SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to Romgaz Conference Call for discussing the report for Q1 2021. After introducing the speakers, Mr. Razvan Popescu, CFO, 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. Razvan Popescu, CFO; Mr. Dumitru Rotar, Deputy CEO; Mr. Radu Moldovan, Energy Trade Director; Mr. Marius Veza, Accounting Director; Mr. Dan Cornea, Head of Investments; Mr. Gabriela Tranbitas, Head of Financial Reporting and Accounting methodologies and the Investor Relations department. Now I would like to give the floor over to Mr. Razvan Popescu, CFO, who will open the conference with an opening speech.

Hi. Good afternoon, ladies and gentlemen. Thank you for joining our conference call to discuss the results for numbers for first quarter of 2021. On Friday, we released the quarterly report of the Romgaz Group, which includes the presentation of our economic and operational performance and the consolidated condensed interim financial statements. Also a detailed presentation of the group activities and financial performance is available on our website in the Investor Relations section. So now we would like to address some headlines for the gas market environment and legislation in force in the first quarter of 2021 as compared to the first 3 months of the previous year. We estimate that the natural gas consumption in Romania recorded a marginal increase of 6% year-on-year with imports higher by the same rate and accounting for around 20% of global consumption. The wholesale average weighted gas prices on the Romanian commodities exchange, both spot and forward markets recorded a 2-digit decrease in the first quarter '21 compared to the same period of 2020. These prices are considered [ highest ] of the month of delivery. Regarding the gas sector regulation, these were reported starting 1st of July 2020. Gas prices in Romania has been fully liberalized, both for producers and suppliers. Nevertheless, certain price restrictions have imposed for the gas release program to the regulator's orders #143 and 144. Accordingly, starting July 1, 2020, large gas producers have the obligation to offer 40% of the previous year's gas production, less own consumption on satellite markets with a discount of at least 5% from the previous 60 days average price of standardized products. This program will last until the end of 2022. Also until June 3, 2020 (sic) [ 2022 ], prices of gas sold by producers to household and assimilated consumers were capped at a maximum value of $60 per megawatt, as reported by the governmental involvements and ordinances issued 2018 and 2019. So in summary, in the first quarter of 2021 compared to the first quarter of 2020, part of the gas owned by large producers was subject to the gas release program, and there was no regulated price cap for the cash flow to households. Regarding gas prices on the several European gas hubs, we saw significant recovery in the first quarter 2021 compared to same period of 2020. Performance of the data provided by then National Agency for Mineral Resources. Overall, in the first 3 months of 2021, we can emphasize the following operational and financial performance reported by Romgaz Group. So we continued the production recovery, which started in the last quarter of 2020. We purchased 1,311.5 million of scented natural gas with a decline of 3.7% year-on-year, but our daily gas production adjusted by only 2.7% year-on-year and reported an increase of 1.4% versus Q4. This represents a strong performance given the still weak sentiment and show that we succeeded to consolidate and stabilize the potential of our quarterly gas production at the level of 1.3 billion -- 1.4 billion cubic meters. Natural price isn't wrong for us, with a strong contribution for the rehabilitation programs, capital repair and recompletion works and efforts to upgrade production infrastructure for [ mid- this summer’s ]. In the first quarter, we improved our position of the Romanian gas market. According to our estimates, we achieved a market share of 37% of total gas delivered in South Romania and a 43% market share considering only domestically produced yet. Both market share were higher by around 3% compared to last year according to our estimates. Regarding gas point of sales, we succeeded to increase both the delivery to third parties including resales by 40% year-on-year and by 50% compared to Q4. Total revenues from the gas sold stood at RON 1.4 billion, lower by around 5% versus the first quarter 2020 but improved by 33% compared to the fourth quarter given also the price environment. Revenues from the storage services reported a steep decline of 28% year-on-year mainly due to the lower capacity utilization but withdrawal service accelerated in this period and reported revenues higher by 30%. Electricity added RON 42 million in revenue as a result of the linked development of our electricity segment and overall market demand. Overall, in the first quarter, we succeeded to report revenues of RON 1.33 billion, lower by 7% year-on-year. On the expenses side, the key indexes included in other expenses items in the P&L, the windfall profit tax and gas&UGS royalties, dropped by 19%, due to mixed results of the oil produced and sold in parts of Romania and -- on the CG chart. All in all, we reported a net profit of RON 464 million, lower by 19% over the same period of the previous year. We guesstimate this to be a strong performance under the current sedentary environment and a high comparison basis. We also can underwrite the good profitability margin and the improved ones reporting in the first quarter 2021, well above the level we reported full year 2020, EBITDA margin of 52.4%; EBIT margin of 41.3% and net profit margin of almost 35%. These aspects are presented at Page 15 to 23 in the longest booked presentation available on our website. With respect to our balance sheet, we have a total cash position of 2 -- RON 1 billion and still 0 indebtedness. On the CapEx side, longest book investment, a total amount of only RON 94 million in the first quarter sites at 1% of that level as a result of lower drilling activity and difficulties in completion of the new Iernut power plant investment. CapEx in Q1 were 24% on geological exploration, 74% on the upgrade of production, equipment and other expenses and 2% in our gas storages. Regarding the strategic development of Romgaz, we are in the process to reassess the development and investment strategy that was approved midterm '20, in order to take into account the latest developments. Also, we are also in discussion to assess optimal solutions to finalize the Iernut power plant. With respect to the [indiscernible] outlook, the shareholder meeting held on May 7 has approved the 2021 consolidated budget. This improves an increase in our gas production of 11.2%; drilling works for a larger number of wells, some people did 4,000 liters centers; higher gas and sales; higher expenses with royalties and drilling programs, overall, leading to budgeted profit before tax of RON 1.14 billion. The evolution of the domestic gas market and the microeconomic thorough -- under the COVID pandemic are still important. We remain committed to develop the production potential by consolidating the gas reserves and the resources to consolidate our position on the gas and electricity markets and to develop new business lines. With that, we would like to close our presentation, and thank you for your attention.

[Operator Instructions] Ms. Iuliana Ciopraga.

I just wanted to ask something about Neptun. If you could update us what is happening there. When should we expect any news on the project? Actually, anything that you could tell us would be helpful. Can you hear me?

We are in the process of negotiation right now with the former subscription. We have informed the stock market about this, and we have informed the stock market that we have suspended the [indiscernible] until the 30th of May. So at this moment, we are still committed to finishing the plan. We have a number of solutions that we are looking at, and we have offered the association, because as you know, prior builder, the open bidder, has had a change in management, so they requested also suspension. So the new management will have a meeting with Romgaz. The meetings are still in place as we speak and will take place until the release, until the 28th of May.

But I -- yes. And if you could update us on Neptun, the Black Offshore project?

No. At this moment, we're under strict confidentiality agreement, and we cannot offer any type of disclosure about Neptun.

And -- but should we expect a resolution there in the second half of the year or early next year? Can you give us any sort of indication on timing?

Just -- they're not -- we are not -- any type of disclosure at the moment in a strict confidentiality agreements. When we would have updates, we will inform the stock market. Of course, with that, I'm going to -- we will proceed with moving forward.

And regarding pricing, if I look -- if I calculate it correctly, the average realized price for the first quarter was around RON 65 per megawatt, which seems to be below what -- even what you're reporting for the average price for the market. Can you give any sort of guidance how should -- regarding prices -- pricing in the following quarter? I mean, should we still expect the discount versus what the price we're seeing on the market? Or how should I look at this?

Related to the prices for Q2, what we forecast, these are increasing in line with the prices of Vienna market.

But I'm asking more about -- I'm asking also about the discount of the realized price versus prices that we're seeing on BRM on the market. Should we still expect the discount in the following quarters? What triggered the discount, and should we expect one in the following quarters? Because we see the prices right now on BRM market. I'm wondering, are they a good indication? Should the -- should we allow for a discount to that price?

So for an average -- for an average price, the Romanian stock market, the BRM, represents a good indication of prices.

We have received the written question from Ms. Laura Simion. What was the average realized gas price in Q1 2021? And our answer is that according to our quarterly report, this price can be easily calculated. And was just minutes ago mentioned about by your colleague that's around RON 65. We have another written question by Irina Railean. What is the amount of Romgaz should -- of natural gas Romgaz should sell via the gradual release program in 2021? So this amount that Romgaz should sell on according to the GRP is 20.2 terawatt hour. Another written question from Ms. Laura Simion, what are the causes for the increase in other operational expenses in Power segment in Q1 2021 versus Q1 2020?

The main part of the increase is the cost of the CO2 certificate in the first quarter of 2021. We have an expense of RON 67 million compared to RON 15 million in Q1 2020.

Another written question received from Mr. Eugene [ Ludovic Daradicz ]. I'd have a question. Romgaz plans to invest in green energy?

Yes, of course, we do have plans to invest in green energy. We are looking at multiple projects, and we have looked at some feasibility studies regarding some of those projects. And we also have some energy projects -- some green energy projects that are international plant for the divisions.

Another written question from Ms. Irina Railean. The investment plan released last year in June, is it still in force?

As I have mentioned in my opening statement, the investment plan is under review, and it will be submitted sometime in the next month or when it is finished. We are reviewing a lot of the projects that are included there, and we are trying to prioritize our investment process and also has the most feasible investments left plan. So at this moment, the plan is under review.

We have received another question from Mr. [ Eugene Ludovic Daradicz ]. What is the status of the project in Mintia?

We have had a feasibility study for the Mintia already laid. But right now we are working with our majority stakeholder for our options in Mintia. It is most definitely calmer. It will be probably in investment plan.

So we have the hand raised by an Iuliana Ciopraga. If you have more questions, please.

I have a question actually for the following year. So if -- assuming you take over Exxon's stake in Neptun, is there a risk that you might not even pay 50% of dividends? I mean have -- or in your projections, have you made any estimates regarding dividends going forward? I know that there is a legal requirement to pay at least 50%, but I was wondering, is there a risk that you will forgo that? And just one more regarding Iernut. How likely is it that you'll be starting production next year? And when would you rather see production there?

Can you please repeat the question? Or please, the point, because we have had interruptions, and I did not understand the question.

My question was, is there a risk that if you buy the 50% stake from Exxon, is there a risk that you'll forego dividends? I know there is a legal requirement for you to pay 50% in dividends. But is there a risk that you will forgo that? You will not apply that. Have you ever taken into account not to pay dividend, not to pay 50% of dividends? That's actually the question. Is it possible not to pay? Have you taken that into account? Because it's quite -- we're talking about the sizable investment, and I guess you don't want to overburden the balance sheet. Was there a discussion not to pay dividends? Is it -- is this something that you are taking into account?

Well, this is not something that Romgaz can -- this is orders from the government that the dividend should be between 50% and 90%. This is already the majority staple that has taken into account the price points that Romgaz would win in the future. We cannot forgo the dividends, just because we have the investments. But if the majority stakeholder will take into account the investments, of course, we hope that the dividend will be kept at RON 10.1 million level possible.

Okay. And regarding Iernut, when should we expect production in Iernut? Or is it too early to say?

Well, we are hoping that the Iernut power plant production should start sometime in the first quarter of the next year during the summertime.

We have another written question by Laura Simion. What caused the discount of synergy realized price versus the BRM in Q1 2021?

So the highest prices are on bilateral contracts, and the difference of prices comes -- depending on the month when these contracts have been concluded on the gas release program. And this month could be a very low price, having causes in the deliveries.

[Operator Instructions] We have hand raised by Iuliana Ciopraga.

So should I understand correctly that the discount was caused by GRP, because it wasn't clear what -- it just wasn't clear what the answer was. Was this caused by GRP, the discount between the realized price, RON 65 versus the BRM price, was it caused by GRP? Because -- or was it caused by the bilateral contracts? Sorry, but the answer was just unclear.

So I will translate this answer from Romanian. It would take just a few seconds. [Interpreted] So according to our analysis, the prices of all contracts concluded on the BRM, on Bucharest stock market, and other contracts different from GRP, with the delivery in Q1 2021 are represented by gas sold by the lowest price. Even gas, even gas representing GRP have a higher price than those gas that are on the stock market. This is our situation as explained.

Sorry. So you're saying that you sold at the lower -- it's a bit confusing what the message is actually. So you're selling on the market, you're selling on BRM, but the price is at the lowest price? Sorry, it's just I'm not sure I understand what you're trying to say. So the price on the market was lower than GRP, that was part of the answer as far as I understand.

Yes, you understood correctly. So for these gases on the stock market, the prices are lower than the prices of gas required to be sold on the gas release program.

But you sold as -- even on the sales on the market, I mean, even when you sold via the market, via BRM, the price was lower. It doesn't come -- the difference doesn't come from bilateral contracts. It's coming mainly from volumes sold on the market. And what should we expect going forward? Can you give us any guidance there? Should we still expect a discount? I mean, was there something specific in the first quarter? From your answer before, I understand that we should be looking at CHG. But more importantly, we should be looking at BRM in the end. I mean, BRM is the best indicator, but BRM should increase pull forward CHG, yes? Would that be correct?

[Interpreted] So you will receive the answer right now. So for the deliveries, for the gas deliveries, different from the Romanian stock market deliveries. We use the Vienna prices after the prices for alternative fuels. And the price is used on BRM in different ways. And these -- all these 3 prices are a guidance for the price used on bilateral contracts.

So BRM, CHG, and the third 1 was? Alternative fuels, meaning what? Oil?

Yes, the price for alternative fuel.

Like oil? Like crude? What do you mean by alternative fuel?

Heavy oil and gas oil.

And this is only for bilateral contract? Or this should be a good indication for all the sales -- for the overall sales of Romgaz? No, I guess you sell on BRM, so no, I'm guessing you refer only to [ bilateral ]. Okay.

The line is still open if you have other questions. [Operator Instructions] 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 is now concluded. On behalf of Romgaz team, thank you for attending today's conference call. You may now disconnect. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]