SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to Romgaz Conference Call for discussing the financial results for the first half year of 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 attending conference, Mr. Razvan Popescu, Chief Financial Officer; Mr. Marius Veza, Accounting Department Director; Mr. Ion Foidas, Production Department Director; Mr. Ovidiu Pinca, Exploration Appraisal Director; Mr. Dan Cornea, Head of Investments, Project Management Mr. [ Mario Sabol ], Head of Quantities, Contracting Transportation and Management; Ms. [ Cornelia Serdan ], Head of Crisis; Mrs. 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. Razvan Popescu, who will open the conference call with an opening speech.

Good afternoon, ladies and gentlemen. Thank you for joining our conference call to discuss the results recorded by Romgaz Group in the first half of 2021. We released our Board of Directors report on Friday, including the presentation of our operational and economic performance and the interior consolidated financial statements. Also, an overall presentation of the group is available on our website. We will first start by presenting some highlights of the gas market environment in the first half of 2021 compared to the same period of the previous year. We estimate that the total natural gas consumption in Romania recorded an increase of around 8% in the first 6 months. In the second quarter alone, gas consumption averaged slightly more year-on-year, while our imports almost doubled and weighted [ 39% ] of total consumption according to our assessment. Average of wholesale gas prices on the Romanian Commodities Exchange both spot and forward markets, recording that decrease of 2 digits in the first half of 2021 compared to the same period of 2020. These prices are considered as of the market delivery. Regarding transactions over the Central European gas hub, we noted that average reference prices in H1 2021 and in Q2 alone were more than doubled compared to the same period of 2020 according to the data provided by the national agency of mineral resources. With respect to the gas sector regulation, please remember that on July 1, 2020, gas prices in Romania have been fully regularized for production -- for produces a suppliers. Nevertheless, selling price institution were reinforced through the Gas Release Programme through the regulator's order #143 and 144 for 2020. Accordingly, starting July 2020 and 2022, large gas production -- producers are to offer 40% of the previous year's gas production less for technological consumption on centralized market with a discount of at least 5% for the previous 60 days average price of standardized products. In summary, in the first half of 2021 compared to H1 2020 part of gas produced by large producers were subject to the Gas Release Programme, and there was no regulated price cap for the industrial to households. Overall, in the first half of 2021, Romgaz Group reporting the following operational and financial results. Natural gas production increased by 12.2% year-on-year, in line with the budget. That good performance is mainly due to investment efforts to expand and modernize the service infrastructure in order to start production in our gas discoveries and to increase output in the current fields such as [indiscernible]. Also, we continue to do rehabilitation programs in many fields that perform work of our operations, which resulted in the reactivation of 75 well. We carried out optimization of well operations by using modern methods to eliminate accumulated water, to monitor operation parameters by using minimal invasive technologies for our well operations. We reached comp market share of 41% of total gas delivery in Romania according to our estimates and our market share of 53% in deliveries from domestic production in H1 2021. Both figures are significantly higher compared to 2020. On the sales side, all gas delivered [indiscernible] 3%. In H1 2021 to 2.64 billion cubic meters versus the low level reported in the same period of 2020. But this is due to the pandemic. Total revenues from gas, including resales were up by 8% with mixed impact from higher quality sold and a lower average selling price in this period. Revenues of storage services were down 37% on lower capacity reservation in the 2021-2022 storage cycle complete compared to the previous one. Revenues for from electric also reported a decrease due to the market demand, price evolution of competitive market segments, but a low operational capacity at the [indiscernible]. Overall, we reported total revenues of RON 2.25 billion, up by 2.6% year-on-year. On the expenses, mention that gas and royalties increased significantly by 74% year-on-year as a result of higher gas production and rising gas prices. [ Windfall ] tax decreased by 22% compared to last year. Jointly expenses reported a 5% increase year-on-year. In addition, we reported depreciation, amortization and impairment expenses higher by 6% compared to 2020. Bottom line, our net profit stood at RON 762 billion 6 in the first 6 months, lower by 5% to the previous period. Both profitability margins remained strong. EBITDA margin at 52.7%; EBIT margin of almost 39% and a net profit margin of RON 33.8 million. For the second quarter alone, we hired the following way results. Actual recovered by 36.7% to 1.21 billion cubic meters but we have to report that Q2 2020 was seriously impacted by sanitary environment. Total revenues were up by 21% year-on-year. Net profit reached RON 298 million, around higher by 30% year-on-year. All profitability rates recorded rates. So we can mention that EBITDA margin of over 53% and net profit margin up to 32.3%. Regarding our balance sheet, it continues to be robust with 0 interest. With respect to the dividend, please report it on being the shareholder distribution outflow from gross dividends of RON 691 million on representing a gross dividend payout ratio of 55% for the last year. On the CapEx side, we invested RON 225 million in the first 6 months, which accounted for 54% of the budgeted amount that we delivered in our past year report. CapEx in H1 focused 27% from geological exploration, 69% of the upgrade of production equipment and other expenses and the 4% balance represented investment in our gas storages. Regarding the strategic development of Romgaz, we are in the process to reassess and development and investment strategy that was approved mid-2020 in order to take accounts to the account related developments also offers the early termination of the construction contract of the new Iernut power plant. We are in the process to assess the optimal solution to finalize this objective and continue to invest [indiscernible]. At the end of H1, we published a 2020 sustainability report, which addresses the relevant issues within longer term regarding our economic, social and environmental portfolio. We remain committed to develop our production potential and ensure the security of gas supply and to develop new businesses. With this, we would like to close our presentation, and thank you for your attention.

[Operator Instructions] We have a hand raised from Mr. [ Kian Wat Lim. ] A written question from Mr. Tamas Pletser. What is the current status of the new Iernut power plant? When do you expect to finish this investment?

So in respect to the Iernut power plant, as we have stated, we will finish next month. We are waiting for the final reports on the works that we've completed and the works that remain to be completed. And right now, the management is assessing the current state of the power plant and is looking to find the best solution. We are looking to start production in the Iernut power plant in late next year.

We received another written question from Mr. Gaborit. What is the -- when will Romgaz be able to monetize the high level of natural gas price?

Romgaz will monetize after the -- in the second part of this year and the beginning of next year.

Another written question from Mr. Gaborit. What is the usual duration of forward selling contracts?

[Interpreted] So the answer is on gas year from October saying this year until September, the other year.

Another written question from Mr. Tamas Pletser. When do you expect Romgaz bilateral agreements to be repricing in order to reflect the current higher prices on the gas exchange?

Yes. After -- in the second half of this year and the next first half of next year, because the contracts, as mentioned before, have a bit longer duration and the impact in our financial statement is from 6 months.

We have another written question from Mr. Gaborit. Is the company able to hedge the currently high level of natural gas prices?

We do not usually hedge high prices of producers may usually hedge lower prices. But not the high prices, we do not expect any hedges.

The next written question from Mr. Christian Vattern, any news on Neptune?

We are in the process of negotiating with Exxon. As you know, we have -- we have issued a statement and we will receive [Indiscernible] until the 15th of October, and we will inform the stock market if any news is of importance.

The next question is from Ms. Laura Simion. This is the second quarter when contracts concluded in 2020, determined a realized gas price significantly lower over 20% versus market price, what should we expect for Q3 and Q4? The answer will be provided in Romanian and will be translated.

[Interpreted] Prices for Q2 are under the market price because there are contracts that were concluded last year. Before October 2020, when the prices were very low, 62, 64 leu per megawatt. So Q3 maintains at the same trend as Q2, slightly increasing. So for the same reason -- because there are the contracts that were concluded last year and are still ongoing until this year, September. And starting with the Q4, when the new gas year will start, the prices will be at the current market price.

So related to the next question from Mr. Kian Wat Lim. Can you share some color on the realized price for Q2. The team considers that the answer has been given previously. The next question comes from Daniel Lamandro. How much of production do you sell on forward market. The answer will be provided in Romanian and it will be translated.

[Interpreted] On the forward market, we trade over 90%, even 95%.

There's again a question related to Neptune. but it has been answered. The next question comes from Mr. Gaborit. Is there any subsidy scheme for lower income families who will essentially have to face larger price increase.

This is not something that Romgaz knows or as long as we can do, but let me pay you -- will forward to us. May be is something that you should ask the government.

We have received another written question from Mr. Kian Wat Lim. Can you kindly advise on the status of Iernut upgrade? Why is Iernut not able to produce power? We understand that the gas price is high, but so is power prices.

The old power plant from Iernut, it is a matter of solution -- It's also a matter of quite low capacity -- operational capacity on the old plan plus that the CO2 certificates, the price of the CO2 certificate have went and we find always the best solution and which is the most profitable way, either to sell the gas either to sell that energy and quarterly expenses from year. It was always sort of management decision to start the [indiscernible].

The next question from Ms. Luliana Ciopraga. In October 2021, you will be closing first year contract as you have done last year.

[Interpreted] So related to the contract period, we have started yet to conclude contracts for the gas year 2021, starting with October 2021 until September 2022. And yes, the 1-year contracts are going to be closed this October.

Another question from Mr. Kian Wat Lim. How much of the gas are sold under contract?

[Interpreted] So all the gas quantity produced by Romgaz is traded under contract. So these are traded on the stock exchange and bilateral contracts with direct negotiation.

The next question is from Mr. Christian Vatter. Have you started to sell any 2022 production?

[Interpreted] So as can be understood from previous discussions, we conclude contracts starting with October 2021 until September 2022 and this is 9-month production for the next year.