SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Hello, everybody, and welcome to Romgaz conference call for discussing the H1 2020 results. The conference starts with a short presentation and will continue with a Q&A session. Please be advised this conference is recorded. In case you disagree, you may disconnect at this time. [Operator Instructions] I will introduce today's representatives attending the conference: Mr. Marius Leonte Veza, Interim Economic Director; Mr. Vasile Ciolpan, Director of Gas Trading Department; Mrs. Mihaela Toader, Director of Strategy, International Relations and EU Funds; Mr. Ion Foidas, Head of Production; Mr. Dan Cornea, Head of Investments; and the Investor Relations department. I will start by giving the presentation of the H1 2020 results. Good afternoon, ladies and gentlemen. Thank you for joining our conference call to discuss the group's results recorded in the first half of 2020. We released the first half 2020 report on Friday, and it includes the presentation of our operational and economic performance and the interim consolidated financial statements. Also, an overall presentation of the group is available on our website. I will present some highlights of the gas market environment in the first half of 2020 compared to the same period of the previous year. We estimate that the total natural gas consumption in Romania recorded a marginal increase of around 1% in the first 6 months. In Q2 alone, total consumption advanced by a higher rate with imports weighting 23% of total consumption compared to only 15% in Q2 2019, according to our assessments. Gas production sold to households and assimilated consumers remained kept until June 30 at the maximum price of RON 68 per megawatt, as enforced by the Government Emergency Ordinance 114 for 2018, amended by GEO no. 19 and GEO no. 1 of this year. Regarding gas sold by producers to industrial consumers on the commodities exchange on spot and forward markets, we note that the average weighted gas price trades with delivery in the reference months have still been supportive in H1 2020. With respect to the Central European Gas Hub, we calculated a 47% decrease of the 1st Front Month Reference Index in the first 6 months of 2020 compared to the same period of 2019. Last but not least, the serious pandemic impact needs to be considered. Overall, in the first half of 2020, Romgaz Group presents the following operational and financial results. Natural gas production decreased by 16.8% year-on-year. To secure a constant production level, we continued the production rehabilitation program of the main mature fields, the well workover program whereby 70 wells with a production potential of over 420,000 cubic meters a day were completed and completed investments in the development of production infrastructure and connection of new wells to this infrastructure. Volume of own gas delivered to the market decreased by 19% in H1 2020 to 2.15 bcm compared to the same period of 2019, one reason being the higher volumes of imported gas in Romania. A strong market share of 37% of total gas deliveries in Romania, according to our estimate, although lower by around 8% versus the same period of 2019, it is a good performance considering that imports weighted 21% in the total gas consumption. Total revenues of RON 2.19 billion, lower by 24% year-on-year driven by revenues from gas sold from domestic production. Revenue from storage increased by 46% to RON 196 million due to intensified underground storage activity, both in Q1 and in Q2. Electric power production was higher, but stood at only 295 gigawatts due to the works at the new power plant. Positively, revenue from electricity added RON 58 million in H1. On the expenses side, we favorably mentioned that gas and UGS royalty were down by 49% year-on-year and windfall profit tax also decreased by 38% compared to last year as a result of weaker gas volumes and prices. In addition, we recorded depreciation, amortization and impairment expenses lower by 26% compared to 2019. Bottom line, our net profit stood at RON 101 million in the first 6 months by 17.9% lower compared to the same period of the previous year. Nevertheless, all profitability margins were strong and exceeded the level recorded last year. EBITDA margin advanced to 54.3%, EBIT margin reached 42% and net profit margin climbed to 36.5%. These aspects are presented at Pages 16, 18 and 22 to 24 of Romgaz's group presentation available on our website. For Q2 alone, we highlight the following main results: natural gas production of 0.88 bcm adjusted by 30% compared to Q2 2019, total revenues down by 34% year-on-year, net profit of RON 229 million compared to RON 434 million in Q2 2019. Positively, profitability rates stood at favorable levels. We mentioned EBITDA margin of 51% and net profit margin of 30%. Regarding the balance sheet, it continues to be robust with 0 indebtedness and able to finance distribution of dividends and our short-term investments. With respect to dividends, please recall that the Shareholders Meeting on April 22 approved the distribution of total gross dividends of RON 621 million, representing a gross dividend payout ratio of 6 -- of 57% for the last year. On the CapEx side, we invested RON 317 million in the first 6 months, which accounted for 58% of the budgeted amount, which is due to COVID-19 pandemic. CapEx in H1 were focused 34% on geological exploration, 19% on works at the new power plant in Iernut, 43% on the upgrade of production equipment and other expenses and a 4% balance represented investment in our gas storages. Importantly, the Shareholder Meeting on June 15 approved the company's development and investment strategy for the mid-2020 to 2025 with RON 15.7 billion planned to be invested. Main strategic directions envisaged by this strategy include continuous geological exploration for the discovery of new gas reserves, development of production potential by adding new facilities in the operation blocks, upgrade of existing equipment and assessment of new growth and development opportunities. In H1, we also made available the 2019 sustainability report, which presents the key points, objectives, performance indicators and actions performed during 2019 as well as future development directions to be addressed. In terms of 2020 perspective, we are mainly concerned with the domestic gas consumption, pricing and regulation and with Romania's macroeconomic progress under the COVID-19 pandemic while ensuring security of gas supply with no compromise on the group's safety. With this, we would like to close our presentation and thank you for your attention. The Q&A section is open now. [Operator Instructions]

Irina Railean, please. We don't hear you. Could you repeat your question?

Hello?

Yes. Hello. We can hear you now. Please state your question.

Yes. I'm sorry. I'd like to -- I have several questions. First of all, one -- first of all, I'd like to ask you if you could provide us more details about the recent decline in the second quarter of the gas production, gas deliveries. I know you mentioned that increased imports may be one of the cause. But still, we had some oversupply in the market at the end of the first quarter, and we also had a quite depressed gas prices. I mean what caused this situation? If you could provide us some insights on this. My second question relates to the gas release program. If you could provide us some updates regarding the volumes that Romgaz sold in June and in July, and maybe have some average prices through this gas release program. And my third question relates to the average realized prices. If you could provide us some figures regarding -- I mean what was the average realized gas price in the second quarter?

What I say, I try to offer you an image of the Q2 and to extend the explanation about the gas release program with the data which we have at this moment. One of the questions is the quantity sold on the regulated market in second quarter. The quantity is 2.9 terawatt. This is the quantity which we have sold to the 68 lei, which was mentioned in the authority order. Regarding the prices on the third quarter, I cannot refer an image of the entire quarter because it's on running, it's not finished. But the transaction which was made are very low in the third quarter, around 30 lei, 24, 35. This is the lowest which exists in the market on the gas release program. The entire quantity which we have sold on the gas release program in June and July is around 3.1 terawatt. And an average price, 55.7, depends on the product, monthly, quarterly and the cold season or yearly. The price are increased from summer to winter. Another one question more is the average price which we have realized on the Q2, the price is around 79 lei per megawatt. The same was -- is to entire semester, 179 lei per megawatt. Regarding the lowest quantity which we have sold are 2 mains goals. One of them is the order of the authority by the 463, the ordinance who -- not the ordinance, the decision of the authority to impose to the producer to sold to the supplier on the 68 lei and the supplier then to sold to the thermal environment, so to the producing for thermal water. And the second was the environment created by the COVID. And most of the supplier have not taken the quantities, which was right to have, but they don't have because they cannot do supply on the -- drop down the consume in the second quarter.

I knew that demand somehow was led and even slightly higher in the second quarter of the gas. I'm not sure I mean given that the demand is, let's say, almost flat or even a little bit higher, I guess that there was demand in the market.

The total consumption in third quarter was increased and was consumed import quantities because this was to the lowest price and the market has acquired significant quantities against our 68 or another prices which we have. Regarding the volumes in the Q3, they are increased and the market is prepared for the winter. They try to inject and to assure the quantities on the storage.

I think that's the answers provided to Irina. Have all -- met also the questions formulated by Iuliana, right? Iuliana has some questions regarding the prices and the volumes. Now the other, we will take a question from [ Ugan Ludovic Daradicz ]. In what stage is a Mintia power plant investment?

Okay. So for Mintia, in the previous quarter, we stated the feasibility study was approved. Now we are under development with the public procurement process for technical assistance. And beginning of 2021, maybe the third trimester, we will start the public procurement for execution, project and execution on Mintia.

We take now a question from Daniela Mandru. Question is, can you provide an estimate for synergies gas sale and production in forward year 2020?

We are not very sure how we close the year 2020, but an estimation, we can offer now around 15% of down the production and the sales according to this amount of quantities.

We take now another question from Mrs. Iuliana Ciopraga. So regarding the volumes sold through GRP, are you selling the gas at a premium versus the prices set by ANRE? What was the average premium achieved so far?

The price which was settled from the order of the authority, we have obtained a little bit higher price, but depends on the product which we have sold. The yield, we have between 4% to 40%, depends on the products which we have sold. But it's a little bit higher as the price set from the authority.

Are there any other questions? We take another question also from Mrs. Iuliana Ciopraga. Update on Iernut, when will it start operating?

Okay. According to the contract with the general constructor that we have, the finalization of work is hard to be met by 26th of December this year. This means also commissioning. So now we expect the company that is on-site there to respect the contract and to be able to make also the debt and the commissioning by the end of this year. We will be following closely the general contractor to see if they stick to the terms and for the deliverable that they have told to stick to by the end of 2020. Probably you are aware the government decision of extending the deadline for the national investment program that is financing 25% of Iernut was prolonged by the end of 2020, 31st of December.

Okay. There is another question from Daniela Mandru. It reached 50% production decline. The answer is provided by Mr. Ciolpan.

Our estimate, it is 15, 1 5, not 50. 15, we estimate end of the year.

Okay. We have another question from [ Ugan Ludovic Daradicz ]. There will be acquisitions in the short term of renewable energy producers?

Regarding the investment in renewable energy, you have seen in our development strategy, we want to diversify and start producing the energy from renewables. Right now, we probably then in the next day, we will be signing a technical assistance contract regarding an opportunity study on what types of renewables we can invest on, what could be the most suitable locations and in what configuration if we are going to mix solar with wind or geothermal. The study will be finished in 6 months. And then we will see where we would invest in the renewables. Right now, we are not discussing about acquisition of energy producers from renewable. We are studying the opportunity and allocations and to see if we intend to go where we're investing greenfield infrastructure on renewables, which probably is the best option at this moment.

We have another question from Iuliana Ciopraga. What created the increase in salaries expenses? What should we expect for the next half year?

Regarding the increase in salaries over the first half of 2020, we can mention the fact that at the group level, salaries have been adjusted with inflation in the months -- in November last year. Also, in the first 6 months of this year compared to the same period of 2019, we had an increase of the number of salaries of around 1% or exactly 0.6%. So the increase in salaries is due to these 2 factors. As regards the full year 2020, we do not expect at this moment any increase in salaries at the group level.

Please, are there any other questions? Any more questions? We have another question from [ Mr. Daradicz ]. Can you offer some insight on the partnership with Alro Slatina about the power plant? Thank you for the question.

Mihaela...

Go answer the other question.

Regarding the partnership with Alro Slatina, now we are on the evaluate the technical solution which is proper for their consume. We have discussed about the needs of the consume and -- to approximate on production price for this location. It's about the Slatina location, the main consume of the Alro. This is -- this partnership is included in the line of our business to develop solution for industrial consumer, and this project is one of this business line. It's at the beginning, but we think in the future, we can to develop a solution. And then to offer a concept which solve the problem of the consume into -- for Alro will be programmed CCGT which can to follow the consume and the dynamics of the consume in the -- their location. This have, at the moment, for this project.

Thank you. Are there any other questions, please? [Operator Instructions] Thank you. It seems that there are no more questions. Oh, sorry. Just -- a new question just came in from [ Andrea Palicz ]. You included in your CapEx plan a methanol production facility. Can you give us details on the project?

Yes. Thank you very much. This investment is also in our strategy that was approved on the 15th of June. It's an investment that would diversify the activities. And also, we will increase the chain of production from gas to other products. Right now, we are preparing in the next few weeks to start the public procurement procedure for prefeasibility study and feasibility study. According to our plans, we hope that by second semester of 2021, November, December, probably, 2021 to finalize the feasibility study and to have the location identified and start the actual works. Probably the construction of the plant would last for another 2 years. So it's a long-term project, and now we are preparing the critical midyear feasibility study. Thank you.

Thank you. Please feel free to address any other questions. So it seems that there are no more questions. So we thank you very much for all the questions you have addressed. In case you need further information, please contact our Investor Relations department team. The conference is now closing. On behalf of Romgaz team, thank you for attending today's conference call. You may now disconnect and have a good day.