SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to our conference call for discussing the financial results recorded by Romgaz Group in the first half of 2022. 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. Andrei Bobar, Finance Director; Mr. Marius Veza, Accounting Department Director. Mr. Ion Foidas, Production Department Director; Mr. Paunescu Octavian, Exploration Appraisal Director. Sorry. For a second, there's been a technical error on our screen. We go on with the participants. Ms. Gabriela Tranbitas, Head of Financial Reporting and Accounting Methodologies; Mrs. Cornelia Sardan, Head of Prices Department; Mr. [ Cornel Kjertes ], on behalf of Investments and Project Management; and our 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. Thank you.

Good afternoon, ladies and gentlemen, and thank you for joining our conference call to discuss the results recorded by the Romgaz Group in the first half of 2022. We released the Board of Directors report last Friday, and this comprises a detailed presentation of our economic and operational performance and also the consolidated interim financial statements. Also, an overall presentation of the group is available on our website in the Investors section. I will start by highlighting some aspects of the gas market environment in the first half of 2022 compared to the period of the previous year. We estimate that natural gas consumption in Romania decreased by 13% year-on-year while imported gas volumes advanced and reached 29% of consumption. In the second quarter alone, gas consumption declined by almost 19%, with imports maintaining a steady quarterly weight according to our estimates. It is worth to note that compared to other European countries, Romania still enjoys a high independence of gas imports as consumption presently relies heavily on the domestic production. Regarding the transactions done on the Romanian commodity exchange, the wholesale average price was 5x higher in H1 2022 compared to the same period of 2021. These prices are considered as of the month of delivery for transactions concluded on this market segment. The average reference price on the Central European gas hub in the first 6 months also increased over 5x year-on-year according to the data provided by the Romanian Agency for Mineral Resources. Regarding the gas and energy sector legislation in Romania, our activity was influenced by 2 main regulations in H1 2022. The Gas Release Program and the Government Emergency Ordinance No. 27. In the GRP according to the ANRE Order 143 for 2020, large gas producers got an obligation to offer 40% of the previous year gas production on centralized market with a minimum 5% discount from the previous 60-day average price of standardized products. The program started 1st of July 2020 and was suspended on 1st of April 2022 by the Government Ordinance No. 27 for 2023. This government ordinance is effective during April 1, 2022, and 31st of March 2023. Main provision applicable to gas producers include regulated selling prices of RON 150 per megawatt for the gas sold to households and RON 251 per megawatt hour for the gas sold to heating plants to produce thermal energy for household. Exemption of windfall profit tax for revenues for the gas onto regulated prices and computation of gas royalty based on these prices instead of [ CEGH ] prices. Also, gas suppliers have kept selling prices for some categories of final clients as follows: maximum RON 310 per megawatt hour for households and a maximum of RON 370 per megawatt hour for power plants for the gas used to heat the households and for industrial clients with annual consumption below 50,000-megawatt hour. For the energy market, the ordinance also imposes pricing norms as well as an 80% windfall tax profit for energy-producing -- producers during the application period. Regarding the operational and financial performance reported by the Romgaz Group in the first semester of 2022, we can highlight the following results. Natural gas production was 2.52 billion [ cubic ] meters exceeded by 2.3%, the budgeted figure with only a marginal adjustment compared to 2021. We continue to consolidate our production through exploration programs to stream new wells into production, production rehabilitation projects in the main mature reservoirs, workover and recompletion operations to reactivate high-flow wells and optimization of wells operation by using modern techniques. As regards with the investments in our gas production facilities in the first half of 2022, we put into operation the gas dehydration plant in Cosereni, an investment of RON 31 million for the development of the Snagov project. We completed 1 production well and design is in progress for 8 other wells. We finalized 9 surface facilities and other 7 are in construction, with -- and 19 other are in different preparation stages. Then We also performed a completion, reactivation and repairs for 106 wells. In addition, the external auditor of our gas portfolio that was performed by DeGolyer & MacNaughton U.S.A. was finalized by the end of June. The audit states, the total gas reserves are 65.9 billion cubic meters and total gas resources of 55.9 billion cubic meters. We increased ever more our already strong position on the Romanian gas market. Our market share exceeded 43% of total deliveries in Romania and 61% in the consumption covered for domestic gas according to our estimates. Regarding the gas sales to third parties, volume decreased by 8.9% year-over-year in H1 as a result of lower gas consumption in Romania. We mentioned that the volumes trading in the GRP were lower, impacted by the high price environment and the status of ELCEN Bucuresti and ELCEN Constanta as captive clients that had a negative effect on growth. Nevertheless, total revenues from the gas sold reached historical high in H1 to RON 6.68 billion, almost 3.4x year-on-year due to a significant increase in our average realized gas selling price that overcompensated for the volumes sold. Revenues for electricity added RON 499 million compared to RON 43 million in H1 due to higher production and favorable prices in the market. Revenues from storage services reached 108 million, higher by 46% year-on-year, mainly due to higher revenues from capacity reservation and injection services. Overall, the group reported total revenues of RON 7.50 billion, over 3.3x a year -- higher year-on-year at a historical high. On the expenses side, we can underline the windfall profit tax increased over 17x year-on-year to RON 3.67 billion coming from RON 231 million in H1 last year. And also total royalties that rose 5x to almost RON 1 billion. Altogether, these 2 taxes reached RON 4.59 billion from RON 400 million in 2021. These accounted for over 61% of total revenues in H1 and almost 83% from total expenses. Bottom line, we recorded a record-high profit of RON 1.73 billion, more than double from the same -- compared to the same period of 2021. Profitability rates declined in H1 2022 as a result of the substantial tax expenses, but were still at favorable levels. EBITDA margin standing at 29.1% and net profit margin at 23%. For the second quarter alone, we can highlight the full main results. Natural gas production edged up 0.02% to 1.21 billion cubic meters. Total revenues were higher 3.9x to RON 3.57 billion. Net profit was at a record high at RON 746 million, up 2.5x year-on-year, and profitability rates continued to decline with EBITDA margin of 26.8% and net profit margin at 20.9%, but still stay at favorable levels. Regarding the strategic development of our company, the latest achievements are in line with the development strategy for '21-'30 that was approved by our shareholders on November 4, 2021. Our strategy includes the important objective: development of onshore blocks under concession, concession of new perimeters and exploration of offshore gas in the Black Sea, production of sustainable energy and the 10% reduction of carbon, methane and other gas emissions. In line with our objective on August 1, Romgaz successfully completed the transaction with ExxonMobil for the acquisition and transfer of all shares issued by ExxonMobil Exploration and Production of Romania Limited, representing 50% of the rights and obligations related to the Neptun Deep project. The acquisition was partially financed through a credit facility in the amount of EUR 325 million that was signed by Romgaz on March 30. In the next period, we'll make efforts to pursue the development of production fees as soon as possible. Regarding our new power plant, the legal norms released in Q2 will help us finalize construction works by the end of 2023 and have expenses reimbursed by mid-2024. On the CapEx side, Romgaz Group invested a total amount of RON 218 million in 2022, 3% lower year-over-year and 55% of the amount budgeted excluding the Neptun Deep project. CapEx was focused 26% on geological exploration, 71% on equipment upgrade, and 3% balance on the electricity and storage segments. Also, in line with the national and European retail requirements for nonfinancial reporting in June, in August, released the 2021 sustainability report which addresses relevant issues regarding corporate governance, ethics and anticorruption as well as our economic, social and environmental performance. Finally, I would like to mention the distribution of dividends to our shareholders. Payment started on July 27 to the shareholders in the registry on July 6. Please recall that the Shareholders Meeting in April decided upon total gross dividends of RON 1.46 billion, or a total gross dividend per share of RON 3.80, which results in a gross payout ratio of 76% from the 2021 net profit. With this, I would like to close our presentation, and thank you for your attention.

[Operator Instructions]

This is Iuliana. I have a question. This is Iuliana Mocanu Ciopraga. I have a question regarding the offshore law. How much of your current production could benefit from the amended offshore law, which now allows onshore dip to benefit from the same taxation as offshore?

Yes. thank you for your question. At the moment, from Romgaz's side and what the exploration we have on onshore, we do not benefit from the new offshore law, but as time will pass, and probably we will have investments in more deep onshore project as well as the onshore project, we'll have, probably, a response for you. But at the moment, Romgaz does not benefit from the modification in the offshore law.

But from Caragele, I understand that there, you started some production in Caragele Deep.

Yes. So there are 2 different sites in Caragele. There is the Caragele Deep and the Caragele Shallow. And we currently extract only from the shallow part of Caragele. The deep is in exploration at the moment, and we're actively trying to finish 2 wells that are being built there. But at the moment, we do not extract from the deep part of Caragele.

Sorry. Sorry, I want to add something. Regarding this deep production onshore, I want to mention the fact that the National Agency for Mineral Resources has the obligativity to issue clarification of which fields are considered to be from deep production, because we have wells -- in a certain field, we have wells at 2,800 meters. We have also wells drilled at 3,200 meters. What is the production that we consider in which we will apply this favorable taxation? The one that only for the well that is below 3,000 meters? Or the entire production of the field? take into consideration that there are certain wells that are below 3,000 meters. So at this moment, the national agency for mineral resources is working to issue a statement for identifying the respective fields in which we will apply this favorable taxation from the offshore law. Okay?

So you might benefit from the new offshore law, but it's not clear yet.

Yes, yes, yes.

We don't have a clear picture. We don't have the clear picture at the moment to issue a...

But potentially, how much of your production could benefit? I mean you already have a view -- an overall view how much is produced below the 3,000 meters?

Well...

On well, we have the regulation, the rules for establishing which fields will be considered and which is the production that will be considered and applicable to this offshore law. We cannot make any statement. We have to obtain the clarification from National Agency for Mineral Resources because the quantities can vary significantly depending on how you assess the ultra-deep fields, okay?

Okay, I understand. And regarding Caragele Deep, there have been some comments in the media regarding Caragele Deep. The reserves might be higher than they were initially estimated. So the initial estimate was 30 bcm, but there were some comments that reserves could be higher. Can you provide us any details on this? And when do you expect production in Caragele Deep?

Yes, we cannot comment on what has been stated in the media regarding these reserves. And the ones has published the reserve that was were audited by the end of the year. So those are the published reserves and those are the reserves that are calculated on the procedurings that are used in the European Union. So those are the reserves that will be taken into account. Otherwise, we cannot comment on any speculation. We can't comment on the declarations being done intermediately.

And when do you expect production in Caragele? I would assume this is -- Caragele Deep would have been included on the resource, right, in the latest report from DeGolyer & MacNaughton?

Can you repeat, please?

The Caragele Deep, has it been included in the resources in the latest report?

Yes, this is that are included also in resources and reserves.

But the deep part, I would assume it's included on the resources, right? The 30 bcm that was mentioned initially, where would I find that? Where do we find that? And when do you expect production in Caragele Deep? That's the follow-up question.

In Caragele Deep, we told investors we started acquisition procedure for the rebuilding of 2 wells that have been dug out, but we encountered technical problems. And we are probably -- it depends on how fast everyone can move. But I think it's somewhere should be till the end of the next year. It also -- it depends a lot on the technical status and the technical spec status of the wells and also if we will encounter any type of accidents during the drilling. It's very hard to say at the moment, to give a correct answer.

But these 2 wells that you mentioned, this would not be a production --a plateau from the, right, exploration.

Yes. No, for sure not at the moment. They are production -- there are also production wells. They are not exploration wells.

So regarding the DeGolyer report. So we have 1 well producing starting with 2019 that produces from this ultra-deep field. And the other part, the most significant part, it is in the -- it is not in proved reserves.

So you already are producing from Caragele Ultra-Deep. Okay so...

Only from 1 well.

And you will -- by the end of the year, you should have 2 more wells in Caragele Deep. Production wells, not exploration, right?

So the exploration field is also ongoing. There will be also other wells drilled this year. And also seismic prospections will be made also further in the Northern part.

Thank you. We go on with a written question received from Mr. Tamas Pletser. "What was the reason that electricity generation posted negative result in the second quarter of 2022 period?"

As mentioned in the segments noting in the financial statements in the first semester of 2022, we've had a change in accounting policy. Meaning we changed the way gas and electricity are provided inside the group. So before this change, gas was received in the electricity segment at cost. Now it's received at market price. So this increase generated the loss.

Thank you. We continue with another written question from Raluca Moica. "How do you comment the impact of the windfall tax and royalties on the first half of 2022 results? What are the expectations in this respect for full year 2022?

Well, in terms of the first semester, we didn't miss by much. In the budget, they were a bit higher than budgeted, and of course, a lot higher than 2021 that we got direct result of the price -- the average price that we've managed to commercialize the gas. But I think at this moment, we are close to the budgeted results and also till the end of the year, taken into consideration the O.G. 27 issued and the quantities that will be issued on this ordinance and also the royalties and tax being paid by the effective O.G. 27 prices, we should see a small decrease in these royalties.

Ms. Irina Railean, you may now address your question.

Do you hear me?

Yes, we can hear you. Please.

Okay. Sure. I'd like to ask something about the management's view on the evolution of natural gas prices. I mean, we see very high prices now on the BRM market, something like above RON 400 per megawatt for the entire year 2023. I mean what is your view? Are this level -- high level of prices truly reflecting the current market situation? And how do we see this context?

I mean, it is very hard right now to comment on market prices, given the fact that the European markets are interconnected. So when you look at the BRM, you also have to look at the [ CEGH ], you have to look at the TTF market. I think everyone right now is trying to benchmark itself through these markets to get a better glimpse. We are looking at the BRM market that's quite in connection with it. And of course, still -- because before you give arbitrage opportunities and now it's normal that you have a connection of prices that for a producer, we don't them as sustainable for the long run as it could lead to demand restructure. And that would create problems for any upstream company in the long -- in very long run.

Okay. So to conclude and just to follow-up, I see that your average realized price is below what's indicated on the BRM. What should explain this? Just because...

Yes, those are historical contracts. So these contracts have been yearly contracts, stemming from last year, which were given a fixed price. That was the market price at that time. So we try to have our consumers and our clients give us stability for the period. But for now, even our price will be in conjunction with the market.

So you also see much higher prices probably starting the next gas year when your old contracts should be updated?

Exactly. But here, we have, let's say, a crash with O.G. 27 that has allocated most of our production. So all 3 production at the end of the period that O.G. 27 is applicable, has already been distributed. So we will probably be capped for the moment, but also I wouldn't not be able to tell you the appetite the market would have at market prices at the moment. Because there is different distortion on the BRM and also under bilateral market because of the government ordinance.

Yes. I just noticed there's a very big difference from BRM and bilateral contracts right now, so I was wondering.

Yes, it is, but it's also -- I saw that happening in the market and given into account that one of our biggest clients are -- so we have 2 captive clients, which you know about and has been, in details, they have been offered a fixed price that was in the market last year. So when those contracts will be over, the prices will definitely -- will be higher. So as you can see, the prices every quarter have gone up. It is normal to go up also in Q3 and in Q4.

We will answer the written question from Raluca Moica. Can you disclose company's estimates as of today in terms of revenues, EBITDA for full 2022?

[Foreign Language]

At this moment, we cannot disclose the figures for the full year of 2022. We go on with another question from Mr. Tamas Pletser. "If here, no generated loss by purchasing gas at market prices, why did you not sell the gas instead of running your power plant? Also, when do you expect new Iernut power plant to be operational?"

Yes, we have been doing that last year. So we're trying to maximize the profit, but the change to the accounting standards has been done after gas was supplied to the Iernut power plant. Also, we have to take into account that near Iernut power plant are low-pressure wells, which are going directly. So the gas from those wells is going directly to the Iernut power plant, and they could not have been put into commercialization, so they are not linked in the national transport system, which makes it a bit complicated. So now we have to look also at the stability of the electricity production and also the profit that could stem from selling the gas directly or from the opportunity of transforming it to electricity. We expect the power plant to be finished by the end of 2023 and to be put in production on the parameters that were in the contract.

Also, I want to add the fact that if you look at the consolidated financial statements at Page 16, you can see the fact that in the second quarter of 2022, practically the small profit, the loss has increased. But it is very important to take into consideration the fact that, as Razvan said, our CFO, that there are some certain wells that will be unable to deliver the production into the national transport system. There are also other fixed costs that are not emphasized here if we stop the electricity production. For example, we have personnel expenses and other fixed costs that if we decide not to deliver natural gas and produce electricity, we still remain with certain costs, so the opportunity to deliver the quantities in other -- to third parties, not to Iernut. It is more complex to assess and is not emphasized in the financial statements. Hope I was clear.

We go on with another question from Irina Railean. "Do you have any updates on Iernut? How is your current estimate for completion? What are the amounts of grants you received up to this point?"

So we have started negotiations with the oil association regarding the restarting of the works. We have issued, as we said in the report, an invitation for them to participate. The negotiations are in course, and we have a target date for operation of the power plant at the end of 2023.