SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our conference call for discussing the preliminary results recorded by Romgaz Group in 2021. After introducing the speakers, Mr. Razvan Popescu 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, 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; Ms. Gabriela Tranbitas, Head of Financial Reporting and Accounting Methodologies; Mrs. Cornelia Sardan, Head of Prices; Mr. Marius Sabau, Head of Contracting, Transportation and Management of Quantities; 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.

Good morning, ladies and gentlemen, and thank you for joining our conference call to discuss the preliminary results recorded by Romgaz Group in 2021. We released a preliminary consolidated annual report on Friday, 25th of February, and this includes a brief presentation of our performance recorded last year. Also, an overall presentation of the group is available on our website in the Investor Relations section. I would like to take this opportunity to address certain aspects regarding the market context and also, to highlight the operational and financial performance of our group. So regarding the market context of the previous year, I would briefly mention some important factors that have had impact on our group performance. According to our assessment, total natural gas consumption in Romania recorded a marginal increase of 2% year-on-year, while in the last quarter alone, domestic gas consumption was roughly flat compared to the same period of 2020. Monthly weighted average of prices of wholesale gas on the Romanian Commodities Exchange spot, forward and balancing markets recorded a bottom in October 2020, and in 2021 followed an upward trend, while in the last quarter alone, prices rose almost 4x year-on-year. These prices are considered as of the month of delivery. On the Central European Gas Hub, the average reference price followed a more accelerated increase, almost 4x over the year and over 6.5x in the last quarter alone compared to the last quarter of 2020. Regarding the gas sector regulation, please remember that starting with first of July 2020, gas prices were fully liberalized for producers and suppliers, with some restrictions enforced by the gas release program through the regulatory orders #143 and #144 of 2020 and also #4 of 2022. According to these, large gas product -- producers have the obligation to offer 40% of the previous year gas production, less own and technological consumption, on centralized markets, with a discount of at least 5% from the previous 60 days average price of the standardized products. The program is enforced until the end of 2022, but with delivery in 2023. Regarding the operational and financial performance achieved by Romgaz Group in 2021, we mention the following: Natural gas production has reached over 5.03 billion cubic meters, higher by 11.3% year-on-year. This good performance is mainly due to implementation of action to optimize exploitation of gas reservoirs, extension of rehabilitation projects of the main mature reservoirs, workover operation in low productivity or inactive wells, and completion of investments to develop production, infrastructure and connect new wells to this infrastructure. We improved our favorable position in the gas market. So we estimate our market share of 42.4% in total gas deliveries in Romania, higher by almost 4% compared to the previous year, due to higher gas production and also high deliveries. Gas volumes sold increased by almost 13% to 4.97 billion cubic meters. So we succeeded to fully restore the decline recorded in 2020 and even exceed the 2019 pre-pandemic level. As a result, based also on the favorable pricing environment, we succeeded to increase total revenues from gas sold, this including gas acquired for resale by 52.4% year-on-year to RON 5.04 billion. We pursue an active commercial strategy and enjoy a strong portfolio of clients. Total revenues from storage services added RON 260 million to the top line, lower by 31% year-on-year on lower capacity reservation services. Revenue from electricity increased by almost 70% year-on-year against a 32% drop in production to RON 322 million, due to supportive demand and high realized prices on centralized markets. So overall, in 2021, we reported total revenues of RON 5.85 billion, up by 44% compared to the previous year. Regarding expenses, we emphasize that gas and underground gas storage royalties increased significantly, 3.8x year-over-year, and the windfall profit tax was over 3x year-on-year. This is the result of elevated reference prices on the Central European Gas Hub, correlated with higher gas production and higher gas prices and also, higher volumes sold. Depreciation, amortization and net impairment increased by 2.6% to RON 690 million. We updated the impairment test for assets used in gas production, but the test did not result in the cancellation of the previous set of impairments, as higher gas prices generated a substantial increase in royalties and windfall tax. Net profit has reached RON 1.9 billion, surpassing by 52% the previous year and a record high since our IPO. All the main profitability margins have remained robust throughout the past years, with earnings before interest, tax, depreciation and amortization margin at 47.3%, EBIT rate at 35.5% and a net profit at 32.4%. If we analyze strictly the last quarter of 2021, the results are quite notable. Helped by the favorable price environment and our strong commercial strategy, total revenues more than doubled year-on-year due to total gas revenues, which increased by 121%, and revenues from electricity higher by 135%. But on a volume of gas sold, lower by 60% compared to the last quarter of 2020, but on a gas production demand flat. EBITDA, it's at a historically quarterly high of RON 959 million. Net profit at RON 741 million, higher 2.4x compared to 2020 and the quarterly record high as well. Substantial profitability margin EBITDA rate of 40.7% and a net profit rate of 31.4%. The significant results were achieved in spite of negative impact from royalties and windfall profit tax, which jointly increased by 800% compared to 2020. Regarding the CapEx, Romgaz Group invested RON 458 million in 2021, representing approximately 50% of the budgeted amount. This excluding any expected payments that were supposed to be made for the acquisition of the Neptun Deep project. Extensive details are and will be provided in the annual report. We would also like to point some important events that occurred in 2021 and will have a significant impact for the coming years. First, 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 in October. Romgaz released its strategy for 2021 to 2030 that received a green light in the shareholders' meeting that was held on 4th of November '21. We have foreseen in the strategy several strategic objectives, such as a minimum of 10% reduction of carbon, methane and other gas emissions, annual natural gas production decline to be kept below 2.5% and an EBITDA margin between 24% and 40%. We want to achieve this objective through a series of important investments that will ensure the development and continuation of the company. I will only mention a few important direction provided in the strategy. First of all, the concession of new perimeters and exploration of offshore gas in the Black Sea. As you all are aware, the most important project is the acquisition of ExxonMobil Exploration and Production Romania Limited, the company that holds 50% of the rights and obligation under the concession agreement for petroleum exploration, development and production in the Neptun Deep block that is planned to be finalized this year. As you all may know, on December 10, our shareholders approved this acquisition, and now we are at a very advanced stage in terms of discussion on assets related to the contract that will be concluded between the partners. It is important to mention that in addition to the share purchase price of approximately RON 1.06 billion, Romgaz will have to provide by 2027 the investment necessary for 50% of the development of the project. In addition to this project of strategic importance, I want to mention also another important project called Trident, where Romgaz holds 12.2% share of the Trident Block concession in the Black Sea, along LUKOIL Overseas Atash B.V. Also, the strategy for 2021-2030 provides the development of blocks under concession onshore. Our most important project is the Caragele project, a high depth project with simultaneously mobilized substantial investments in the following 5 or 6 years, approximately RON 675 million, both in the development phase and already discovered accumulations and also, for assessing other accumulation identified by 3D seismic to be subject to future drilling programs. Also, the Snagov project and the construction of surface infrastructure required to steam into production wells that has been positive for hydrocarbon with commercial potential. Also, we have the Moldova Nord project, assessing and streaming into production, discoveries identified in the southern part of the Moldova Nord block. Last but not least, I would like to mention the production of sustainable energy that is part of our strategy, the development of 180 megawatts capacities to generate electricity from renewables and the 60 megawatts solar park that we plan to make it operational by the end of 2023. Assessing the feasibility to construct new gas field power plants, including the use of green energy and hydrogen, streamlining the activity by performing significant investments to increase the efficiency of the Iernut power plant. So we have ambitious goals for the coming years. And in this respect, we focus on strategic investments that will help the company to a long-term development. In the end, I would like to mention that the shareholders' meeting was scheduled today first and first call, second call tomorrow to approve the 2022 consolidated individual budgets and to appoint the interim Board members with a 4-month mandate. The decisions will be posted on the Bucharest Stock Exchange and the London Stock Exchange immediately after this meeting. With this, we would like to close our presentation, and thank you for your attention.

[Operator Instructions] We received a written question from Laura Simion. The possible extension of 80% windfall tax on renewable energy beyond March 31 could hamper or delay your plans to invest in renewables?

So indeed, from what we know, this is a measure that is only temporary, and our goal to invest in renewables is not to be deterred by any kind of windfall tax. We will take this into account and it has been taken into account. But for now, we view it as only a short-term measure by the government to stem the rise in electricity prices.

We received another written question, from Irina Railean. Could you provide a status update of the Iernut power plant? When the plant will be commissioned, what is the CapEx spend in 2021? What amounts should receive via P&I in -- should be received via P&I in 2022? Thank you.

So as we all know, the Iernut power plant being such a hot topic and also a very important project for Romgaz. As we have informed the stock market with every evolution of it step-by-step, we have finalized the, let's say, the evaluation of the works that have been done. We have informed the stock market about the status of the power plant. And right now, we are working in conjunction with the Ministry of [ Resource ] to find the best way that we can reopen the works with another contractor or even with the previous contractor. I cannot give you any type of, let's say, detailed CapEx spending expenditure during 2021, because it has been -- they have not been notable. So 2021 was more of a buffer year that we used -- that we have used it to, let's say, to more -- to have more evaluation done and see exactly where the project is standing. But the simple -- as a simple -- from a CapEx perspective is around 2% of total investments that have been done in the Romgaz Group during 2021.

We received another written question, from Mr. Tamas Pletser. What is your prediction for the first quarter of 2022 and 2022 production of natural gas, meaning Romgaz production?

We are looking for a production that is going to be relatively the same and stable as the one that we had in the previous year.

Another written question from Ms. Laura Simion. How much was royalty in Q4 2021 in billion cubic meter?

Royalty [indiscernible].

Mr. Foidas, do you have the numbers in front of you? The preliminary results?

There is an answer provided by Mr. Foidas, around 7% from production.

So they're referring to royalty just in cubic meters, okay.

Another question, a written question from Ms. Laura Simion, Iernut power plant. Why is it taking so long to complete until Q4 2023 for a project which is already 70% completed?

The project has encountered a lot of missteps because there has been, let's say, from the part of the association that was building the project and it being a key project, we could not overstep the boundaries of the Romanian acquisition laws. So we could not pay more than the law allows us to do. And because the prices have went up during the last period, we need to find a judicial way to update and to somehow amend the works that have been done there. We are in active process of doing that but this is not something that Romgaz, not being an EPC company, can do by itself. This is something that a third specialized party that also has experience in the projects and that can implement this type of project can do. So that's why it has taken so long to finish the project, but we are hopeful that we will see the first electricity come out of the power plant in Q4 this year.

Thank you. Another question, from Daniela Mandru. Please provide the gas volumes sold through the GRP program in 2021. The answer will be translated from Romanian. It is answered by Ms. Sardan.

[Interpreted] The gas volume sales are about -- around 39%.

From total sales.

We have a raised hand by Mr. [ Victor Nansianu ]. Mr. [ Victor Nansianu ], you are not connected to audio, and we cannot activate your microphone if you would like to address the question. We have another written question from Ms. Daniela Mandru-Petrovici. What is the expected realized gas price for 2022?

This is not something that we can share at the moment. It's not a public information that we can share with the investors. Thank you.

Another question from Mr. Tamas Pletser. What is your expectation about the change of realized gas price in the first quarter of 2022? Do you see overall higher sales prices than in Q4 2021?

It's a very volatile market at the moment. It's very hard to anticipate this regarding -- especially in the context of the geopolitical evolution, but Romgaz has sold in Q1 part of this production at market prices, and it's also ensuring the selling on the Romanian exchange. But it's very difficult to have an anticipation right now and put a number if it's going to be higher or lower than in the last quarter of 2021.

Another written question from Irina Railean. What is the expected CapEx for the 60 megawatts photovoltaic capacity? The answer is provided by Mr. Daniel Cornea, and it's being translated. Around EUR 45 million. EUR 45 million. Another written question from Daniela Mandru-Petrovici. What is the assumed gas price on which you base financial year 2022 budgeted sales?

We have published the budget, and we have submitted it to our general shareholders meeting. And there, you can, let's say, figure out a close number to that, but we cannot give the exact number on what we have budgeted, because that would give out a lot of the information of the company.

Another question from Irina Railean. How much of the 2022 gas production has already been sold? The answer is provided by Mr. Dan, around 65%. Another written question from Irina Railean. Are there any additional amounts to be recovered from ANAF?

We have, yes, some additional amounts that we are looking to recover, but I cannot give you the exact details, but they are not, let's say, significant in respect to the total turnover of the company that we expect to have next year. The significant part is the windfall tax and the royalties that are supposed to be paid to the Romanian government.

Mr. [ Victor Nansianu ], you may address your question. Please activate your microphone. Mr. [ Victor Nansianu ], if you would like to address the question, please activate your microphone. If you have any other questions, please feel free to address them. [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 call is now concluded. On behalf of Romgaz team, thank you for attending today's conference call. You may now disconnect.

Thank you very much. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]