SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for joining our conference call to discuss the results recorded by the Romgaz Group in the first 9 months of 2023. We published yesterday our quarterly report and a consolidated condensed interim financial statements for the first 9 months period and the third quarter of this year, which presents our economic and financial achievements in this period. Also, an updated presentation of Romgaz Group is available on our website in the Investors section. I will start with some aspects regarding the gas market context in the first 9 months of '23 compared to the same period of the previous year. According to our assessment, natural gas consumption in Romania decreased by 12% year-on-year, while gas import dropped to less than half and accounted for 16% of consumption compared to 29% in the previous year. As expected, the Romanian Commodities Exchange recorded weak liquidity as a result of the current regulation in force and the average of wholesale prices was lower by around 35% year-on-year. 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 gas price has also reported a significant decline in the first 9 months of 2023 according to the data provided by the Romanian Agency for Mineral Resources. Regarding the fiscal framework in the energy sector in Romania, Romgaz's activities continue to be affected mainly by the Government's Emergency Ordinance No. 27, applicable April 1, 2022, subject to the subsequent amendments. We remind the main provisions applicable to the gas producers. Regulated gas sale prices of RON 150 per megawatt hour for the gas sold to suppliers of household starting 1st of April 22, and to the heat producers and their suppliers for the production of thermal energy for household starting September 1, 2022. The price of gas sold to the latter category was RON 250 per megawatt hour in Q2 2020. Kept prices for the gas sold to some categories of end consumer, maximum RON 310 per megawatt hour VAT included for household and maximum RON 370 per megawatt hour VAT included for heat producers and for industrial clients with the consumption below 50,000-megawatt hour in the previous year. Producers are exempt from the windfall profit tax for the gas sold at regulated prices starting 1st of April also. The gas royalties are computed based on these regulated prices instead of the CGH reference prices. As of September 1, 2022, energy producers we started operation before this date are required to contribute to the energy transition fund to the amount exceeding RON 450 per megawatt hour. In addition, gas and energy traders all contribution to this fund for the profit in excess of 2% over the acquisition price. Gas storage is also mandatory for gas suppliers and key producers to secure part of the estimated consumption for final clients during November 2023, March 2024. Also, the Government ordinance No. 186, December 2022 introduced for the 2022-2023 fiscal years, a 60% solidarity contribution applied to the amount of the taxable profit that exceeds by 20% in the average value of taxable profits reporting during the years 2018 to 2021. Additional fiscal legislation was introduced in October 2023 for certain companies operating in the oil and gas sector, including producers, Law No. 396 regarding fiscal budgetary measures reinforced a 0.5% tax on turnover with some deduction applicable for the fiscal years 2024 and 2025, and a 1% tax turnover if this is higher than the 16% corporate profit tax payable starting with 2024. Government Ordinance No. 91 increased gas royalties with approximately 1.5 percentage points starting October 30. For this new regulation, we are waiting for the secondary legislation and are in process to assess the financial impact. We will continue this presentation by highlighting the operational and financial performance recorded by the Romgaz Group in the first 9 months of 2023. We recorded a natural gas production of 3.5 bcm, lower by 4.7% compared to last year, but well below the national consumption growth of almost 12%. Our gas output in the first 9 months of 2023 was impacted by the recompletion program and certain measures to optimize production as well as by the gas consumption level in the national transport system and by the natural decline in our field. We continue to consolidate the potential of our onshore output through production rehabilitation projects in the main mature reservoirs, work over and recompletion operations, optimization of well operation and through new well streamed into production following successful exploration programs and completion of the infrastructure. Also, I would like to point out that we continue to perform important investment in our production facilities. We completed 3 production wells, finalized 11 surface facilities and performed recompletion, reactivation and capital leasable repairs for 133 wells. We improved even more our already significant position on the gas market. Our market share climbed to almost 55% of the total deliveries in Romania, and we hold 65% of consumption covered from domestically produced gas in the first 9 months according to our estimates. Regarding gas sales to third parties, volume declined by 4% year-on-year as a result of current regulations. Total revenues from gas sold amounted to $5.91 billion, lower by 36% year-on-year from the historical high value recorded in last year as a result of the large volume sales as the regulated prices of RON 150 per megawatt hour in the first 9 months. Revenue from storage facilities grew by 31% year-on-year to RON 424 million, mainly due to capacity booking services. Revenues from electricity added RON 288 million run, well below the level reported last year as a result of production lower by 24% and the requirement to sell almost the entire production at RON 450 per megawatt hour. Overall, in the first 9 months of 2023, we reported total revenues of RON 6.81 billion, at a 37% decline for the -- from the historical high value reported last year. On the expenses side, the 2 main taxes in the other expenses items in the P&L recorded an important drop with a positive impact on our profitability. Windfall tax amounted to RON 770 million from RON 4.8 billion in the same period of last year due to exemption for household and their significant weight in sales. Gas and other royalties totaled RON 425 million from RON 1.5 billion last year due to lower prices on the European Gas Hub and higher sales at regulated prices. On the other hand, the solidarity contribution, which is recorded as income tax expense amounted to RON 1.39 billion. Altogether, these 3 taxes represent a significant expense of RON 2.58 billion and accounted for 30% of total revenues in the first 9 months of this year. We reported a gross profit at a historical high value of RON 4.04 billion, up by almost 52% compared to last year. Bottom line, we reported a net profit of RON 2.17 billion with a marginal 3% adjustment year-on-year impacted principally by the solidarity contribution. All profitability rates recorded a significant advance in the first 9 months of 2023, both the EBITDA and the EBIT margin reached a historical high value of 62.8% and 57.4%, respectively, and were more than double year-on-year. Net profit margin increased to the strong level of 31.8%. For the third quarter alone, we point out the following main achievements. Gross profit, RON 1.04 billion, a record high for this period. And a net profit of RON 483 million, the EBITDA rate more than doubled and an EBIT rate 3x higher year-on-year. On the CapEx side, Romgaz Group invested a total amount of RON 849 million in the first 9 months of this year, split 47% and 42% in equipment upgrade, 39% represented the investment in the Romgaz Black Sea Limited, the Neptun Deep Project. 11% in the storage segment, 5% in geological exploration and 2% balance in the electricity segment. Regarding investment, we can underlie important achievement that occurred in the third quarter, in line with the development strategy of the group. On the 1st of August, Iernut Power Plant submitted a handover report to the contractor, Duro Felguera, to start the remaining works to complete the combined cycle gas turbine power plant. With this, the completion of this strategic project is on the right path. On the 3rd of August, the development plan of the Neptun Deep Project was endorsed by the National Agency for Mineral Resources meaning that the project entered an effective development phase. OMV Petrom and Romgaz will invest up to EUR 4 billion for the development phase which will enable around 100 bcm of natural gas to be brought on stream. First gas production is planned for 2027. The platform generate its own electricity, operating at the highest safety and environmental protection standards. Neptun Deep represents the most important investment in the Romanian energy sector in the past 30 years and will make Romania the largest natural gas producers in the EU. I would also like to mention that in the third quarter, in July, we distributed total gross dividends of RON 1.32 billion. Total gross dividend per share amounted to RON 3.42 resulting in a total payout ratio of 52% for the last year. Regarding the capital markets, I am glad to mention that Romgaz celebrates the 10-year anniversary for its listing on the Bucharest Stock Exchange on November 12, 2013. This year, in mid-November, the company's capitalization was RON 18 billion, which makes it the fourth largest listed company by capitalization. With our forward-looking vision, our commitment is not focused only on meeting the current energy demands, but also on to ensure a cleaner and more sustainable energy future for our generations. With this, I would like to close our presentation, and thank you all for your attention.

Thank you for the presentation. To be advised that this conference is being recorded for internal purposes. [Operator Instructions] So Ms. Ioana Andrei, turn on your microphone, and you may address your question. Ms. Daniela Mandru, if you can hear us, you can address your question. .

Do you hear me?

Yes, we can hear you.

I have several questions regarding the new taxes, let's say, please tell us if you have an estimate for the turnover tax for the next 3 years. That would be 1 question. The second question regards the royalty quota increases, please tell us if you have -- if these increases in the quotas will affect you or not? And the third question refers to the regulated volumes at RON 150 for the last quarter of the year and for the first quarter of next year, because I think you have already have the volumes.

So for the first question regarding the [ 0.5 ] we are still waiting for the Ministry of Finance to publish the applicability of the law. But let's say, a gross estimate that we have done is around RON 30 million a year. For the next question, we are still assessing the impact and the applicability. We are taking each and all petroleum agreements and seeing if the applicability will be over them, but we definitely have to ask more questions to the National Mineral Resource Agency and also to the Ministry of Finance to see if they are applicable just for these ones or for future agreements.

And the third question referred to the volumes that regulated prices of RON 150 per megawatt. The volumes agreed for the last quarter of the year and for the first quarter of next year.

On that -- it's going to be around 90%. So for the last quarter it's going to be a bit higher than we expected, but around 90% will be at regulated prices and also for the first quarter of 2024.

Okay. I don't know some comments on the royalties quota increases. What are you looking to see for to see if this quota increases apply to your concession agreement to the new or to the world? Because according to Petrom, these quota increases apply only to the new concession.

This is our initial estimate as well, but we have to look in each concession agreement and be sure that the royalties quota are inserted in these agreements. And this is -- this we have to see if by law, this will be modified or not.

We go on with Ioana Andrei, if you can turn on your microphone and address the question.

Just a follow-up question on the royalties discussion. Is Neptun Deep subject to the new royalties or to the old ones?

No. Neptun Deep is not subject to the new royalties.

So this is clear. Okay. And then I would have a question regarding the production -- do you consider revising your target of 2.5 for the next year?

Yes. There is a slight -- there will be a possibility of that target to be a bit larger, but it's not going to be a big difference. So we'll be in the 3% range.

Just for the next year or...

Just for 2023, we are still expecting for the next year to be in line with our strategy of a maximum 2.5% decrease.

Okay. And if I may, 1 more question regarding this share capital increase, can you please give us a little bit of more insight why you decided to take this action besides remunerating shareholders, obviously.

No. It's -- I think it's very important given the fact that we are looking to tap the capital markets for our debt auction as well. It's something that we were looking for, for the past months. It's also a real incentive for our shareholders to be part of our company. It's a way to, let's say, imburse our shareholders for keeping our company in their portfolios, and it's also a way to have a bit of a tax deductions from this operation.

We go on with Iuliana Ciopraga.

I have a question regarding the EU legislation actually. Are you aware of any changes in that legislation that allowed the government to impose the solidarity tax. And actually, I'm referring to a change at [indiscernible] to prolong the tax after 2023. So that's 1 thing. Regarding royalties, I'm not sure I understood fully. So in the contract, where royalties are already included, you don't expect changes there, right? That's my understanding. Only when they will be renewed I understand that those might change. But otherwise, most likely -- I just wanted to check that I got this correctly. And third, I see in the third quarter an increase in cost of goods sold, if you could explain a bit what has been driving that. That's all my side.

Regarding the royalties, our initial assessment and provisional assessment is exactly as you have said. We are looking only if the royalties are embedded in the contracts than just to an additional act, this could be possible, but we are still analysis because we are taking each and every petroleum agreement by hand. Regarding the European legislation, of course, this has to be transposed international legislation. So this is something that is going to be the decision of the government. And I will ask our CFO, Gabriela to answer your third question.

The main element of cost of goods sold relates to cost of electricity imbalances due to the fact that we had some defects, let's say, on the power plant, we had to buy electricity from the market. However, this caused some imbalances.

And I guess, they are not deducted from the windfall tax, right, otherwise.

No.

But I mean, regarding my question on the European legislation. I was just wondering if the legislation was changed to allow them to prolong the tax. I mean I remember the tax only set in 2023 -- has there been any amendment to that? Because I couldn't find it, but I think you probably know that better.

From what we don't know, we know what norm and wanted to [indiscernible].

[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 is now concluded. On behalf of Romgaz team, thank you for attending today's conference call. Goodbye.