OQ Gas Networks SAOG (OQGN) Earnings Call Transcript

Good afternoon, everyone, to discuss OQGN performance and results for the year 2024. Before we start, I will have a briefing topic, [Foreign Language] I'll convert to English now. We have Ali Mohammadi, he is Head of Business Development; and we have Mr. Khalifa Makhmari, he is Chief Operating Officer; Khalid Al Qassabi, Chief Financial Officer; and Faisal Al Mamari, Chief People Technology and Culture Officer. So the presentation will be started by Khalifa who will take you through the achievement and brief of the year 2024, followed by Ali, who will take you through the growth and future aspiration, and Khalid, who will deep dive on the financials. After that and finally, we will open the platform for the question-and-answer session. Khalifa, you can start, please.

[Foreign Language] I hope you could hear me. [Foreign Language] We will speak in English because the majority, I think, they speak in English as well. So we'll turn to English. So I'd like to welcome all of you into the session discussing the performance of the company until 31st December 2024 and financial results of the year as well. Please move to the next slide. So as you can see, the first one, I know a few in OQGN. We are the exclusive owner and operator of the gas network throughout the country. You can see the map of Oman from the far north to the far south. Our network is really providing or supplying the gas to all these areas in the country. We have a concession agreement of 50 years will be 2070, will expire in 2070, which is demonstrating our capability of being the operator of this gas network as well. We are a great company to an independent regulator authority of public services regulation. We have been maintaining high reliability and availability and integrity of our process. As you can see, it's very critical to supply all this -- to supply the gas into our network. Next slide, Ahmed. So on the next slide, you can see the -- our network is around 4,235 kilometers of high-pressure pipeline with also our experienced staff, more than 500 people are operating, dedicated and highly qualified employees who are running the company, the operation of the company as well. We have established more than 130 customers connecting to all -- across the country. And we have demonstrated the high reliability in 2024 of 99.99% of gas availability of total of around 43 million cubic meter of gas transported, which is 6% higher than last year. In terms of safety, if we go to the next slide, Ahmed, I'm glad and proud to inform that we have completed the year with zero LTI last year in 2024, demonstrating our high commitment into safety as well. And we are glad also to report that we have achieved almost 15 million LTI freeman hours as well. We have been faced with a challenge on the road safety, which we are really working hard with the team to emphasize on defensive driving and increasing the awareness of our people in road safety. Then if we can move to the next slide, Ahmed. So last year also, we are proud to have also worked hard in the energy transition. We managed to achieve 57% reduction in flaring and 48% cut in CO2 emissions. Also, we have -- in terms of gas network growth, we have received approval in 42-inch pipeline and also to go ahead with the FEED with the SOGL project as well. Also last year, we have inaugurated 32 and South Grid De-bottlenecking Project, which had also added 60% of gas into the southern of Oman grid, from 10 million standard meter cube to 16 million standard meter cube. In terms of project, we have accomplished various connection projects as you can see. Also, we have been successful in conducting very critical activity in our 48-inch project, where we manage to do the connection -- interconnection using high technologies, Bisat and the RTB, the Remote Techno Plug, which avoided us from interrupting the gas to our customers. There is no disturbance and it was done safely and successfully, also to avoid an impact in the environment as well. In terms of business and financial, Khalid will take you later on through the financial. But from -- again, into the -- we have maintained a very high reliable and gas available to our customer, more than 99.99% of gas availability. Also, we have signed MoUs with an Academic Institutes, 11 Academic Institutes to support our utilization of training levy as well. Also, we achieved high scale delivery record of 131 million standard cubic meter per day as well. As I said, Khalid will take us through the financial later on, and that it has been a very successful year for us and we continue in the same trend with a lot of improvement. I would like to hand over now to Ali to take us and give us an overview on the growth and future aspiration. Thank you.

Thank you, Khalifa. So I'll talk you through the growth aspirations we have at OQGN. Looking first at our core business of natural gas transportation. As you can see, and as Khalifa mentioned, so our current pipeline length is just over 4,200, it's 4,235 kilometers. And this is a story of steady growth, steady and consistent growth. So as we see here in the presentation slide, we expect the growth to be continuing over the price control, the current price control that we're in, and we expect it to reach just under 4,500 by the end of this price control period, 2027. Likewise, with the amount of gas transported to reach just under 80 billion standard cubic meter, and the volume transported also increased. So it's really a story of steady growth in our core business for the short and medium term, governed by strong operational performance, strong project performance and conducting any O&M projects on the site to increase the robustness of our network to ensure we continue delivering gas at the 100% availability that we're always striving to achieve. You can also see on the map on the right-hand side, some of our growth projects that we're currently looking at, which have expanded our network. So the latest ones is the 42-inch Fahud-Sohar Loopline project which will add just under 200 kilometers to our network. So moving on from our traditional natural gas transportation to our future aspirations and growth of non-traditional volumes. So OQGN has been one of the leading companies working with the government and main stakeholders to grow -- to enable the energy transition in Oman, specifically to enable the green hydrogen economy in Oman. So Oman has strong ambitions. The country has strong ambitions to be an exporter of green hydrogen energy abroad, whether it's as green hydrogen or as derivatives. And OQGN has been playing -- we have positioned ourselves to be in a very good position to enable this to happen and to be the infrastructure provider for transportation of hydrogen. So when we look at the numbers, the orchestrator, the national orchestrator of the hydrogen -- the green hydrogen in Oman is Hydrom. We are one of the first early companies to sign an MoU with them, and we've been working very diligently with them. The goals are to look at producing and roughly exporting about 1 million tonnes per annum of hydrogen, green hydrogen by 2030, going up to 8 million tonnes. And what this quantities mean is potential pipeline volumes for us at OQGN. Besides this, we have conducted a techno commercial strategic study to look at how we can position ourselves. So what are the business models we can employ here. What are the potential impact on us? And obviously, what are the revenues we can see from transportation of this very attractive business opportunity. And currently, we're actively involved with Hydrom, to finalizing their prefix study for a common use infrastructure, where hydrogen pipeline is part of that. So the map you see on the right side is what are the currently announced blocks where the international consortium members committed to looking at building plants in order to produce hydrogen. So electrolyzers, renewable energy mix, which is wind turbines, electrolyzers, and -- sorry, PV -- solar PV power in order to produce hydrogen, and our pipelines will transport this hydrogen to the coastal areas where they'll be transformed to derivatives that could be exported or used for local industry. So the story for growth of hydrogen is very attractive for us, and it's something where we'll continue to focus. It was -- 2024 was very successful in terms of positioning ourselves there and reducing the ambiguity in this business, and thus 2025 is to look at expanding that. Moving on to the next slide, Ahmed. Likewise here, so besides hydrogen, there's an attractive opportunity in transportation of CO2, and this is in line with the government's objective to achieve net zero by 2050. So decarbonization by carbon capture is one of the key pillars to achieve this net zero by 2050, and where OQGN plays a big role is carbon capture doesn't happen without transportation of that CO2. And OQGN has been identified as a national target for CO2 transportation. We've been working with MEM and some of the leading companies in this business as part of a core team that is under MEM's guidance. So we have been leading the Workstream 2 in transportation in that front, where our objective is to reduce ambiguity and provide full analysis in terms of what are the regulatory requirements to enable CCUS to be uptick in Oman, to enable investments to happen in the CCUS value chain. And for us, specifically, we look at the transportation of CO2. Likewise, now looking at the right side, some of the opportunities we're looking at as part of this core group, there are some projects identified as Trailblazers. These are projects that are a bit more advanced stage where transportation will be required along with other parts of the value chain. So we've been working with our partners over the past 1 year to mature these opportunities, namely some of these opportunities is the northern ecosystem opportunity. So it's looking at potential decarbonization of the Sohar Industrial Estate and finding things and uses of the CO2, and this could entail a CO2 pipeline extending more than 200 kilometers potentially. And then in the center of Oman is working with a consortium partner of Shell and OQ to -- it's a blue ammonia project where CO2 has to be captured and installed in an inland location. So that also offers a very big growth opportunity for OQGN in transportation of CO2. And that's it from the growth side for now. We are very excited for 2025 to mature these opportunities more. I'll pass on to Khalid.

Thank you, Ali. In the financial, our financial is still solid. As you can see on the slide, an actual fact, despite this one-offs that we had on the year 2023, you will see our return on net profit is still above the 30%, as you can see in the slide. And the income buildup has declined compared to 2023, but that's mainly attributed to the construction revenue, which always comes with a higher cost as well. So the fall through with that reduction in the net profit is not as much, but the fall-through in the increased revenue when you see on the slide in the finance income and in the financing -- I mean, the allowance of OpEx actually have a higher fall-through to the net profit. And that's why we see our net profit, despite the reduction in the construction revenue, haven't been impacted much. In fact, it's still under 30% of the net profit. And the main reason for the construction revenue to actually drop a bit last year, is one of these is the project that we have in Sur, because they have been impacted by two events of weather conditions, have been ceased for sometimes for rectification, but those are only phasing, because the investment is still there and will come as an investment to our RAB's value in the near future. According to that, our consumption revenue have been dropped by the claim of the insurance that we had for one of the projects and the past events where we had a cyclone as well impacting our construction where the claim has been reduced in our RAB assets after the collection of the insurance claim. Besides that, there were also some liquidity damages applied into one of the vendors where the settlement have been settled, not to pay the vendor for LD. And that has all contributed to reduction in the construction revenue. We would have been at 2%, more than 2% compared year-on-year increase, but compared to a 1.4% in increase in RAB value. But we'll come to the RAB value as we move into the slides. In terms of the cost, as I said, construction revenue comes with a higher construction costs as well. So there is a little margin when it comes to a revenue drop if the drop happens in the construction revenue. But the bottom drop shows the movement of our expenditure over the past 3 years, including 2022. 2022 and 2023 is actually the old price control, Price Control 2, and we started the new price control, Price Control 3 in 2024. And you see the circle green where it has mentioned the 93% or 92.6% is how much we have recovered as a cost out of the OpEx allowance. So the recovery of the cost has improved from early 80s to 93%. So that means our costs have been recovered almost fully, a few of these unrecovered cost probably also associated to regulatory fees being a listed company as well. But overall, expenditure, there is an increase in employee cost, and that's related to the accounting change where we used to capitalize the construction or used to capitalize the project delivery teams where the Price Control 3 did not allow to capitalize the ERC or employee-related cost of Project Delivery. So that has been expensed. But the other element is the insurance -- and also, I would say, some IT related for the IT, cybersecurity insurance as well, has increased the cost. But as I said, most of these costs have been recovered as the OpEx allowance by EPS. Moving on as well in the cash conversion. Cash conversion is still -- the cash generation is still solid at above 40%, in the year 2024, it's at 56.3%, supported basically by a lower spending in the construction. But the standard -- the level that we see the OQGN is at 40% between 40% or 50%. Besides that is the asset evolution, as I said earlier, there is an increase in assets RAB value of 1.4%, despite the reasons that I have said earlier, but there have been an increase and the increase should have been at 3% or around the 3%, and these are, as we said, it's a phased out to this year, and hopefully, there would be a catch-up, because of also introduction of when we start the construction of the loopline to Sohar. On the capital structure, we have -- and I would also assume that some of you have read the financial. We have also announced in the financial, we have repriced our facilities. Actually, the USD facility to a lower rate. We used to pay 1.9% plus the SOFR, the new rate is 125 plus a SOFR so it's a reduction of almost 65% -- 65 bps. So -- and -- the ratios are still solid. The adjusted net debt to adjusted EBITDA is at 3.25x. And probably for some who doesn't know, we are issuing two financial statements every year, one financial statement that is the one that usually get published, IFRS because the IFRS financial statement already published in MSX platform. The other one is the regulated financial statement, which we used to calculate our regulated EBITDA. And usually, it's also equally important to the management, because that is more aligned to the cash flow. And when I say more aligned to the cash flow, it's usually used by a regulator for reconciliation purpose. It gets audited, but it's not for publicly -- not to be publicly disclosed, but we have agreed earlier to also provide the bridge between the two EBITDA, which we will also show in the coming slides. Net debt to RAB, it's at 0.33x, the only covenants, as I said also earlier, the only covenants we have in the facility is not to exceed the 70 or 0.7x in the net debt to RAB and that leaves us with enough rooms for the future growth and of course, dividend distribution. The lower slide -- the lower stack bar shows where we are compared to the market or the peers, and we are in a good position of below even the average when it comes to the debt to RAB, our peers or -- our peers are actually in a higher rate already, and that allows us, as I said, for future growth. And as per what I call investment grade, we also have that headroom for future growth. As I said, we will provide the bridge between the two EBITDA, our EBITDA for the RAB usually gets supported by the depreciation revenue that we have in the RAB financial statement. That is not the case in the IFRS financial statement. So usually, the RAB or the regulated financial statement is higher in EBITDA because of capital and depreciation retained as a part of the revenue. And that's the picture you will see in the slide is between the '23 and '24, we are still at above 70% when it comes to EBITDA rate. The coming few slides also for, yes, reading is also to compare between the 2 years because we thought maybe this would be worth noting to the investors that our last year financial was supported by a few one-offs. One of this one-off is the transfer from OCI, other comprehensive income of the OMR 9 million that comes out of the termination of the hedge, and other one-off events is the waiver of the loan interest that we used to have with the shareholders that we don't anymore have, because we defines that. But the middle two solid green or the dark green actually shows the actual revenue, how they would have been without these one-off events. So the apple-to-apple comparison is an increase -- sorry, I said revenue, it's the net profit, but the net profit apple-to-apple would have been an increase of 2.6 -- 2.8%, but there have been one-off in the year 2023, they are not there anymore. There was one-off in 2024 as well as the reimbursement for the 2020 -- sorry, the reimbursement for the Price Control 2 of OMR 5.3 million, which is also depicted in the slide. So that we don't see this is coming, but will be hopefully compensated by a higher growth when it comes to construction revenue and also our financial income, because we have a higher RAB value. Similar slide to go to the total income. Our total income, as I said, probably without the one-off, would have been lower still but lower from the construction revenue, you see the construction revenue have dropped to OMR 23 million year-on-year, but transmission revenue and finance income, which usually comes with a higher flow-through to the profit have increased, and that's why our profit remains solid for the year 2024. With this, I will leave the floor for you to ask questions if you have any. Thank you very much.

Yes. Thank you, Khalid. Thank you, Khalifa and Ali. We apologize for this technical issue where I think you cannot ask questions directly. But I advise you to actually write your questions on the chat. So we have in the Q&A, we have questions coming from Joyce Mathew. So we have a question from Joyce Mathew. Yes, this is the first question. Joyce is asking, you were anticipating construction revenue of OMR 25 million in Q4, but still short of achieving that target in Q4. Could you please tell us what was the reason behind this drop? How do you see this year performing in terms of asset addition?

I don't know whether the question came before my speak, but I've explained the three main components to the job despite the -- also the delay in one of the projects, we attributed that to the weather incidents that we had in the Sur areas, but we had few reversal when it comes to the asset base, one to do with LD with one of the old projects that was settled with the vendor not to pay as part of the LD and that comes with a big value of OMR 6 million. But also, we had a claim from the insurance that was also settled for weather unrest happened during the Shahin time where we have claims from the insurance and they have paid us back some of the investment of rectifying these incidents that we had in the pipeline, and that comes out of the asset base. The anticipation in 2025 as what we have also announced in the news, the loopline from Sohar to -- from Fahud to Sohar, will help actually reforming and the catch-up of this 2024, will have in 2025 because of this additional loopline that wasn't there in the price control, recently been announced. Of course, we still enter the tendering process as of now, and we will come market after the appointment for the EPC of how much this potentially will add into the value. But this is one of the largest projects that we are going to construct. So the 2025 construction will be finger crossed, will be higher because of the loopline, but also we don't see a repetitive incidents of LDs or claims that would happen in the future similar that we had in 2024. But also to expedite the process of construction, we have also -- maybe Khalifa, you want to elaborate in...

Thank you, Khalid. So exactly, Khalid, you highlighted what was the concern in 2024 and how we are proceeding with 2025. Just to give an assurance also, we have came up with Project Delivery efficiency where we established different framework agreements for the core of EPC call of contracts we have established. And also, we established framework agreement for pipeline suppliers and also for the mounting skids as well. So we are really making all these kind of improvements in our process in order to improve in Project Delivery. Hopefully, that will be realized in the coming years.

More questions from -- I don't know if you have answered for that question from [Audio Gap] quantified the lost revenue as a result of the insurance claim and the LD claim amount. Are there any other claims outstanding as of now and how much?

So to -- I don't have these in front of me, but what I can remember, the increase could have been at 2.1% year-on-year. instead of 1.4% today. So you do the math, but splitting these, I'm not really sure of the exact number. But yes, it would have been shorter than the 3%, but not as 1.4%. It would have been at 2.1%, but the major -- I wouldn't say major, but the delay that we have in Sur, because of the weather has impacted also on this, but yes, it would have been 2.1%.

The question is, for 2023 -- you can read the question, the net income excluding one-off, is OMR 41.3 million; for '24, the net income, excluding the one-off is OMR 42.5 million. So can we assume there's an RAB?

So I'm not in the position to give a forecast for 2025, but I have also said we have repriced our facility of USD facility. We -- our RAB value would increase. Of course, we would also expect an increase in ERC because of the merits. I still see a solid return similar to 2024 despite a one-off of Price Control 2, reimbursement of OMR 5 million. But the 2025 to my level best estimates, I'll leave it to you how to estimate it, but it will be solid as 2024, yes.

I have also a question regarding the dividend policy. Is it sustainable long term? If not, what percentage of that profit can be reasonably distributed as a dividend while maintaining necessary funds for growth?

So our current dividend policy is going to still be valid for the year 2025. We will be in the Phase 2 review and announce the new policy during the course of 2025, for 2026. But there was no intention to actually not to pay. To which level, it will be discussed with the Board before it comes to the shareholders. But yes, we know the market distribution and MSX of how much, what's the level of dividend yield. So we are watching these out. We will come in a composition of what growth we are also anticipating, but dividends is not about the formula to be majorly impacted.

We wish to interacting with you, Joyce. So he have the follow-up questions, this time about the operating cash flow. He say that's consistently on the decline path, while cash generation has been better than your expectation at 50% due to lower CapEx. So he is asking, could you please provide an overview of the reason for the reduction in operating cash flow. What could be the normalized cash generation level in that?.

So as I said, we are usually in the level between the 40% and 50% in the cash generation. So that's the level we usually have. I mean, going back in the years, you will see different levels. There are years when we have a big acquisition where you have a lower cash generation, but also a higher cash generation because we have a lower CapEx expense. But it should be our target -- I mean, we should be between the average of 40% to 50%.