SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Discussing the financial results recorded by Romgaz Group in the third quarter and for the first 9 months of the year. After introducing the speakers, Mr. Razvan Popescu, who will make an opening speech. Thereafter, the Q&A session will take place. Please be advised that this conference is being recorded for internal work. On behalf of the company, the following speakers attend this conference. Mr. Razvan Popescu, Chief Financial Officer; Mr. Radu Moldovan, Energy Trade Director; Mr. Ion Foidas, Production Department Director; Mr. Ovidiu Pinca, Exploration and Appraisal Director, Mr. Dan Cornea, Head of Investment Project Management; Ms. 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, CFO, who will open the conference call with an opening speech. Thank you.

So good afternoon, ladies and gentlemen, and thank you for joining our conference call to discuss the results recorded by Romgaz Group in the first 9 months of this year. We released the quarterly report on Friday, and this will use the presentation of our economic performance and IFRS and internally consolidated financial statements. Also on our overall presentation of the group is available on our website. In the beginning, we present some of the highlights regarding the gas market environment in the first 9 months of 2021 compared to the previous year. We estimate that the total nature of gas consumption in Romania marginally increased by 3% in the first 9 months, while in Q3 alone, gas consumption reported an increase of [ 13% ] according to our assessment. Monthly average and wholesale gas prices on the Romanian commodity exchange, both spot and old markets recording a bottom in October of last year, and afterwards followed the steep upward trend. These prices are considered as of the amount of delivery on the Central European Gas Hub the average reference price followed by more accelerated increase in 2021, almost 3x in the first 9 months and over 5x in Q3 alone compared to the similar period of the previous year. Regarding the gas sector regulation, please be advised that prices of gas sold by domestic producer to household will jump at the maximum value of [ SEK ] 68 per megawatt hour until June 30, 2020. Starting with first of July 2020, gas prices have been fully [ moralized ] both for producers and suppliers with some restrictions, the imported by the gas release program for the regulators orders #143 and #144. Accordingly, large gas producers have the obligation to offer 40% the previous year gas production, less home and technological consumption on the centralized market with a discount of at least 5% from the previous 60 days average price of the standardized products. That program is applicable until the end of 2022. For the first 9 months of this year, we can emphasize the following key operational and financial performance achieved by the Romgaz Group. We succeeded to increase our gas production by 15.9% year-on-year to 3.71 [ million ] cubic meters. The good performance is growing due to work to optimize well operations, continuous and extended rehabilitation programs in main mature reservoirs, work over operation at low flow for inactive wells and completion of investments, particular of the production infrastructure and connect new wells to this infrastructure. Our market shale total gas deliveries in Romania climb to 45.8% according to our estimate, higher by 8% compared to the same period of the previous year. On the sales side, traded gas volumes improved by over 26% to 3.76 billion cubic meters, close to the 2019 pre-pandemic level and at the highest level recorded in the past years. Consequently, total revenues from gas to including resales were up by 26%, also due to an active commercial strategy and strong portfolio product. Revenues from storage services has declined by 30% on lower revenues from capacity reservation and reduction activities during the period. Revenues from electricity also increased by 27.5% year-on-year based on the favorable gas engine policy conducted by Romgaz on the supportive electricity market demand and our pricing as well. So overall, we reported total revenues of RON 3.5 billion, up almost by 20% compared to the previous year. Regarding the expenses, we can mention the negative impact of oil and gas and royalties that increased significantly 2.6x year-on-year, mainly as a result of high reference prices on the European gas hub market and also the windfall profit tax that grew by 9% in the period on the -- based on the higher ones. We reported a net profit of RON 1.16 billion in the first 9 months, which exceeded by almost 23%, the level reported in the previous year. We also maintained all profitability margins at strong levels, but EBITDA margin of 51.7%. EBIT margin at 37.5% and net profit margin of over 33%. In the third quarter alone, results were significant helped by our favorable promotional strategy and improved pricing in the market so we can highlight the overall performance. Natural gas production was higher by almost 25% to 1.19 billion cubic meters, volume of gas trade has grown by 34% year-on-year at the highest Q3 level reported after our listing on the [ New York ] Stock Exchange. Total revenue were up 72% year-on-year, mainly due to total gas revenues, which increased by 85% and also helped by revenues from electricity generated by the whole year [indiscernible]. Positively, we reported EBITDA almost doubled to RON 622 million and a net profit of RON [ 395 ] million on which is 2.8x higher compared to the previous year. All profitability rates recorded an increase so we can again mention the EBITDA margin of almost 50% and a net profit margin up to 31.7%. All these significant results were achieved in spite of the negative impact from royalties and windfall profit tax that jointly were higher 3.5x compared to the previous year. Regarding the CapEx, we invested RON 349 million in the first 9 months, which accounted for 54% of the budget in the month. We provided additional details in our quarterly report. There are also highly important event that occurred for our plan in this Q4 of this year and which are in the investors' attention. In October, the government approved the extension of exploration program for 8 blocks by 6 years up to 2027 as negotiated with the National Agency for Mineral Resources. We issued the new Romgaz strategy for [ 2021, 2030, ] which received the green light from our shareholders on November 4. The main strategic objectives are to develop portfolio resources, both onshore and offshore focused on mitigating the climate change effects to produce electricity with low CO2 emission and use renewable energy sources and digital transformation of the [ cover ]. The strategy is available on our website. In line with our strategic objectives to strengthen our gas resource portfolio we are in advanced stage to acquire 50% of the rights and obligation for the petroleum exploration, development and production in [indiscernible]. The transaction cost is going to be partly financed to EUR 325 million in bank loans. Both on an extraordinary and ordinary general meetings of shareholders are held on December 9, to approve the acquisition and the related bank loans. As we have previously announced, we expect to finalize the transaction in the first quarter of next year after obtaining all the required approvals and meeting all the terms mentioned in the sales purchase agreement. With this, we would like to close our presentation, and thank you for your attention.

[Operator Instructions] We received the written question from Irina Railean. What would be a CapEx guidance for the next 5 years that would meet the production evolution target mentioned in the recently published strategy, excluding acquisitions.

So the 5-year CapEx strategy and the amount is very dependent on and if our shareholders will approve the acquisition of the Neptune Deep Project. Also, the CapEx is dependent with how we will view the investment strategy in relation with the [indiscernible]. And in that case, that would be [indiscernible]. I cannot give you an exact target right now because it will include both the investment in Neptune Deep, and it would include both the investment in our own capabilities and development of the onshore part of the project.

The next question from Iuliana Ciopraga. Can you disclose how much have you sold on -- sold forward for 2022 per estimated?

[Interpreted] So at this date, we have sold, except for the GRP, which is an obligation for each month. We have sold approximately 90% of the available gas quantities.

The next question, what is the current status of [ Yano ] power plant project? When do you expect -- We cannot see the final words. When do you expect a new year, not power plant.

As you know, we have contracted a third party consultant evaluate the works that have been done, our important has been issued that we have issued a press release on the stock exchange or guide at report. And right now, we are actively looking for the best solution to continue to finalize the power plant. Right now, we are looking for some time next year to the end of next year to [indiscernible] and finalize and [indiscernible].

The next question from Irina Railean. Given the recent spike in the natural gas prices, when might we expect a reversal in the impairment of gas production assets?

According to IFRS, whenever there is a significant change in assumptions considered in previous impairment test, we have to reperform the test. At this point, we are investigating into how long term the spike is. And we will reperform the impairment as by the end of the year.

The next question from Iuliana Ciopraga. Can you also disclose the average price for the volumes sold forward, excluding GRP?

[Interpreted] But we can mention that the guest sold on the market -- on the stock exchange. We're sold for a price that is equal. So this price was equal and sometimes even higher than the price on the Vienna Gas Hub. And the prices from the bilateral negotiated contract are based on the prices used on Vienna Gas Hub, on the Romanian commodities market, and the quotation for alternative fuel and these prices are available. So these are valid only for the date when the offer has been made.

The next question is from Mr. Tamas Pletser. What is your opinion on the dividend payment if you succeed to buy Exxon's stake?

Now the dividend payment is regulated by law and by now, we have to issue a dividend from 50% to a maximum 90%. That only depends on our shareholders. So our majority shareholder call for that dividend or would decide if that dividend should be 50%, [indiscernible] 90%.

The next question from Irina Railean. What is the amount Romgaz further invest to develop Neptune Deep until the first acquisition of the 50% in Neptune. I'm sorry. I cannot see the entire question. So I repeat the question, what did the amount Romgaz should further invest to development to an until the first gas besides the acquisition of the 50% in Neptune.

Right now, we cannot give an exact number until our shareholders will approve the actual acquisition, so we cannot make any kind of remarks regarding this CapEx. These remarks will be made and could be made after the 9th of December when our shareholders will approve the actual acquisition.

Another question from Iuliana Ciopraga. How much have you sold on bilateral contracts for 2022 estimated?

[Interpreted] So it's around 44%. So around 44% from the contracted quantities are sold on bilateral contracts. And from the 44%, around 85% are contracts with heat power plants, heating companies.

We have another question from Mr. [ Oleg Galbur ]. How do you explain the decrease of earnings before tax in the upstream segment in Q3 2021 versus Q2 2021, which happens in an environment of more favorable gas prices on the centralized market?

We had higher royalties and [indiscernible] tax. This would be the main explanation for the lower results.

Another question from Irina Railean. What is your view on the long-term gas prices? For how many quarters can we see such high levels of gas prices?

[Interpreted] So the prices on both markets on the European on the Vienna Gas Hub and on the Romanian commodities markets are now a little bit temporary. So at least for the present time. But considering the transactions, we concluded until September and with the delivery for the next year. In quarter -- in the fourth quarter and in the next year. The delivery prices will grow significantly in the fourth quarter of 2021 and in the first quarter of 2022.

Another written question from Iuliana Ciopraga. Assuming you buy Neptune Deep, given high CapEx, do you plan to ask for an exemption on the rule to distribute minimum 50% as dividends?

This exemption will depend on how the gas market will evolve in the coming years and will depend on the -- also on the Executive Board. And how [ we ] do the CapEx investment. It is on our solution and is also a possibility to do that. But we will probably do that after the 9th of December.

The next question from Mr. [ Oleg Galbur ]. What is the Board of Directors' view on the 2021 dividend? Would you see room for paying higher dividend per share?

The dividend -- the distributional dividend is regulated by law and is 50% of the net profit. So we will probably abide by this regulation from the information that we have at this point in time.

The next question from Mr. [ Christian Pete ]. When do you expect more parameters related to Neptune to be issued? Are they included in the December shareholders' meeting, like reserves, CapEx, et cetera?

Yes, they are included in the December shareholders' meetings and after -- just after the shareholders will have the [ say ] on the proposal after that, we can give more information to the market on is CapEx and the other questions that you have put forward.

Another question from Mr. [ Oleg Albur ]. What is your average realized price of gas in the upstream segment in Q3 2021? And how does it compare with the realized price in Q2 2021? [Audio Gap]

[Interpreted]So it is important to highlight more than 50% of the guests ready on the stock market in the first 9 months are from contracts concluded in 2020. Under the conditions, under the price conditions that existed in 2020. And 19% of the gas delivered under bilateral contract are delivered under the contracts concluded in 2020. I cannot give you a price. But I can say it is around 25% higher than the price of the previous quarter. The average, this is related to the average list price. [Audio Gap]

Mr. [ Christian Pete ] has the hand raised. You may now address your question. Okay. Then we go further on with Ms Daniela Mandru, you may now address your question. [Audio Gap] Unfortunately, we cannot hear anything. We have --

Sorry. Yes. Okay. I muted my mute myself. So again, please help us with figuring out the price, the realized gas price in the last quarter of this year. According to my computation, it should be 2x higher, about 2x higher compared with the realized price in the third quarter of the year. So it should be around RON 168 per megawatt. How far I'm from the actuals? This is my question, the first question. So I'm too optimistic. I'm saying that in the last quarter, I'm seeing the price at over 150 per megawatt, I'm too optimistic on average on all markets. [Audio Gap]

Do you mean the fourth quarter of the year or the third quarter?

The fourth? Because for the third quarter, I can compute it by myself by, according to your data because in the third quarter, the realized price is RON 88 per megawatt, it's simply computed by the data you provide. In the fourth -- the last quarter of this year, according to my -- based on the -- what we see on the GDP market on centralized market, according to my estimates, the price should go at around RON 168 per megawatt. My question is, I'm too optimistic, I'm good with these estimates, giving the data that you already have because the quarter is already -- it's almost closed. I'm referring to the last quarter of the year.

So our -- our management says that you have calculated correctly.

So now regarding the Neptune Deep project. Given the amount that you are preparing to pay for 50% participation in this project. Can you disclose to us or help us to the value of the project, the estimated value of the project, the were estimated by Romgaz, given that you are preparing to pay $1 billion for 50% in this project. What is the net present value of this project according to your estimates?

Romgaz have done some estimate. This estimate will be presented to the shareholders meeting on the 9th of December. And afterwards, with our partners, [indiscernible], of course, our shareholders will accept. We can give you this estimate. But until then, we cannot disclose any kind of estimate to the market.

Okay. Let's try it again with the gas. So my guess is that the value of the project, the net present value of the project should be close to $3 billion. I'm close to your estimate?

[indiscernible] But this is the value of the entire project.

The value of the entire project. Yes.

Around this figure. I think this is -- your estimate is going to ours as well. [Audio Gap]

We received 3 written questions by e-mail from Mr. [ Daniel Bosio ], and we will provide an answer for them now. I will read them by turn. Can you tell us why Romgaz longer makes public or enforce [ BUCA ] Stock Exchange about the value of the big contracts concluded with the company's client.

[Interpreted] So we would like to inform you that the law 24 from 2017 has been amended, modified last year with respect to significant transaction and affiliate. And this no longer obliged is our company to make public such data. So the -- those who meet the conditions are going to be public.

The second question from [ Daniel Bosio ]. When do you expect [ Gerno ] power plant to be put into use?

We are already answerd that question. So the [ Gerno ] plant, we expect it to have been finalized and in production by the end of next year.

And the third question from Mr. [ Daniel Bosio ] is related to how much gas do you expect to extract by 2022?

[Interpreted] For production for 2022 is estimated to be almost equal like the production for 2021. We have hand raised from Mr. [ Christian Pete ]. You may address your question. Mr. [ Christian Pete ], you are self muted. Would you like to address a question?

Just -- sorry. Now can you hear me? I'm sorry.

Yes. Please.

Just a follow-up on net on approval shareholders meeting. I'm looking on the site, and there's no available information. How can we consult, how can we see this information? I'm representing a shareholder.

Information can be consulted -- will be consulted as long as headquarters where you can do also the share purchase agreement and all other classified documents. Please be advised that all the documents are classified, and they can only be viewed by the longest shareholders by request of our headquarters. So the document will not be able on site. [Audio Gap]

If there are any other questions? [Audio Gap] Ms. Daniela Mandru, please address your question.

Yes, please help us, at least help me a little bit with these taxes because now everything is changing. So please, the reference price for [ wind for tax ] which is the level of this reference price. It's 68 or 47.5? Because I don't know anymore. [Audio Gap] Hello? [Audio Gap] Hello? Did you hear my question?

Yes, we heard it. We'll provide an answer now. So with respect to your question, what lies between [ 43.5 and 85.5 ] is taxed with 65% after decreasing royalties and investments. And what is above [ 85 ], the tax is 80% decreasing minus royalties.

I didn't understand anything. My question regarding the [ windfall ] tax. So [ windfall ] tax should be computed versus the reference price. What is the reference price? Up to [ 85 ], yes, because they are making a [ windfall ] tax differentiated by the level of the gas price in the market or realized gas price, okay. But 85 minus what reference price multiplied by 60% should be -- what is the reference price? Because I'm not sure if it is [ 68 or 47.5 ] adjusted with the inflation or not adjusted to inflation, this is my dilemma right now.

The reference price for completing the wind fall back.

So it is -- the reference price is 47.5. Without inflation.

No inflation. Yes, good. And the royalties are computing based on [ take ] price, correct?

Can you repeat, please?

And the royalties are computed based on the [ tag price ] Austrian Hub Price, gas price.

Yes. If you have any other questions, you may address them now. [Audio Gap] We received the written question from Iuliana Ciopraga. Royalties are computed taking into account the larger CEGH or realized price or just the Vienna Exchange? And the answer would be only the price from Vienna Stock Exchange. [Audio Gap] If there are further questions, please feel free. So we have a hand raise from Mr. [ Christian Pete ]. Please address your question. Mr. [ Pete ], you are self muted.

Sorry. Just one question, if you can develop a little bit on the EU level, how are the discussions going regarding natural gas -- energy produced by natural gas inclusion in taxonomy or not and as a transition fuel, if you can develop a little bit on this? [Audio Gap]

Can you repeat the question, please.

Right. So if you can develop what is -- how are the discussion at the EU level regarding the inclusion of energy produced by natural gas burning in the taxonomy? And what is your stance here?

This, our Romgaz views and [ we'll view ] gas has been a transition fuel, but this is not for us to decide. So time of [indiscernible] inventory talking about -- with all the producers already paid assumed to certificates. They also pay the one from tax, but it's up to the government to decide if an extra tax will or not be improved. And it's up to the European Union to view gas as a transition fuel or not. So Romgaz, we only abide to the rules and what the decision will be. But we do not know, and we do not have any extra information to issue at this time. [Audio Gap]

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.