SNGN Romgaz SA (SNG) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Romgaz conference call for discussing the preliminary results for 2020. After introducing the speakers, our CEO, Mr. Aristotel Jude, 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. Aristotel Jude, Chief Executive Officer; Mr. Dumitru Rotar, Deputy CEO; Mr. Razvan Popescu, Chief Financial Officer; Mr. Daniel Cornea, Head of Investments; Ms. Gabriela Tranbitas, Head of Financial Reporting and Accounting Methodologies; and Mr. Bogdan Simescu, Chairman of the Board of Directors. Now I would like to give the floor over to Mr. Aristotel Jude, Romgaz CEO, who will open the conference call with an opening speech.

Good afternoon, ladies and gentlemen, and thank you for your joining of our conference call to discuss the 2020 preliminary results. We released yesterday our preliminary consolidated annual report on the economic and financial activity of Romgaz Group. A detailed presentation of the group activities and financial results is also available on our website in the Investor Relations section. We would like to take this opportunity to address certain aspects regarding to the market context and to highlight the operational and financial performance of our group. In 2020, important factors had mixed outcomes on our group performance. The natural gas consumption in Romania increased by 5% compared to the previous year, with imports around 18% of total consumption according to our estimates. The domestic energy market was influenced by higher temperatures over the year-end by the COVID pandemic, which has seriously impact all fields of activity. Please recall that Romania has been under the state of alert since May, and strictly safety measures are still enforced. Until June 30, 2020, prices of gas sold by domestic producers to households and assimilated consumers were kept, and the maximum value of RON 68 per megawatt hour as enforced by the Governmental Emergency Ordinance issued in 2018, 2019, namely 114 amended by 19 per 2019, and [ 1 ] per 2020. On July 1, 2020, gas prices in Romania have been fully liberalized for producers and suppliers. Nevertheless, with price restriction enforced by the gas release program through the Regulator's Order No. 143 and 144 per 2020. Accordingly, large gas producers have the obligation to offer 30% of the previous year gas production, less own and technological consumption and centralized market, with a discount of at least 5% from the previous 60 days average price of standardized products. The program is applicable until the end of 2022. As a possible consequence, the average weighted price of gas sold by producers on the commodity exchange on spot and forward the market, trade with delivery in the reference method recorded a significant plunge of around 38% in the third quarter of 2020 compared to the same period of 2019, according to the -- our computation. On Central Europe Gas Hub, we note that the first month reference index recovered in Q4 from the bottom recorded in Q3. But overall, in 2020, the decrease was significant. Regarding the operational and financial performance achieved by Romgaz Group. In 2020, we mentioned the followings. Natural gas production stood at 4.52 bcm, only 40% lower year-on-year as we successfully managed to overcome the commercially enforceable environment, which impact our Q3 and Q3 performance. We recovered significantly in Q4, and those success -- succeeded to exceed by 4.7% of full year budgeted output level. We started production in Caragele Deep in January 2020, with 77 Rosetti well, with an output potential of 1,500 barrel oil equivalent per day and put into production 2 other wells in Caragele commercial field with a total output potential of 1,000 barrel oil equivalent per day. As an important performance, we achieved a global of resting the natural decline and maintained at 1% through the wells workover and special operation programs and higher efforts to build the production infrastructure of discoveries made in the previous year. On the exploration side, we drilled 16 exploration well in 2020, out of which for 8 wells, we drilled -- the drilling works were finalized with positive results. We maintain our good position in the market as we accounted for around 39% of the total gas deliveries in Romania according to our estimates. Also, we estimate that Romgaz market share, considering only domestically produced gas, stood at around 38%. On gas volume sales, we succeeded to restore the significant decline recorded in Q2 and Q3 with good results achieved in Q4. So that in full year 2020, the negative adjustment was only 10% compared to 2019. On the gas revenue side, excluding gas acquired for release, we've also recovered in Q4 from the bottom reach in the previous quarters and succeeded to shrink the full year decline to 23% year-by-year with impact from the declining price environment. Revenues from storage services improved by 13% last year with capacity booking services having the largest contribution. Revenues from electricity increased by 30% year-on-year as production in the old power plant also by almost 59%. Overall in 2020, based also in the -- on the good performance recorded in Q4, we succeeded to shrink the decline on our top line revenues to 20% year-by-year to around RON 4.07 billion. Regarding the main 2 taxes included in the other expenses item in the P&L., we can mention that windfall profit tax and gas and UGS royalties were down by 42% jointly as a result of lower gas price and lower volumes produced and sold. Expenses with depreciation, amortization and impairments stood around RON 477 million in 2020 , compared to the high RON 1.358 million expensed in 2019, mainly due to the one-off items. All in all, we recorded a net profit of RON 1.25 billion, higher by over 50% compared to the previous year. All main profitability margins were robust last year with EBITDA margin at 45.7% and net profit margin increased to almost 31%. In Q4 alone, we can point out good operational and financial performance, gas production of 1.32 million cubic meters with a significant increase of 39% compared to Q3, and of marginal adjustment of only 0.4% co;mpared to Q4 2019. Gas volume sales higher by 15% year-on-year. And net profit of RON 313 million compared to a net loss in Q4 2019. These aspects are presented at Page 16 to 24 in Romgaz Group presentation available on our website. On the balance sheet side, We have 0 indebtedness and a total cash position of RON 2.4 billion. With respect to dividends, we remained -- I would like to remind you that the shareholder meeting on April 22, approved the distribution of total gross dividends of RON 621 million, leading to a gross dividend payout ratio for 37% in 2019. Regarding CapEx, we invested in total RON 637 million in 2020, which accounted for 71% of our consolidated budget, mostly due to the pandemic environment. CapEx was related to geological exploration for the discovery of new gas reserve, exploitation, drilling works and equipment modernization and underground gas storages and works at the new power plant, the Iernut. As regards the perspective for 2021, we will publish our budget proposals and call the shareholder meeting shortly after the state budget is approved, according to the applicable regulation. In line with the investment and development program approved by the shareholders in June 2020, we continue our efforts to develop the production potential by consolidating our current portfolio of gas reserves and resources by adding new facilities, consolidate our position on energy supply market and develop our business by approaching new markets. With this, we are closing our presentation, and would like to thank you for your attention.

Thank you, Mr. Jude for your presentation..

[Operator Instructions] Ms. [ Juliana Chopraga ] you may address the question. Sorry, we have a technical issue with the microphone. We will answer the written questions.

Can you hear me now?

Yes. yes. We can hear you. Okay.

I was wondering, can you provide any sort of update on the discussions with Exxon? Can you tell us anything about this project, how you're you looking at this acquisition? Are you willing to acquire the stake from Exxon even before the new offshore law? Can you provide us any sort of update on the offshore law?

Thank you for your question. Due to the nondisclosure agreement, it will be very hard for me to answer to your question. But what I would like to emphasize is the fact that Romgaz is fully committed to purchase 50% from the Neptun Deep, Exxon participation. And in the next given time, we will bid for that. And we will get back to the investors with a public announcement related to that.

We continue with Mr. Tamas Pletser. We received a written question. What are your natural gas price expectations in Romania for the first quarter of 2021 and the whole year?

Our estimations are in full accordance with the prices that was already published by BRM. And probably when we will announce the preliminary results of -- and the results of Q1, we will inform you related to the prices obtained by Romgaz.

We received another written question from [ Juliana Chopraga ]. What are your expectations regarding volumes sold and production in 2021?

Thank you for your question. Regarding the production, as we put in our presentation, we have almost recovered our potential of production in Q4 2020. And we don't have any reason to think that in 2021, we'll not keep the same level of the production. Accordingly, the sales volume will reflect the production volumes in 2021. But we will keep the trend from Q4 2020.

Ms. Laura Simion, you may address your question now. Ms. Laura Simion, can you hear us? Do you want to address the question? you have to activate your microphone to be able to speak with us.

Hello, can you hear me now?

Yes. Yes. It's fine.

So I have 2 questions. One is regarding the strategy development plan that you published last spring. Do you have any updates to this plan? For example, for 2021, you had a CapEx of about RON 2.65 billion and from this amount, about RON 1.8 billion were for investments in partnerships and joint ventures. So if you could detail a bit on this. And regarding also the power plant, when will the new plant become operational? And another question is related to the market in terms of prices. We can see on the BRM oil prices of last year. So you mentioned that the trend that we saw in Q4 continued in this first quarter of 2021. Where do you see prices this year? Do you see it recover at the level of 2020 -- 2019?

Thank you for your questions. I would like to start with the Romgaz development strategy. What I would like to inform is that in the next period of time, we will review our development strategy to do the decision that we would like to purchase 50% from Neptun Deep. That means a huge investment. And based on that, we would like to review as soon as possible our development strategy. And related to the -- probably the question you raised related to the Iernut power plant, please be advised that we are fully committed to finalize the Iernut power plant by the end of this year. But in the meantime, we will analyze all the solutions that may be applied by the executive management in order to achieve that goal to finalize the Iernut power plant by the end of the year. And related to the prices, please be advised that the Q second, Q third and Q4 of 2021 are already published by BRM. And as we can see from that presentation, we expect that the prices are slightly recovered compared to 2019. But we have to admit that the prices were very strongly affected by the government decision already mentioned by me in the first presentation.

We received a written question from Ms. [ Juliana Chopraga ]. Should we expect production at the level of 2019 or 2020?

As we see the production, it's recovered quite well. So we rather expect to reach a level close to 2019 rather than 2020.

There's another question from Irina Railean. How tariffs for the storage business will be established starting April this year? Do you estimate them as being higher or lower compared to the previous year?

The answer is very short. Based on the new regulation, the regulated -- eliminated already the regulated tariffs. At the moment, internally, we are working in this respect, then probably in the next period of time, we will publish the new tariff. But for sure, in our point of view, the underground gas storage activity will be very attractive for the participants. And in -- by the other hand, we are fully committed to invest in the underground gas storage in order to offer to the participant the best services according to the international standard market tech.

We received another question from Mr. Tamas Pletser. What is your experience with BRUA pipeline? Is it operating well? Did you sell already any natural gas outside of Romania?

Our cooperation with Transgaz is very successful. But at the moment, we cannot answer on your question related to the operational aspects and technical aspects of the BRUA as we were informed, BRUA is working at the projected technical parameters. As regarding the -- our supply activity, at the moment, we are selling the gas in Romania. But we are fully committing in the same time to develop our supply activities in order to get also the final consumers, even that we are speaking about the industrial consumer or household consumers, will be, for us, the main target in the -- in our supply activity. And as the case may be, if the market will say that probably Romgaz will use BRUA in order to get other markets, and probably if Romgaz succeed in order to get Neptun Deep probably in the -- after development of that field, then probably Romgaz will use more than that BRUA, which is, in our point of view, on a strategic project and it's in our benefit.

We will answer the written question from [ Juliana Chopraga ]. When should we expect production at the new power plant at Iernut? Can you provide an update on Mintia?

As already mentioned, we would like to finalize the Iernut power plant by the end of this year. It is the only comment that I can have. But probably, the production will start next year, but it's only an assumption. It's not something that can be named as a certainty. But we will do our best in order to get that. And the second one. Mintia, it's one of our investment objectives. But as I said before, we would like to analyze again our development strategy, and probably based on the results of our further analysis, we will take a decision on that. But we are fully committed to invest also in the other power plants, but probably we would like to reduce our risk in this kind of investments.

We have another question from [ Juliana Chopraga ]. Iernut was partially financed by the state, [ plus ] EU funds. Is there a risk of you losing the funding because of the delay?

There is a risk, and we would like to build that risk in order to avoid to pay back the money received by Romgaz. And probably, we will state out that based on our further analysis, and we will inform the investors at the right time.