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Edited Transcript of SNG.BX earnings conference call or presentation 14-Nov-19 11:00am GMT

Q3 2019 Societatea Nationala de Gaze Naturale Romgaz SA Earnings Call

Medias Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Societatea Nationala de Gaze Naturale Romgaz SA earnings conference call or presentation Thursday, November 14, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gabriela Tranbitas

Societatea Nationala de Gaze Naturale Romgaz SA - Head of Financial Reporting and Accounting Methodologies Department

* Cristian Victor Serban

Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department

* Nelu Paraschiv

Societatea Nationala de Gaze Naturale Romgaz SA - Deputy CEO and Head of Gas Trading Department

* Manuela Ogrinja

Societatea Nationala de Gaze Naturale Romgaz SA - Head of IR Department

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Conference Call Participants

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* Catalin Diaconu

Raiffeisen Bank Romania - Analyst

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Presentation

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Unidentified Company Representative [1]

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Hello, everybody. Good afternoon and welcome to Romgaz conference call held to discuss the nine months' results for 2019. Let me introduce you the participants who are attending this conference call. We have Mr. Nelu Paraschiv, Deputy Chief Executive Officer, in charge with the Company's Development and Investment activity; Mr. Marius Leonte Veza, the Interim Chief Financial Officer; Mrs. Gabriela Tranbitas, head of the Financial Reporting and Accounting Methodologies Department; Mr. Cristian Victor Serban, Head of the Gas Trading Department. And we also have representatives of the investors relation department.

Today we will start with a short presentation of the results, followed by a Q&A session. On behalf of the management, I would like to read the introduction to the conference call for the discussion of the nine months' 2019 results. This morning we released our quarterly report, which includes the interim consolidated financial statements prepared in accordance with IFRS. Also an updated presentation of the group is available on our website at the investors relation section.

We take this opportunity to address a few aspects about operational performance of our group and about the market context.

Comparing the first nine months of 2019 to the similar period of the year, we noticed that important factors had mixed outcomes on our financial performance, as follows. Natural gas consumption in Romania recorded an overall decrease of around 6%, according to our estimates. In our view, this is the most -- is mostly the result of mild temperatures registered, especially in the cold months, and of higher gas prices.

Gas prices on the commodities exchange were more supportive in 2019 as compared to 2018, when CEGH Front Market Index recorded a decrease. Governmental Extraordinary Ordinance number 114, issued in December 2018 and amended in March 2019, brought the following important changes on the gas and electricity markets. On one hand, prices of gas sold from the internal production to households and assimilated consumers are capped at the level of RON68 per megawatt starting with May 1, 2019; and on the other hand, gas and electricity producer are charged a 2% fee on revenues with certain deductions. Also, starting with April 1, 2018, the windfall profit tax for gas producers includes an additional charge of 80% on the difference between selling prices and the RON85 per megawatt.

On the back of these external influence factors, we continue to implement and apply a flexible pricing policy for the gas sold to industrial consumers and to optimize the gas value chain by properly managing the gas volumes.

Overall, in the first nine months of 2019, we reported significant achievements. Natural gas production increased by 0.7% year on year, roughly at the budgeted level, due to rehabilitation programs in mature fields, workover operations in wells, improved productivity of some gas reservoirs, and discoveries brought on stream. Our gas deliveries recorded a better dynamics compared to the natural gas consumption estimated for Romania. As such, in our opinion, we consider that we increased our market share by approximately 7% to 59% in terms of the country's gas consumption from domestic production.

Consolidated revenues reached RON3.79 billion, higher by more than 10% compared to the same period of 2018, driven by total gas revenues, which increased by 13%. Revenues from storage and other services rose by 12% in the period. Revenues from electricity recorded a decline, as expected, because the investment in new power plant is in progress.

Regarding expenses, we recorded windfall profit tax higher by 50%, gas storage royalties lower by 23%, and the new 2% fee on gas and electricity revenues of RON63 million.

All in all, EBITDA increased significantly by 25% to RON1.96 billion, and net profit advanced strongly by 19% to RON 1.19 billion. We also continued to improve our already elevated profitability margins. Net profit margin rose to 31.3%, EBIT margin advanced to 36%, EBITDA margin reached almost 52%. These aspects are presented in pages number 16, 17, and 23 to 25 of Romgaz Group presentation, available on our website.

Reading Q3 alone, we can underline the following key developments. Natural gas production decreased by 2.5% compared to the same period of 2018 because of lower gas consumption in Romania. Consolidated net profit edged down by 2% year on year to RON209 million due to lower total revenues and higher expenses with taxes, depreciation, and amortization. All profitability rates recorded an improvement to more significant levels.

With respect to our balance sheet, it continues to be strong with zero indebtedness.

Regarding CapEx, Romgaz Group invested RON631 million in the first nine months, which accounts for only 59% of the budget planned for this year. Of total amount, geological exploration and equipment upgrade accounted for around 30% each, and works in the new power plant for 36%. A key strategic direction is to consolidate our position on the energy supply markets. The investment in the new power plant is in progress and will improve the operating efficiency and production level of our electricity segment. Investment in our storage subsidiary is also important and aims at securing the domestic gas supply over the long-term.

Arresting the gas production decline remains a key investment objective of Romgaz. Currently, this is achieved through discovery of new resources and improvement of recovery rates in existing reservoirs. We are also exploring additional investment opportunities in order to improve our gas value chain.

We kindly remind that in Q2 of this year, in April, the shareholders' meeting approved the distribution of total gross dividends of RON1.6 billion. The dividends have been distributed in July and translated into a 118% gross dividend payout ratio.

In terms of 2019 outlook, we have a few remarks. We anticipate that the gas consumption in Romania will stay in line with the performance recorded in the first nine months. Our gas production will be in line with the level budgeted for 2019. With a strong marketing policy, Romgaz will continue to hold a significant market share in terms of gas supply in Romania. Revenues from the gas storage activity will be resilient this year.

On the cost side, the windfall profit tax, the gas storage royalties, and the 2% fee will take the toll. Overall, we make our best efforts to maintain the financial profitability of the Company and to create value for shareholders.

With this, we are closing our presentation. Thank you for your attention.

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Questions and Answers

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Operator [1]

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Catalin Diaconu.

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Catalin Diaconu, Raiffeisen Bank Romania - Analyst [2]

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So I have four questions. The first question would be, if there were some impairments in the third quarter, and what was the cause? The second question would be if -- what were the deliveries just on the regulated segment in the -- just in the third quarter? So not for year-to-date figures.

The third question would be, what should be the trend in the prices on the liberalized segment in the fourth quarter? And the fourth question would be, what is happening at Iernut? I mean, we saw that you are requiring legal assistance for a potential loss with the builders of Iernut, so what's happening there and what's the new schedule for when the plant could be operational? Thank you.

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Unidentified Company Representative [3]

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Thank you. Mr. Diaconu, could you please repeat your second question? The connection was bad. Thank you.

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Catalin Diaconu, Raiffeisen Bank Romania - Analyst [4]

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Yes, so regarding the deliveries, just in the third quarter on the regulated segment, so at RON68 per megawatt. Thank you.

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Gabriela Tranbitas, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Financial Reporting and Accounting Methodologies Department [5]

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Hello. Regarding your first question on impairments recorded in the third quarter, we recorded an impairment of RON103 million, coming mainly from wells that we drilled but which were unsuccessful.

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Cristian Victor Serban, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department [6]

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For the second question, gas deliveries under regulated prices were of 20.6% for the first nine months, and we envisage a percentage of approximately 32% for the entire year.

As regards the price trend for Q4, you can -- for the non-household market, these are public prices on the BRM side, the commodities exchange market. There is a slight decrease, but let's have in mind that Romgaz already sold most of its production a long time ago already.

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Nelu Paraschiv, Societatea Nationala de Gaze Naturale Romgaz SA - Deputy CEO and Head of Gas Trading Department [7]

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(interpreted) So with respect to the fourth question, in December the legislation changed. It provided in terms of construction works an additional increase in terms of wage, so the supplier had to bring justification with respect to this cost increase. So far, we haven't been able to reach an agreement with the suppliers working for Iernut power plant, so we bring this case to the trial.

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Catalin Diaconu, Raiffeisen Bank Romania - Analyst [8]

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So should we expect a delay in the commissioning of the new Iernut power plant beyond the first half of 2020?

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Nelu Paraschiv, Societatea Nationala de Gaze Naturale Romgaz SA - Deputy CEO and Head of Gas Trading Department [9]

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(interpreted) A delay might occur, but we hope it's not a long one. Thank you.

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Catalin Diaconu, Raiffeisen Bank Romania - Analyst [10]

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Okay, understood. Thank you.

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Unidentified Company Representative [11]

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We have a written question on behalf of Iuliana Ciopraga. So the question reads, could you give us some guidance on full-year sales to third parties?

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Cristian Victor Serban, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department [12]

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So for this question, our sales will be (technical difficulty) budget from the quantity point of view. We (technical difficulty) no reason to have a discrepancy compared to the budget.

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Unidentified Company Representative [13]

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Another written question from Mr. Tamas Pletser. Dear Romgaz, I wonder why sales volume of gas was down in Q3 2019 period versus Q3 2018 period, when your main competitor, Petrom, reported a strong rise in sales.

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Cristian Victor Serban, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department [14]

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To this question, our Q3 sales are exactly in line with our budget and we are not able to comment on Petrom sales.

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Unidentified Company Representative [15]

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(interpreted) We have another written question from Mrs. Iuliana Ciopraga. In terms of volumes sold on the regulated market, could you provide the volumes sold in second quarter and in the third quarter?

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Cristian Victor Serban, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department [16]

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Yes. Our volumes in -- I don't -- just a second. Yes, volumes sold at regulated price in second and third quarter are of 8 terawatts, approximately. Whole-year sales on -- to third parties will be exactly in the -- in accordance with our budget, so we see no reason to worry about Q4. I don't have now a breakdown of -- for Q2 separately from Q3, but I can provide this in a few minutes. It's not a problem. Could you please address the question in writing? And you will receive the answer as soon as -- in a few minutes or hours. It's not a problem.

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Unidentified Company Representative [17]

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Another written question from Mrs. Iuliana Ciopraga: could you remind us what the budget entailed in terms of volume sold to third parties for the following year? So I'll repeat the question: could you remind us what the budget entailed in terms of volumes sold to third parties for the financial year?

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Cristian Victor Serban, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department [18]

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Approximately 51 terawatts.

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Unidentified Company Representative [19]

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We have now another question from Mr. Jonathan Lamb. Is there any credit risk to Romgaz from RADET bankruptcy?

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Cristian Victor Serban, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Gas Trading Department [20]

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To answer your question, Romgaz has no contract relationship to -- directly with RADET. From public information, we -- actually we don't have any details additional to public information with regards to what the intention of the Bucharest City Hall in this respect is for the following period, but our relationship is with ELCEN.

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Manuela Ogrinja, Societatea Nationala de Gaze Naturale Romgaz SA - Head of IR Department [21]

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And we can add that right now the commercial relationship with ELCEN is, let's say, good; and we don't -- I mean, this client does not record delayed receivables.

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Unidentified Company Representative [22]

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And we have another question also from Mrs. Iuliana Ciopraga. Should we expect further impairments in Q4?

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Gabriela Tranbitas, Societatea Nationala de Gaze Naturale Romgaz SA - Head of Financial Reporting and Accounting Methodologies Department [23]

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As you know, our activity entails some kind of risk. We cannot say from the start of drilling a well if that well will be successful or not. We keep analyzing the status of the investments that we make. And we -- it is possible that we will have further impairments, but we cannot estimate now.

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Unidentified Company Representative [24]

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Are there any other questions? If there are, please address them. Thank you. Other questions please? So we have another question from Mrs. Iuliana Ciopraga: any news on Caragele Deep?

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Nelu Paraschiv, Societatea Nationala de Gaze Naturale Romgaz SA - Deputy CEO and Head of Gas Trading Department [25]

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(interpreted) Currently our Company carries on the exploration appraisal phase for this discovery. As soon as there are any significant news to be reported, we will do so. Thank you.

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Manuela Ogrinja, Societatea Nationala de Gaze Naturale Romgaz SA - Head of IR Department [26]

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Also relating Caragele, we might add that we are in the final phase of obtaining construction authorization for building five evaluation wells. The process will take place during 2019-2020. And also we are in the process of verification with four wells for possible extension of hydrocarbon accumulations. Thank you.

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Unidentified Company Representative [27]

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(Operator Instructions) Thank you. Other questions, please? (Operator Instructions)

So in case there are no further questions, we would like to thank you very much for the questions you have addressed so far. In case you need further information, please contact our Investor Relations team.

The conference is now closing. On behalf of Romgaz team, thank you for attending today's conference call. You may now disconnect, and we would like to wish you a good day. Thank you.

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Editor [28]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.