SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the conference call for discussing the results recorded by Romgaz Group in the First Quarter of 2024. 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; Mr. Ion Foida, Production Department Director; Mr. Radu Moldovan, Energy Trading 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 results recorded by Romgaz Group in the first 3 months of 2024. Yesterday, we released the quarterly report, which includes the presentation of our economic performance and the consolidated interim financial statements. Also, a presentation of Romgaz 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 assessment, natural gas consumption in Romania increased by 5.5% year-on-year. Imported gas volumes recorded a significant increase of 69% year-on-year, reaching a 13% weight in total consumption compared to 8% in the similar period of the previous year. On the Central European Gas Hub, the average reference price dropped by around 60% year-on-year according to data provided by the Romanian Agency for Mineral Resources. The Romanian Commodities Exchange recorded a similar downward trend in Q1 with the weak liquidity due to regulations in force. Regarding the fiscal environment in Q1 and for full year 2024, Romgaz activities continue to be influenced mainly by the Government Emergency Ordinance #27 issued in March 2022 and subsequently amended and supplemented. The main legal provisions applicable to gas producers include regulated gas sales price of RON 150 per megawatt hour for the guests of the household and suppliers of household and also to heat producers and their suppliers, but only for the production of thermal energy for households. According to Government Emergency Ordinance 32 issued in 2024, starting April 1 of this year and until the end of 2024, the new regulated price is RON 120 per megawatt hour. 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 until the end of 2024. Our energy producers, we started operations before September 1, 2022. The contribution to the energy transition fund is enforced where prices exceeding the regulated level of RON 450 per megawatt hour until March 31, 2024, and RON 400 per megawatt hour after April 1, 2024, until March 31, 2025. Also, Government Emergency Ordinance #21 issued in October 2023, increased gas royalties with approximately 1.5 percentage points and gas storage royalties with 0.5 percentage points. For comparison reasons, please recall that the solidarity contribution introduced by Government Emergency Ordinance 186 in December 2022 was due only for fiscal year 2022 and 2023. Regarding the operational and financial performance recorded by Romgaz Group in the first 3 months of 2024, we can point out the following aspects. Natural gas production amounted to 1.29 bcm, 4.4% higher compared to Q1 last year and also up by 1.4% compared to Q4 2023. We succeeded to achieve this good performance due to restarted production at some inactive wells as a result of our corporate operations and capital repairs, lower workover periods and operational optimization and gas compression and dehydration capacities, higher productivity at low debit wells and continuous rehabilitation projects in the main mature reservoirs. Regarding the investments made in our gas production facilities, I can mention that we performed drilling operations for one production well, finalized surface facilities to streaming to production two wells, while other surface facilities are in execution to streaming to production another seven wells. Also, we performed the reactivation and capitalizable repairs at a total of 44 production wells. We continue to hold a strong position on the Romanian gas market in Q1. We estimate a market share of 34% of total gas delivery in Romania and almost 39% of the consumption covered from domestically produced gas. With respect to gas sales to third parties, volumes declined by 7.2% year-on-year in Q1, partially due to lower volumes withdrawn from underground storages. Nevertheless, compared to the fourth quarter of last year, we succeeded to record an increase of 5.7% in the gas volumes sold in Q1 this year. Total revenues from the gas sold amounted to RON 1.92 billion, and a 25% decline year-on-year, mainly as a result of a lower average realized gas selling price. Compared to Q4, total gas revenues were elevated by 3.8% as the average gas selling price was quite stable over the 2 mentioned quarters. Total revenues from storage services adjusted by 9% year-on-year to RON 137 million, mainly due to lower revenues from capacity reservation while we grow services reported an increase. Still, UGS revenues improved by 7% compared to Q4 based on the contribution of withdrawal services. Revenues from electricity added RON 109 million, 10% lower year-on-year as a result of decline production in the old power plant. Around 70% of electricity was sold at RON 450 per megawatt hour, in line with Government Emergency Ordinance 27 of 2022. Overall, we reported total revenues of RON 2.27 billion at an 11% adjustment year-on-year. On the expenses side, the main duties and taxes included -- in the taxes and duties item in the P&L statement, had a mixed trend as follows. Windfall profit tax decreased significantly to RON 77 million due to the exemption of our households and their high weighting sales. Gas and UGS royalties rose to RON 185 million, mostly due to higher gas production and royalties quota applied starting in October 2023. Altogether, these taxes, including the duty to the energy transition fund, represented an expense of RON 267 million, 58% lower year-on-year, which had a positive effect on our profitability. Bottom line, we reported a net profit of RON 1.25 billion, up by 28% year-on-year and at a historically high quarterly value. As already mentioned, the solidarity contribution is not due anymore starting 2024, which translated into higher profitability this year compared to 2023. Profitability rates were substantial and record high in Q1. EBITDA margin increased to 69.6%, EBIT margin of 63.6% and net profit margin stood at a strong level of 54.8%. On the CapEx side, Romgaz Group invested a total consolidated amount of RON 460 million in Q1 2024, of which RON 338 million represented the investment of Romgaz Black Sea Limited. For the full year 2024, total investments are budgeted at RON 4.5 billion, mainly due to the high contribution of the Neptun Deep project. Regarding this project, progress of the investment is in line with the work programs and the execution schedule. Main investment activities are related to detailed execution design, procurement of equipment, drilling preparatory works and permitting activities. The strategic focus is to finalize award in the main contracts focused on permitting activities, start construction and prepare to start the first well. As a result, Romgaz and OMV Petrom are on track to simply deliver the first gas from Neptun Deep in 2027, and the project remains within the up to EUR 4 billion guidance for total investment. Neptun Deep project represents the most important transaction in the Romanian energy sector in the past 30 years and also a historical milestone in Romgaz corporate transformation and development. Another strategic objective is the new combined cycle gas turbine power plant in Iernut. We are now performing the remaining works to finalize the new plant until the scheduled date. At the end of this presentation, I would like to mention the approval of dividends to be paid this year. On April 25, the shareholders decided upon total gross dividends of RON 549 million for a total gross dividend per share of RON 0.1425. The total payout ratio of 21% for the last year allows Romgaz to partially finance its ambitions investment and development plans. Please note that the stated total gross dividend per share is computed, taking into consideration the 10x share capital increase with 9 free shares to be granted for each share owned by shareholders on the registration date May 29, 2024. With this, I would like to close our presentation, and thank you for your attention.

[Operator Instructions]. Ms. Ioana Andrei, please address your question.

Can you hear me?

Yes, we hear you.

I have several questions. First, this year, you had a lower payout ratio. Now I was wondering if this is a new strategy until Neptun Deep kicks in? Or it was just a special situation this year and we should be seeing dividends higher starting next year? Second, my question is regarding sales at the regulated new price of RON 120. What are your expectations regarding volumes this year? And third, regarding royalties. You've mentioned in the presentation, an increase in royalties in some perimeters and we've already seen an increase in the first quarter. Can you tell us exactly for what percentage of the total volumes are the new higher rates applicable? And if I may, one more question regarding the budget. Do you take into consideration the revision of the budget? Or do you still consider the estimated net profit achievable?

Regarding the lower payout ratio, we -- the management of Romgaz, we expect to have this policy until Neptun Deep goes live, because, as you know, it's a capital-intensive project. So we need all available resources and also the support of our shareholders. Regarding sales at regulated new price, we expect that around 53% of sales this year will be at related prices. As for royalties, the royalties are applicable to the entire production, not just some fields. As for the budget, yes, we are considering revising the budget. Once we finalize the figures, we will go to the shareholders to obtain their approval.

So sorry, for the royalties, so the new higher rates are applicable to all, right?

Yes.

Okay. Starting with this year, well, October?

Exactly.

Mr. Oleg Galbur, please address your question.

Can you hear me now?

Yes, we hear you.

I have three. You mentioned that the domestic gas consumption increased year-over-year by 5.5%. I was wondering whether you can give us some more details regarding the drivers behind this increase. For example, was it on the industrial consumption side? Or was it the colder weather, which triggered this increase or maybe other factors? Second question, looking at the revenue development or better say, earnings development in the -- in your core business upstream and comparing this to the evolution of volumes sold, which increased by 6%, if I'm not wrong, and the decline of benchmark prices on the European gas hubs, that would imply a significantly higher realized price for Romgaz. I was wondering if you can explain us what was supporting a strong increase of the realized price? Was it the volume sold to regulated group of consumers or maybe third parties sales, whatever you can tell us would be very helpful. And the third question, what level of impact on earnings would you expect from the changes of -- from the regulatory changes and I refer to the new regulated gas and electricity prices, but also from the increase of royalty starting this October.

Regarding your first question, we don't have the information of gas consumption based on markets or type of clients. These are information that the national regulator could provide. Regarding the revenue, we don't understand the question. Prices actually decreased in Q1 2024 compared to Q1 2023. While on Q1 2023, we achieved an average of RON 188 per megawatt hour. In Q1 2024, we achieved a price of -- an average price of RON 150 per megawatt hour. Regarding the level -- the impact on earnings from regulatory changes, as I mentioned previously, we are working on a revised budget until then we cannot make any information public. As for the gas royalties, the impact is estimated at about 20% increase compared to 2023 level.

Okay. Maybe a few follow-ups. On the second question, I was rather talking about the quarter-on-quarter comparison. So comparing Q1 to Q4 and looking at the changes in the earnings before tax, which increased significantly higher than the volumes sold. But it's okay, maybe I can discuss this in more details afterwards with the IR team. And then on royalties, you said 20% increase comparing to 2023 but you refer only to the one quarter of 2024, which is the fourth quarter, right? Comparing it to the full year of 2023 or to the fourth quarter of 2023? Just to make sure.

Full year 2024 should be around 20% higher than full year 2023.

Ms. Laura Simion, please address your question and activate your microphone.

I have follow-up questions for the volume for this year at regulated prices, you said 53% of the sales?

Yes.

That is call it [indiscernible] I was thinking it is quite low because usually, you paid [indiscernible] and a lot of other things in 2023.

These are the volumes that the national transmission operator submitted to us based on the demand of the market participants.

And I have a question about this year CapEx. So out of the RON 4.50 billion, RON 3 billion are destinated to Neptun. And for the rest, if you could give us more details about the main destinations. I know you mentioned that you are looking for some renewables projects. Did you plan to start investing? I mean, even in this year, CapEx are included to such projects. And what about your note? How much CapEx do you need there to complete the project?

Regarding the investments in Iernut plant, we expect to have a CapEx of RON 440 million by the end of the year. Regarding other projects in Romgaz CapEx plan, we expect to spend around RON 101 million in exploration activities, RON 346 million in upgrade of equipments used in gas production. We are investigating -- investing in renewables production facilities. At the moment, we completed the feasibility study, which is under analysis -- under internal analysis. Once we will have a result and an outcome on this, we will make the information public.

So there are no projects this year in renewables. This is incipient pace and probably will be the CapEx for the next years.

Yes.

Ms. Ioana Andrei, you may address your question.

I have a follow-up question on Iernut power plant. Considering the level of works in progress, do you believe it will be fully functional starting with the beginning of 2025 or we might witness again to some delays?

We expect the project to be completed on time. We have constant communication with the constructor. We also have a site supervisor, which is constantly monitoring the evolution of the project. Based on the information we have, we will be able to complete the project.

If there are any other questions.

Just a quick question, if I may. Do you plan to sell the gas from Neptun Deep internally. So in the Romanian internal market? Or do you plan to export it in case you plan to do some export, can you tell us if capacity reservation has been done already? Or if it's physically feasible at all.

Currently, we are working on setting up the strategy to sell the gas extracted from Neptun Deep. Once we finalize this, we will inform the market.

Can you tell us -- just out of curiosity, what is actually the export capacity to Hungary that Transgaz actually can make available to Romgaz, for example.

This information should be available on Transgaz website. Please consult that information.

Mr. Daniela Mandru, you may address your question.