The energy sector on the BSE, downward results in Q1

Energy sector heavyweights on the Bucharest Stock Exchange (BSE) failed to live up to the market and investors’ expectations in regard to the financial results in the first quarter; although a number of companies registered positive developments, the BSE stock index for the listed energy sector received a negative boost that is not to be neglected. However, analysts are quite optimistic about the future of the companies that really matter, which means that 2015 could be, after all, a good year as a whole for the energy sector index of the Bucharest Stock Exchange.

BVBOMV Petrom recorded a turnover by 20% lower than in the first quarter of 2014 and a fall in profit of almost 70%. Romgaz recorded a 6% lower turnover in the first quarter of 2015 against the same period last year, and a lower profit by 7%. For the same interval, Transgaz reported a decrease of about 12% in both turnover and profit. Rompetrol Rafinare, also for the first three months of 2015 against the same period last year, registered higher losses by about four times and sees its turnover fall by 27%. Rompetrol Well Services and Condmag recorded 80% - 90% decrease in profits and 30% to 90% fall in turnover recorded in Q1 2015 as compared to the same period in 2014. Meanwhile, in the electricity sector, Transelectrica surprised the market in an unpleasant way, by registering in the first three months a net profit by 7% lower than in the same period of 2014. These are just some of the figures showing that the energy sector has seriously deteriorated during the first quarter of 2015 and in particular in regard to the oil and gas companies (the most important component of the energy sector listed on the Bucharest Stock Exchange - with a share of about 75% in BET-NG), as we may notice. It should be noted, though, that the negative developments in the oil and gas sector were not necessarily a surprise; declines on this market segment were predictable, given the negative developments on the world oil market earlier this year! More important than the falls themselves is the fact that the figures were weaker even than the analysts’ expectations in more than one case.

It is true that there were also pleasant surprises; both in the oil and gas sector in general, but especially in the electricity sector (which, in turn, totals about 25% in the Romanian energy sector stock index). Nevertheless, such positive developments were not sufficient to offset the negative impulse given by the oil and gas companies to the energy sector. Hence, the BET-NG index, calculated and disseminated by the Bucharest Stock Exchange, reflecting the overall evolution of energy sector companies traded on the Romanian capital market, has decreased in only four sessions from 714 points to 700 points.

THE OIL AND GAS SECTOR, RESULTS BELOW ESTIMATES

Romgaz and Transgaz are the companies that have laid the negative imprints in the energy sector; they were among the first to publish their financial results, both reporting lower turnovers and profits, below the analysts’ estimates. In other words, although the market/analysts were not expecting extraordinary financial results, the reported figures were even weaker than the estimates!

For example, Romgaz reported in the first three months of 2015 a turnover of RON 1.36 billion, down by 6% as compared to the one achieved in the same period of 2014 (RON 1.45 billion), and a profit of RON 563 million, by 7% lower than the one registered in the first quarter 2014 (RON 608 million). Without being spectacular, the drop in profit is unexpected and rather large -11% below the average estimated by analysts, according to a report by investment firm SSIF NBG Securities, one of the very active brokers on the Bucharest Stock Exchange; the report reads that the average analysts’ estimates pointed to a profit of about RON 630 million. “Romgaz has reported a disappointing profit for the first quarter; below our estimates, which were of about RON 655 million, and below the average market estimates,” the Alpha Finance analysts say - one of the leading brokerage houses on the Romanian capital market, thus complementing the NBG analysts perspective. “The EBIT margin decreased to 48.7% from 49.3%, leading to a decrease in the operating profit to RON 665 million (against RON 763 million according to our estimate, and RON 757 million as the market average estimates),” said the Alpha Finance analysts in regard to the figures.

The relatively negative figures are conjectural and do not ruin the attractiveness Romgaz shares exert on the market players, add the Alpha Finance specialists, who, although they expect an increase in selling pressures, add that “... financial results for the first quarter can be considered a milestone on the company’s way to a strong performance over the whole year 2015, performance to be supported by making more efficient the activities in the upstream area. Therefore, we maintain our price estimate and our recommendation,” they concluded, thereby supporting the shares are to be bought (recommendation ‘buy’) and may reach, in their opinion, RON 41.5/share (target price) - which would mean a potential increase of about 16% as compared to the price by mid-May.

Transgaz gave the market the same kind of (negative!) momentum: and even if the fall in profit was not as surprising to all players (the reported profit is, for example, in line with expectations - according to NBG analysts, and below expectations - according to Alpha Finance analysts) it was received by the market as negative signal - says a report dated May 13 issued by SSIF BlueRock analysts - one of the most dynamic brokers on the Romanian capital market.

“Transgaz reported poor results in Q1 as compared to the same period last year; the profit decreased by 12% y/y, being about 26% below our estimates (which were of RON 268 million),” Alpha Finance analysts say. The Romgaz case is similar; however the negative trend in the first quarter is not a concern for investors, analysts further say, stating that the negative difference between the achieved profit and the estimated one will be recovered in subsequent quarters. Both the Alpha Finance report and the Transgaz

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report sent to the BSE say “... the profit drop is due to the fact that, as of the third year of the third regulatory period (2014 - 2015), the allocation pattern of the total income for setting up tariffs for transmission has been changed, causing a radical change in the mode of revenues distribution from natural gas transmission; this change actually resulted in fact in a decrease in revenues from transmission during the winter quarters, due to the decrease in volumes, and an increase of revenues from transmission during the summer, due to the capacity reservation growth as compared to the previous natural gas year.” For the Alpha Finance analysts, the recovery in profits in the coming quarters - which is more than likely - does not seem enough for the company to keep profitability up, since there is a high probability that transmission fares are reduced by autumn of 2015, which, according to them, will lead to a lower profit than the one achieved in 2014 by the end of the year. Despite this not so optimistic outlook, the report published on May 15 by Alpha Finance analysts includes a ‘buy’ recommendation for Transgaz shares and a target price of RON 310/share, so the growth potential of about 13% as compared to the price by mid-May.

OMV Petrom (SNP) - the largest company on the Romanian capital market, and also the company with the highest weight in the BET-NG index (see the table ‘Who dominates BET-NG index’), is part of the list of companies which, although not having surprised the market, have decisively influenced it in a negative way.

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The company reported first-quarter profits of RON 345 million, down by 70% as compared to the same period last year, and a turnover of RON 4,271 million, by 20% less than the one in Q1 2014. The results presented by the company were thus even weaker than the analysts’ expectations in terms of profits, although turnover exceeded their estimates; according to a poll run by Reuters on May 15, the surveyed analysts’ estimates indicated an average turnover for Q1 2015 of RON 4.1 billion (with a minimum of RON 3.8 billion and a maximum of RON 4.5 billion), while for profit, the average estimates was of RON 428 million (with a minimum of RON 243 million and a maximum of RON 846 million). Although there are differences between estimates (sometimes major ones as in the case of estimates on profit), the surveyed analysts unanimously agreed, however, that the OMV Petrom results will be clearly affected by the falling prices. “On the back of previous investments, Romanian hydrocarbon production advanced in Q1/15 by approximately 2% yoy, on higher contribution from well workovers and field (re)developments. Nevertheless, the upstream result was affected by the sharp drop in oil prices, which was only partly compensated by positive FX effects and slightly higher sales volumes. In exploration, together with ExxonMobil, we finalized drilling at two deepwater wells and the rig has since been moved to a new drilling location in the Neptun deep block. In Downstream Oil, refining contribution was strong, triggered by solid refining margins and improved operational performance, while in marketing, retail sales volumes advanced by 4% yoy. In response to the low crude price environment, we scaled back our 2015 group investments by approximately 30% yoy and continued to optimize our cost structure, measures which are expected to protect our free cash flow position. Nevertheless, these initiatives will impact our hydrocarbon production in the future,” the release reads, offering the market a not so optimistic view.

GOOD RESULTS IN THE ELECTRICITY SECTOR

Similar to the way Transgaz and Romgaz, in the oil and gas sector - have surprised the market with lower results than expected, Transelectrica is the company in the electricity sector which unpleasantly surprised the market; the company reported for the first three months of the year a net profit of RON 126 million, by 7% lower than the one reported for the same period of 2014. This trend was registered on the background of increasing revenues by around 11%, from RON 699 million in the first quarter of last year to RON 779 million this year. The amount of charged power increased by 4% as compared to Q1 2014, the revenue growth coming equally from both the business where the profit is allowed (given a significant boost by exports) and from the regulated activities - where profit is not allowed.

The decrease in profit is considered bad news for the market by the SSIF NBG Securities analysts, because the company is facing a number of problems in exploitation determined by costs; the more so since the probable modification of tariffs, which could take place in July 2015, may reduce gains related to exported energy, NBG Securities analysts say. “... Operational expenditures increased by 18% against the same period last year, while technological consumption increased by 11.6% due to the increased cost of energy purchase from RON 182.1/MWh to RON 185.9/MWh; EBITDA recorded a fall of about 7%, resulted mainly in the zero profit area,” they mentioned in the report released on May 15, immediately following the release of Transelectrica results.

In contrast, Nuclearelectrica (SNN) and Electrica (EL) were two of the companies that brought the BET-NG index in general (and particularly to the electricity sector) growing profits, offsetting the situation somehow. Thus, Nuclearelectrica reported in the first three months of the year a net profit of RON 35.4 million, up by 11% against the same period last year, and a turnover of RON 468 million, up by 2% against Q1 2014; NBG Securities analysts consider the results positive news for the market, as an effect of maintaining production levels and of cutting operational costs.

A serious contribution to cutting expenditures and thus a contribution to the good results achieved by Nuclearelectrica, has had the reduction of the tax on special constructions (from 1.5% to 1%) as of January 1, 2015, say both the NBG and Alpha Finance analysts. The latter also draw the attention to the fact that the amount regarding the special construction tax for 2015 has been already included in the financial results for the first quarter, which means that should help increase profits during the coming quarters; on the other hand, they warn, in Q2 the Cernavoda Unit 2 will be closed for about a month, according to the program already announced, which will negatively affect, obviously, the quarterly results.

Electrica is one of the companies with financial results pleasing the market! With an increase in first quarter profits of over 30% to RON 126.8 million (RON 95.9 million in Q1 2014), on the background of a turnover increase of just 6%, the company was noticeable not due to improvements in operational activity (the main business, namely the transmission and distribution of electricity registered an increase of only 8%) or to the large cost cuts (operational expenditures increased by 5.6%), but due to the major impact of the financial results, which dramatically improved from minus RON 1.1 million in Q1 2014 to a plus of RON 7.1 million in the first quarter this year.

Thus, the positive development of profit is decisively determined by the fact that Electrica is based on the money coming from the IPO by which it was listed – and it has not yet decided how to use the money; therefore, the high profit reported does not seem an element to support Electrica shares’ upward trend, especially since another expected event, with the potential to support a possible increase, did not occur. We are talking about the MSCI decision (one of the largest financial institutions globally, which creates and disseminates stock indices) to review the composition of the MSCI Frontier Market indexes, without including the Romanian company Electrica (EL). “We believe that this information has a negative impact on Electrica,” NBG analysts say regarding the EL exclusion from the MSCI indices; “we consider that Electrica has a relatively positive development in fundamental terms, but not good enough to lead to substantial appreciation in the price,” they conclude.

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HUGE LOSSES, SMALL PROFITS

Transgaz and Romgaz may be called (by some market players) as just some smaller or larger ‘surprises’, more or less ‘unpleasant’, Rompetrol Rafinare is the company in the oil sector and gas that does not surprise anymore - but its results are the more unpleasant for the market! The company, owned by KazMunayGas, reported for the first quarter of 2015 a loss of RON 329 million, about four times higher than that the one reported for the first quarter of 2014 (RON 78.6 million) and a falling turnover by 27%, from RON 3,343.3 million in Q1 2014 to RON 2,430.6 million by the end of the first quarter of 2015. The company’s turnover was mainly driven by falling oil derivates prices that could not be offset by the increasing quantities sold (+1% on the domestic market, +4% on the foreign market in Q1 2015 against Q1 2014).

According to the official press release the company’s financial results were impacted by the faster decrease of selling prices than the commodity prices, particularly in January and February, as well as by the currency fluctuations. The stocks of finished products were produced at higher costs, but sold at lower prices in January and February 2015, due to lower quotations for petrochemical products. Rompetrol Rafinare exports increased by 5% in volume in Q1 2015, but their value (USD 365 million in Q1 2015) was significantly lower, on the background of falling market, of price quotations for crude oil and of falling prices for finished products.

Member of the same group KazMunayGas, Rompetrol Well Services (PTR) also registered a negative trend! According to the report published on May 14, the operational activity of the company was deeply affected by the economic climate in the oil and gas industry; the company felt the full effects of the price falls, of the postponement of projects for exploration and production (conventional and/or unconventional), of the reduced investments and of lower demand for well services. The company reported a profit of only RON 0.25 million in the first quarter, 92% less than in Q1 2014 when it regisered a profit of RON 3.26 million and a significant decrease (although not as ample!) in turnover: from RON 21.3 million in Q1 2014 to RON 15.2 million in Q1 2015. The even worse part, than the reported poor results, is that the negative PTR developments seem to not stop here. At least that is clear from the company release, which makes an X-ray profile of the market. “The market for well services in Romania was negatively impacted in 2014 by the delayed construction licenses valid for domestic customers, and by the significant cuts in operational and investment plans of our customers, driven by the sharp decline in oil prices, meaning lower demand for well services, propagated also in 2015, a trend likely to perpetuate on the medium term.” Operating on the same market of oil services, Dafora Medias registered a decline in turnover comparable to the decrease in turnover of PTR. Thus, in the first quarter of 2014, Dafora Medias (DAFR) achieved a turnover of RON 52.8 million, in Q1 2015 the turnover fell by 80% to RON 7.6 million. In parallel, the company’s losses almost doubled, increasing from minus RON 3.4 million in Q1 2014 to a deficit of RON 6.3 million in Q1 2015.

An even worse development was recorded by the Constanta based company Petrolexportimport (PEI) - a company which, since 2012, is in a spectacular and difficult to explain decline, given that until 1997 the company had the monopoly of petroleum products imports and exports in the refining system. By the end of 2012 it reported a turnover of RON 361.5 million and a profit of RON 1.1 million, in the first quarter of 2015, PEI reached a turnover of RON 0.19 million and a loss of RON 1.2 million, about four times higher than the one recorded in the first quarter of 2014, when it reported a negative result of RON 0.4 million.

Petrolexportimport is owned 76% by Laird Resources Ltd, a company registered in the Virgin Islands and controlled by Ovidiu Popescu, former PEI director, who died in 2011; Ovidiu Popescu was a businessman with a fortune estimated to EUR 15 million, owner of Stirbey Palace on Calea Victoriei, also shareholder and manager of several successful companies such as Laird Resources Romania, Tomis Oil Maritime and Black Sea Coast Trading Romania.

With such figures, DAFR and PEI stand on the top places in the BET-NG index ranking of the poorest developments in terms of the dynamics of financial results for the first quarter of 2015; at the other extreme, as a good example, along with Electrica (the electricity sector representative), stands the crude oil transporter Conpet Ploiesti (COTE) (as representative of the oil and gas sector).

COTE recorded a net profit of RON 17.7 million in the first quarter of this year, up by about 20% over the same period last year; at the same time, the company’s turnover increased by 4.67% to over RON 96 million. The company has exceeded not only the results in the previous year, but also the targets included in its own income and expenses budget (for the first quarter it had provided a turnover of RON 91.8 million and a profit of RON 10.4 million). The company owes this positive dynamics of financial results to the increase of oil imports; significant contributions have also had the streamline of operations and the tariffs increase!

Thus, in the first quarter of 2015, against the same period of 2014, revenues from transmission services registered a growth of about RON 4 million (4.5%) driven by the increasing transported volumes (especially by the system of import by 411,000 tonnes – i.e. RON 5.6 million) and by the crude oil transportation tariff increase with effect from February 3, 2015. Simultanously, the use of the transmission system increased from 25.9% in the first quarter of 2014 to 38.4% in Q1 2015. In the same category of pleasant surprises, are also the results registered by Oil Terminal Constanta (OIL), provider of import, export and transit of oil and chemicals, which seemed to have benefited from the oil and derivates prices decline. OIL doubled the value of the transited crude oil in the first quarter of 2015 as compared to Q1 2014 (from RON 7.8 million to RON 14 million) and increased by about 60% the diesel transit value (from RON 6.4 million to RON 10.5 million). As a result, the company achieved in the first quarter of 2015 a net profit of RON 6.5 million, 13 times (1,200%) higher than the one achieved in the first quarter of 2014 (which was about RON 0.5 million).

AN AILING INDEX

In this context lacking spectacular positive developments, pressed even by lower or higher surprises, unpleasant or ‘less’ pleasant... the BET-NG index was still reluctant to break the barrier of 700 points which it approached about five times in the last five years (see the chart ‘BET-NG evolution’). In terms of technical analysis, however, the moment of exceeding this threshold may not be far away! At least that’s the way one could interpret the fact that the threshold of 700 points has been tested and temporarily exceeded three to four times in the last about 18 months. Such a perspective can be sustained primarily by the good results over the whole year, which could come from companies such as SNG, TGN and SNN (as underscored by the expectations of some above mentioned analysts).

An even stronger positive impetus can come from OMV Petrom however, the company with the largest pulling force in the entire sector, which is likely very close to completing the process of adapting to the new realities of the international oil market. And the fact that companies in the oil and gas industry on the Romanian capital market (included in the BET-NG index composition) have already internalized - including/taking in financial results from late last year and early this year, a great deal of the negative effects coming from the fall in oil prices from the end of 2014 and from the beginning of 2015, and have adapted their plans to the new reality... this may mean that what the worst is over. If over such an optimistic outlook we anticipate the slightest resumption of oil prices increase, the recovery scenario and the breaking of insurmountable barriers by the Romanian energy sector does not seem at all fiction.

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