SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, and welcome to our conference call for discussing the preliminary results recorded by Romgaz Group in 2023. After introducing the speakers, Ms. Gabriela Tranbitas, Chief Financial 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: Ms. Gabriela Tranbitas, Chief Financial Officer; Ms. Ioana Zilahi, Finance Director; [ Mr. Ion Foida ], Production Department Director, Mr. Radu Moldovan, Energy Trade Director and the Investor Relations department. Now I would like to give the floor over to Ms. Gabriela Tranbitas, who will open the conference call with an opening speech.

Good afternoon, ladies and gentlemen. Thank you for joining our conference call to discuss the preliminary results recorded by Romgaz Group in 2023. Yesterday, we published our preliminary consolidated report for 2023, which includes the key economic and financial results of Romgaz Group in the period. Also, an overall presentation is available on our website in the Investors section. I would like to take this opportunity to address some aspects regarding the market context in 2023, which impacted our group's performance. According to our estimates, natural gas consumption in Romania declined by 6.5% last year with gas imports recording a significant drop and reaching a 17% weight in gas consumption. As a result of the current regulations in force, the remaining commodities exchange recorded a weak liquidity and the average of wholesale prices declined by around 36% year-on-year. Also, the average monthly reference gas price on the Central European Gas Hub adjusted downwards in 2023, according to data provided by the Romanian Agency for Mineral Resources. With respect to the fiscal environment in the gas and energy sector in Romania in 2023, Romgaz activities were mainly impacted by government's emergency Ordinance 27 effective April 1, 2022. We remind the main provisions applied to gas producers in 2023. Regulated gas sales price is up RON 150 per megawatt hour for gas sold to suppliers of households and the heat producers and their suppliers only for the production of thermal energy for households. Gas prices for the gas sold to some categories of end consumers, maximum RON 310 per megawatt hour VAT included per household, and maximum RON 370 per megawatt hour VAT included for small industrial clients, power plants and industrial parts. Gas sold at regulated prices is exempt from payment of the windfall profit tax while gas royalties are computed based on these regulated prices instead of CEGH reference prices. Contribution to the energy transition fund is due for the amount exceeding RON 450 per megawatt hour for energy producers, which started operations before September 1, 2022. Also, government in emergency ordinance 186 issued in December 2022 introduced for the period 2022, 2023, a 60% solidarity contribution applied to the amount of the taxable profit that exceeded by 20%, the average value of taxable profits reporting during 2018 to 2021. Additional fiscal legislation was introduced in October 2023 for certain operators in the oil and gas sector, including producers as follows: a 0.5% tax on turnover with some deductions applicable for 2024 and 2025; a 1% tax on turnover if this is higher than the 16% corporate tax payable starting 2024. Gas royalties higher with approximately 1.5 percentage points and gas storage royalties [ topped ] by 0.5 percentage points. With this new legislation, we are waiting for the regulator to come up with some additional clarifications. Regarding the operational and financial performance achieved by Romgaz Group in 2023, we can mention the following aspects: our natural gas production amounted to 4.79 bcm, 2.99% lower compared to 2022 as a result of the gas consumption dynamics in the national gas transmission system, specific decline in some reservoirs. Important output performance was achieved in Q4 alone, as mentioned in the related section, which will follow. Our steady efforts to consolidate the potential of our onshore production include work over operations and low productivity or inactive wells, continuous rehabilitation projects in main mature reservoirs, production optimization of gas reservoirs and investments for the development of production infrastructure and connection of new wells to this infrastructure. We continue to improve our significant position already held on the gas market. According to our assessment, Romgaz ranked as leading gas supplier in Romania during 2023 with a substantial market share of 50% in total gas deliveries. Also, we are strongly positioned in our gas consumption covered from domestically produced gas, holding a significant market share of almost 60% last year. With respect to gas sales to the market, volumes declined by 4.6% year-on-year also due to lower volumes withdrawn from underground storages. Total revenues from gas sold were reported at RON 7.77 billion, a 31% drop from the historically high value recorded in 2022. This was the result of government ordinance 27, which imposes to sell the bulk of production at the regulated price of RON 150 per megawatt hour. In 2023, 80% of the volumes sold were at this price. Revenues from storage services increased by 18% year-on-year to RON 552 million, withdraw revenues reporting the highest growth rate and capacity reservation having the largest share. Revenue from electricity diminished its contribution to RON 407 million, 3.3x below the record level achieved in 2022. As always, the entire production was sold at RON 450 per megawatt hour, in line with government emergency ordinance 27. Overall, in 2023, total revenues amounted to RON 9 billion, at a 33% decline from the historically high value reported in 2022. Regarding expenses, the 2 main taxes included in the taxes and duties items in the P&L recorded an important drop with a positive impact on our profitability. Windfall tax amounted to RON 890 million, down from RON 4.9 billion in 2022 due to the exemption for households and their significant weight in sales. Gas and UGS royalties totaled RON 601 million, down from RON 1.6 billion in 2022, due to lower gas prices on CGH and higher production sold at regulated prices. On the contrary, the solidarity contribution recorded as an income tax expense, recorded a 68% increase to RON 1.69 billion. Altogether, these 4 taxes, including the duty to the energy transition fund, represented a significant expense of RON 3.18 billion, and accounted for 35% of total revenues in 2023. Nevertheless, this level was lower compared to the one reported in 2022 of 60%. Bottom line, we reported a preliminary net profit of RON 2.81 billion, up by 10% year-on-year and at historically high value. All profitability rates were substantially in 2023. Both EBITDA and EBIT margins reached historically high annual values of 59.7% and 54.4%, respectively. Net profit margin was at a strong level of 31.2%. For Q4 alone, we can know the following main performances. Gas production was 2% higher year-on-year and 12% -- 12.5% higher compared to Q3. Electricity production was up by 18.5% year-on-year. Net profit of RON 643 million elevated by 108% compared to 2022. Net profit margin more than doubled year-on-year at 29.4%. Regarding investments, we can highlight important achievements performed during 2023, which are in line with the development strategy of Romgaz. Neptun Deep Project represents the most important transaction in the remaining energy sector over the past 30 years, ensuring the country's energy security. It is also a historical milestone in Romgaz proper transformation and development. We made important progress in this project. On June 21, Romgaz subsidiary, Romgaz Black Sea Limited together with its partner, OMV Petrom, submitted for approval to the National Agency for Mineral Resources, the development plan for 2 commercial field in the next Neptun Deep block on August 3. The National Agency for Mineral Resources confirmed the development of plan for Domino and Pelican South commercial fields. This represents the actual start of the development phase of this field. This phase includes drilling and construction of the required infrastructure for exploiting and marketing network gas. Overall, as of the end of 2023, over 80% of the execution agreements required to deliver Neptun Deep projects have been awarded. As a result, Romgaz and OMV Petrom are on track to safely deliver the first gas from Neptun Deep in 2027, and the project remains within EUR 4 billion guidance for total investment. Another strategic objective is a new combined cycle gas turbine power plant in Europe. On August 1, the unit power branch submitted the handover report to the contractor, which is now performing the remaining work to finalize the new plant by the scheduled date. Regarding the capital market, the share capital increase as approved by the shareholders on December 18 is ongoing. The share capital of Romgaz will increase 10x as line for shares will be granted for each share owned by shareholders on the registration date, May 29, 2024, as they deemed May 28. I am also glad to mention that in 2024, Romgaz celebrated its 115-year anniversary from the first discovery of natural gas in Romania Sarmasel, which marked the beginning of the gas sector in our country. With this, I would like to close our presentation, and thank you for your attention.

[Operator Instructions] Ms. Iuliana Ciopraga, please address your question.

I have a number of questions. Regarding 2024, if you could provide some color, what do you expect when it comes to production? What do you expect when it comes to volume sold? Anything regarding unit commissioning? When will you see that? And also, is there any fiscal impact from the share capital increase? I'll start with those and maybe later on, I can ask more.

Regarding production budgeted for 2024, we are within the guidelines established in our strategy. We are in line with the 2.5% decrease in production. Volumes sold are marginally low. As for unit commissioning, we expect the deadline of December 2024 to be met. Regarding the fiscal impact of the share capital increase, there will be a legal reserve, which will be recorded according to the remaining fiscal legislation. This will deduct the corporate income tax. There is no other impact.

I'm sorry, can you clarify, so this would reduce the corporate income tax? That's what I understood.

Yes. The legal reserve is deductible for tax profit computation.

And how much -- what would be the legal reserve? What's the level?

5% of net profit, up to 20% of the share capital. So each year, we will set up a 5% legal reserve from the profit until we reach the level of 20% of the share capital.

So basically, the impact in 2024 would be up to 20%.

No. 5%. We will not reach 20% this year.

Yes, yes, up to 5% of net profit?

Yes.

Of the current year net profit? So in 2024, up to 5% of 2024 net -- earnings before tax, I guess, right, would be nondeductible, would be...

Deductible. Yes.

Deductible, sorry, yes. Okay. And regarding volumes sold, how much do you expect to sell on the regulated market? Do you have more visibility now?

We didn't receive any information from the transmission operator. This information should come in March.

How about the first quarter? How much do you expect to sell in the first quarter of 2024?

We estimate that around 90% of the quantity delivered in the first quarter will be according to the ordinance.

Can you comment anything on the regulations that have been mentioned in the media recently regarding these changes to energy relations?

Just like you, we started using the media. We didn't receive anything official from the authorities. We are running various scenarios, but I can't comment more on that.

But just briefly, if I may, so assuming you pay windfall taxes starting April, have you run a scenario, what would be the impact on your on your profitability this year, assuming you still continue to sell at RON 150, but you begin paying windfall taxes and you run a scenario, what that would mean?

As I said, we have a scenario in place. But considering there is no official information from the authorities, I cannot issue such an information.

We received a written question from Mr. Adam Milewicz. How do you assess probability of potential changes in gas markets? Selling gas to households instead at market price in position of supplementary taxation on regulated gas sales? Did you calculate impact on 2024 EBITDA, if it materializes?

Regarding potential changes in the gas market, as I already mentioned, we saw the news in the media. We do not have official information from the authorities. So I cannot give further information at the moment.

Another written question. It's in Romanian language. Will you succeed to finalize the new Iernut Power Plant in 18 months from [indiscernible]?

We started according to the schedule. If there will be any delays, which we hope will not happen, we will announce the market.

Mr. Tamas Pletser, please address your question.

I got a question regarding your CapEx in 2024. Can you tell us how much is -- what is your plan for CapEx? How do you plan to finance the Neptun? And also, I have a question regarding your dividend payment. When can we expect the dividend announcement after 2023? Can you tell anything about the size of the dividend?

Our investment budget for 2024 is of around RON 4.4 billion. This includes Neptun Deep with about RON 3.3 billion. As our CEO has told in various occasions, we are planning on issuing an MTN program this year with a first tranche of around EUR 500 million. Regarding the dividend payment, we will submit for shareholders' approval. Our proposal in April.

We received a written -- several written questions from Mr. [indiscernible]. Congratulations on the decent results. Three practical questions, if I may. We have seen the visit to Caragele project last Saturday. By finalizing drilling and confirming data, what is your estimated yearly output that could -- that you could reach from Caragele Deep or at least the magnitude by 2027? Could you give us some color around the Iernut Power Plant project? What is the estimated completion rate in Q1 2024, bearing in mind start-up by the end of the year? And the third question regarding #1 -- the item #1 of the agenda of April 4, OGMS. Could you give some details about the magnitude of the damage caused to Romgaz? And what is the process that you envisage?

Regarding Caragele, in 2023, the production we obtained from Caragele was up around 5.4% of total production. By the investments we are going to make, we expect an increase to around 8% of total production. At the moment, I cannot give a completion rate, it is work in progress. What I can say is that we have an independent supervisor overseeing the works. So we expect any delay that may or may not occur to be brought to our attention in due time so that we can take the measures to limit their impact.

Ioana Andrei, you may now address your question.

I have a question regarding the budget proposal. Actually, a follow-up question on the regulated market shares. Can you please share exactly the budget proposal was made considering what percentage of regulated sales?

The budget was prepared based on an estimate that somewhere between 60% and 70% of sales would be under the ordinance.

Ms. Iuliana Ciopraga, you may now address your questions.

Yes, something regarding the financials in 2023. In the fourth quarter, you booked something in other income, which is basically an expense. Can you comment a bit what was that?

Yes. According to government emergency ordinance 27, electricity producers had the right for the electricity sold at RON 450 per megawatt hour. So if the cost of the CO2 certificates used in the production, would exceed the energy transition fund contribution. We're entitled to receive this difference. We recorded up to third quarter an income on this. However, considering that up to now, there is still no procedure in place on how we can recover the amount. We analyze in more detail on the accounting standards and concluded that the recognition criteria for the receivable and the revenue were not met. So we reversed that income.

Also basically, that means that you booked the CO2 costs in 2023, right? I mean that's basically the end result. If you don't recover, then that means that you book it. So you receive RON 450 net for the power sold, but then you have to deduct the CO2 costs, right? Is that right?

Yes.

And I guess the same -- you would follow the same accounting rules for 2024, if that's the case, right?

Yes, until we will have some assurance that this amount will be recoverable.

We received 2 written questions from Mr. [ Torne Marius Calin ]. The first one, do you have projects for green hydrogen?

We do not have such projects.

And the second question is related to Neptun Deep. Do you have a profit estimate to be obtained when producing 4 billion cubic meter per year for 10 years? How will you use the profit?

We have a business plan for Neptun Deep. However, information is continuously changing. We cannot advance at the moment any financial information on this project. The profit that will be generated will be used to repay the loans and the bonds that we will issue. It will be also reinvested in other projects.

We received another written question from Mr. Adam Milewicz. What was the reason for significant deterioration of electricity segment margin in Q4 versus Q3?

The reason for the lower result was the one I mentioned earlier. The reversal of the income we recognized up to Q3 regarding the cost of the CO2 certificates that will be recoverable under ordinance 27. However, considering the original procedure in place to actually claim the money from the Romanian state, we considered this revenue does not meet the recognition criteria according to accounting standards. So it was reversed.

Ms. Iuliana Ciopraga, please address your question.

Actually, it was related to the question about Neptun Deep. Do you have an idea how you plan to sell the gas? I mean what you want to do with the gas of Neptun? Because we're talking about the cash, what you in to do with the cash? But first, what do you want to do with the volumes? And what type of projects you want to finance with the cash from Neptun? Any color on that?

I guess there will be a structure from Neptun Deep. It will be sold to clients on the best conditions that we can achieve.

But you don't plan another gas power plant, for example, right? Or chemical -- sorry?

At the moment, we don't have specific plans. Of course, based on how the market will progress until 2027, we will have more clarity on the investments that we will make and which direction we will take.

We received a written question from Mr. [indiscernible]. You mentioned before you would like to or you expect to receive investment-grade rating from 1 of the 3 biggest rating agencies. Can you give information from which exact agency? And when do you expect to receive the rating? I guess that should be obtained before going to the market for financing Neptun Deep in the second half of this year.

We appointed Fitch as credit rating agency. We expect the rating to be issued by the end of April.

We received another written question from [ Mr. Torne Marius Calin ]. Will the bond issue be addressed only to institutional investors? Or will you have a trend for retail investors? Do you have an estimate when will you launch the bond emission?

We are considering various scenarios. We will appoint a debt adviser with experience on this type of transactions. Based on the advice we will get, we will decide the market and the investors to which the bonds will be issued. The bonds we plan to issue -- we plan to issue them in the third quarter, the latest.

If you have any other questions, please feel free to address them. 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 call is now concluded. On behalf of Romgaz team, thank you for attending today's conference call. Goodbye.