SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to our conference call for discussing the preliminary results recorded by Romgaz Group in 2022. After introducing the speakers, Mr. Razvan Popescu, Chief Executive Officer, will make an opening speech. Thereafter, the Q&A session will take place. [Technical Difficulty]

Good afternoon, ladies and gentlemen, and thank you for joining our conference call to discuss the preliminary results recorded by the Romgaz Group in 2022. Yesterday, we published a preliminary annual consolidated report, which includes a brief presentation of our performance recorded last year. Also, an overall presentation of our group is available on our website in the Investors section. I would like to take this opportunity to address certain aspects regarding the market context of 2022, which impacted our group's performance. According to our estimates, total natural gas consumption in Romania decreased by 16% year-on-year with gas imports reaching 27% weight in total consumption. In the last quarter, gas consumption declined by almost 22% year-on-year, while imports decreased their [ weight ] according to our estimates. It is worth noting that compared to other European countries, yet consumption in Romania is heavily covered by domestic output. Monthly average of wholesale gas prices on the Romanian companies exchange forward and balancing market; third, over 3.2x in 2022 compared to 2021. In the last quarter of '22, gas prices on this exchange reversed their upward trend and adjusted downwards by around 35% compared to the third quarter. On the Central European [ gas out ], the average monthly reference price also advanced over 3x year-on-year according to data provided by the Romanian Agency for Mineral Resources. Also on this market, in the last quarter, prices adjusted on a downward slope compared to the previous quarter. Regarding the fiscal environment of 2022, Romgaz's activities were impacted mainly by government emergency ordinance #27 issued on March 22, amended several times during the year. The main provision applicable to gas producers on regular gas selling prices of $150 per megawatt hour for the gas on to household starting April 1, '22 and up until March 31, 2025. Regulated gas selling prices of $250 per megawatt hour for the gas-to-thermal plants to produce thermal energy for households during April-August '22 and $150 per megawatt hour starting 1st of September 2022 to ensure gas consumption of household during the core months until end of March 2025. Exemption of windfall profit tax for revenues from the gas on regular prices and computation of gas royalties based on the regulated prices instead of take prices. The above-mentioned ordinance also state that gas suppliers have kept selling prices for some categories and end consumers, maximum RON 310 per megawatt hour for households and maximum RON 370 per megawatt hour for thermal plants and industrial clients with a consumption below 50,000 megawatts hour in the previous year. For the energy market, the audience also improved pricing levels and an 80% win for profit tax for energy producers during 1st of April, to end of August '22 for prices exceeding RON 450 per megawatt hour, just to make an exercise certain deductions do apply. Starting the 1st of September 2022, energy producers, which started operations before the state energy trailers and gas traders are required to contribute to the energy transition fund to full amount exceeding RON 450 per megawatt hour. Here, also certain deductions apply. Gas storage is also mandatory for gas suppliers and thermal plants to secure 30% of household consumption starting April 2022. In addition, the government emergency ordinance #186 issued in December 2022 in line with EU legislation involved for the 2022 and 2023 fiscal years, a 60% solidarity contribution applied to the annual taxable profit that exceeds by 20%, the average value of taxable profits recorded between 2018 and 2021 included. Regarding this operational and financial performance achieved by the Romgaz Group in 2022, we can mention the following aspects: We recorded a natural gas production of 4.94 billion metric cubes. 1.8% lower compared to 2021, but within the 2.5% limit of the average annual decline assumed through the development strategy by Romgaz. We continued our measures to support the development of our onshore production, namely the optimization of wells operation, extension of rehabilitation projects in the main matures reservoirs, workover and recover completion operations at inactive or low flow level wells and completion of investments to extend production infrastructure and connect new wells to this infrastructure. In addition to this, we performed workover activities for 215 wells, finalized 9 surface facilities and 1 production well while others are in different execution stages. In the second quarter of the last year, we put into operation the gas dehydration plant in [ Cochard ], an investment of RON 31 million. Also, at the end of June, the [ Golian McNatt ] U.S. completed the external audit for our gas portfolio, the audit state, the total gas reserves of 65.9 BCM and total gas resources of 55.9 BCM as of 31st of December 2021. We continue to improve our significant position already held on the gas market, reaching 49% of total supplies in Romania and 68% of consumption covered from domestic gas. Total gas supplies, including those to the Iernut power plant declined by 1.7% year-on-year as a result of lower volume of gas acquired and resold. Total revenues from gas sold were at a record high, totaling RON 11.33 billion, over 2.2x higher year-on-year. Of course, due to the market environment, which led to a significant increase in our average realized gas selling price for the first 9 months, especially. The electricity segment had a strong contribution with record high revenues of RON 1.33 billion, over 4x higher year-on-year due to elevated prices and a higher reduction of 74% year-on-year. Revenues from storage services also showed by 81% year-on-year to RON 469 million due to higher capacity reservation and injection services. Overall, in 2022, we reported total revenues of RON 13.38 billion, almost 2.3x higher year-on-year and at a historical record. Regarding expenses, we can underline the extremely high level of taxes and contribution for the last year when whole profit tax increased almost 4x to RON 4.9 billion. Total royalties were over 2.2 higher at RON 1.67 billion, with for profit tax from electricity, respectively the contribution to the energy transition fund stood at RON 404 million and also the solidarity contribution that amounts to almost RON 1 billion. Together, this [ full ] taxes reached a substantial amount of RON 8 billion and more than 4x elevated compared to the previous year. Also, the expenses with these 4 taxes accounted for more than 60% of total revenues in 2022 compared to only 34% in the previous year. Bottom line, net profit was at a record high of RON 2.54 billion, 33% higher compared to 2021. Profitability rates continue to be robust, although impacted by high tax expenses, the EBITDA margin of 26.3%, EBIT margin at 22.2%, and [ MP ] margin at 19%. If we analyze rely the fourth quarter of 2022, we can also [ follow ] EMEA results. Gas production declined by 5.6% year-on-year, but reported an increase of 6.5% compared to Q3. Total revenue were at a quarterly record high of EUR 2.57 billion, up 9% year-on-year. Royalties and will for tax diminished almost 4x year-on-year due to the measuring in force to limit and even increase the gas prices in the market. Also, net profit was reported at RON 37 million, impacted by the solidarity contribution of RON 1 billion that is due for the entire fiscal year but was recorded entirely in the last quarter as it was introduced in late December. Profitability rates remained at favorable levels an EBITDA margin of 24.5% and [ MP ] profit margin at 11.9%. On the CapEx side, in 2022, Romgaz Group invested a total amount of RON 5.6 billion, which also includes the acquisition of 50% of the [ Net G ] project. We want to remind the market that on 1st of August of 2022, Romgaz finalized the transaction with ExxonMobil for the acquisition of all share issue but by Exxon Mobile Exploration and Production in Romania Limited, which owns 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 on March 30. This important achievement is aligned with the development strategy for 2021 through 2030 of Romgaz, which includes the development of our onshore and offshore hydrocarbon resources and reserves portfolio, focusing on resilient hydrocarbons and mitigating the effects of climate change. As regards the perspective for this year, the 2022 budget proposal was endorsed by our shareholders' meeting held on February 20. For 2023, the consolidated guidelines include a profit before tax of RON 2.41 billion and total investments of over RON 2.2 billion. The 2023 CapEx program is mostly based on projects aiming to increase the reserves and resource portfolio and offset the natural decline of gas production as well as on electricity generation. With this, I would like to close our presentation, and thank you for your attention.

[Operator Instructions] We received the first question from Irina Railean. Could you detail the reason for such a high income tax expense in the fourth quarter? [Audio Gap]

Although the results for the fourth quarter of 2022 was only 300 million. We want to remind that the contribution tax is a nondeductible expense. So that explains the high income tax.

The next question from Irina Railean, what is the financing mix you envisage for Neptun Deep? How much additional debt do you expect to take in to finance this project?

We're looking at having a mix of debt that includes also a credit line with a banking consortium and also the issuance of bonds to cover the high CapEx ticks that we will have during '25 and '26. We are talking about in our estimates, looking to almost EUR 1 billion to EUR 1.2 billion.

Another question from Iuliana Ciopraga. Can you please disclose our production estimate for 2023? How much do you expect to sell on the regulated market in 2023?

We're looking to keep production in line with the strategy to no more than 2.5% decrease. And also, we have not yet received from the OGS, the [indiscernible] situation regarding the gas that Romgaz has to supply to the final end consumer and to the geothermal plants for the next gas year.

As regards the sales to the regulated market for the first quarter, 89% from the deliveries are according to the government emergency ordinance 27. And as from April 1, we are expecting for the transmission system operator to distribute the quantities.

Another written question from Mr. Tamas Pletser. What was the proportion of eligible customers, households, municipality heating companies from the total sales in the fourth quarter.

In the last quarter, I think it had the higher proportion around 90%, 9-0, having been shipped [ under ] regulated but directly in the market.

And we would like to add that for households, about 74% and for heat producers, 16%.

Another written question from Mr. [ Rishi Mancharkani ]. Some companies started to contest in the courts of justice the solidarity tax. Is there any chance in case they succeed for Romgaz to take similar steps?

It is not our business, what other companies are doing because they have to look at their own mix of gas and their own percentages related to the wording of the ordinances. Romgaz has analyzed the ordinance in detail also using our external advisers and how it is written at this point in time. As you can see in the budgeting, we have budgeted the solidarity tax as applicable to Romgaz.

We have a raised hand from Iuliana Ciopraga.

A question from me regarding the budget that you've made public some months ago. And mostly about the operating cost and increase in operating costs that we're seeing there. Can you please clarify what is triggering these increases? And actually, a bit more color on the budget would be highly appreciated. And secondly, of course, if you can discuss a bit the dividend and what you expect to pay out of 2022 net profit and 2023 as well.

Sure. So regarding the operational cost and the hike in operational costs, we have envisaged larger than in other years intervention for our mature wells. We have budgeted more operations, more workover operations, also the drilling with our own internal services of a couple of wells and given also taking into account the high inflation and rising costs, given that we see a lot of bottlenecks in the supply chain and in the part of demand for this type of parts. We have seen very high prices. We are looking at higher prices, and we are also looking at a higher consumption and higher volume due to the advanced workover and optimization operations that we are looking to implement. Given and taking into account the dividend policy, we are hoping and looking at having a minimum dividend of 50% that is required by the government ordinance #64 to be taken out of Romgaz offers given the fact that we are also paying the solidarity tax.

We received another written question from Ioana Andrei. On the power market, can you please disclose what are your expected sales on the centralized power acquisition market at the regulated price of around 450 per megawatt per hour.

We expect that the percentage of the production to be sold at RON 450 per megawatt hour to be 15% for 2023.

Another written question from [ Christian Petran ]. Can you give more details on Iernut Power progress?

Yes. We are in the final steps of the negotiation regarding restarting of the plan, and we will inform the market shortly taking into account that we are looking to finalize the negotiations in a very short period of time. The market will be informed accordingly regarding to both the way that it's going to be restarted and the total amount.

Next question from Laura Simion. The profit from 2023 will be compared to 2018, 2021 average or 2019, 2022.

So the average will remain the same. It will be the average between 2018 and 2021.

Following question from Ioana Andre. Regarding dividends. Do you maintain your expectations of a 50% payout in the light of today's discussions, your proposal will be more likely to reach 90%.

No. Our proposition is 50% of payroll dividend given the high degree of investments that Romgaz has to implement in the coming years.

Next question from Irina Railean. What is the stand-alone individual net profit for Romgaz? Is the RON 2.38 billion indicated in the budget for 2022 preliminary, still a good indication?

The 2022 net profit is estimated at EUR 2.5 billion.

Ms. Daniela Mandru.

I have several questions. The first one, please disclose the quantities sold the last year for households and thermal power producers. I'm referring to the total quantities not regulated. So in order for us to make an estimation for this year? The second question regards because I was not -- I didn't understand very well, I think what you estimate as investments for Neptun Deep until the exploration starting in 2027. And if you have some investments planned for this year in Neptun Deep? And the third question refers to Iernut power plant, what would be the estimated production for this year?

So, related to total quantities sold, annually, it would be according to the government emergency ordinance 16 terawatt, for households 14 terawatt, for thermal power plant producers 2.6 terawatt. According to the GRP program, it would be 10.8 terawatt hour. On the commodities exchange market, it would be 616.9. Bilateral contracts with thermal heat producers, it would be around 22 terawatt out of which 1.7% is for thermal heat producers.

Sorry, I didn't understand anything. So please repeat. My question was last year, how much did you sell on for households and thermal power producers?

Just to give you an idea, if I'm trying to extrapolate what happened last year to this year, I don't think it's going to work because the [inaudible] 27 were introduced starting to the first April started with an injection period. When we are looking at the entire production for last year, it's around 33% sold at regulated prices over the whole year, but we have not yet received the allocation for 1st of April to 31st of March 2024 yet from the OTS if that answers your question.

That means, for example, because my calculation, okay, if you saw last year, 35% to households and thermal producer non-households. Probably the same quantity because these are your clients will be allocated to you. So it is...

Not necessarily.

Not necessarily?

That's why I asked where you are trying to get the question so we could clear it. But it's not necessary because, first of all, you had 3 months, almost 4 months in which you had the free market on which to sell them the allocation game. So it should be higher if you ask. And given the -- so looking at the Neptun investment, yes, we have budgeted for 2023, almost EUR 150 million in investments in Neptun Deep. We are waiting for the operator and partner to take FID. Romgaz, as I have stated, has taken FID the moment we decided to acquire Exxon's stake. So for us, the FID is implicit. We're looking at total investments up to 2026, 2027 in [indiscernible] of up to EUR 2 billion on our end, so Romgaz' investment in that project.

Yes. I just wanted to compare your estimates with Petrom estimates. So you are at the same level?

Yes. Because the operator with the nonoperator through the operation to the operating committee has this set up together. So of course, they have to be similar, given just a few difference of estimations, but they should always be similar in terms of costs throughout the project.

Do you have an estimate for net present value of the Neptun Deep project?

We cannot share this fact.

And the last question was that regarding the power production of this year estimate?

It would be almost in line with the production that we realized in 2022. We will have 2 on things which will do the maintenance in April and October. And our estimate is that our production will reach the same levels as in 2022. We don't estimate that the finalizing, the new power plant will affect the production in this year. But once we will have more information, we will communicate with the investors.

We have another written question from Adam Milewicz. Is it a good assumption that you sell 75% of your production at regulated gas price of RON 50 per megawatt hour in 2023? And another question, do you expect FID on Neptun Deep in mid-2023 or you expect any delays?

Well, we cannot give the assumption because we have made our own assumption regarding this, and we have budgeted it because we have not -- as I stated before, we had not yet received the quantities that we have to supply under the premises of the ordinance. Regarding the FID, we do not expect any delay and we have budgeted in accordance with having the FID mid-2023 with those delays at this point in time.

Mr. Tamas Pletser sent another written question for clarification. Can you please repeat your production target for 2023, please?

Our production target is in line with our multi-annual strategy and keeping it in check at a maximum 2.5% decline in production. Our aim is to keep production as close as to the 4.9 billion cubic meters per year.

Ms. Daniela Mandru.

I have a question. I don't know if it's the same situation for you as for Petrom. But when you are selling gas for power plants, you are selling it at RON 100 per megawatt, what are the market price?

But it's regulated by the ordinance and it is at RON 100 per megawatt hour, starting with September, of course.

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. Bye.