SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to our conference call for discussing the financial results recorded by Romgaz Group in the first 9 months of 2022 and the third quarter of 2022, respectively. After introducing the speakers, Mr. Jude Aristotel 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. Jude Aristotel, Deputy Chief Executive Officer; Mr. Andrei Bobar, Chief Financial Officer; Mr. Marius Veza, Accounting Department Director; Mr. Robert Chirca, Exploration Production Director; Mr. Ion Foidas, Production Department Director; Mr. Radu Moldovan, Energy Trade Director; Mr. Andrei Novac, Finance Director; Mr. Hatagan Olimpiu, Economic Director from Iernut and our Investor Relations department. Now I would like to give the floor over to Mr. Jude Aristotel, who will open the conference call with an opening speech.

Good afternoon, ladies and gentlemen. Thank you, first of all, for joining our conference call to discuss the results recorded by Romgaz Group in the first 9 months and Q3 of 2022. We published yesterday our quarterly report and the consolidated financial statements at September 30, 2022, which comprise a detailed presentation of our operational, economic and financial achievements in the period. Also, an updated presentation of Romgaz Group is available on our website in the Investors section. Now I will start with some aspects regarding the gas market context in the first 9 months of 2022 compared to the same period of the previous year. According to our assessment, natural gas consumption in Romania declined by 30% year-on-year, while gas imports grew and reached 31% of consumption. In third quarter alone, gas consumption decreased by same pace, while imports were flat year-to-year in volume, and those increased their weight to 43% according to our estimate. It is worth to note that compared to other European country, gas consumption in Romania relies heavily on the domestic outlook. Regarding transaction on the Romanian commodity exchange, the monthly average of wholesale gas price, spot and forward markets, increased over 6x in 9 months 2022 compared to 2021. These prices are considered as of the month of delivery for transaction concluded on this market segment. On the Central European Gas Hub, the average monthly reference price also advanced over 6x year-on-year in 9 months 2022 according to data provided by Romanian Agency for mineral resources. Regarding the fiscal framework in the first 9 months of 2022, Romgaz operations were influenced mainly by Governmental Emergency Ordinance #27 and #119 by 2022 and by the gas release problem. The Governmental Emergency Ordinance #27 2022 and Governmental Emergency Ordinance #119 2022, comprised provision effective during 1st of April 2022 and August 31, 2023. Main provision applicable to gas producers includes regulated gas selling price of RON 150 per megawatt hour for the gas contracted for households and RON 250 per megawatt hour for gas contracted with thermal plants to produce thermal energy for households. Starting with 1st of September 2022 and until the end of August 2022, the price of RON 150 per megawatt applies to both categories. Exemption of windfall profit tax for revenues from the gas sold but regulated price and computation of gas royalty based on these prices instead on CEGH prices. Dimension ordinances also state that the gas suppliers have kept selling price for some categories of final clients as follows: maximum RON 310 per megawatt for households and maximum RON 370 per megawatt for power plants and for industrial clients with the 2021 annual consumption below 50,000 megawatt hour. For energy market, the Ordinance has also imposed pricing levels and an 80% windfall profit tax for -- was enforced for energy producers during April 1 and end of August 2022. Starting with 1st of September 2022, energy producers which started operation before this day, energy traders and gas traders are required to contribute to the energy transition fund. Gas storage is also mandatory for gas supplier and thermal plants to ensure 30% of our households consumption during April 2022 and October 2023. Regarding the gas release program, this is suspended during April 1 and December 31, 2022 by the Governmental Emergency Ordinance #27. We continue this presentation by highlighting the operational and financial performance recorded by Romgaz Group in the first 9 months of 2022. Natural gas production was reported at 3.69 billion cubic meters with a marginal adjustment of 0.5% compared to the same period of 2021. We continued our efficient measures to support production development. And here, I could mention optimization of wealth operation, extension of rehabilitation projects in the main major gas reservoirs, workover and recompletion operation in active or low flows wells and completion of investment to expand production infrastructures and connect new wells to these infrastructures. We also continue to make investments in our gas production facilities. We put in operation the gas dehydration plant in Cosereni in the second quarter of this year, an investment of RON 31 million. We completed first production well, 4 wells starting drilling acquisition process and other 3 wells design is in progress, and we finalized 9 surface facilities, other 8 are in construction and 19 are in different preparation stages. And also, we performed the completion reactivation and repairs for 161 production wells. Please also note that an external audit of our gas portfolio was finalized by DeGolyer and MacNaughton to the end of June. The audit states that the total Gas Reserves is at 65.9 billion cubic meters and total gas resources of 55.9 billion cubic meters as December 31, 2021. We improved even more our already significant position on the gas market. Our market shares climbed to almost 51% of total deliveries in Romania, and we reached as much 73% of consumption powered by domestic gas according to our estimates. Regarding gas sales, the third parties volume of our own gas delivered to the market was flat year-on-year. The total gas sales declined by 6.2% year-to-year as a result of lower volume of gas acquired and resold. The revenues from the gas sold were again record high at RON 9.28 billion, over 31x year-on-year, supported to the favorable market environment, which leads to a significant increase in our average realized gas selling price. The electricity segment had a very good contribution with revenue from electricity a historical high of RON 1.009 million, almost 7x year-to-year, reflecting the high energy demand and elevated price on centralized market as well as almost double production indeed. Revenues from storage services added RON 324 million, higher by 66% year-on-year, mainly due to the higher revenue from capacity reservation and also higher injection services. Overall, we recorded total revenues of RON 10.81 billion, over 3x higher year-on-year but a historical record. On the expenses side, we can mention that Windfall Profit tax increased over 30x year-on-year to RON 0.4, RON 0.5 -- RON 0.475 billion from RON 364 million in 2021. The total royalties rose over 3x to RON 1.49 billion. Having the contribution to the energy transition fund, altogether, these 3 taxes reached a substantial amount of RON 6.36 billion, almost 9x higher compared to 2021. The expenses with these 3 taxes accounted for almost 60% of total revenues over the first 9 months of 2022 compared to only 20% a year before. Bottom line, net profit was record high at RON 2.24 billion elevated by 94% compared to the same period of 2021. Although impact by substantial tax expenses, our profitability rates continue to be strong. EBITDA margin at 26.8% and net profit margin at 20.7%. For the third quarter 2022 alone, we can note the following main results. Natural gas produced edged down 1.3 billion cubic meters to 1.17 billion cubic meters. Total revenues were recorded high at RON 3.32 billion. Net profit reached also a historical high of RON 512 million, up 30% year-on-year. Profitability rates remain at favorable levels. EBITDA margin at 21.5% and net profit margin at 15.4%. And with respect the strategic development of our company, the latest achievements are in line with the development strategy for 2021-2030. That was approved by our shareholders in November last year. We already informed the market that on August 1, 2022, Romgaz finalized the transaction with ExxonMobil for the acquisition and transfer of all shares issued by Exxon Exploration and Production Romanian Limited, representing 50% of the rights and obligations related to the Neptun Deep Project. We partially financed the acquisition through a credit facility of EUR 325 million that was signed by Romgaz on March 30. Regarding our new power plant, please recall that the legal norms released in the second quarter will help us to finalize the remaining works by the end of 2023 and have expenses reimbursed by mid of 2024. Regarding the CapEx side, in the first 9 months of 2022, Romgaz Group invested a total amount of INR 5.5 billion, which included also the amount paid for the acquisition of 50% of Neptun Deep projects. Another important event that we will also like to mention here is the release of the 2021 sustainability report in June, in line with the national and European legal requirements for non-financial reporting, which also address corporate governance, ethics anticorruption and well as also our economic figures, social and environmental performance. But at the end of this presentation, I will look also to remind you the dividends distributed in this July. Total gross dividends amounted to RON 1.46 billion or a total gross dividend per share of RON 3.80, which resulted in a gross payout ratio of 76% from the 2021 net profit. With this, I would like to close our presentation, and thank you once again for your attention.

[Operator Instructions] So we have hands from Ioana Andrei. [Operator Instructions] In the meantime, we received the written question from Mr. Oleg Galbur. We will answer. We will provide the answer for the written question. What was the volume of gas sold by Romgaz to gas-fired power producers in third year, not in the second quarter of 2022. And what volume do you expect to sell to this consumer group in the fourth quarter of 2022 and in 2023?

Mr. Galbur, did you mean the quantities for the quantities of gas sold by Romgaz to gas fired power producers in the third quarter of 2022 or the second as you wrote -- the third quarter, okay.

So for thermal energy producers, the quantity delivered was 0.4 terawatt hour in Q3 2022. The quantities delivered for 9 months 2022 was 0.51 terawatt hour and for the fourth quarter it was 11.9 terawatt hour for households and thermal energy producers because it's -- because the sale price was the same.

We received another written question from Irina Railean. What were the volumes sold at a cap price of RON 150 per megawatt hour and those sold at 250-megawatt hour per megawatt RON per megawatt hour in the third quarter?

So the answer would be for households. In the third quarter, the price for RON 150, the quantity was 3.3 terawatt hour. And for thermal energy producers, 0.4 terawatt hour at an average -- at an weighted average price of RON 214 per megawatt hour.

We received a written question from Mr. Andrei. The Romgaz import gas so far in 2022, if yes, in what quantity and at what price, we received several questions. The second one, are there any plans to import gas in the future, Q4 2022 and year 2023? Do you target any specific quantities to be imported? And the third question, do you see a scenario in which there will be a gas shortage in Romania in the next 12 months?

So the first question, the answer is no. On the second one, as indeed, we have some plans in order to conclude some import contracts. We are in the middle of negotiation with some third parties, but the moment we are still covered by the confidential information in this respect. And once the contract will be concluded, we will inform also the capital market and also the market in this respect. And on the third question, in our point of view, the answer is no. And also, please note that at the moment in the natural gas storage is the highest percentage of gas store during the last period of time. And in this respect, the consumption also will be covered by the gas extracted from the natural gas storages.

Thank you. We received another written question from Cosmin Paraschiv. Given the developments of gas prices, when should we expect these high prices to kick in? The second question, if you can provide some details on selling activity, is 2023 mostly covered already by the end of last month? The answer will be provided by Mr. Radu Moldovan in Romanian and translated.

So price evolution reached the maximum level in 2022. And as it can be seen in the national and the international market prices began to decrease. Romgaz has contracted all natural gas quantities for the first quarter of 2023. And for the sales for the second quarter we are expecting that the transmission system operator does this. So the TSO has to allocate to distribute quantities for -- according to Government Emergency Ordinance 119.

Another written question from Laura Simion. Were there other factors contributing to the decline in average realized price quarter-by-quarter beside the quantities sold at regulated prices?

Prices have decreased on the international market and Romgaz prices for the third quarter 2023 -- sorry, 2022, our prices that were contracted last year and gas contracted according to Government Emergency Ordinance 27. Since April 2022, no other new contract has been concluded.

A written question from Mr. [ Florin Turcas ]. How do you foresee your activity in 2023?

Romgaz is still under analysis. And once with the budget for 2023, there will be a decision.

We received another written question from Irina Railean. What was the realized natural gas price on the competitive market in the third quarter?

The answer is around RON 250 per megawatt hour.

We received another written question from Mr. [ Christian Patron ]. Can you detail a little bit on prices and ordinance and Government Emergency Ordinance 119? What are the caps? How much do you have to sell at these prices?

Mr. Patron, Romgaz will publish detailed information in this respect. So Romgaz has transmitted all the information to the transmission system operator. And we are waiting to see how much of these available quantities the TSO will distribute, starting with the 1st February -- sorry, with 1st April.

A written question from Ioana Andrei. You presented at the half year 2002 results that around 12 terawatt hours should be delivered in Q4 2022. Is this estimate still in place?

The answer is, it may be around 14 terawatt hour.

Ms. Iuliana Ciopraga, you may address your question. You have your hand raised.

I actually, I written now the question. So on the one hand, we're seeing a lower price on the competitive market, RON 250 is lower compared to the second quarter of what you achieved in the third quarter is lower. It seems lower anyway compared to the second quarter. If you could provide the reasons for that. And also, we noticed a decline in EBITDA in the third quarter versus the second. Would one reason be these costs with imbalances that we're noticing in the power?

So as mentioned before the gas delivered in Q3, except the gas that are subject to Government Emergency Ordinance 27, so those quantities were contracted mostly in September 2021. And the contract price is fixed, so the price differences are resulting from price -- from quantity differences. The difference from quantities from contract that have different prices.

Regarding the decrease in EBITDA, practically in the third quarter, what we can see is that starting with September 1, 2022, the windfall tax for electricity of 80% was changed to contribution to the energy transition fund. And right now, the percentage is not 80%, is 100% starting with 1st of September 2022. Also it's very important to mention the fact that the royalty or the natural gas produced has increased. And in September, the royalty for the natural gas produced, which was not sold under regulated price reached a record high of RON 1,200 per megawatt. So this clearly affected the financial results of the company. So we had higher taxation.

We received a written question from Mr. Oleg Galbur. What is the volume of electricity expected to be generated by the Iernut power plant in Q4 2022?

So the quantity will be around 150 megawatt hour for the fourth quarter of 2022.

We received a written question from Ms. Raluca Moica. There are 2 questions. The first one, EBITDA in Q3 2022 is lower by 25% versus Q2 2022.

You received an answer just a second before.

And the second question, how is Q4 2022 forecast versus Q3 2022, weaker or better?

It is very difficult to respond regarding the Q4 EBITDA because on one hand we have the electricity EBITDA, EBITDA generated from electricity. So here, we will have a full quarter with 100% of contribution to the transition -- the transition fund to the electricity transition fund instead of 2 months with 80% and 1 month with 100% after RON 450. Of course, after we can deduct the CO2 certificates from this price. But we also have the royalty, the royalty, it is very significant, and it is unknown at this hour, practically the National Agency of Mineral Resources, it is communicating the royalty each month based on the royalty -- based on the gas prices on the CEGH.

A written question from Laura Simion. How much gas do you expect to sell at regulated prices in Q4 2022 and the first quarter of 2023?

For the fourth quarter of 2022, it's 11.88 terawatt hour, around 19% from sales. And for the first quarter of 2023, it's 12.1 terawatt hour, around 91% from sales.

Another written question from Ioana Andrei. What happened at Iernut power plant in August? Can you tell us the power acquisition costs related to this outage recorded in Q3 2022? Related to the question about Iernut power plant, we will provide the answer in a few minutes. Until then, we will go on with another question from Iuliana Ciopraga. The price for the competitive market was lower in the third quarter 2022 versus the second quarter of 2022 and why?

And the answer to this question was provided a few minutes ago.

We go on with another question from Iuliana Ciopraga. We will answer a question from Ioana Andrei. Please tell us what was the amount recorded in Q3 2022 for impairment charges related to the misinterpretation of Government Emergency Ordinance 27. Can we see a reversal on this amount over the next quarter?

So regarding the changes in the interpretation of the Emergency Ordinance 27, there was a certain interpretation that starting with the application of this ordinance. Practically, we will apply the prices for -- in the contract prices that are stipulated in the Emergency Ordinance 27. But there were also cases in which the prices in the already signed contracts before the introduction of this Emergency Ordinance were lower than the prices according with the ordinance. So our customers said that should be applied to the lower price, meaning the price from the contract, not the price from the Emergency Ordinance. After that, in this summer of 2022, with the operation of the law to put the application of the Emergency Ordinance this interpretation was clarified. But starting with that time, the most favorable price should be applied, meaning that if you have the signed contracts priced lower than the price calculated based on Emergency Ordinance, you remain with the lower price from the contract. I hope it's clear.

Another question from Iuliana Ciopraga. Cost of imbalances for power, were they deducted from the windfall tax, were these cost reason, the reason for the weaker financial performance in Q3 versus the second quarter?

So to respond to the costs for imbalances for power. If they are deducted from the windfall tax, yes, they are deducted, they were deducted. And the second question were these costs -- the reason for the weaker financial performance in Q3 versus Q2? Yes, of course, practically, when we had that technical problem with the power plant, practically, we had to go to buy electricity from the day-ahead market from [indiscernible] day-ahead market. So the prices that we bought from day-ahead market were higher than the prices that we were selling the electricity, but we had to deliver the electricity in accordance with the contractual obligation.

We received a written question from Mr. Oleg Galbur. What is the reason for such a low electricity production plan for the fourth quarter of 2022 at Iernut of only 115 gigawatts, which is lower both quarter-on-quarter and year-on-year. The figure was 150 megawatt hour.

So if we want to refer to gigawatt hour, it's roughly 240 gigawatt hour for the fourth quarter of 2022.

Another question from Irina Railean. Just a follow-up question. Volumes to be sold at a cap price of RON 150 per megawatt power in Q4 is 14 terawatt or 11 terawatts total volumes both to households and heat producers?

So it is 14.3 terawatt hour total deliveries, total supplies and 11.88 terawatt hour sales according to Government Emergency Ordinance 27, households and thermal energy producers.

Another written question from Ioana Andrei. But can you tell us what amount was registered in Q3 for these impairment charges, RON 70 million?

Yes, it is receivable related to only one client. So it is about RON 70 million. Yes.

Another written question from Irina Railean. Do you plan to reverse this amount of RON 70 million?

So currently, practically we are in discussion with this customer in order to recover this amount. So if the discussions are not, let's say, positive to reach the conclusion that we want to recover, practically we will address to the court. And if we successfully recover this amount, practically, the depreciation will be reversed, of course.

We received a question by email from Mr. Florin Turcas. What percentage of your 2023 production capacity is already sold and at what medium price do we intend to hedge arbitrage on gas price?

So the sales are only the quantities related to the first quarter of 2023. And these quantities fully sold. And the percentage that it represents from the full year 2023 will be discussed when we will have the budget draft. And related to the question if we intend to hedge, the answer is no.

Another written question from Irina Railean. Could you provide any updates regarding Iernut development? What is the updated deadline for completion?

We have launched acquisition procedure in August. We are still negotiating the contract with the third party for the remaining execution works. And as soon as possible and when we will reach a common agreement with a third party in this respect, we will announce the capital market and the market by announcing the signing of the contract.

Related to the written question from Ioana Andrei. Please consider my previous question. What happened to Iernut power plant in August. Can you tell us the power acquisition costs related to this outage recorded in Q3 2022?

So regarding the Iernut power plant in August, there was a technical problem with the turbine. As you already know, we are operating an old power plant that will be in production until April 2024. Currently, we are operating with one single group of 200 megawatts gross power. Practically, that time in August, the problem with the turbine took us 10, almost 11 days of not functioning the power plant, a period in which we had to acquire energy from the day ahead market, which was at a very high price of over RON 3,000 per megawatt, and we had to sold this energy further to our customers for which we already had contracts in place at a lower price.

Another written question from Ioana Andrei. Please detail the main aspects regarding our selling, your selling strategy over the next couple of years?

We would like to remind you that the sales strategy is public on Romgaz website.

Another written question from Irina Railean. On Iernut by how much do you expect the total investment cost to increase compared to your initial budget?

We will present the final figures once the contract will be concluded. But at the moment, we are still negotiating the contract. And based on the negotiation, we'll result also the final figures of the remaining works. Being under the procedure, it's very hard for us to inform a third party in this respect. We have to wait finalization of the negotiation. And only afterwards, we may release any figures in this respect. And regarding the sales strategy, probably you refer to the energy produced by Iernut power plant. At the moment, Romgaz is still analyzing the latest emergency ordinance stating the centralized trade per case and sales. And we have also to amend the strategy in this respect by reflecting the amendments and the provision of the latest emergency ordinance.

Ms. Iuliana Ciopraga you may now address your question.

You mentioned gas royalties. You mentioned an average price of -- sorry, 1,200 as referenced for the third quarter, if I understood correctly. But I check in the third quarter was around RON 1,200. So the reference price have been closer to 1,000, not 1,200. So can you clarify a bit on this? And also, what's the average percentage for royalties? And another question I was asking you before in this balancing costs from the third quarter, you were able to use them to offset some of the windfall tax. But from your answer, it seems that you were able to use them, but even so you still incurred some losses. Is that correct?

Regarding the royalty, practically, you have to multiply that reference price of 1,200 megawatts with the quantities sold under free market that's not regulated prices.

But why RON 1,200 because the check in the quarter was EUR 200. That would mean about less than RON 1,000, not RON 1,200?

So only for December, I explained that the reference price for the royalty has increased gradually during the year, reaching an all-time high in the third quarter. I mean, more specifically, in September month was the highest price that we received from the National Agency for Mineral Resources of RON 1,200 per megawatt.

Okay. So it wasn't an average for the third quarter, okay.

So the average percentage for the royalty is 7%.

[Operator Instructions] Iuliana Ciopraga, do you have another question?

Actually, I do. About 80% of power segment, so you were mentioning before that in the fourth quarter, you'll see the impact of windfall tax of 100%. But on the other hand, the transfer price between Gas & Power is now [ RON 100 ], right, you'll be using that RON 100. So in principle, EBITDA in the segment should be quite good. I mean there will be an impact on upstream but not in the downstream side, not in power production, right?

In order to answer to your question earlier that you said if -- with the imbalances that although we had deducted them from the windfall, yes, but it was not enough. So clearly, that generated a loss. So the electricity acquired for the 10, almost 11 days in August was over RON 83 million in value.

We received a written question from [ OG RBI ]. What is the reference price for calculation of royalty on the gas supplied to Iernut?

So the reference price for the royalty on the gas supplied to Iernut is the reference price for all the quantities that are sold to the free market. So it's not a special price. So the price communicated by the National Agency for Mineral Resources.

A question from Ioana Andrei. So starting with September, it will be 100 per megawatt.

So no, this is what we have requested also that the price -- the transfer price of RON 100 should be also applied to royalty. So we know that this Emergency Ordinance it's in parliament right now. So we have proposed also modification that the RON 100 reference price should be applied also to the calculation of royalty.

Another written question from [ OG RBI ]. Does Romgaz sell gas to other gas-fired power plants. If yes, what was the volume in the third quarter?

So we sell natural gas to customers that produce electricity, but also thermic energy. So not only just fired power plants, it's also thermic energy producers, okay.

The answer was already provided before. Are there any other questions? 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. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]