SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to Romgaz conference call for discussing the financial results of the first 9 months of 2020. After introducing the speakers, Mr. Pena Daniel, Deputy CEO, will make an opening speech. Thereafter, the Q&A session will take place. [Operator Instructions] Please be advised that this conference is being recorded for internal purposes. On behalf of the company, the following speakers attend this conference namely: Daniel Pena, Deputy CEO; Robert Chirca, Deputy CEO; Vasile Ciolpan, Gas Trade Director; Mihaela Toader, Strategy, International Relations and European Funds Director; Gabriela Tranbitas, Head of Financial Reporting and Accounting Methodologies Office; [indiscernible], Head of Production Management Office; and Manuela Ogrinja, Head of Investor Relations Office. Now I would like to give the floor over to Mr. Pena Daniel, who will start the conference by presenting the financial year results of the first 9 months of 2020.

Good afternoon, ladies and gentlemen. Thank you for joining our conference call to discuss the results reported in the first 9 months of 2020. Romgaz Group released the quarterly report on Friday, and this includes the presentation of our economic performance and the consolidated interim financial statement. In addition, a detailed presentation of the group activities and financial results is available on our website in the investment -- Investor Relations section. Let's let us start with some highlights of the gas market environment in the first 9 months of 2020. According to our estimates, total natural gas consumption in Romania increased marginally by around 3% compared with the same period of 2019. Taking about the third quarter alone, total gas consumption, which includes the gas delivered to the gas-fired plants, advanced by a higher rate with imports weighting around 30% of the total consumption. Prices of gas sold by domestic producers to households and accumulated consumers were cut at a maximum value of RON 68 per megawatt hours, including June 30, 2020, as imported by the Government Emergency Ordinance no. 114 by 2018, amended by GEO 19 and GEO 1 from 2020. Starting with July 1, 2020, gas prices in Romania has been fully liberalized for both producers and suppliers with some restriction imposed by the gas release program, through the regulator's order number 143 and 144 by 2020. As such, large gas producers have been assessed their obligation to about 40% of the previous year gas production, less own and technological consumption on centralized market with a discount of at least 5% from the previous 60 days average price of the standardized products. The program is applicable until the end 2022. Regarding the gas sold by producer on the commodities exchange on spot and forward markets, the average weight gas prices of trade we delivered in the reference months recorded a decrease of -- in the third quarter of 2020. On the Central European Gas Hub, we note that the first 1 month reference index recorded a significant decline of 40%, both in the third quarter and overall in the first 9 months of 2020 compared to the same period of 2019. In addition, the COVID pandemic is seriously impacting all fields of activity as Romania has been under the state of alert since May and safety measures are in force, while the evaluation of the next months can hardly be predicted. Overall, in the first 9 months of 2020, Romgaz Group reported the following operational and financial results. Natural gas production declined by 90% year-on-year to 3.2 billion cubic meters. As a result of commercial regulatory and sanitary factors compared to our recently amended budget, it was slightly above the forecast. We continue, first, in the production rehabilitation project of the most important major gas reservoirs, the wells workover operations, and third, completed the investment in the development of production infrastructure and connection of new wells to this. Volumes sold from domestic production to the market amounted to 2.79 billion cubic meters, lower by 18% compared with the same period of 2019 due to the mixed factors mentioned before. We continue to hold a significant market share, about 38% of the total gas delivery in Romania according to our assessment. This represents a good performance, giving the 20% weight of imports in the total gas consumption in the same period and confirms our position as a major gas supplier in Romania. Romgaz Group reported consolidated total revenue of RON 2.92 billion in the first 9 months, adjusted down by 30% year-to-year and driven by revenues from gas sold from domestic production. We recorded a significant increase of 26% of revenue from storage to RON 28 million due to strong underground storage activity, especially in the first semester. Electricity production was more than doubled to 618 gigawatts in line with energy demand and price development in Romania and also considering the lower reported in 2019 due towards in the new power plants. As a result, revenue from electricity amounted to RON 114 million, higher by 36% compared to the same period of the previous year. Talking about expenses, we can mention that the UGS royalty declined by 51% year-to-year, and windfall profit tax also decreased by 40% compared to last year as a result of lower gas prices and volume sold. In addition, we recorded depreciation and amortization and environment expenses by 27% lower compared to 2019. Bottom line, we reported net profit of RON 942 million in the first 9 months, lower by 25% compared with the same period of the previous year. Positively, our profitability margin were robust and exceeded the level recorded last year. EBITDA margin remained flat, 51.6%. EBIT margin advanced to 36.7% and net profit margin came to 32.3%. These aspects are presented at pages 16 to 24 of Romgaz Group presentation available on our site. Regarding Q3 2020 alone, we can emphasize the following main developments. Gas production of 0.95 billion cubic meters adjusted by 34% compared to Q3 2019, but higher by almost 8% compared with Q2 with the second quarter of 2020. Total revenues of RON 725 million, lower by 21% year-to-year. Net profit RON 141 million compared with RON 209 million in third quarter of 2019. Profitability rates at strong level with EBITDA margin of 43.5%, a net profit margin of 19.5%. On the balance sheet side, we still have 0 indebtedness as the total cash position of RON 1.7 billion. With respect to the dividend, we remind that the shareholders' meeting on April 22 approved the distribution of the total gross dividends of RON 621 million, leading to a gross dividend payout ratio of 71 -- sorry, 57% for the last year. Regarding CapEx. The group invested RON 465 million in the first 9 months, which accounted to 76% of the revised budget amount. Among the investment categories, capital expenses for geological exploration were within budget. CapEx in the first 9 months were 30% on geological exploration to discover new gas reserves, 19% of works at the new power plant of Iernut, 45% on the upgrade of production equipment and other expensing, and 5% balance representing investment in our gas storage. An important event that took place in June 15, 2020, was a shareholder meeting of Romgaz that approved the company's development and investment strategy for 2020 to meet 2025 with RON 15.7 billion plan to be invested. As previously mentioned, strategic development direction includes continuous geological exploration to discover new gas reserves, development of production potential by adding new facilities in existing blocks, upgrade of production facilities and equipment and for assessments of new growth and development opportunities. Regarding the next period, we are mainly concerned about the COVID-19 pandemic evolution that is significantly impacting the domestic gas consumption and pricing and Romania's overall economy. With this, we would like to close our presentation, and thank you for our attention. In addition of that, we would like you to offer guidance for the last quarter of -- which was this year, for which we are improving our guidance. We estimate that the key financial figures for the last semester -- last quarter of 2020 compared with the budget, the adjusted budget to be 8% financially higher. Starting with October 2020, the production of last quarter is scheduled to be 30% gas production. Gas production to be higher by 30% of last quarter of 2019. Adjusted fourth quarter of 2020 -- adjusted budget production is by 5% higher than last quarter of 2019. And the production achieved in October compared with October 2019 of gas is higher, by 23% higher of the last quarter of 2019. In October, because we had the reference of October month. We do not compare it with the budget. We prefer to compare with last year, the same year 2019 with October 2019 where the -- of our power plant Iernut, electricity production higher with 0.8%, while the Iernut technological consumption, it's almost the same. It's only an increase of 0.4%. And the total gas production is with -- for October month, which is compared with the same period of 2019 is higher than with 8%. So what we -- the other figures that we have is that the electricity production for November we continue the trend. And it's almost 2%, so increased from 0.8% last month compared this month. So we expect the total production to be higher with about 50% this quarter. But due to the negative influence from the price, which we expect for at least our payout budget we have taken into consideration compared with the last year price less 22% to be only an increase of our key figures, financial figures with 28%. In addition to that, the price of selling from the market and the Romanian commodity exchange are higher than the price that was used on selling the gas that everyone mentioned in the budget. So the financing figures will be around 8% to 15% for the last quarter. This is what we expect. Directive [ in ] the price evolution of all the gas in the market. Thank you. If you have any questions, we'll be pleased to follow them.

[Operator Instructions] Daniela Mandru is addressing the question.

Please, can you tell us what quantities have you sold on the centralized market in the third quarter in terawatts, please?

Daniela, on the first quarter, you said, right?

No. On the third quarter.

On the third quarter. Okay. On the third quarter. Thank you.

Daniela, I will try to -- Dan Pena is my name. I will try to -- I do not have the figures, frankly speaking. But what I can tell you that about 27% of our gas is sold in [indiscernible]. We are seeing [indiscernible] market.

27%. Okay. Good.

And second, I prefer to give you a guidance even for the next period, almost the [ GRP ] are sold including January. Now we are think -- sorry my fault -- at this stage.

Okay. Good. Can you tell us also the prices?

GRP or the prices that you are -- for the entire gas that we are serving? Because another price on centralized market. And the other price that we have on direct selling and Romanian exchange commodities.

Yes. On the centralized market and on the OTC, so for -- on the free market, let's say?

I give you the guidance, according to the guidance, on the budget, what we have obtained in the market include the average price of gas that we are selling because this is the figure that we can give, I'm telling you for October, theoretically, the prices in October that are based on our budgets are 20 -- 34% comparing lower -- comparing with 2019. And the price that we have obtained is with 15% lower compared with 2019. This is what I can tell you now for October. And on the budget, what I would like you to say is that all estimates that we have done for last quarter of 2020, we have done on a prudent approach considering economic commercial in payment and health factors. And we prefer that as it was in October, what we obtained in the price in the market to be higher, let's say, even much higher on the price side. The idea -- the budget -- the price mentioned in the budget is much lower than the price that we have obtained in the market.

Yes. I don't know what price is mentioned in the budget. Because really, I didn't see it. But I'll look after to see. Anyway, now turning to the to the full year forecast and to the latest revised budget. So you are seeing that for this year, you -- the results obtained will be higher than the latest revision of net profit.

[ Saying ] my language. You are now saying that it should improve but in the guidance, you know what [ mathematically ]...

Yes. Okay. So -- because I didn't understand very well. That's why I want to clarify this -- on the last quarter of this year, on the -- you are saying that you are selling more gas by about 8% in October or for the full quarter, quarter-on-quarter or year-on-year? I'm not clear on this.

Okay. So the production that we are selling on gas, quarter-to-quarter, it's -- we expect to be higher with 13% average. What we have done in October month-to-month, so October 2020 compared with October 2019, it's higher. And compared with the adjusted budget, with the budget what we have, we expect that for the entire quarter 2020 compared with last quarter 2020 to be higher with 7%. So when we compare with the budget, 7%, if you compare with last quarter 2019, it's 5%.

Okay. I understood. But I'm not sure that you published in the budget, the quantities, the production and the sales. You published only figures. So I have nothing to compare the budget to with what you are saying. So in the last...

Yes. 2019. And while we are comparing with the figure of 2019, you can compare [ automaticallly ].

Yes. Okay. Good. And also, you are saying that in this quarter, in the last quarter of 2020, the gas prices are higher compared to the budget and lower compared with last year.

Yes.

Okay. Good. This is all from my part.

I would like to mention the following. What we are seeing now is the market if a price investor following the storage activity during the summer time. Everyone knows and the analysts knows that during the period of summer, gas was at much lower price because it was the effect of the COVID in the economy. Once the price of storage trend is to recover because the coming winter consumption is increasing much more comparable with summer. It's not only a competition with the import gas that we have. But I -- even the effect of the price reversal because once you have achieved gas stores, you can sell it at a little bit lower prices. But we expect this to finish this month, and starting with October to be only the effect of the import. If something is not happening with a lockdown or something like that. Anyway, we have figures, and we have seen, and we have managed to have an option even with -- will take place partial down of the economics. We have a solution from that one.

Okay. And regarding Iernut, when will Iernut be completed and starting operation?

My colleague -- and I think that they can help me. I would pass the microphone to them. Sorry.

I'm Robert Chirca Stelian. Based on the actual situation in the pandemic situation, which we were facing in the last period we estimate that Iernut would be fully function somewhere in the Q3 2021. We are facing now with, let's say, a challenge situation. Daily we have people which are affected with the coronavirus in the field in the -- and we have to, let's say, postpone works. So this is our estimation.

Okay. And can you give us a guidance on next year, for example, how do you see the gas sales production, let's see, the prices we will see how they will be.