ADNOC Gas PLC (ADNOCGAS) Earnings Call Transcript

Okay. I got the question, Abhishek. Thanks for that. I believe that there will be some pressure on near-term CapEx and you've got disruptions in the supply chain. There is sometimes a challenge with getting the crews at site. But at the same time, what we shouldn't forget is that we operate our growth project under EPC contracts. So the risk of a material increase in CapEx is fairly limited. And that is the nature of our contracting structure. So at the moment, we benefit from the tax holiday in the domestic market, as you referred. And there is an extension, I think, is what you are asking at the moment is not being discussed. We simply operate within our contractual frameworks that mitigate to a large extent, the impact of higher cost. Now it does not mean it's 0, right? There are certain subcontractors, smaller contractors, for example, that struggle with the price of diesel. Is it in your interest to not compensate them a little bit, right? That's open for discussion. But the general rule is a contract is a contract. The EPC contracts are very clear on what we will pay for the services rendered based on certain milestones.

Our next question is from Scott Darling of Cantor Fitzgerald. What is the progress of the Ruwais LNG and MERAM ramp-up? What is the timing of RGD, rich gas development, Phase 2 and Phase 3 final investment decisions?

Ruwais LNG is the 9.6 MTPA export facility. And when I last looked in February, the progress was actually quite good. They were ahead of schedule. I expect that the company is able to deliver the project on time, but there might be, again, short-term lower activity. Like I said, it's more the manpower overall, given we were doing really well before the war started. I'm not concerned about it. MERAM is interesting because what we did so far was we accelerated a number of shutdowns, but we were also able for MERAM to accelerate a number of tie-ins, right? So MERAM is the ethane recovery. That facility needs to be connected to other parts of our infrastructure. So there, we have an advantage. But also at MERAM, we did face some issues with crews, and that makes perfect sense, right, in the time when we have these attacks, the safety of the people is the #1 priority. So we will not make any compromises on that. So -- and then the other question Scott was asking is about the FID for Phase 2 and 3. So as a reminder, if you look at the rich gas development, the rich gas development enables us to process more gas coming from upstream, from ADNOC. And that investment program is extremely timely in my view, especially if you look at the exit from OPEC, right? If you look at OPEC exit, it means that ADNOC Gas will have more volumes because there are no quota anymore. And also when more oil is produced, it comes with rich gas. So it is a positive more volumes, but it's a double whammy because you also have better quality, richer gas when there are no quotas in place. Now the first step of the Rich Gas Development is that we debottleneck our facilities that is ongoing as we speak. And then the second and third phase is when you start to build new infrastructure. So Phase 2 is a new processing plant and Phase 3 is a new fractionation plant, which is specifically for the export. And we will come back to you to provide you clarity on the costing and the impact on EBITDA, which I expect to be very helpful for our growth story in due time. Going through the questions, then we have Akash on Habshan. The question is, will the repairs be recovered from war insurance? So ADNOC Gas is part of the overall ADNOC insurance scheme, which gives us a lot of cost advantages. And what I believe is that certain parts of the damage will be covered by insurance, but not the entire amount. And we're now in the process, as you can imagine, with assessing the damage and then you got the loss adjusters or the evaluators, I think they're called, and then we have more clarity on it. But I do not expect the full amount to be recovered from insurance. Then [ Remy ] asked a question on do you foresee support from the parent, right? At this moment, I'm -- maybe correct me if I'm wrong, but very optimistic when it comes down to the company being extremely resilient and able to mitigate the financial impact of the crisis. The balance sheet is not used, right? We're extremely resilient when it comes down to our operations. The moment the Strait opens, it will take 24 hours, 48 hours, and we're up and running with our exports. So we do well, I think, in making sure that we are prepared to benefit from the opening. And in the meantime, I mentioned this before, our strength -- financial strength enables us to deliver on our promises. Think about growth, think about dividend. On the margins, again, we have -- if you look at the domestic market, we have basically 3 revenue streams. One is sales gas that goes to the power sector. You've got ethane that goes to the petrochem industry. And then last but not least, you also have reinjection gas. We favored sales gas over reinjection gas because the margins are higher. So in the UAE is simple, maximize your methane, C1 sales gas margins at the expense of lower-priced reinjection gas. Then in the total picture, we lost due to Strait of Hormuz disruptions, the higher-priced exports. That is why you got higher margins. So it's a combination between what happens in the domestic market. Note the reinjection gas having lower margins than the sales of C1 and C2, methane ethane and also take into account that the export is, of course, impacted by the ability or not to deliver those products. Oliver is asking, could you elaborate on the levers that you have within the domestic system to manage higher gas demand if the Strait remains closed into the third quarter, especially in the absence of the Habshan at full capacity? That's an excellent question because you know that our business is seasonal. So what we are preparing for is the higher demand during summer. That is everybody can see that in our presentations that the sales volumes are impacted by the seasons and the company at this moment is able to meet all demand in summer for the UAE market, also if the Strait of Hormuz remains closed. And Habshan as you rightly point out, is not at full capacity, but do not forget that we have more than 30 processing trains in country. Ildar is asking a question on the joint venture for LNG. And he is asking the question, well, you are about to receive a fleet of new LNG vessels. And the question is, are these take-or-pay contracts? If so, is the joint venture paying for the vessels? And how are these utilized at the moment? The vessels will arrive and we will take delivery. You then have a charter rate, which you can call it a take-or-pay. But we are quite happy actually to take these new vessels because do not forget that I said before that we are ready with our LNG production to serve our customers. That can happen in 24 hours, 48 hours, very short timeframe. And if I then have all these new tankers at my disposal, I will not be restrained in any capacity issues. These LNG vessels are there to serve our joint venture exclusively. If the pricing today is very favorable, you do not want to have any bottlenecks in your sales process. So having these vessels is something that we really welcome. And then the impact of -- is the next question, Habshan disruption will have on the volumes for domestic gas and liquids in '27? The short answer is very little. What we gave you is that the full capacity is back in '27, mid-'27. But we, first of all, did not use the full capacity across all our sites. Remember, last year, we had an 85% utilization rate, and we can easily switch to other sites if demand increases, which we expect will happen in '27. Next one, [ Shukash ] is asking about the increase in CapEx guidance. And you rightly point out that we previously had a range of $4 billion to $4.5 billion, and we increased it to $4.5 billion to $5 billion. So we added $0.5 billion. And I all of a sudden realized, and thank you for the question that in the presentation, I may have said that we didn't change it. I was wrong. We actually increased it by $0.5 billion. Sorry for that. Now what we did is I'm keen in an environment like this and never waste a good crisis to relook at the portfolio of our projects, and we have more than 150 projects roughly. When we engage with you, we look at the big ones. In our opinion, we believe that we should make a rigorous effort every time to ensure that we only execute the most profitable projects. And especially now, that question is even more profound. At the same time, I also see that we will have pressure in certain areas because of the disruption in the supply chain. So it is a bit difficult for us to give an accurate range, especially, and that's the last reason, I do not know exactly how much the reinstatement of Habshan is going to cost us. So the reason in summary is basically 3 reasons: one, capital discipline reduced; two, some maybe distortion of the supply chain may give us the need for a small increase. But last but not least, it's the reinstatement of Habshan. Then let's go to Ildar. The domestic gas sales guidance is about 20% weaker pre-conflict, which sectors and industries. And again, this comes back to a certain extent, the swap between the reinjection and the sales gas into the system. We also always prioritize the power sector in whatever we do. But the main reason is that we prioritize sales gas over reinjection gas. And don't forget, some of our customers are also impacted, right? Examples where some of the customers had damage and they need some time to restore that. Then Jean-Pierre. Jean-Pierre is asking, can you detail the impact of restoring Habshan capacity? How much is it going to cost? And what is the impact on your net profit unit margins? Now the latter part is easy. I do not expect that the reinstatement of Habshan has any impact on our net profit unit margins because that is much more driven by the mix of products that you sell. It's too early to give you a feel and an idea on how much the reinstatement costs are going to be. I'm not going to disclose this, but to give you an idea, internally, we use ranges with 50%, 50% accuracy. That is not good enough at this stage. It needs to mature further. And only once we got that clarity at a lower uncertainty range, we will communicate this to you. Jessica Wang is asking, how can the company, ADNOC Gas benefit from the gas supply with Ta'ziz? And how will it impact sales gas EBITDA margin? And how will it impact sales gas EBITDA margin? I said before that the company has been able over the last years to constantly enhance its EBITDA margin. And you see that in the numbers. How do we do it? There are 3 ways of doing it. A new contract like Ta'ziz, but any other contract is always positioned that the sales price is above the average of the portfolio. Two, when a customer, an existing customer wants an expansion and needs more gas, we will not automatically charge in the same amount of money that we used to do in the past, an extension comes at a high price. And thirdly, if a customer, particularly in the power sector, wants more flexibility in offtake because they switch to solar, which does better during the day than at night, that flexibility we can offer, but that comes at a price. So Ta'ziz is no exception. We also will deliver methanol, but that's a very low-margin activity. But in general, any new customer that comes into the sales portfolio brings up and improves the EBITDA margin. And you got enough proof points in the last 3 years to see what I mean with that because we started the IPO with a range of 33% to 35%, and we were last year at 37%, and I believe Q1 was just north of 36%. Ahmed asked that you mentioned that existing OPEC supports higher associated gas volumes. And can you quantify the expected uplift in production from the policy shift? It's too early. But I want to repeat what I said. The exit of OPEC means there are no quota on oil production. Oil production comes with gas, rich gas. Those are the valuable molecules that we export. So we benefit indirectly a lot from the OPEC exit. It will mean that there are no limitations on production and the company is being configured and that is why we've got our growth program to absorb these higher volumes, which will enhance the EBITDA. And that is why we're so confident that the 40% target can be achieved. I think I addressed the question on the underlying drivers for the reduction of domestic gas consumption, right? It will normalize over time. But today, we use more sales gas and less injection. We've got a question from Lydia. Fatema?

Yes. So Lydia is asking or greeting. Hello. Firstly, thank you to the entire ADNOC Gas family for the work and keeping operations going. I know you've touched on it, but perhaps you can take us through the challenges of responding to the crisis. And then it's natural to focus on the short term, but the long term really matters as you rebuild. Have you had much chance to think about strategic choices longer term and new opportunities that open up AI, additional storage, et cetera? Thank you, Lydia, for the question. And I'm giving Peter some rest so that I'll take this question. First of all, the -- when we talk about preparedness, we've established comprehensive scenarios for different situations on business continuity. And they came handy even before the incident as we were seeing the tension increasing in the region, we made sure that we are prepared and we are ready, including, for example, keeping the inventories as low as possible so that we can prolong it and keep our operations going for longer. When it comes to the attacks that happened to our assets, I would like, in fact, to share this because maybe we're not translating it as it should be. ADNOC Gas, as you know, is the main gas supplier to the industry and the main supplier to the energy sector and power sector. At the moment of the attack, we went because of the fires in some of the assets and because of some other plants tripping to a record low supply to the network. We were working on two layers or two levels at site attending to the crisis. And there, we've seen the timely decision-making saved not just assets, saved life as well as the response to the incident itself. While on a strategic -- more strategic management level, we were trying to keep the network from collapsing in any scenarios, and Lydia, I've been in this industry for more than 26 years now. And any -- if anyone explains to me that scenario, I would say we would have a total blackout. The actions that were taken on the ground saved the supply to the network and made sure that within the first 12 hours, we go back and supply the main customers. And within the -- as we speak today, we are almost satisfying 60% of the network. So a lot of action that is not seen and not witnessed happening in terms of preparing and responding. I know we're not just looking at today, and we're making sure that we're keeping track of all the lessons learned as we are going through and I think unprecedented, and this is underestimation of the situation -- unprecedented situation today, but we are capturing all the actions that -- or all the learnings that we've had and we came across. As simple as our engineering and our -- how we build our facilities, how we structure it for the future because, as you know, we're also growing our assets. So we want to make sure that we build for the future right. And looking at alternative routes so that we are never again in the same situation today. So there are multiple things. AI, you're mentioning AI, AI played a critical role today in the inspection that we are doing for some of these damaged assets. It saves days of work using the robotics and using some of the AI tools that we've already included in our maintenance. So no, we're not looking short term. We're focusing as well on the longer term. We're working on different work streams, crisis or working on the business continuity preparing for the next day, the exact next day, and Peter touched on this. We want to be ready as soon as the movement is relaxed within the Strait of Hormuz, and we have built that inventory to push towards the market. And for the longer term, making sure that we build our projects right and we build more resilience within our system.

I see another question from Ahmed Kamal. In the interest of time, let me answer the third one, which is how quickly do you expect product prices, propane, butane, et cetera, to normalize following the Strait of Hormuz reopening? I believe that at the moment, there is such a huge backlog in meeting demand that the pricing environment will remain quite strong also after the Strait of Hormuz opening. I emphasize and I thought just the same, right? We want to be ready on day 1 when Strait of Hormuz opens and to benefit from that favorable pricing environment, which, in my view, will not normalize in a very short time span. And we are in a position. I think we spoke about LNG vessels in the past to grab that opportunity. You need to be ready, you need to have the ships in place. And I think LNG is, of course, priced off Brent. Now it may come down a little bit because there is some premium in the pricing, but it will be different, higher from pre-war levels. Last question on Habshan, you mentioned full recovery by mid-'27. What's the ramp-up profile between now and then? And what will remain offline in 2026? So I think we will ramp up to the 60% to 70% in Q2 or Q3. We want to be very careful asset integrity. The AI, Fatema mentioned has played a big role -- plays a big role in this. And I think in these conference calls, we alluded before how AI helps us in our control rooms, in our maintenance. And again, that is a big lever we're pulling. And then it will go slowly to the 80% capacity. Again, you will not rely on just one train, one plant. We have sufficient capacity in country located in different parts. Each facility has several production trains. So we guide you with how it is restored. But let's not forget that we do not depend on 1 or 2 trains in this case on Habshan. We have a portfolio with 30 trains. And therefore, we're able to meet the demand, and I alluded to the summer when you have higher. But more importantly, our long-term sales forecast indicate more growth and that is part of our investment case. That is what we're investing to for. And that means that, as I said before, you will see the increase in the dividend by 5% every year, but also the EBITDA growth, we remain very confident that we can achieve the 40% plus growth. Thank you.

Thank you. We have no further questions in the queue. We will now hand back to Richard to close the meeting.

Thank you very much for attending the call. If you would like to ask more questions, then do reach out to the IR team. You have our details both on the website and our individual emails, and we look very much towards meeting all of you in the near future. And thank you for joining the call once again.