SNGN Romgaz SA (SNG) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to our conference call for discussing the results reported by Romgaz Group in the first half of 2026. 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. One half 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. Radu Moldovan, Energy Trading Director; Mr. [indiscernible], Reduction Department Director 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 joining our conference call to discuss the results recorded by the Romgaz Group in the first half of this year. Today, we released the Board of Directors report, which comprises a detailed presentation of our economic performance and the consolidated interim financial statements. Also, an overall presentation of the group is available on our website in the Investors section. I will start by highlighting some of the aspects of the gas market import in the first half of 2026 compared to the same period of the previous year. We estimate that natural gas consumption in Romania increased by around 3% to 6%, while imported volumes declined by 14%, reaching the 22% weight in the total gas consumption. The European natural gas market remained challenging and highly volatile during the first half of 2026, with prices above the levels reported in the similar period of last year. Market dynamics continue to be shaped by geopolitical uncertainties to lower storage levels and Europe's increasing exposure to global energy markets, while security of supply remained a key priority across the region. On the Romania commodities exchange, the trading liquidity remained weak due to record requirement for gas producers to sell part of their production at our regulated price. Regarding the gas center legislation in Romania, Granges activities continue to be influenced mainly by the ordinance issued to regulate the gas prices. The NPL provisions applicable to gas provisions include regulated gasoline price of 110-megawatt hour applicable starting 3rd April 2026 and up on the 31st of March '27 for the gas sold to household consumer and their suppliers and to hit producers for the production of thermal energy for households. The previous regulated pricing was higher at 120-megawatt hour and what line to a slightly wider category of consumers. For the gas sold at regulated prices, payment of the windfall profit tax is exempt and gas royalties are computed based on these regulated prices instead of the reference price. Regarding the operational and financial performance recorded by the group in the first half of '26, we can highlight some of the following impairment results. We recorded a natural gas production of 2.4 Bcm, which exceeded by RON 22 million or almost 1% the level budgeted for the first 6 months. In Q2 alone, the natural gas production was 1.7 Bcm, and we succeeded to narrow the production decline to 2.8% year-over-year, closer to our strategic annual goal of 2.5% and improvement compared to the decline recorded in the first quarter. The 6 month outlook results were achieved through steady efforts aiming to consolidate the potential of our onshore production, which included interventional and completion operation, which allowed us to resume production at 89 inactive wells that improved production by over 62 million cubic meters, successful exploration activity and completion of the investment to expand the production infrastructure. This resulted in 2 new production wells, which increased output by RON 11.6 million in the first half of '26. And of course, the continuous rehabilitation project of the main mature gas fields and the optimization of gas field exploitation. Regarding the investment in our production facilities, we can point out that we formed the reactivation and capital leasable repairs for 104 wells and finalized 2 surplus facilities while 2 others are in different preparation stages. We can also highlight that all these measures led to a 10% increase in our condensate production to the level of above 27,000 tonnes in the first half of 2026, mostly due to higher production level in our [indiscernible] commercial field. Regarding [indiscernible] works are progressing with 76 Rosetti now induction, 3-odd wells are already in production from the previous years. 54 Damianca well, which has been successfully tested waiting for time and 56 Damianca well, which is actually in drilling as we speak. Also, we have 6 other wells in different stages of drilling preparations. We also can add that our gas production was expectedly impacted by major overhauls and number of wells and by the natural decline as well by power outages in the first quarter of the year and higher network pressure and by water influx in some of our [indiscernible] deep wells. We continue to hold a significant position on the domestic gas market in the first 3 months. Ranges was the leading gas supplier with a 43% market share in total gas delivery according to our estimate. Regarding gas consumption covered only from domestically produced gas, we have a 55% market share according to our internal assessment. We recorded total revenues of gas sold of RON 3.34 billion, lower by 10% year-over-year as a result of declining production and volumes extracted and sold from storages but also are regulated to lower price. Revenues from storage services wire by 3% year-on-year at RON 284 million with draw rated revenues up by 30% and capacity reservation having a 54% weight. As of 30th of June 2026, 86% of the operational capacity of our gas underground storages was already booked. Revenues from electricity added RON 49 million, adjusted by 16% year-on-year due to an almost half production of the old power plant to 182 gigs. Overall, Romgaz Group reported total revenues of RON 3.88 billion, adjusted by 9% compared to RON 4.25 billion run in the previous year based on the lower contribution of our gas segment. Regarding expenses, we recorded win for profit tax of RON 486 million and royalties of RON 284 million, representing a total expense of RON 771 million, only up 0.4% compared to the previous year. Bottom line, we succeeded to achieve a net profit of RON 1.74 billion, higher than 3.4% compared to RON 1.68 billion reported in the same period of last year. We also recorded a substantial profitability rate in the first 6 months and an EBITDA margin at about 53%, EBIT rate of over 46% and a net profit rate at above 4%. In the second quarter alone, we reported a net profit of RON 763 million, elevated by 4.7% compared to last year and the highest net profit rate ever recorded in the second quarter of the company. On the CapEx side, the first half of '26, Romgaz invested a total consolidated amount of over RON 2.55 billion of this amount 2.2 billion represented the investment in Romgaz Black Sea Limited and RON 429 million, the investment that were made by Romgaz on order. RON 99 million was the CapEx for the Depogas subsidiary. Regarding our strategic project, Neptun Deep, the progress made this year is aligned with the budget and with the execution calendar. The Transocean Barents Rig is currently drilling and completing well operations, 6 wells have already been completed out of our total 10 development wells across the project. Installation of the Neptun Alpha offshore production platform was achieved in July, representing a major milestone to project of an unpreceded magnitude for Romania and the EU. The 160-kilometer offshore main gas pipeline has been installed. This will transform natural gas from the Neptun Deep Alpha platform to the [indiscernible] where the gas will be metered and delivered into the national grid. Also, preparatory drilling work have performed in H1 for the Anaconda on exploration well with drilling scheduled after the net block drilling is completed. We aim to explore this new prospect in the Neptun Deep block. As a result of this significant development, Romgaz and OMV Petrom on track to simply deliver the first gas from Neptun Deep in 2027 and the project does remain within our RON 4 billion guidance for the total investment. Another strategic objective is the CCGT power plant in [indiscernible]. The project has now entered an addressed implementation stage that comprises the execution of already awarded contracts and the procurement procedures for the remaining activities. The multidisciplinary team dedicated to the project is operating at full capacity, simultaneously managing design, procurement negotiation, contracting execution and monitoring activities. A memorandum has been approved by the Romanian government in May, aiming to facilitate the procurement process. It enables the initiation and acceleration of award procedures, reduced decision-making times and facilitating the fast mobilization of all entities. As a result, significant progress has been made in the procurement procedures with the required steps being initiated and advancing at an accelerated pace. We already concluded contracts with the company deemed critical for the completion of the project, including the supplier of the gas and steam turbines, heat recovery boilers and similar equipment. GE, with a project integrator and [indiscernible] International and the supply of the technical equipment hammer power, the full resumption of on-site activities is also influenced by the status of disputes involving [indiscernible], both in relationship with Romgaz, but mainly with the subcontractors that previously carried out works on the project. We adopted the necessary measures to limit the impact and allow work to continue, provided that ongoing activities proceed according to the green schedule and no unfavorable circumstances arise independent of Romgaz. We anticipate that the completion deadline stipulated in the financing contract can be met. Regarding our investment plans, we remind that on the 6th of July, Romgaz shareholders approved the transfer of business agreement between Romgaz as a supplier and the [indiscernible] a sell. For Romgaz, the agreement scope is to improve the gas call chain, provide new value-added products and also assure a partial natural hedge against gas price volatility. At the end of the presentation, I would also like to mention the dividends that Romgaz distributed this year, we remind that on 29th of April, the shareholders of Romgaz decided upon total gross dividends of RON 606 million, which resulted in a total payout ratio of 19% for the last year and will allow Romgaz to partially finance is significantly investment plans. With this, I would like to close our presentation, and thank you for your attention.

[Operator Instructions] [indiscernible], you may now address your questions.

First, could you please confirm the kept prices -- kept price gas volumes of around 7.9 terawatts in the second quarter. And if you could provide the expectations for the third quarter and the fourth quarter? This would be my first question. Second, if you could please share with us if you still expect for 2026, gas production of around 4.8 bcm, this would imply in the second half of the year, a decline of around 3%. Is this the correct profile for the second part of the year? And should we see production stabilizing around 2026, also in 2027 before Neptun Deep starts contributing? And my last question is regarding the Iernut power plant. In the presentation, it appears that it has been shut down until August has electricity production now resumed and the plant is fully operational. And regarding the new power plant, we are already in the third quarter, and we're moving really close to year-end. Is commercial operation in the first half of 2027 realistic target? Or should we expect a meaningful contribution from the new plants in 2027 or maybe later from 2028?

Thank you for the questions. Regarding the quantities that were sold of the second quarter of '26, on the ordinance, we sold 7.84 data. In the third quarter, we are estimating somewhere above 7.5%. For the fourth quarter, we estimate that quantity to rise but over 9.9. This is for the gas at regulated prices. Regarding the decline for the entire year 2026. We estimate that the decline versus 25% will be below 3%. So we are trying to catch up a bit in the second and third quarters of this year and continuing from the then the target is under a 2.5% decline. So probably, yes, the production will stabilize. But again, this depends on a number of factors. . Regarding the power plant, we are now producing with one group from the old power plant is working at full capacity and will work at full capacities to out August, the month of August, it has all worked a full capacity through [indiscernible] July. So we do not expect the old power brand to stop this summer. Probably we will have a maintenance period for it somewhere in mid-September. Regarding the new power plant, we are moving fast as we can, given the fact that it's also August, a lot of companies that we are working with haven't mobilized yet. But starting on the first of September, we should see a meaningful advance in works in the power plant. The fact that we had this memorandum was very helpful in respect to the procurement process. And we managed to reduce the procurement time was significant. At this point in time, we have a view the synchronization of the grid to happen this year and for the power plant to inject the first minors. Regarding commercial operations, we will have an update in the third quarter of this year.

We received written questions from Mr. [indiscernible]. Three questions, please. One, the first one. Can you please tell us what percent of gas sales was done at regulated prices in Q2 and in the future, include a number in your presentation? And the second question, can you please also increase the forecast percent of gas to be sold at regulated prices? So these 2 questions already received an answer from the progress previously. And the third question, do you foresee any delays for [indiscernible] from what is happening in the Black Sea?

For the entire semester of 2026 for the first semester, the entire price that the regulated prices, gas sold was 73%. And for the Q2 alone, it was almost 67%. No, we will not include in the presentation the forecasted amount and we do not foresee any delays for the Neptun with what is happening in the Black Sea. The Romanian institutions are taking every precautionary measures and long as with [indiscernible] the subcontractors are taking all necessary measures in order to mitigate of this happening in the Black Sea.

Another written question from Mr. [indiscernible] what clients do you have for the gas in Neptun Deep? How many contracts did you sign? And the second one, what is the status regarding the gas sale -- the gas supply for population?

We haven't signed any contracts regarding the gas in Neptun Deep for now and when that will happen, it will be in a transparent manner, respecting the offshore legislation for the gas supply to the population, we expect the first offers from Romgaz to be made in December with deliveries starting from 1st of April 2027.

We received a further written question from Mr. [indiscernible]. What was the reason for decline in average gas selling price in Q2 versus Q1 despite the increase in market gas price?

The first reason is the fact that the regulated price declined from RON 120 to RON 100 megawatt hour. And as a gas company, we sold some of the gas both on the stock market and had some bilateral contracts that were concluded in the beginning of the year for Q2 as well. And given the fact that we had a decline in production in Q2, we didn't have available quantities to sell on the BRL market. we, as a strategy, all the quantities that we have available, we injected them into deposits in order to have them for the cold period.

Another detail question [indiscernible]. What was around RON 51 million deferred tax income recognized in Q2 [indiscernible] catch-up or [indiscernible] the second half?

The reforecast recognized in Q2 was generated by the fiscal loss required by markets next year, which been generated mainly by increasing foreign exchange rates. Currently, the exchange rates appear to be quite stable, so we don't expect significant impact on results of Q3.

We have a raise hand by Mr. Oleg Galbur.

I have several questions. First of all, specific -- 2 specific ones. Could you explain what is the nature of almost RON 120 million reported under the net impairment gains on trade receivables in the upstream segment in the second quarter. And secondly, on the income tax in the second quarter, it went down to just 4%. Maybe you can explain as well what is the reason behind this drop. And lastly, on [indiscernible], if you could provide an update on the assets takeover process following the shareholders' approval from July. So basically starting when should we see these costs related to the employees of [indiscernible] to be booked on -- to be booked and reported by -- or covered, let's say, by Romgaz. And also, if you could provide an estimation when do we expect to actually start operational activities at [indiscernible] under Romgaz umbrella. And lastly, could you also disclose what was the realized gas price in the second quarter alone and remind us what was it in the first quarter of this year.

If you recall last year, in December, we reported an impairment on receivables from the Ministry of [indiscernible] cat prices related to sales to household consumers. According to legislation issue in [indiscernible]

Excuse me, excuse me, there is a background noise, and it's very hard to listen to what you are saying.

Sure. I'll start over. In Q4 of last year, we recorded an impairment for receivables from the Ministry of Energy. In 2022, an ordinance was released, we said that we should sell gas to household consumers at a related price. And whatever difference between this price and the price we had contracts already signed would be recovered from the remaining states. In 2025, we decided to report an impairment as 3 years had already gone by, and we didn't receive anything from the [indiscernible]. However, in this June, we received a significant amount of the standing receivable. So we released that impairment. Yes. Regarding the income tax, this release of impairment generated nontaxable income, which reduced the income tax and also we recorded a deferred income tax related to the pistols in Romgaz [indiscernible]. Regarding as a mortgage, we are currently waiting for clearance from the Competition Council and from the foreign investment commission. If these clearances will be issued this month, closing of the transaction will occur in September. So that's why we should have the first cost related to the plant.

And what cost level are we talking about, please? .

Sorry?

What is the cost level you are expecting to incur on a quarterly basis or [indiscernible]

We cannot give this information now. What I can say is that we are working on a revised budget, and we will have this information when we will come up with this revised budget.

And on the realized prices, if you can say a word.

So the realized gas prices for the second quarter, and this includes the gas sold at regulated prices, it's around RON 124. And for the first quarter, and that includes the gas and regulated prices at RON 120 was 100 -- somewhere over RON 130 barrel.

Okay. So the -- let's say, the weighted average realized price in the second quarter was lower than the first quarter despite the up price movement, right?

Correct with which was impacted mainly by the reduction of RON 10 in the regulated gas price.