SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to our conference call for discussing the results recorded by Romgaz Group in the first quarter of 2023. After introducing the speakers, Mr. Razvan Popescu, Chief Executive Officer, 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 Executive Officer; Ms. Gabriela Tranbitas, Chief Financial Officer; Mr. Marius Veza, Accounting Department Director; Mr. Andrei Bobar, Finance Director; Mr. Ion Foidas, Production Department Director; Mr. Radu Moldovan, Energy Trading Director; Mr. Robert Chirca, Exploration and Production Director and our Investor Relations department. Now I would like to give the floor over to Mr. Razvan Popescu, who will be opening 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 in the first quarter of 2023. We released the quarterly report of the Romgaz Group at the end of last week, and this includes the presentation of our economic and financial performance and the consolidated interim financial statements. Also, a presentation of the group activities is available on our website in the Investors section. I would like to emphasize some aspects regarding the gas market environment and also to highlight the group's performance. Let me start with some aspects regarding the market context in the first quarter of this year. According to our assessments, natural gas consumption in Romania decreased by 12% year-on-year in Q1. Imported gas volumes recorded a significant decline, reaching an 8% contribution in total consumption compared to the high rate of 29% reported in the similar period of 2022. On the Central European gas Hub, the average reference price dropped by 17% compared to the same period of 2022, according to the data provided by the Romanian Agency for Mineral Resources. As expected, the Romanian Commodities Exchange spot and forward and balancing markets recorded a weak liquidity due to the regulation in force with an average price in the same period reverting to the level recorded a year before. These prices are considered as of the amount of delivery for transaction concluded on this market segment. Regarding the fiscal environment, Romgaz' activities continue to be influenced mainly by the Government's Emergency Ordinance No. 27 issued in March 2022 and subsequently amended and supplemented. The main provision applicable to gas producers include the following: regulated gas selling price at 150 RON per megawatt for the gas sold to household supplier starting with April 1, 2022 and directly to or to suppliers of heat producers for the production of thermal energy for households as of 1st of September '22. For the gas sold at regulated prices, revenues are exempt from the windfall profit tax and gas royalties. And gas royalties are computed based on these regulated prices instead of the CEGH reference prices starting with the 1st of April 2022. The ordinance also states that gas suppliers have kept selling prices for some categories of end consumer, maximum 310 RON per megawatt hour for households and maximum of 370 RON per megawatt hour for heat producers and for industrial clients with consumption below 50,000 megawatt hour in the previous year. As of 1st of September 2022, energy producers, which started operation before this date are required to contribute to the energy transition fund, the full amount exceeding 450 lei per megawatt hour, certain deductions do apply. In addition, gas and energy traders all contributions to this fund for the profit in excess of 2% over the acquisition price. Gas storage is also mandatory for gas suppliers and heat producers to secure the maximum between 30% of the estimated consumption of final clients during November 23, March 24 and 90% of the underground storages' capacity. In addition, the Government Emergency Ordinance No. 186, issued in December '22, imposed for the 2022 and 2023 fiscal years, a 60% solidarity contribution applied to the amount of the annual taxable profit that exceeds by 20% the average value of the taxable profits recorded during 2018, 2021. Regarding the operational and financial performance recorded by Romgaz Group in the first 3 months of '23, we can point out the following aspects: Natural gas production amounted to 1.24 billion cubic meters as we succeeded to exceed by 0.7% our quarterly budget. The output was at a 5% adjustment for the high level recorded in the first quarter of 2022 and also 1% below Q4 '22. We continue to take efficient measures to develop our onshore gas output. And here, I could mention only a few specific activities such as workover and recompletion programs in inactive or low productivity wells; continuous rehabilitation projects of the main mature gas fields; optimization of the gas field production and completion of investment to extend production infrastructure and connect new wells to this infrastructure. Regarding the investments made in our gas production facilities, I can mention that we're completing the works at surface facilities to stream into production of 5 wells, and are in progress with investment on surface facilities to steam into production another 14 wells. Also, we perform intervention works at a -- total of a number of 40 production wells. Our position on the Romanian gas market continues to be significant. We achieved a market share of 38% of total gas delivered in Romania, higher compared to the same period of 2022. And we held almost 42% of consumption covered from domestically produced gas according to our estimates. With respect to the gas sales to third parties volume declined 5.3% year-over-year in the first quarter, representing nevertheless a better performance than the drop of the domestic gas consumption over the period, as I mentioned earlier. Compared to the fourth quarter of last year, we succeeded to record an increase of 6.8% in the gas volume sold in the first quarter this year. Total revenues from gas sold amounted to RON 2.57 billion lowered by 25% compared to the historical high recorded last year as a result of a lower average realized gas selling price. Compared to the fourth quarter of last year, total gas revenues were elevated by 26% quarter-on-quarter due to higher volume and prices. Total revenues from storage services grew by 71% year-on-year to RON 151 million, mainly due to higher revenues from capacity reservation and withdrawal services. Revenues from electricity added RON 121 million, well below the level reported last year as a result of production lowered by 6% and fiscal frame regarding prices higher than 450 RON per megawatt hour. Overall, in the first quarter of '23, we recorded total revenues of RON 2.91 billion, 26% below from the historical quarterly high reported in the first quarter of last year. If we compare with Q4 '22, we can note that total revenues recorded a positive performance with a 14% increase in Q1 this year. On the expenses side, the 2 main taxes included in the other expenses item in the profit and loss income recorded a decline with a positive effect, windfall profit tax amounted to RON 477 million on lower gas prices and volumes sold. And gas and UGS royalties totaled RON 150 million, mostly due to lower gas prices on CEGH and in Romania and also due to lower production. The solidarity contribution, which is recorded as a tax expense starting Q4 amounted to RON 538 million. Altogether, these 3 taxes represented a substantial expense of RON 1.16 billion and accounted for 40% of total revenues in Q1, albeit lower compared to the 59% weight recording in the first quarter of last year. Bottom line, we reported a net profit at a high level of RON 970 million at a marginal decrease of 1% year-on-year. Compared to the previous quarter, the net profit in Q1 was higher over 3x as the solidarity contribution due for the entire year 2022 was fully expensed in the last quarter of last year. All profitability rates recorded a strong advance in Q1 2023, but EBITDA margin reaching -- reached 64.7%, EBIT margin at 59.9%, both rates being more than double year-on-year. And NP margin stood at a high level of 33.3%. On the CapEx side, Romgaz Group invested a total amount of RON 223 million in the first quarter of '23, split 50% in equipment upgrade, 16% in the storing segment, 12% in geological exploration, 12% represented the investment in the Romgaz Black Sea Limited and 2% balance in the electricity segment. With respect to the strategic objective of Romgaz, we remind that these included the development of our onshore and offshore hydrocarbon resources and reserve portfolio focused on resilient hydrocarbons, the production of energy with low CO2 emission and also mitigation on the effects of climate change. As the latest development on May 10, the shareholders' meeting approved a settlement between Romgaz and Duro Felguera. And on April 3, the procurement contract has been signed with the objective to finalize the works and commissioned a new power plant located in Iernut. In the end of the presentation, I would like to mention the approval of dividends to be paid this year. So on April 26, the shareholders meeting decided upon a total gross dividend of RON 1.32 billion or a total gross dividend per share of RON 3.42, resulting in a total payout ratio of 52% for the last year. Dividends will be paid to shareholders in the registry on July 6 and will be distributed during July. With this, I would like to close our presentation, and thank you for your attention.

[Operator Instructions] So we have the first hand risen from Ms. loana Andrei. Please turn on your microphone and address the question. Ms. loana Andrei, if you would like to turn on your microphone and address the question. No, we cannot hear you. So until Ms. loana Andrei solves the problem, Ms. luliana Ciopraga, please turn on your microphone and address the question. Ms. luliana Ciopraga. If you have a question, please.

I guess you can hear me now. So following the decline in production in the first quarter, do you still see possible a decline in production of up to 2.5% as per the strategy? That's the first question. And secondly, how much was sold at regulated prices in the first quarter out of total sales? And also if you could give some guidance for the rest of the year, how much you expect to sell at regulated prices over to -- from the second quarter to the forward. This would be my first batch of questions.

Can you please repeat the first question?

I understood. It's fine. So yes, because in the first quarter, we had workovers and capital repairs to a number of wells that were delayed from last year. So given our production profile, we still expect to be in the 2.5% decline for the entire year versus last year. Regarding to the structures of the volume sold, we're looking in Q1 at around 90% at regulator -- regulated prices and we're looking for around the same amount with a couple of points of plus or minus for the entire year of 2023, actually up to March '24 -- end of March '24.

You mean that you expect to sell 90% of total volumes for this year at regulated prices? Is this what I should understand?

Yes.

Okay. So 90% of the total volume sold in 2023 will be at regulated prices.

Yes, around 80% to be more exact.

And also -- actually that's more a question related to the budget, your budget for this year. In the budget, we're seeing significant increases in costs. And actually, you're budgeting a decrease in profitability for this year compared to 2022. But that's not what we're seeing in the results that you've just released for the first quarter. What should we expect to see? I mean, should we expect to see in the following quarters, significant increases in costs? Or were you just cautious in the budget?

Not necessarily. As you know, Romgaz' budget is done quite cautious because we don't want to overestimate. The increases in costs are due to the fact that we have not budgeted such a big proportion of gas being issued under the ordinance and this is a part of explanation for what we're asking. We are, of course, striving to have the best cost versus income profile. And we're looking to improve our profitability rates, as you may well see in our Q1 data.

So basically, what you're saying is that you build a budget on the assumption that you would be selling less at regulated prices, right?

Yes. Exactly.

Ms. Ioana Andrie, you may now address your questions.

Can you hear me now?.

Yes, we can hear you.

Okay. Great. So I have a question regarding the average realized gas price. From my computation, it stands below the first quarter of 2022, but it was higher compared to the last quarter of '22 considering you had similar regulated volumes. How was this possible? And prices did not increase in the same period. And my second...

Okay. Let me answer the first question. Indeed, you're correct. But this is possible because in the last quarter of last year, our entire production was under the ordinance, almost our entire production was distributed this way and the realized gas price was lower. And in the first quarter of '23, there was some production that was available to sell on the free market, and that's why the average realized price of gas was higher than the one in Q4.

When you're talking about some production, you're actually referring to the 10% of volume.

Overall 10%, yes.

Okay. And my second question was regarding the power segment. Based on my computation, your average realized power price stood below RON 450, actually below 400 RON per megawatt. Again, can you explain how was this possible in the first quarter?

From our calculation, it was not below 450 RON per megawatt.

You had actually RON 121 million from power sales and you had a volume of 320 something gigawatts, right?

No. No, that was the volume of electricity produced so that volume of electricity sold was 259.

Okay.

So actually, the realized price is 467.

Okay. Can you please explain a little bit how much did you sold via this centralized mechanisms?

250.

Everything, right?

From 259 so 27%.