Q1 financial results of the O & G industry listed in BSE
- Written by Laurentiu Rosoiu
The low price of oil has continued to influence the Bucharest Stock Exchange (BSE), where the large companies in the oil and gas industry, which significantly influence the indices, have had a first quarter weaker than last year in terms of financial results. The companies which registered growing figures could not offset the negative impact on the sector given by the results of large players. Beyond the figures, however, the reports show that the industry is undergoing restructuring, which, due to the possible confirmation in terms of oil price stabilization (or even its bouncing back) can lead to a positive revision of the outlook for this year.
After almost two years of severe distress for the companies in oil and gas industry conducting consistent operations in the area of production - the ones whose profits are directly dependent on the oil price - signs of better times are looming. That’s because, on the one hand, the upward trend of oil prices that began by mid-February can be a breath of oxygen for upstream operations; and on the other hand, because the end of oil’s downward trend overlaps the end of a period of reconfiguration and of industry’s adaptation to the new paradigm characterized by an oil price by more than 50% below the level registered 20 months ago.
END OF THE TREND
If in early 2016 the oil price recorded new lows of the last 12 years, the end of Q1 leaves room for slightly better prospects for the output operations. The price stabilization above USD 30 per barrel in January and February, followed by its increase to around USD 40 per barrel by the end of March, these are developments to take the oil and gas industry out of the anxiety that ruled it for more than one year and a half.
The oil price bounce back may be a more encouraging signal for oil companies as it takes place after the failure of the Doha meeting, which had planned to impose the output freezing to the producing countries. In other words, the fact that the oil price has bounced back, even if the pressure on production and sale was not in any way reduced by an agreement between the OPEC members, shows that the market has reached a point of balance by itself; this could provide the players in the industry a landmark around which they might build the development and restructuring strategies.
Obviously, from technical perspective, the rebound in oil prices can be considered a markets nervous move in response to its over-extensive evolution in the negative area; and this may question the sustainability and duration of the rebound, even if the ascending intermediate trend continued with almost the same push in the first months of the second quarter (reaching the threshold of USD 50 per barrel by mid-May). What is certain is that, unlike the end of 2015 or even the first month of 2016, the players in the oil and gas industry - whether companies, energy traders and/or specific products traders, brokers and investors or companies in adjacent sectors... the first quarter brings the first much needed and expected landmark: a minimum of USD 30 per barrel, confirmed by the market (see the graph ‘The evolution of oil price’).
RESULTS AND EXPECTATIONS
In this context the results of OMV Petrom, the largest player on the Romanian market and the largest company on the Bucharest Stock Exchange, can be analyzed and interpreted, as it reported a net profit of RON 288 million in Q1. An outcome lower by 17% against Q1 2015 (when it reported RON 345 million), but higher than the budgeted level (RON 199 million)... and which brings the company back to positive territory, following losses of RON 1.68 billion in the last quarter of the past year (see the table ‘OMV Petrom results’).
Thus, in the first three months of 2016, the group’s financial results were affected by low oil prices, but the company continued to implement operational costs and capital expenditures cuts and investments were reduced by approximately 28% against Q1 2015. The Upstream activity was affected (see table ‘OMV Petrom upstream production figures’), but the company managed to achieve profit due to the good results in the Downstream, which offset the losses in the Upstream caused by the low price of oil and by the decrease of oil production.
In this operational sector (Downstream - refining and retail), the EBIT CCA operating profit, excluding special items, increased to RON 302 million in Q1 2016 (as compared to RON 177 million in Q1 2015), due to the very good results of Downstream Oil (which represented 64% of consolidated sales, while Downstream Gas accounted for 33%). In the first quarter of 2016 the volume of retail sales at group level (which represented 49% of total sales of refined products) increased by 3% against the level in the same period last year, driven by higher demand caused mainly by the lower prices of final products. The sales of refined products, except for retail sales, have increased by 4%, mirroring thus the higher sales on the domestic market. The refinery utilization rate increased to 94% as compared to 88% in Q1 2015.
In the power generation segment the company had also performed better than in the first three months of last year, registering an EBIT, after excluding special items, of RON 47 million, significantly above the RON 3 million in Q1 2015. Yet, the result in this segment was boosted by the including of provisions amounting to about RON 15 million, unlike the first quarter of last year when their building up had adversely affected the results.
Seen in the context of oil price developments, the OMV Petrom results were well received by the brokers in Bucharest, for whom the confirmation of a support level can be an anchor for estimates and for the companies’ businesses, providing more credibility.
“Chances are good that OMV Petrom titles will soon close the negative trend began more than one year and a half ago,” said, for example, Simion Tikhon - broker at the Prime Transaction brokerage house for ‘Bursa’, on the occasion of OMV Petrom results release. “In the context of falling oil prices below USD 30 dollars in Q1 2016, the OMV Petrom results are good,” he added. His outlook was completed by Nicu Grigoraş - broker at the Intercapital Invest brokerage house in Bucharest, who said: “it is very important that OMV Petrom has managed to adjust its business model to the new market conditions, partly offsetting the turnover and profitability decline through the implemented streamline measures (measures to cut operating costs and capital expenditures).” Which means, in his view, that in the quarters ahead, if oil prices stabilize (or even increase), we could witness pleasant surprises in terms of OMV Petrom’s financial results.
LOW PRICES, HIGH PROFITS
The oil price development was beneficial for Rompetrol Rafinare, company which controls Petromidia and Vega refineries. Rompetrol (stock exchange symbol RRC) was helped to stay on profit in the first quarter of this year, confirming the sustainability of the positive result (profit of over RON 268 million) at end of 2015, concluding Q1 2016 with a net profit of RON 165.7 million (against a loss of RON 329.5 million in Q1 2015).
This occurred despite the fact that the company’s net turnover fell by 28.8% to RON 1.73 billion, due to the price decrease of petroleum products, despite the increase in quantities of the products sold; thus, exports recorded a 32.5% fall to about RON 989 million and revenues in Romania shrank by 22.4% to RON 747.08 million. Rompetrol Rafinare exported about 660,000 tonnes of products in Q1 2016, a similar level to the one in Q1 2015. In Q1 2016 Petromidia refinery produced 379,000 tons of gasoline, by 18% more than in Q1 2015. The volume of domestic fuel sales has increased by 9%, reaching in Q1 2016 the level of 377,000 tonnes.
Overall, in Q1 2016, the Petromidia refinery processed 1.297 million tons of raw materials, up by 3.12% against the same period last year, and the utilization degree of the refining capacity remained at 83.27%, a level close to the previous year. Vega Refinery processed a larger quantity of raw material in the first three months of 2016, reaching 66,231 tonnes, while increasing the utilization degree capacity to 80.28% (see the graph ‘Rompetrol Rafinare results’).
Let’s note that in Q1, the company became profitable (EBITDA operational result of USD 3.2 million and a net result of approximately USD 3.2 million) in the petrochemical segment too, mainly due to the growth of margins for petrochemicals and of quantities processed; for example, the total production of polymers was over 38,000 tons, up by 3.13% against the same period last year, sales were also on an upward trend.
The distribution segment too had a positive contribution to the group’s results: despite the price decrease, which led to lower turnover in this segment by about 8%, the net income was of USD 9.1 million - against a minus of USD 4.7 million in the same period of 2015 (see the graph ‘Rompetrol, the distribution segment profit’) due to the increasing amount of products sold (fuels, LPG) by about 11% in Q1 2016 as compared to same period in 2015.
The company is Romania’s largest exporter of petroleum products and the second largest national exporter, the petrochemical division of Rompetrol Rafinare is also the sole producer of polypropylene in the country.
The first quarter proved to be beneficial for Constanta Oil Terminal and for Conpet Ploiesti companies operating in transport and storage services for oil and gas, with business directly dependent on the oil industry. In close connection, given that Oil Terminal is interconnected with the Romanian refineries (which are the destination of products handled by own terminals) through the pipelines of Conpet Ploiesti, the two companies had financial results that can be considered positive - although in both cases far below the actual potential.
Oil carrier Conpet Ploiesti (stock exchange symbol COTE) reported in Q1 a net profit of RON 18.4 million, up by 4% against the first three months of 2015 and by 40% higher than the budgeted level (RON 13 million). The positive result comes due to lower operating expenses, as the company’s businesses and revenues were declining; Conpet’s turnover in the first three months was of RON 93.7 million, down by 2.4% against the same period last year, due to the decrease of the transported oil by 153,600 tons, but by 2 8% above the budgeted level. Conpet transported in the first three months a quantity of 1.8 million tonnes of oil, down by 8% as compared to Q1 2015, but by almost 9% higher than the budgeted level (see the graph ‘Conpet operations’); in parallel, operational expenditures fell by 4.3% to RON 79.713 million, while the operational profit was up by 6.2% to RON 21.096 million (see the table ‘Conpet financial results’).
A positive trend on profit was registered by Oil Terminal, the company that operates the oil terminal in Constanta, recording in Q1 a net profit of RON 7.091 million, by 8.5% higher than in the similar period of 2015 (of RON 6.532 million), based on higher turnover by RON 2.894 million against January-March 2015 to the level of RON 37.355 million. The operational revenues totalled, during that period, RON 37.091 million, while operational expenses amounted to RON 27.979 million. The volumes managed increased by 16.4% (to 203,000 tonnes) against the budgeted level.
It is to be noticed the decrease of operations with crude oil and petrochemical products and the increases (more or less significant) of operations with diesel fuel, gasoline and heavy fuel oil in particular (see the table ‘Oil Terminal operational results’). On the other hand, it is to be noticed a slight increase of the dependence on Petrotel Lukoil - company which represented more than 38% of the Oil Terminal’s turnover in the first three months of 2016, against 34.5% in the first three months of last year (see the table ‘Oil Terminal customers’).
DISAPPOINTMENTS IN THE GAS SECTOR
As the companies operating in the oil sector registered rather positive developments, as shown in the figures and information above... for the companies operating in the gas sector the financial results in Q1 2016 were not only weaker than in Q1 2015 but, as in Romgaz case – were below market expectations.
Analysts estimated for Romgaz a net profit of RON 525 million in the first quarter of 2016; but the company reported a profit of only RON 489 million, far below market expectations, and even far below the level achieved in the first quarter last year (RON 563 million). “Amid market challenges, given by the reduced demand and by the pressures to review the terms of the contract with one of its main customers, Electrocentrale Bucharest, in Q1 the EBIT fell to RON 602.2 million, down by 9.4% against the same period last year,” says the analysis report conducted by Alpha Finance brokerage house following the release of results (see the table ‘Analysis of Romgaz financial results’).
The output fell by 4%, while gas deliveries from domestic production decreased by 5% on the background of lower domestic demand by about 6%. On the other hand, the storage activity generated revenues of RON 160 million, by 4.8% more than the same period last year, despite a fall of about 19% of invoiced volumes. Also, in the power generation, the company recorded revenues of RON 69.2 million, supported by the doubling in volume (up by 93.8%) of the delivered energy, leading to a market share increase from 0.96% in Q1 2015 to 1.96% in Q1 2016.
In terms of revenues, the company remained around the level reached in Q1 2015 of RON 1.36 billion, supported by the increase in revenues from electricity generation and by revenues from storage - increases which have offset the decreasing revenues from Upstream operations. Upstream revenues fell by 4.85% against Q1 2015 to RON 1.11 billion due to lower volumes (see the table ‘Physical indicators of Romgaz’).
In contrast, the Transgaz results reveal a more positive note than the market expectations - although, just like Romgaz, they are weaker than those achieved in the first quarter of 2015; the Alpha Finance analysts estimated the Transgaz profit for Q1 2016 to RON 155 million and a turnover of RON 397 million, but the reported figures were significantly better!
“We were pleasantly surprised by the keeping of the same sales level and by the income stability from regulated operations (RON 371.3 million in Q1 2016 against RON 370.4 million in Q1 2015), given that we expected both a fall in transported volumes and in transport tariffs,” Alpha Finance analysts said, explaining the surprise of good result given by the increasing revenues from the booking of the transmission capacity. On the other hand, a positive impact on results was brought by the increasing revenues from transit operations, due to the USD appreciation (the currency in which the contracts were concluded) against the RON (the reporting currency) by 3% Q1 2015 (see the table ‘Transgaz revenues by operations’).
The company made a profit of RON 172 million - higher than expected by the Alpha Finance analysts, however by 13.5% lower than the one reported for the same period last year, due to smaller profit margins. Transgaz had a higher EBITDA of RON 257 million - against RON 280 million in Q1 2015 and EBIT of RON 206 million - against RON 232 million in the same period last year. The developments of the core business were driven by the increase of operational costs on the background of maintaining about the same levels of revenues (see the table ‘Analysis of Transgaz financial results’).
The operational revenues were maintained by incomes from the national gas transmission system operations – a sector that fuelled Transgaz with revenues of RON 17.5 million.
On the costs side, Transgaz reported increasing operational expenditures to RON 277 million - growth driven by the increased technical consumption (and by distribution losses), representing about 1.1% of the transported volume in Q1 2016 against 0.41% in the same period of 2015. Overall, the cost increase was faster than the revenues increase, so the Transgaz profit margin fell from 51.8% to 45.1%, leading the EBIT value to RON 205.5 million, by 11.6% lower than the level in Q1 2015, Alpha Finance analysts further said.
ESTIMATES AND PROSPECTS
Beyond the figures reported for the first quarter of 2016, more or less good, the prospects for the coming months are important. And if the lows of USD 30 per barrel prove to be an insuperable threshold on the downward trend, the prospects for oil and gas companies for the rest of the year seem to be somewhat more encouraging.
“In 2016 we expect the Brent crude oil price to record an average of USD 40 per barrel,” the OMV Petrom release on financial results for Q1 reads - giving reason for optimism to investors. Optimism may be offset, however, by the negative outlook on the operations in the gas sector - an area characterized on one hand by an obvious decline in consumption and, on the other hand, by an increasingly fierce competition from imported natural gas. Pressures on companies in the gas sector listed on the Stock Exchange in Bucharest may be amplified by the results of investigations announced by the National Energy Regulatory Authority (ANRE) which will test, by July 1, if the regulated companies (Transgaz and Transelectrica) meet their investment plans and performance indicators, depending on which the managements of these companies get their salaries and bonuses. An unfavourable outcome could therefore lead to a new round of tariff cuts and thus of profits.
However, these are just some of the items that may put negative pressure on the future developments of financial results and on the stock prices of companies in the oil and gas industry listed on the Bucharest Stock Exchange! There is also a positive factor - the oil price, which, if the end of the trend is clearly confirmed, can offset the potential negative impulses. A fact that can be considered very likely, based not only on analyzes of oil prices, but also on reports from previously analysed companies, which are mostly, for a long time, in the area of over-selling. This supports the idea of a bouncing back, even if short-lived.