Good afternoon, ladies and gentlemen, and welcome to our conference call for discussing the results recorded by Romgaz Group in the first half of 2024. After introducing the speakers, Mr. Răzvan 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. On behalf of the company, the following speakers also attend this conference: Ms. Gabriela Trânbițaș , Chief Financial Officer, Mr. Ioan Foidaș, Production Department Director, Ms. Cornelia Sardan, Head of Prices Department, and the Investor Relations Department. Now, I would like to give the floor over to Mr. Răzvan Popescu, who will open the conference call with an opening speech.
Good afternoon, ladies and gentlemen, and thank you for joining our conference call to discuss the results recorded by the Romgaz Group in the first half of 2024. Today, we publish the Board of Directors report, which comprises a detailed presentation of our economic and operational performance, the consolidated interim and the standalone interim financial statements. Also, an overall presentation of the group is available on our website in the investor section. I will start by highlighting some aspects of the gas market environment in the first half of 2024 compared to the same period of the first year. We estimate that natural gas consumption in Romania was roughly flat at a slight increase of 0.6% year-on-year, while imported gas volume rose by 19% year-on-year and increased their weight to a 17% compared to a 14% a year before.
On the Central European Gas Hub, the average reference price declined by almost 50%, according to the data provided by the National Authority for Regulation of the Mining, Oil, and CO2 Geological Storage Activities. The Romanian Commodities Exchange still recorded weak liquidity as a result of the current regulation in force. According to our own computations, the wholesale average price recorded a significant drop in the first six months of the year. Regarding the legislation specific to the Romanian gas and energy sector, Romgaz activities continue to be influenced mainly by the Government emergency ordinance number 27, effective starting first of April 2022, subsequently amended and supplemented. We remind below the main legal provision applicable to the gas and energy producers.
Up until March 31, 2024, regulated gas selling price stood at around RON 150 MWh for the gas sold to households and suppliers of households, and to heat producer and their suppliers for the production of thermal energy for those households. Starting April 1, 2024, and until the end of 2024, the new regulated price is RON 120 per MWh, according to GEO number 32, issued at the end of March 2024. Gas sold at regulated prices is exempt from the windfall profit tax until the end of March 2025. Until end 2024, gas royalties are computed based on these regulated prices instead of CEGH reference prices.
Energy producers which started operations before September 1, 2022, are charged a contribution to the Energy Transition Fund for selling prices exceeding 450 RON per MWh until March 31, 2024, and for energy sold over RON 400 per MWh between April 1, 2024, and until March 31st, 2025. Also, the GEO number 91, October 2023, increases gas royalties with approximately 1.5 percentage points in certain gas perimeters and the gas storage royalties with 0.5 percentage points. Law number 228, issued in July 2024 to approve this, this GEO, finally brought more clarifications regarding the application of these royalty rates.
In addition, for comparison reasons, we remind that the Solidarity Contribution introduced by GEO 186 in 2022 was due only for the fiscal year 2022/2023. Regarding the operational and financial performance reported by the Romgaz Group in the first half of 2024, we would like to highlight the following results. Natural gas production amounted to 2.49 BCM, 4.3% higher compared to last year and exceeding the budgeted level by 1.3%. This good performance is due to production of new wells following exploration programs in our commercial discoveries, continuing rehabilitation projects of main mature gas fields, resume production at some inactive wells by performing interventional and recompletion operation.
Also, the optimization of wells operation by using other modern techniques and the completion of investment for the development of production infrastructure and connection of the new wells to this infrastructure. As regards to the investment made in our gas production facilities, we can point out that we completed drilling of one production well. Four other wells are in different stages, and we finalized four surface facilities and have performed recompletion, reactivation, and capitalizable repairs for 100 wells. Regarding our gas portfolio, we announced that DeGolyer and MacNaughton has completed their external independent audit on our onshore reserves and contingent resources.
Based on the data available through 31st of December 2023, the audit report revealed that total gas reserves amount to 65.09 BCM, and total gas resources of 74.69 BCM, significantly higher by 34% compared to the last audit completed as of the end of 2021. We continue to hold a significant position on the Romanian gas market. According to our assessment, in the first half of 2024, our market share reached 45% of total gas delivered in Romania and over 54% of the consumption covered from domestically produced gas. With respect to gas sale to third parties, volume adjusted by 4.5% year-on-year due to higher volumes injected into underground storages and lower volumes withdrawn from storages.
Total revenues from the gas sold amounted to RON 3.25 billion, at a 24% decline year-on-year, mainly as a result of both lower regulated gas prices and overall downward price environment. Revenues from storage services were RON 277 million, adjusted by 4% year-on-year, mainly due to lower revenues from capacity reservation and injection services, while withdrawal services recorded an increase. Revenues from electricity reached RON 180 million, 10% lower year-on-year, as a result of the expected decline production of the old power plant and selling price requirements in line with the amended GEO 27. Overall, we recorded total revenues of RON 3.9 billion, 20% below the value recorded in the first half of last year.
On the expenses side, the two main taxes included under taxes and duties in the PNL statement were as follows: windfall tax decreased significantly to RON 383 million due to lower selling prices. Gas and UGS royalties were roughly flat at RON 275 million. Altogether, these taxes, including the duty to the energy transition fund, represented an expense of RON 651 million, at a decline of 30% year-on-year, with a positive effect on our profitability. Bottom line, net profit amounted to RON 1.84 billion, up by 9% and at a historically semiannual value. We re-remind that the solidarity contribution is not due anymore in 2024, and compared to RON 971 million, recorded as an income, income tax expense in the first half of 2023, which added profitability this year compared to 2023.
All profitability rates were substantial in the first six months. Net profit margin rose to a historically high semiannual value of 47.1%, while both EBITDA and EBIT margins stood at strong levels of 60.5% and 53.3% respectively. For Q2 alone, we highlight the following main results: Gas production elevated by 4.3% year-on-year. Revenues of RON 1.62 billion, lower by 18% due to the downward gas price environment, and net profit of RON 592 million, at a 17% decline year-on-year. Profitability rates, again, at robust levels. Net profit of 36.4% higher compared to last year, and a EBITDA rate of 47.4%.
On the CapEx side, Romgaz Group invested a consolidated amount of RON 1.25 billion in the first half of 2024, of which RON 928 million represents the investment of Romgaz Black Sea Limited. Regarding the Neptun Deep project, this is currently in the execution phase and is progressing in line with the work programs and the execution schedule. The main investment activities carried out are related to the detailed design of execution, procurement of equipment and installation, preparatory drilling works for wells, and obtaining the authorizations and permits. In May, the cut of first steel for the platform topsides in Indonesia was celebrated, being an important milestone for the project.
As for the next period, we mentioned that in Q3 2024, we plan to cut the first steel for the platform jacket in Italy, and the strategic focus is on permitting activities and starting the construction and preparing to spud the first well in 2025. As a result, Romgaz and its partner are on track to safely deliver the first gas from Neptun Deep in 2027, and the project remains within the up to EUR 4 billion guidance for total investment. Another strategic objective is evidently the Iernut Power Plant, for which we are now performing the remaining final works. The total progress of the investment of the Iernut project at the end of July 2024, consisting of the execution of the initial work contract, plus the execution of the new works contract, is approximately 91%.
The total progress of the investment project related to the new EPC contract, so this is the part, the new contract that was signed that has started in first of August, is at 54.8% of the end of July 2024. In order to comply with the execution term provided by the contract in place. This is December 2024, the contractor needs to run an exceptional mobilization and efficient implementation of a plan to accelerate the work progress.
In addition, it is important to mention that taking into account that most of the equipment was installed during the initial works contract, meaning 4 years ago, and did not work since then, complex tests will have to be performed in order to ensure the putting into operation of the plant will be done in the best conditions for the equipment without any kind of risks. These test and samples for putting the plant into operation, we're talking here about pre-commissioning and commissioning, have to be performed in a period between 3 and 6 months, depending on the performance of the system accepted by the manufacturer, obtained after the flushing operation with demi water, chemical, or with oil. This is generically called the cleaning.
At the same time, we would like to mention that although the equipment has been subject to maintenance and upkeep programs provided by the manufacturers, the time required to check and clean the various system requires the maximum technical demand and a longer time as well, as the continuous technical assistance is given by the supervisor and by the manufacturers of the main equipment, like General Electric for the turbines. We are in constant communication with the contractor and the supervisor to identify the best possible solution to complete the construction of the plant in the shortest timeframe possible at the highest degree of quality and safety, both for the people and the plant. One other important topic I would like to highlight is Romgaz's commitment to decarbonization in line with the EU and national climate targets.
The company concluded a cost-sharing agreement with EBRD with the aim of contracting specialized consultancy and getting support in elaborating the Romgaz decarbonization strategy. The process consists of the following three phases: Phase one, develops the vision and strategy that will allow Romgaz to align to the national and international commitments regarding climate change. Phase two, focuses on developing an assessment of the environmental, social, and governance, ESG, practices of Romgaz, identifying gaps against the CSRD and providing insights on how to close them. In phase three, the results of the different analysis and the necessary modeling shall result in a combined roadmap containing the detailed and realistic action plan that will allow Romgaz to achieve the vision and strategy defined in phase one. Work is currently in progress, while we expect to finalize the decarbonization strategy in the last quarter of 2024.
I would also like to mention the dividends distributed this year. On April 25th, the shareholder meetings decide upon a total gross dividend per share of RON 0.1425 . This results in a total payout ratio of 21% for the last year, which will allow Romgaz to partially finance its ambitious investment and development plans. Dividends were paid in July, as approved by the shareholders. On the 13th of May 2024, we completed the increase of Romgaz share capital, issuing 9 free shares for each share owned by shareholders on May 29, 2024, that being the registration date. In the end of the presentation, I would like to remind investors that in May this year, Fitch Ratings Limited assigned Romgaz the investment grade rating BBB-, with a stable outlook representing the country's inaugural credit rating - the company's inaugural credit rating.
These are in line with Romania's credit rating. The ratings will allow us to more effectively and efficiently access the credit markets as we continue to execute our high-growth strategy. With this, I would like to close our presentation, and thank you for your attention.
Thank you very much. Ladies and gentlemen, the line is now open to take the questions. We have already received the written questions, and I would like to remind you of the option to raise your hand and turn on your microphone. So the first written question is from Mr. Marius Călin: What is the execution status of the new power plant, Iernut?
Yes, I think we touched upon that in the introductory statements. On the new contract that was signed last year, the status at the end of July is 54.8%, and as a total turnkey project, the status is at 91%.
The second question from Mr. Marius Călin: Is the execution-
Yeah
... to be audited by an independent auditor?
Yes. When we announced, when we stopped the works in October 2021, we announced to the stock market that it was below 90%. So as a turnkey project, Two International has stated that it's at 80% as a turnkey project and 65%-70% as an execution of the project. We have Hill International as being our supervisor, and they are supervising all the works and everything that Duro Felguera is sending to Romgaz. So to answer the question, yes, there is an expert on site right now, which has never happened before in the Iernut project.
The next question comes from Daniela Mândru. Please provide an explanation for the royalty expense decline in Q2, 2024 versus Q1, 2024, while the gas volumes sold on the free market increased significantly.
... When Government Emergency Ordinance number 91 from 2023 was enforced, we paid the gas royalty at the higher rates introduced. In 2024, law number 228, approving ordinance 91, brought clarity on the application of the new rates. The law states that, if concession agreements include specific royalty rates, then the royalties are paid at those agreed rates. All our concession agreements include the rates in force before ordinance 91 was issued. Thus, we recalculated the royalties for Q4 2023 and Q1 2024 at the lower rates. This led to lower royalties, sorry, in Q2 2024.
Thank you. The next question comes from Mr. Marius Călin: Related to the tender for photovoltaic plants organized in the first half of this year, did you contract projects?
No, we have not. We have only one project that is currently on in the phase of implementation, that we are doing by ourselves, and we are waiting for the Modernization Fund, so we can access European funding for it.
The next question from Laura Simion: Could you provide volumes of regulated gas sold in Q2 2024, and volumes sold through GRP in Q2 2024?
Right now, for the GRP is quite low. On the first semester of 2024, we have just a 2.17%, and on the 27 ordinance is at 65.35% in the first semester of 2024.
Another question from Laura Simion: Is it possible that Iernut new plant start of operations will be delayed for Q2, 2025?
Right now, we are working on an acceleration plan with the contractor. Our target is still to have Iernut in operation by the end of this year. As I said in my presentation, with a proper mobilization of the contractor, this is achievable at the moment. We have to take into account the high complexity of this project and the fact that it was a recuperated project. So what we have stated, that some of the machinery, this includes the turbines, having been there for four years, when we will have the commissioning part and the BOP of the plant, all these tests need to be performed in a timely fashion and manner.
These tests will—at that point, we will know exactly if, if, we will be able to have it proper into function, at capacity, until the end of the year. We are working through this. We are working both with the contractor and with the supervisor to achieve this goal. It was not an easy project to recuperate.
Another question from Mr. Marius Călin: Do you have a sales strategy with a higher added value for the gas to be produced from Neptun Deep rather than just sales?
Right now, our strategy is to focus on the Neptun Deep project, to have the spud started in 2025, and have the first well drilled. We are taking and we are looking at other possibilities, of course, of giving more value added to the natural, to the natural gas, but this will require other investments. So that's why in the strategy, we will probably update it and inform the market when the time is right.
The next question from Laura Simion: According to the clarifications regarding royalties, you paid royalties in excess for October 2023, March 2024. Did you compensate with royalties due in Q2 2024?
That is correct. Q2 was influenced by the recalculation of the royalties following the clarifications brought by the law approving the ordinance, introducing the new rates.
The next question from Mr. Marius Călin: What does your decarbonization strategy refer to, actually?
So it actually starts from our actual carbon footprint, the analysis of the impact that it has, the market, and elaborating a concrete action plan to be in line with the decarbonization target at the national levels and decarbonization level in the EU, which is basically net zero by 2050.
A question from Ms. Daniela Mândru: What is the value of royalties adjustments in Q2, 2024?
The royalties adjustment was of approximately RON 50 million.
The next question from Laura Simion: The question regarding volumes referred to the second quarter only, from 15.3 TW sold at regulated price in the first half of 2024, how much was in Q2 2024? We will revert with an answer for your question. Continue with the raised hand by Ms. Ioana Andrei. Please activate your microphone and address the question.
... I have some follow-up questions, as some of my questions were already answered. First, again, regarding the Iernut Power Plant. If completion is done by the end of the year on time, do you have an estimated estimate regarding the time required for the tests that you mentioned?
Yeah, it is very hard to estimate it right now, because we estimated between 3 and tops 6 months period. The first fire will happen this autumn, so theoretically, we can attain this target. But the problem is that these tests will show everything that needs to be shown regarding how the plant has been secured and how all the machinery in the plant will react. Because this is why my team and Duro Felguera and everyone, we have respected exactly the manufacturer's, let's say, directions. We have General Electric in the site as well, helping our team with all their machinery.
But until we will not have a first fire and start raising the pressure, we will not be able to know exactly. I mean, this cannot be a pharmacy, especially right now. After everything, so the construction is finalized, electrical and mechanical will be finalized late in the autumn. The test will tell us exactly if the plant and when the plant will be exactly ready.
Okay, thank you. But, could you at least tell us what is the estimated annual production for the new facility?
430 MWh.
Yes. Yes, but, what production do you expect? Annual production.
It depends where, when we're gonna start it, and it also depends on the commercial policy that is actually being done right now. Because, of course, this power plant will be on the balancing market as well. So, my team from Iernut will give you all the answers in writing.
Okay, thank you. And I have a second question regarding the volumes on the regulated market. What is your current expectation for the full year of... Regarding these volumes?
One second. On the full year, it should be at the same level, somewhere at 65%-70% to 70%.
Okay. Thank you. That's all from my side.
Thank you. So related to the question from Laura Simion, regarding the volumes sold in Q2 2024 at regulated price, the amount is 3.68 million MWh, sales at regulated price for Q2 2024. We continue with, Oleg-
Sorry, sorry, one-
Sorry.
One second. For Ioana, in 2024, we are estimating that 56% to be sold at regulated prices, just to confirm. For the entire year.
We continue with Mr. Oleg Galbur, who has a raised hand. If you please activate your microphone, you may address your question.
Yes. Hello, I can... I hope you can hear me well, yeah?
Yes, please.
Yes. I have one question regarding the windfall tax. Could you help understand what was the reason for the increase from the first quarter to the second quarter? Because I understand that Romgaz sold higher volumes on the free market, but still, if I apply the average realized price to these volumes, I still don't get to your number. So that would imply that the average price used for the windfall tax calculation was significantly higher. Do you confirm that, or if not, if that was not the reason, maybe explain what happened. Thank you.
In Q2, was enforced the new gas year, for which quantities are to be sold under ordinance 27, were enforced. So, quantities sold under ordinance 27 in Q2 were lower than those in Q1 2024, which means we have to pay windfall tax at a higher quantity. Because quantities sold under government ordinance 27 are not subject to this tax.
Yes, I understood that, and that was very clear. However, my calculation shows that Romgaz sold some 7.5, 7.6 TW on the free market. So these volumes were subject to the windfall tax payment. And if I divide- if I take the cost, the, the expense with windfall tax, RON 305 million in the second quarter, and I divide by this volume, I get to a significantly higher implied gas price used for the calculation of windfall tax. And I try to understand how is... What was the-- Okay, maybe you can tell us what was the average price then used for the windfall tax calculation?
... we will get back to you on this.
Thank you.
If there are any other questions?
There is no more question, I see.
If there are no further questions, we will conclude. Oh, sorry, Miss Daniela Mândru, we just noticed your raised hand. Please address your question.
Hi, everybody. Thank you for the presentation. Now, regarding the royalties, can you provide the split by the, I don't know, in the second quarter or in the first half of the year? The split of the gas royalties by gas royalties paid for the volume sold on the free market. I want to compute what is the royalty tax, so in percentage point, in order for me to have it for further computations. That's why. The split, the gas royalty is split by gas royalties paid for the volume sold at regulated prices and for the volume sold at on the free market. I don't know what data you have for now. Maybe for the first half or for the second quarter, I don't know.
Maybe for the second quarter is not quite indicated to provide because it, it is adjusted.
We don't have that information at the moment, but we will answer to you by our investor relations team.
But do you have, on this regard, can you provide, on average, what tax should I apply for the gas royalties on capped prices and on the free prices? What will be the percentage? Usually, historically speaking, it stayed around 7%, 7 point something, sometimes below 7. Going forward, should keep it at this level? Should I keep it at this level, 7.2, let's say?
An average royalty?
Yeah, yeah, yeah.
is around 7%.
Around 7%. Okay, thank you.
You're welcome.
If you have any other questions, please, please, feel free to address them. We have a follow-up on the question related to the volume sold for the second quarter of 2024 at regulated price. The volume is 3.68 million MWh. Sales at regulated price for the second quarter of 2024. Ms. Daniela Mândru, please address your question.
Yes, thank you for taking my question. Now, regarding the Iernut power plant. So, from my understanding, so for now, theoretically, you do not contract any volumes, so for now. So you will go in 2025, you will have an operational power plant and no, no volumes contracted. You will have to sell on spot. What is the strategy here?
So indeed, we don't have any volumes contracted until we will start-
Yeah
... So test of the plant, which will probably happen this autumn. After that, regarding and when we'll know exactly, we'll go on the market and we'll of course commercialize the electricity based on our commercial policy.
But in your feasibility study, when you started to construct this power plant?
Yes
... what's the volume assumed to be sold? What is the utilization rate of this plant for the project to be feasible? So we have to have a net present value higher than zero.
Yeah. Of course, we have the data, and we'll send the ones in the feasibility study. In the feasibility study, part of it is bilateral contracts, and of course, band energy. Part of it is mostly on the balancing market as well, and of course, on the spot market. So there is, of course, percentage for every aspect, but the market has changed until then because the feasibility study has been done quite a long time ago. And this, of course, will depend also on the spot market, on the balancing market, and of course, the appetite that the, let's say, the buyers will have for long-term bandwidth contracts.
Yeah. But for example, in my model, I assumed an 80% utilization rate. It is reasonable?
Yeah, why not?
Yeah, okay. Thank you, so,
But why should, why shouldn't it be?
But I don't know, just asking because, yes, we don't have any visibility on this utilization rate.
... I know, but the issue is regarding the test, because I told you the test could take from 3-6 months. This is very important, because when you do the test, of course, you'll just be on the spot market and you will not be reimbursed for the energy at, let's say, market prices. When we will start the first fire, and we'll see how this power plant fares to the rising pressures, and also with how we will put it into production, if it's going to be in two steps, as we are thinking right now, with 250 MW first and the other 215 MW a bit afterwards, then of course, based on this, we'll go to the market.
Because we don't want to go to the market and have contracted quantities when we do not know the exact timing of it.
Okay. Now, regarding the... Thank you a lot. Regarding these royalties computation. So from my end, I want to be sure that I understood well. So theoretically, you have this rate in the concession agreement, and as in the case of OMV Petrom, you will not pay increased royalties because they are already in the written down in the concession agreement. It is right? So you will go back to what you have been used with OMV with Romgaz paying of around seven percent taxes as royalties, and not increase to what would have been eight, close to 9%.
Correct.
Correct? Correct.
Yes.
Okay. And the adjustment in the second quarter, it's the full adjustment. So going farther, you will not book other adjustments. You adjusted everything, so all you have paid in excess, it's already written down. It's correct?
Yes.
Yeah? Okay. Okay. Thank you. Thank you a lot. This is all.
Thank you. We have another raised hand by Mr. Oleg Galbur. Please activate your microphone, and you may address your question.
Yes, hello again, and thank you for taking my follow-up question. Still about royalties. I'm trying to reconcile the two figures you have provided, which is the RON 50 million adjustment of royalty expenses in the second quarter, with the 7% average royalty rate that you expect to pay going forward. For that reason, could you please, first of all, tell us what was the volume of gas paid as royalties in the second quarter of this year? That would be the first part of the question. And second of all, still reconfirm that going forward, you expect to pay 7% average royalty tax calculated on the revenues generated from gas sales. Because when I look back, first of all, I see a higher rate.
For example, last year, in the second and third quarter, the average rate was above 7.5%, so 7 would be even lower, although you pay a higher rate on at least some of the fields. And also when adjusting the expenses for the second quarter, the royalty expenses with this RON 50 million , I get to an average royalty rate of 8.3. So just to avoid any confusion going forward, maybe you can say a few more words about how this was adjusted and what was the quantity. Thank you.
The royalty rate depends on the production of each field we operate. So this rate may depend, depends on how each field operates during the period. If the production of field grows more than the production on some other fields... I don't know how to say this.
No, no, I understand what you mean.
Can you just-
I understand that you, what you mean, that every field has its specific production profile, and the royalty is based on this profile. But I would not assume any big changes in production profile of your portfolio from quarters to quarters, right? So it should not come from here.
Yes, that's right.
But you confirm that the average royalty rate going forward is around 7%?
7.5%-8%, something in this area.
All right. And the quantity of gas, which was subject to royalty in the second quarter, if you can give it now or later, that would be also very helpful. Previously, you were disclosing this number in the reports, but now I cannot find it in the report.
The quantity is the level of our production. So, for each molecule of gas that we produce, we pay a royalty.
No, no, no. What I meant is that, last year, in the second quarter, there was a table in your, quarterly report providing some operational details, and there was a volume of, gas paid in royalties in million cubic meters. This is exactly what I'm asking for. But as I said, you, you-
Yeah, we will provide this information.
Yes. Yeah, okay. Understood. Thank you very much.
If there are any other questions? If there are no further questions, we will conclude this conference call. Thank you for your questions. If you need further information, please contact our investor relations team. The conference is now concluded. On behalf of Romgaz team, thank you for attending today's conference call.