give us some guidance on deliveries for the second quarter?"

Regarding the guidance of delivery in second quarter depends very much on the demand. Now is the lowest demand. We can not to say how we will be finalize the Q2 because it's ongoing. We expect to have the quantities low because we have no demand. But how much, we cannot approximate now.

Another question received from Irina Railean. "Electricity production has increased significantly in the first quarter of 2020. What are the main drivers of this 5 -- 51, sorry, 51.5% increase?"

Regarding the power plant for the first quarter, the volume of the producing quantity of our power was increased to 258 gigawatts because the environment of the market was changed as last year. And this has -- give us an opportunity to produce more electricity and to sell in the market.

We received another written question from Daniela Mandru. "By how much did the gas sales to third parties decrease year-on-year in the first half of Q2?"

Until that the first quarter -- the second quarter is not closed, we cannot to say what are the numbers for the closing of the semester. In August, we will have a call about the results of the first half of year, and then we can -- to give you the data.

We received -- just a second to read the question. We received two written questions from Irina Railean. The first one, "What will happen with the older power plant capacities? Will you retire the old groups and when?

Answer to this question, yes, indeed, our old power plant, it will be -- it will give up to this power plant, most probably after the Iernut new power plant will be fully -- it will be ready and fully working next year. As an offset, in order to give up to the old power plant is that will be -- will happen in the next year, 1, 2 or maybe 3 years, depends on the all necessary works that we'll be performing in this respect.

And the second question from Irina Railean. "Could you please provide us some details regarding the Mintia power plant project, meaning total capacity, project cost, financing sources, estimate year of completion?"

Thank you to the Mintia project, we have now an ongoing feasibility study, which needs to be detailed and approved by our team. I can attest that we have target around 400 megawatts in terms of -- 400, 450 megawatts in terms of capacity. And our aim is to start this project next year or later. In terms of finance, so that we will have the feasibility study finished and approved, we will come also with the details late into the finance product.

Thank you. We will go on with a written question from Juliana Chopraga. "Given the low gas price, should we expect further impairment?"

We are monitoring the evolution of the market now that the state of emergency has ended. If needed, yes, we will run on new impairments, yes.

Another question from Juliana Chopraga is related to requesting an update on the negotiations with Exxon. And another question related also to Exxon, "Would the transaction with Exxon need approval from shareholders?"

Related to the question, could you give us an update on the negotiation with Exxon, I kindly inform you that for the moment, the negotiation with the Exxon is on hold. I think it's that -- and I'm referring to the second question, with the transaction with Exxon need approval our shareholders, yes, for sure in case that will go for us, we will need an approval from our shareholders. Thank you.

Thank you. We continue with the question from Irina Railean. Why do you find attractive investing in renewable sources? Do you believe they provide high investment yield, higher than natural gas power plants?"

We find renewables a measure for our strategical scope to execute a mix in the market with power from the power plant we have under construction and lowest price on the renewables from photovoltaic or wind farm. This is one of the reasons. And the second is to avoid the risk of the market to have a second section of the business, which give a higher yield to the gas using in the power plants.

We received another written question from Irina Railean. "Could you share with us the overview of the storage market and the outlook for 2020? How do you see injection and withdrawal activity? Does it benefit from current oversupply?"

On the storage activity, because the demand is very low, all of the supplier search an action to spare the quantities and injecting on the storage, actually, is around 1.9 bcm, close to the 2 bcm. And we expect will be fulfilled, all of the storage, by end of the year. One is the lowest price, which is an advantage to store over the summer and to consume in the winter. And the second, they are a part of the supplier, are obliged to store because they cannot to consume the quantities and generally will be a good result for the storage activity end of the year.

Another question from Daniela Mandru. "Can you give some guidance on the gas sales and gas price evolution in Q2 at least? For me, it is impossible to understand that you do not have any visibility."

Regarding the evolution of the consuming -- the second quarter, it's very hard to approximate. I can answer with another questions, is coming the second phase of COVID or is coming not, depends on this, the consume. I cannot to approximate now and to offer you numbers regarding this situation.

Thank you. Another written question from Juliana Chopraga. "Do you have an estimate how much consumption dropped in April?"

Sorry, we don't have an estimate regarding the consumption drop in April. Thank you.

So we have a raised hand by Kalina Mihali. [Operator Instructions] Until then, we received other written questions from -- one from [ Victor ]. "Can you repeat the answer if you expect new impairments in 2020 due to low price of gas?"

Regarding impairments, we said that we are monitoring the evolution of the market. If needed, we will run an impairment but it is early to say if new impairments will come out of it.

We have another written question from Daniela Mandru. "Why did revenues from capacity booking services increase in Q1?"

Regarding the activity of the storage in the first quarter, these are 2 kind of revenue. One is normally, which we have expected from the storage, normal services for underground. And the second are the one of the injections tariffs because in March was -- and the entire winter was mild. The project -- the branch has offered injection services and from these services, increased the revenue from the entire activity.

We go on with a question from Daniela Mandru. "Should we expect that full year 2020 gas sales to third parties to decrease by high or low double-digit rate?"

It is possible. It is possible the expected sales for the entire year to contain 2 digits.

We go on with another question from Daniela Mandru. "What is the probability that the Romanian gas prices to align to CEGH prices in full year 2020?"

Taking in consideration our market is linked to the price from the neighboring markets and the CEGH impact, the price in Romanian market. We can to take in consideration the trend of the prices in Romania follow the trend of the CEGH but not as the numbers.

We continue with a question from Irina Railean. "When did you perform the last impairment test? And what was the natural gas prices assumption at that time?"

The last impairment test was performed in December 2019. The average price we used was RON 92.98 per megawatt hour.

[Operator Instructions] So we received another question from Irina Railean. "According to your internal policies, what are the conditions needed to be fulfilled to record an impairment?

The answers to this question is quite technical. I will -- we will provide a written answer to you in which we will explain the mechanics according to the International Financial Reporting Standards. Thank you.

Well Ms. Juliana Chopraga, do you have any questions? We can still see the raised hand, and we are waiting for your question. If there are no further questions, we will conclude this conference call. Thank you very much for your questions. If you need further information, please contact our Investor Relations team. The conference has now concluded. On behalf of Romgaz team, I would like to thank you for attending today's conference call. You may now disconnect. Goodbye.