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 3 months of 2025. 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; Mr. Aristotel Jude, Deputy Chief Executive Officer; 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 Mr. Razvan Popescu, 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 the Romgaz Group in the first 3 months of this year. Yesterday, we released a quarterly report, which includes the presentation of our economic performance and the consolidated interim financial statements. Also, a presentation of Romgaz Group 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 2025. According to our assessment, natural gas consumption in Romania rose by 2% to 41 TWh. Imported gas volumes recorded a significant increase of almost 70%, reaching a 21% weight in total consumption compared to a 13% weight in the first quarter of last year. On the Central European Gas Hub, the average reference price increased by around 60% according to the data provided by the National Authority for Regulation of the Mining, Oil and CO2 Geological Storage Activities. On the Romanian Commodities Exchange, the wholesale market, both spot and forward and balancing segments recorded a similar trend in the first quarter of 2025 with a weak liquidity due to the regulation still in force. Regarding the fiscal environment, Romgaz activities continue to be influenced mainly by the Government's Emergency Ordinance #27, that was issued in March 2022 that was subsequently amended and supplemented. The main legal provisions applicable to the gas producers include the regulated gas selling price of RON 120 per megawatt hour for the gas sold to household and the supplier of households and to heat producers and their suppliers for the production of thermal energy for these households. The prices applied during April 2024 and the end of March 2026. For comparison reason, we still mentioned that in the first quarter of 2024, the regulated gas selling price was RON 150 per megawatt hour. For the gas sold at regulated prices, payment of the Windfall Profit Tax is exempt, and the gas royalties are computed based on the regulated prices instead of the reference prices. Regarding the operational and financial performance reported by Romgaz Group in the first 3 months, we can point out the following aspects. Natural gas production amounted to 1.29 bcm, adjusted only by 0.4% year-on-year, but higher by 0.6% compared to the Q1 average recorded over the past 3 years. We achieved this performance through steady efforts aiming to consolidate and enhance our portfolio of onshore resources, which includes specific measures. The reactivation of 38 inactive wells through investment works, which improved our production by a little over 32 million cubic meters during this period, and ensuring the optimal operation of all gas compression and dehydration facilities, increasing productivity of wells operating below their potential flow rate and also performing rehabilitation projects in our main mature gas fields. Also, in the first quarter, we performed drilling operation for 1 production well, finalized surface facilities to stream into production 5 wells while other surplus facilities are in execution to stream another 15 wells into production and also reestimated and repaired a number of 47 production wells. We can also underline that all of these important measures led to a 64% increase in our condensate production to over 12,000 tonnes in Q1 this year, based mostly on the higher production level in our Caragele field. Regarding the Caragele commercial field, it stands now as the second largest field operated by Romgaz. In Caragele Deep, we have the 76 Rosetti well in execution and the 54 Damianca well with works awarded. 78 Rosetti well was drilled and is waiting for testing and other 7 wells in different stages of drilling preparations. We continue to hold a strong position of the Romanian gas market. According to our assessment, Romgaz represent the leading gas suppliers in Romania with a substantial contribution of 36% in total gas deliveries in the first quarter. Also, we are strongly positioned in gas consumption covered from domestically produced gas, holding a significant share of 45% according to our estimates. We recorded total revenues from gas sold of over RON 2 billion, higher by 5% year-on-year, compared to RON 2 billion in Q1 2024. Volumes sold increased by 15%, while the average gas selling price recorded a small decline, mostly due to lower regulated prices. Revenue from storage services were resilient at RON 136 million, with capacity reservation and withdrawal services weighing 54% and 44%, respectively. Revenues from electricity improved by 3.5% to RON 113 million, mostly due to uncapped energy selling prices started with the first of January 2025. Production of our old power plant, which operates only 1 unit declined by 24% year-on-year, but it brought its contribution to the security of supply in the energy market in Romania. Overall, the Romgaz Group reported total revenues of RON 2.38 billion, elevated by 4.7% compared to the previous year based on the contribution of the gas sales segment. On the expenses side, the Windfall Profit Tax increased significantly over 4x to RON 322 million, compared to just RON 77 million in Q1 last year due to a lower weight of household gas and UGS royalties decreased by 13% to RON 161 million, mostly due to a lower gas production and prices. Altogether, these taxes also including the duty to Energy Transition Fund increased significantly by 86% and represented almost RON 500 million expense, compared to RON 267 million in the first quarter of last year, with a negative effect on our profitability. Bottom line, we reported a net profit of RON 951 million, lower by 24% compared to the historically high value of RON 1.25 billion recorded in the first quarter last year. Nevertheless, we can positively emphasize that the net profit in Q1 this year exceeded 44% of the quarterly average recorded over the past 3 years. In the first quarter, profitability rates remained at a substantial level, the EBITDA margin at 55%, EBIT margin 47% and NPE rate at 40%. On the CapEx side, Romgaz Group invested a total consolidated amount of RON 854 million in the first quarter. Investment in the Neptun Deep project represented EUR 627 million and Romgaz's only investment RON 223 million, mainly in exploration and production modernization and RON 86 million in the Iernut power plant. With regards to our flagship project, Neptun Deep, the progress reported in Q1 is in line with the work program budget and with the execution calendar. The first gas production well of Neptun Deep project was spudded in the first quarter of 2025. This achievement represents the fulfillment of the development, exploitation work programs for the commercial gas fields Pelican Sud and Domino. In addition to the drilling operation, work continues on various components of the Neptun Deep project. The production platform is under construction, systems for the subsea infrastructure are being manufactured, the supported field vessel is being built, and the natural gas metering station is also under construction. As a result of these significant developments, Romgaz and OMV Petrom are on track to safely deliver the first gas from Neptun Deep in 2027, and the project remains within the up to EUR 4 billion guidance of the total investment. Another strategic objective is a combined cycle gas turbine power plant in Iernut for which we are now performing the remaining works to finalize the plant. At the end of April 2025, the total progress of the investment of the Turkey project consisting of the execution of the initial works contract plus the execution of the new works contract was approximately 98% related only to the new EPC contract, the total progress is at around 88%. Romgaz undertakes all efforts to support the contractor to ensure the investment progress is under finalization. Nevertheless, among the drawbacks that we can mention is principally the difficult financial situation of the contractor, equipment problems that can arise during the test required to put the plant into operation, extension of the deadlines to clean the circuit after the extended stake out of operation, the weak mobilization of companies specialized in the chemical cleaning of the pipes and the need to repeat some tests to assess performance indicators for the P&I contract. With respect to the dividend distribution to shareholders, I would like to mention that on the 29th of April, the shareholders decided upon total gross dividends of RON 604 million for a total gross dividend per share of RON 0.1568 per share. This results into a payout ratio of 20% for last year, which will allow Romgaz to partially finalize and finance its ambition investment and development plans. In the end of the presentation, I would also like to mention that on 30th of April, we released the Romgaz Group consolidated sustainability statement for 2024. The statement was prepared in accordance with the relevant EU directive and the European sustainability reporting standards. The statement provides sustainability policies, actions and targets for Romgaz Group's owned operation, and also an assessment of impact, risk and opportunities for the group operation on its value chain. And it represents a very important tool for investors in Romgaz holding both shares and bonds. With this, I'd like to close our presentation, and also thank you for your attention and presence.

[Operator Instructions] Mr. Daniela Mandru, you may address your question.

[indiscernible] for the first quarter. And if it is possible to let us know what would be the volumes scheduled cut prices for the full year. This is the first question. And then please -- give us a hint how the first quarter results ended compared to the budget for the first quarter? And the last question regards your note. I've noticed, at least this is my feeling that you are going to announce another delay in the completion of this project. Please let us know if my feeling is right. Thank you.

Thank you for the questions. So for the year, the entire year 2025, we expect around 83% of the entire volumes of gas to be sold at regulated prices. For the first quarter, we were mainly in line with the budget that we proposed. And for the Iernut power plant, indeed your feeling is correct. Unfortunately, because of the situation that the EPC company is in, Duro Felguera, always when we come close to finalizing the project, it seems we always have to have another push. We managed to finalize a three-party agreement with the main subcontractor, which is General Electric to be able to pay General Electric directly we managed to close another -- with another electrical company, the same type of deal, and we are pushing the subcontractor to try and have the power plant to be put into function as soon as possible. But as we said, yes, again, there will be delays in this already delayed project.

Okay. And can you help us to understand, okay, what is the new plan now? So when will be?

Our plan is to drive our support and push the EPC company to finish the project as soon as possible. This is the only plan that we can have. We are doing our utmost. We are trying to pay all subcontractors directly. We are trying to fund as much as we can as the project given the legislative limits that as a majority state-owned company that we have. But the main issue in this project is the fact that the EPC company went into, let's say, preemptive insolvency procedure, and they did not have the cash flow to sustain part of the project. So all of this cash flow is right now and is trying to be supported by Romgaz, but of course, respecting the contract in place. We are very close to finalizing it. We have found some issue, for example, for the compressors, we have to send some of them to Korea. They have been amended. They will be sent back to Romania. And of course, we will continue the testing in this respect.

Okay. Now regarding the volumes at capped prices. Please give us the absolute amount volumes. So in the first quarter, how many terawatts and for the full year, how many terawatts?

So it should be around for 2025, around 41.1 terawatt hour.

Sorry, I didn't understand.

For the first -- so for the entire year, around 41.1 terawatt hour.

For the -- okay. And for the first quarter?

For the first quarter of 2025 or 2026?

2025. Okay, thank you, this is all from my part.

We received a written question from Nicole. Thank you for your presentation, Nicole from BT Capital Partners here. I am curious about the percent of natural gas sold at regulated price in Q1 2025, if that can be disclosed?

[Foreign Language] Around 69% of the entire production was sold by capped prices in the first quarter of 2025.

The next written question from Mr. Ciornei Marius Calin. Will you succeed to commission by the end of the year, Iernut power plant?

Yes. We are very involved, and we are in the last steps of doing this. We have had an enormous let's say, mishap with the EPC company, but we are confident that we will be able to put it into production until the end of the day, in full commercial production.

The next written question from Mr. Cristian Petre. Hi, can you comment on the level of windfall?

Yes, the level of windfall taxes was higher because the gas that was sold on the Ordinance #27 was low. So just 69% in the first quarter was sold at regulated prices versus over 94% in the first quarter of 2024. So this was the difference. A lot more gas was sold, but unregulated prices in the first quarter of '25 versus the first quarter of '24.

Another written question from Mr. Ciornei Marius Calin. Why did electricity production decreased in the first quarter as compared to the last -- as compared to the similar period of last year?

We needed to execute works on the Transelectrica station to connect the new Iernut power plant to the Transelectrica station. And we could not do that with the old power plant still functioning. So we had to stop the old power plant. We've also did repair works on the old power plant, but it needed to be stopped in able to -- to make this connection with Transelectrica.

Another question from Mr. Ciornei Marius Calin. If you can follow up for the following projects, ERP for invoicing final customers and negotiations for Azomures procurement?

We've prolonged the acquisition -- the procurement for the final customers. We are still in the procurement phase and waiting to open the offers that we have in order to be able to hit our goal to be suppliers by the end of the year, given the fact that a lot of our production, so around 83% of our production has already been on the ordinance to the suppliers and to the thermal energy producers, we think that end of the year should be okay target to start the supply for households. On Azomures, we also started the procurement procedure to get a consultant to help us evaluate the Azomures actives. Also, this consultant has to give us all the metrics regarding the Net-Zero Industry Act and everything that Romgaz has to abide by given the Azomures situation right now. So we are in evaluation.

Another question from Mr. Ciornei Marius Calin. Did you progress with building the photovoltaic park you envisage to build?

Yes, we are in progress right now to -- we've already opened the offers in procurement. We are analyzing these offers. We are in a technical phase of the evaluation and it will probably end in the next 30 days. So we will have a winner for our park in the next 30 days.

The next question from Laura Simion. Could you disclose the price taken into consideration for gas royalties and windfall tax in Q1 2025?

Gas royalties are computed as the regulated price for the quantities sold under the ordinance, so RON 120 per megawatt hour. For the quantities sold on the free market, the price was the one that we realized with those clients. As for windfall tax, we don't pay this tax on the gas sold under the Ordinance.

The next question from Laura Simion. When do you expect to make a decision regarding Azomures?

Probably the second half of this year.

Another question from Ioana Andrei. What is your current estimate for the gas volumes produced for this year? And also a guidance for electricity production?

For the gas production, we are following the strategic [ longest ] plan, which is around maximum 2.5% decline in our production. We can production at a very respectable level in the first quarter due to the high demand in gas. We are right now working on a lot of our fields, and we are doing repair works on some compressor station and dehydration station, but we are trying to keep production in line with last year's production or to have a small decline versus the production last year.

We received a question from Mr. Cristian Petre. Hi, can you give some color on Azomures takeover benefits for Romgaz?

The benefits are quite clear, given the fact that Azomures is one of the biggest consumers of natural gas in Romania. It will give a lot of advantages for Romgaz to process its own gas to add value to the gas that we are producing both from the onshore and especially the gas that will flow from the Neptun Deep project. It's an important and strategic not only -- but the strategic factory in Romania that can have a lot of benefits in being inside the Romgaz Group.

Another question from Mr. Tamas Pletser. Hello, what profit addition can come from the new Iernut power plant in 2026?

We expect a profit around EUR 10 million to EUR 15 million in 2026 from the plant.

Another question from Ioana Andrei. Can you please give us more details regarding the supply business in Moldova. What is the target here?

From the estimations that we have made in order to open the new subsidiary in Moldova, we are looking to be on the market. There is a potential -- maximum potential 1 bcm, but we are in line, let's say, to have around 20%, 30% of gas being imported by the Moldova state. This is where we have done some estimates are wrong.

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

Yes, I have a question regarding the gas price evolution on the free market. Can you give us some hint on -- okay, we know the trend looks downward. But what would be an average price for the free gas market price this year in your opinion?

It's very hard to pinpoint on price. You saw that we had movements in the TTF whenever there were let's say, discussions surrounding an end to the conflict flow of gas to EU. So we are actually expecting a small decline on the average price of 2025 in the vicinity somewhere 5% to 10%. But these are just estimation expectations by looking at the forward prices on the TTF market. It is very hard to pinpoint...

Okay. Just for -- just a curiosity, you mentioned that the import in Romania of gas increased significantly in the first quarter of the year. From where these imports are coming, what is the source of this gas, if you know?

The source of this gas, if you look at the [ Transgaz ] report, it shows that it's mainly coming from Bulgaria. It also came from Hungary in some days. So this is the source that we have.

[Operator Instructions] We received a written question from Mr. Ciornei Marius Calin. What are the destinations of the 2 bond emissions -- of the 2 future bond emissions issues? [Foreign Language]

So this money will be used to finance Romgaz investment to finance the Neptun Deep project and to finance all other investments that Romgaz has.

And a follow-up question from Mr. Ciornei Marius Calin. Shall this affect the size of the dividends distributed for the future?

The dividend policy, we've always stressed that it has to be responsible one that will also allow to have our shareholders have a dividend, some dividend and cash flow, but also and furthermore to realize our very, very high investment plans to maintain the financial health of the company.

Another written question from Mr. [ Vladimir David ]. As it stands today, do we expect Neptun to start producing gas in the first or second half of 2027?

Production is on plan for 2027. This is the only thing that we can discuss right now. We are still in early stages of drilling. Things are on line. We are looking to be in line with the work and progressing with the work, but what we can discuss today is 2027.

Do you have any other questions? Ms. Daniela Mandru, please address your question.

I have a question regarding the budget. Please correct me if I'm not right. I'm reading what I wrote 1 month ago. You said that the company -- you budgeted that your gas sales declined by 2.2% year-on-year. If you are judging by first quarter results, this assumption is -- the assumption is questionable. So the question is, do you expect the gas sales this year in terms of volume to increase or to decrease? Year-on-year, of course.

No, it's questionable at all because it depends a lot on the consumption. And if we look at the last year, the consumption in the first quarter was very different and much, much lower. But because we have production at such a high level in the first quarter, we'll probably have a small decline going forward this year. So right now, we do keep our sales in check and on budget. So this is why the first quarter -- regarding the sales look much better because we try to push to sell as much as possible, both because of the situation and both because of the demand and the prices.

But the demand, probably you expect this decline in demand at the sector level, of course, to be induced by not by prices, but because the prices on the free market are expected to decline, not significantly, but to decline. So do you expect a decline in the activity of these consumers or where from this pessimistic assumption on consumption in Romania?

This is our assumption that we started the year with, and no one was expecting the winter to last so long and such a cold February. So if you look at the consumption in Romania in February, if you compare it -- and also in the first quarter, if you compare it to last year, it's very, very different. So that's why we had, let's say, a much more pessimistic approach because we expected the weather to be much hotter and the consumption from the households not to be as high site and also from the thermal plants. So that's where the difference comes from.

But just for my curiosity, can you disclose in your budget, what was the assumption of the gas sales in terms of terawatts or in terms of whatever billion cubic meter, whatever you have?

We budgeted around 4.45 billion cubic meters.

4.45, okay. This is all from my part.

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 behalf of Romgaz's team, thank you for attending today's conference call.