SNGN Romgaz SA (SNG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to our conference call for discussing the results recorded by Romgaz Group in the first 9 months of 2024. 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. [ Adriano Agu ] from Production Department; Ms. Cornelia Sardan, Head of Prices; and our Investor Relations department. Now I would like to give the floor over to Mr. Razvan Popescu, who will open the conference call with an opening speech.

Good afternoon, ladies and gentlemen, and thank you for joining our conference call to discuss the results recorded by the Romgaz Group in the first 9 months of 2024. Today, we published quarterly report and the consolidated condensed interim financial statements for the first 9 months and the third quarter of 2024, which present our economic and financial achievements in the period. Also, an updated presentation of the group is available on our website in the Investors section. I would like to start with some aspects of the gas market context end of first 9 months compared to the same period of last year. According to our assessment, natural gas consumption in Romania increased marginally by around 2%, with imported gas volumes higher by almost 31% year-on-year, reaching a 20 point weight in the domestic consumption in this period. On the Central European Gas Hub, the average reference price declined by 35%, according to the data provided by the National Authority for regulation of the mining, oil and CO2 geological surge activities. The Romanian commodities exchange continues to be impacted by the current regulations in force. Wholesale average price has also reached a significant drop. Regarding the fiscal framework in the energy sector in Romania, Romgaz activities continue to be influenced mainly by the government Emergency Ordinance No. 27, effective starting 1st of April 2022, subject to subsequent amendments. We remain below the main legal provisions applicable to gas and energy producers. Starting 1st of April 2024 and up until the end of 2024, the regulated gas selling price is RON 120 per megawatt hour for the gas sold to household, suppliers of household, heat producer and their suppliers for the production of thermal energy for household according to this deal. For comparison reason, please recall that during 2023 until up to 31st of March '24, the regulated gas prices stood at RON 150 per megawatt hour. Gas producers are exempt from the windfall property tax for the gas sold at these regulated prices up until end of March '25. Also gas royalties are computed based on these regulated prices instead of the CEGH reference prices until the end of '24. Energy producers which started operations before September 2022 are required to contribute to the energy transition fund for the energy sold at prices over RON 400 per megawatt hour during 1st of April '24, up to 31st of March '25. The reference price was RON [ 450 ] per megawatt hour until March -- 31st of March '24. Also, the GEO no. 91 August, October '23 increased gas royalties with approximately 1.5 percentage points and the gas storage royalties with 0.5 percentage points. Law no. 228 issued in July '24 to approve this GEO finally brought more clarifications regarding the applicability of the new royalty rates. As such, the new higher royalty rates do not apply to existing concession agreements that Romgaz has in place. In addition, for comparison reasons, we remind that the solidarity contribution introduced by GEO no. 186 in '22 was due only for the fiscal years '22 and '23. We continue this presentation by highlighting the in operational and financial performance recorded by the Romgaz Group in the first 9 months of 2024. Natural gas production reached 3.67 bcm, a higher 4.5% compared to the same period of last year. The significant performance reported in the first 9 months resulted from the completion of the investment for the development of production infrastructure and connection of new wells. This allowed us to stream into production several new wells with an initial daily flow of over 400,000 cubic meters. Reactivation of an important number of wells through specific investment works with a total daily flow of over 1.5 million cubic meters. Optimization -- exploitation of high potential wells and the continuous rehabilitation projects of main mature gas fields, aiming to maximize production and the recovery factor. Also, we finalized 7 surface facilities and performed the recompletion, reactivation and repairs for a number of 158 wells. I would like to point out that Caragele commercial field had an important contribution to this 9-month performance by drilling and streaming into production 1 development well and reactivating 2 other wells and also optimizing production and the well that is operating in the Deep area. Regarding our gas portfolio, we announced in August that the independent auditor of our onshore reserves and contingent resources was completed, revealing a strong portfolio of gas reserves and resources. Compared to the full year of '23, we improved even more our position held in the Romanian gas market. Our market share climbed to almost 52% of total sanction in Romania and 64% of the consumption covered from domestically produced gas. Regarding the gas sales to third parties, volumes declined by 4.5% year-on-year, mainly due to higher owned volumes injected into underground storages and lower owned volumes withdrawn from storages. Total revenues from gas sold amounted to RON [ 4.65 ] billion, 21% lower year-on-year, mainly as a result of the downward average gas selling price in 2024 compared to last year. Revenues from storage services adjusted by 7% year-on-year to RON 396 million, mainly due to lower revenues from injection and capacity booking services, while withdrawal services recorded an increase. Revenues from electricity added RON 307 million, higher 6.5% year-on-year on production higher by almost 14% compared to last year. Overall, in the 9 months of this year, we reported total revenue of RON 5.63 billion, with 17% lower than last year. On the expenses side, we can point out that windfall profit tax and gas royalties accounted for RON 430 million, and respectively, RON 791 million. Altogether, all the main taxes, including the duty to the energy transition fund, recorded a 3.6% increase year-on-year and is representing a total expense of RON 1.24 billion. Bottom line, net profit amounted to RON 2.27 billion, up 4.8% year-on-year and a historically high 9 months value. As already mentioned, the solidarity contribution is not due anymore. All profitability rates were substantial in the first 9 months. Net profit margin rose to historically high 9-month value of 40.4%, and both EBITDA and EBIT margins continue to be robust at 53.8% and 46.2%, respectively. For the last -- so for the Q3 alone, we point out the following main achievements, gas production higher by 4.7% year-on-year due to steady investment rehabilitation and optimization program, revenues of RON 1.73 billion, net profit of RON 436 million and a 10% decline year-on-year. Regarding the CapEx, Romgaz Group invested a consolidated amount of RON 2.16 billion in the first 9 months of 2024. Of this amount, RON 1.54 billion representing the investment of on Romgaz Black Sea Limited and RON 593 million, the investment of Romgaz alone. These were more really in exploration, exploitation and production modernization. Also, RON 22 million went to the CapEx of UGS subsidiary Depogaz. With respect to the Neptun Deep project, it's presently in the execution phase and progressing in line with the work program. In May, the cut of first steel for the platform topside started at the Saipem facility in Indonesia, being an important milestone for the project. In early October, the operator announced the start of the construction works for the steel jacket platform -- the platform support structure at the Saipem construction site in Italy. The platform is expected to be installed in 2026, followed by the hookup commissioning and integration of the subsea production system and pipelines. With these activities, Romgaz and its partners are on track to spud the first well in 2025 and safely deliver the first gas from Neptun Deep in 2027. The project remains between the up to EUR 4 billion guidance for total investment in the development phase. Another strategic objective is the new combined cycle gas turbine power plant in Iernut, for which we are performing the remaining contracted works. The total progress of the investment on this turnkey project at the end of October is at 95%, and the total progress of the investment project related to the new EPC contract that was signed last year was [ 70.6% ]. It is important to mention that taking into account that most of the equipment were installed during the initial works contract approximately 4 years ago and did not work since then. Complex test will have to be performed in order to ensure that putting into operation of the plant will be done in the best conditions and without any risk for the facilities for the people working on the site. 72-hour operational test and endurance test for the plant will be performed during April and May 2025. Given the weaker-than-expected mobilization of the entrepreneur, the new deadline to finalize the entire remaining works and put into production the entire capacity of the plant will be June 2025. Considering the difficult situation in the national energy system, it is desired to maintain the operation of the energy block #5 of the whole [ plant ] without dropping the connection works for the new combined cycle [ plant ] the grid. The operation of the block will be insured during the difficult winter period. An important achievement that we did in 2024 was the successful subscription of the EUR 500 million in overall bond issue under the new EMTN program that we established. The bond is rated BBB- by Fitch Rating. The subscription process took place on September 30 on the international markets. The issue offers an annual coupon of 4.75% and matures in 5 years on October 7, 2029. The inaugural issue registered a record number of international investors and subscribers. And the demand in the [ new ] building process exceeded EUR 5 billion, which marks a first for the issuance of corporate bonds in Romania. The success indicates the trust that investors have put in our development plans and do confirm our position as a strategic player in the regional energy center. We would like also to remind the investors that in May this year, Fitch assigned Romgaz as an investment-grade credit rating BBB-, with a stable outlook representing the company's inaugural credit rating. The rating reflects our dominant position on the domestic gas market, corroborated with the production growth potential from Neptun Deep and Caragele reservoir developments and a cautious financial policy approach. The rating allows us to more effectively and efficiently access the credit market. One other important topic I would like to highlight that Romgaz is fully committed to decarbonization in line with the EU and national climate targets. The company concluded a cost-sharing agreement with EBRD with the aim of contracting specialized consultancy and getting support in elaborating Romgaz's amortization strategy. Work is currently in progress and we expect to finalize the strategy by the end of this year. At the end of the presentation, I will also remind you that on September 11, our shareholders approved the delisting of our GDRs from the London Stock Exchange. The delisting is expected to be completed at the end of 2024, and the decision was made as a result of weak liquidity on the LSE. Romgaz share will continue to be listed and traded on the Bucharest Stock Exchange, maintaining the company's possibility to benefit from additional sources of finances from new investors. With this, I'd like to close our presentation, and thank you for your attention.

[Operator Instructions] Ms. Ioana Andrei, you may now address the question.

Yes, I do. But can you hear me?

Yes. Yes, please.

Okay. Great. I have some questions. First, regarding the volumes delivered at the regulated price in the third quarter and the estimate for the fourth quarter, if you please disclose. Second, you mentioned the Caragele field. Can you please indicate what is the production generated by Caragele? And what is the annual forecast stemming from this field? And third, can you please tell us what is the impact on Romgaz after the court decided that the overtaxation measures regarding the power market are unconstitutional? And if I may, one more question regarding dividend. Previously, in the previous calls, you mentioned a lower dividend payout forward on, given the high financing needs. Has your perspective changed in any way? That's all from my side.

Okay. So thank you for the questions. Regarding the first 9 months of this year, the percentage is around 55% of gas sold at regulated prices. And for the entire 2024, the percentage will be a bit over 56% gas sold at regulated prices. . Regarding the Caragele fuel, we are in the process of drilling. Right now, a new well has been put into production on -- even on Monday. We have done rehabilitation works on 77 Rosetti, which is our deep -- the well that explores the deep end of Caragele. Right now, Caragele has around 1 million cubic meters per day of production, but we are looking to increase this in the future. Of course, it depends on the success the 2 wells that are being drilled right now at 78 and 76 Rosetti that will be followed by the 54 Damianca well that is going to be drilled next year.

Regarding the effect of constitutional court on the provision -- on certain provisions of Ordinance 27, we are waiting for the decision to be published. We noticed that in the public information they released, they report producers of renewable energy, which we are not. So we cannot issue any thought on this at the moment.

So until we will not see exactly why did they give such a decision, we cannot speculate or disclose anything. On the dividend policy, the approach to dividend has to be cautious because as you can see, Romgaz has had a high investment in the first 9 months and this investment with the starting of a drilling in Neptun Deep will be higher in 2025 and 2026. So we need to have a cautious and prudent approach regarding the dividends.

Ms. Laura Simion, you may now address your question.

I have two questions. One regarding the volumes. You had production at 9 months 2024 by 4.5 percentage higher year-on-year. And what could you tell us about the full year, any indication for this year and for the next years until Neptun Deep comes into production? And second, requiring -- the second question is referring to the revision that you made on financial situations. I want a confirmation, if my understanding is correct, that from what I read in your report, the increase in personnel expenses is mainly due to the fact that the works performed internally are now presented as revenues and the expenses separately. And before, they were presented as income as the net income. And you -- I want to confirm it, if interpret it correctly the change.

Thank you for your questions. I will answer your second question. The revision of the presentation of our financial statements did not have any impact on the increase in personnel expenses. The increase is granted to personnel based on inflation. The increase seems large because in 2023, we only granted this increased starting in April, so 2023. And 9 months was not impacted by this increase.

So we increased when we managed to increase the salaries in 2023 and indexed it with inflation, we did that in late October. So it wasn't -- the first 9 months of 2023 were not impacted by this. And we had a subsequent inflation bonification to our employees that was done in July this year as well. And all of this was because that we couldn't do this indexation with inflation because of the state budget laws. So this is why you see -- but it looks like a higher increase than it actually is. Regarding the production, we are -- for this year, we expect total gas volumes of around 4.9 bcm, a tad higher than last year. For the next year, our strategic objective is to keep the decline in the limit of 2.5%. But we are doing all of our best to keep gas production in the region of 4.9 bcm until Neptun deep will come online. I hope this answers both questions.

Ms. Daniela Mandru, please address your question.

My questions. What is the -- what are the volumes allocated, the regulated prices for the first quarter of next year? So I'd like a volume in terawatts, not the percentage. And then the second question regards the power production. So it would be reasonable to expect the power production in the last quarter of this year to be zero? Or should we expect some production, given the construction of the new power plant? That would be the second question. And these are all my questions.

So regarding our production node, it will not be zero. The old Iernut power plant indeed, it has been stopped for the works of the [ Transelectrica ] power station that we connect also the new power plant to the [ Transelectrica ] station. But because of the situation that we are seeing in the Romanian [ balancing ] market, we will do our best and [ Iernut ] will be operational as long as possible and also it will be in operation as well when the test will start. Regarding the test, we are estimating that the first fire for the first gas turbine will happen mid-December. Subsequently, the next one and subsequently, the first synchronization for the first steam turbine in February 2025. All these are estimations. As you know, Romgaz has submitted to the Romanian government and the Ministry of Energy the prolongation of the P&I term up to mid next year. So we are expecting that the government will promote, the Ministry of Energy will promote the prolongment of the P&I. Subsequently, we will sign an addendum with the dual contractor for the prolongment of the term and putting into synchronization and finalizing the year of Iernut power plant.

So if I may here, just to intervene. So in a nutshell, so this new Iernut power plant will start this production in the second half of the year. So after the...

So it will start commercial production.

Commercial?

Yes. The test and the first in turbine, we expect it to be finalized by mid-2025 -- February 2025.

Okay. And until then, so we have 3 quarters until that, what would be the quarterly production of -- remaining?

It's very difficult to say. Right now, it is very difficult to give you an exact estimation of the production. It's dependent on the test. It's very dependent on the test, but we will also keep the old Iernut power plant as long as possible function -- in function.

But would it be reasonable to assume 40%, I don't know, reduction compared with last year's quarters or something like this?

You cannot compare what we had in the past of the old power plant compared to the new one because the new one is 430 megawatts. It will start production [ 215 ] megawatts we already started mid-February. The only thing is that the prices will probably not be the ones being in testing. It depends a lot on the steam testing as well. So it's very difficult to give you an answer at this point in time.

Okay. I have the other question regarding the gas volumes, the regulated price allocated for the next quarter -- not for the next quarter, for the first quarter of next year.

For the next quarter of next year, the gas, we needed the OG27 to be already prolonged because they haven't prolonged the price. We are looking at -- from the 1st of November to the 31st of March, we are looking at 16,600 -- 16.6 terawatt hour. Around 30% from all quantities are with -- that are going to be delivered in the first quarter of 2025.

So 30% of the first quarter?

Yes, are already sold.

[Operator Instructions] Mr. Daniela Mandru, please.

Yes, I would have another question. Now I think your personnel expenses exceeded all the analyst expectations, so what for the last quarter of the year? So what would be the amount or the increase year-on-year?

So year-on-year, our expectation is to be below what we've budgeted this year. So...

So you are referring to the full year?

Yes, to the full year.

But can you please remember what is the budgeted amount for the full year?

Yes. One second.

Because your budget, it's some -- I don't know, it's budgeted over us -- here if IFRS result. So there are some differences. So maybe you can indicate a value for the -- on the IFRS accounting?

According to our budget, personnel expenses should be tops [ RON 1.2 billion ]. Following the change in presentation that we have in our financial statements, there shouldn't be any differences and more between how we budget the expenses and how you present them to the financial statements.

Okay. What I noticed also in the last -- in the third quarter, I think, yes, I noticed -- no, sorry, that was for the other company. So this is all from my side.

If there are any other questions, please. Ms. Laura Simion, address your question.

Yes. Coming back to the personnel expenses, I have succeeded to find the page in your report. So referring strictly to the difference from the previous reporting for 9 months 2023, you had 678 million before and revised the revised figure is 762 million. So I was referring to this change.

So the change is done because when we built our initial budget, we did not budget in relation with the national budget law, which didn't allow us to give any type of indexation and had -- we were obliged to keep the level of the entire budget as the one we had in the previous year. After that the law was changed and the budget was changed, when we did our revised budget, we could do the indexation.

But it's not about the budget. It's about the reporting in...

The change. So the difference between the two amounts when we reported previously and when we are reporting out was reported as a costs including the items of property, plant and equipment that will be developed in-house. Now if you look at the financial statements, we have an additional mark in the P&L., I mean, were performed by the group and capitalized. So this income was netted against the employee benefit expense and some other expenses. It's all explained in Note 2 to our financial statements.

But this was exactly my initial question, if I might -- it was more confirmation, if my understanding is correct that before you presented the net income, and now you have on revenue of RON 172 million and some expenses in addition to the previous expenses that you had in the budget -- our personnel expenses.

It's not just personnel expenses. It's also an appreciation of our property, plant and equipment, consumables, and some other expenses.

Yes. But I saw that the personnel expenses have an addition of 114 million, so it's the largest.

Yes. But if you look at our financial statements, you will see the impact of this change. There is personnel expenses of 114 million and some other expenses reaching a total of up 192 million. There is also an additional income reflected in the financial statements of the same amount, 192 million. So it has no impact on the financial statement, no impact on the end result. It's just on how we present the figures.

Yes, yes, but it has an impact on the reported personnel expenses, which you see -- last part of -- this increase is due to this change in reporting?

No, because what you are seeing in the 2024 financial statements and the comparative for 2023, they are based on the same reporting rules. So the increase is -- does not relate to this change in presentation.

The year-on-year increase, yes. But before your reporting, we based our estimates on the previous reporting. So that's why personnel expenses exceeded, as [ Dana ] said, or our expectations.

Okay. I understand.

Mr. [ Christian Petri ], please address your question.

I have a few questions. Can you give more details on the replacement rate upward review? Is it connected to Caragele to Neptun?

It is not connected to Neptun. This is only our onshore reserves. And It is connected to our entire, let's say, exploration perimeters.

Okay. So [indiscernible], as far as I understand, you expect first sales in H2 2025?

Yes. First commercial -- proper commercial sales and commercial operations starting from the second half of next year. And up until then, as I said, we will keep the old plant in function as much as possible, as far as we can. And the new plant will start the test, and first fire will be in next month, in mid-December 2024.

Okay. And regarding Strategy 2030, I have a few questions. So you mentioned a new gas-fired power plant. Can you give more color on capacities? Or is it too early to talk about it?

No, it's way too early to talk about capacity right now.

Okay. And also in Strategy 2030, as mentioned, the business diversification on like entering distribution sector and methanol production units. Do you have anything in mind to will it be new licenses for the distribution? Or will it be existing? Would you acquire some distributors?

Right now, we are looking -- so we have a project of photovoltaic that we participated with it on the modernization fund. We are also looking to diversify our electricity production with buying in or acquiring some renewables around 800 to 200 megawatts that will be put into production up to 2027. On the methanol hydrogen, we are still looking in the market, and we are evaluating our position and where we can find the most alpha. And regarding the distribution, we are probably looking at distribution and distribution companies. We have been looking also at supply companies as well. We are looking to develop our internal Romgaz supply side as well. So we are working in this direction.

And do you have any timeline when we expect these new business lines to be operational?

Not operational, but we will inform the market when we will have something extra. On the supply side, we are aiming for next year to probably start also our entrance to sales on the retail market.

Okay. And the last question is regarding gas-to-power project to exploit isolated natural gas reservoirs. What does it mean? These are small power plants or what's...

Yes, these are small, let's say, modular engines that -- where we cannot connect or it is not economical to connect these wells to the national transport infrastructure, and it's easier to connect them to the grid. They will be set next to the [Audio Gap] right now, looking at complementing natural gas on [ GNC ] also to add value to these wells.

So these are mostly related to some new fields?

Also old deals that we have them drilled, but are not connected to the national transport system.

How is the delivery done up to now on the old fields or wells?

It's not. There are drilled wells. The production tests have been done. And some of them, we had some engines, but are no longer functioning. We are looking to replace those engines with modular engines to produce electricity, and some of them have been in conservation.

[Operator Instructions] Ms. Daniela Mandru, please address your question.

Regarding the issuance for EUR 500 million, I have only a question. The coupon payment is yearly or half year or quarterly?

Annual.

So it's annual. Okay. So you will not pay anything this year?

No.

If there are no further questions, we will conclude this conference call. Thank you for your questions. If you need further information, please contact our Investor Relations team. The conference is now concluded. On Romgaz behalf, thank you for attending today's conference call.