YEAR-END REVIEW: MINUSES AND PLUSES FOR THE COMPANIES LISTED ON THE BVB

We have recently ended 2016, a rather weak year for the companies in the oil and gas industry on the Bucharest Stock Exchange (BVB), if we look at the developments in the financial statements. The relatively negative image of the industry, shaped by the declining figures in the balance sheet, must be filled up with the positive events; elements that set the prerequisites for growth for the coming period, with a possible start time in 2017; at least if we weigh the major trends and changes with positive impact on the world oil market in the last part of 2016.

The latest reports in 2016 of the oil and gas companies listed on the Bucharest Stock Exchange, i.e. the ones submitted for the first nine months of the year, show that the industry has evolved weaker from the financial point of view against the previous year; this is visible in figures, if we refer to those registered at the industry level and if we look at those of each company. The developments in figures are primarily a result of a context characterized by yet a relatively low oil price. Nevertheless, unlike the first nine months of 2015, when the oil price fell from more than USD 50 per barrel to below USD 30, in the same period of 2016 the trend was reversed: the oil price increased from USD 30 per barrel to above USD 50 per barrel; a development that could have supported the improvement in figures. On the other hand, beyond the negative image from the balance sheets and despite the risks of higher political tensions worldwide, the prospects of the local oil and gas industry seem to be rather positive for 2017; and this comes because the existence of political or operational risks are offset on one hand by the prospect of continuing the positive trend in oil prices, and on the other hand by a series of positive events for some of the companies in the field.

DECREASING RESULTS

Thus, the amount of sales of oil and gas companies listed on the Bucharest Stock Exchange (OMV Petrom, Transgaz, Romgaz, Rompetrol Refining, Oil Terminal, Conpet, Rompetrol Well Services and Petrolexportimport) was, in the first nine months of 2016, of RON 26 billion; by RON 4.5 billion - or 18%, lower than the one achieved in the same period of 2015, when the same companies totaled sales of over RON 30 billion.

Meanwhile, the profits reported by the mentioned companies in the past nine months of 2016 totaled RON 2.1 billion; by RON 370 million (or 18%) less than in the same period of 2015 (see the graph ‘Industry’s financial results development’).
The industry’s developments are seen better if analyzed at company level - none of the eight specialized companies listed on the BVB has reported turnover and profits against the negative trend (see the graph ‘Financial results at company level’); so, even if some positive developments were noticed, they were only partial, for one of the two indicators at the most.

Industry financial results development

Financial results at company level

However, the oil and gas field listed on the BVB was foremost influenced by the adverse developments of the ‘heavyweights’, such as OMV Petrom and Romgaz – companies with negative developments in terms of turnover and profits; the negative image of the sector was filled up by the regress recorded by some small companies (such as Rompetrol Well Services or Petrolexportimport) and, on the other side, by the figures reported by other issuers (such as Rompetrol Rafinare, Transgaz, Oil Terminal or Conpet) which registered downfalls (more or less aggressive) either in terms of turnover, or in terms of profits.
In this picture of the industry stands out, obviously, OMV Petrom – the company achieving about half of the sector’s profits and turnover; during the first nine months of 2016, OMV Petrom had a turnover of RON 11.6 billion, by 14.5% lower than the one achieved in the same period of 2015; in parallel, the profit decreased by 11.4%, from RON 991 million to RON 878 million.

The oil and natural gas low prices and the decrease in refining margins are among the main causes of these negative developments, according to the company’s report. The company managed to partially offset these negative developments by improving the cost management and by concentrating its efforts and investments to profitable projects in the upstream segment. One consequence is, however, the fall in investments from RON 2.99 billion during January - September 2015 to RON 1.8 billion in the similar interval in 2016; the upstream investments totalled RON 1.5 billion (compared to about RON 2.8 billion in January - September 2015) and downstream investments amounted to RON 328 million (from RON 203 million in nine months of 2015).

For 2016, the OMV Petrom investments value is estimated at around EUR 0.6 billion, by 30% lower than in 2015, about 85% of this amount was allotted to the upstream; but the investments in exploration are expected to decline for the whole 2016 by about 70% as compared to 2015, mainly as a result of the completion of drilling activities in the Neptun block.

The same negative trend in terms of financial results was registered by Romgaz - the largest producer of natural gas in Romania. Thus, at the end of 2016 the company reported a profit of RON 713 million for nine months; down by about 27% against the profit (RON 975.3 million) registered in the same period of 2015. In parallel, the turnover decreased by 18%, from RON 2.93 billion for January - September 2015 to RON 2.4 billion during the same period in 2016.

Yet, the figures have a margin of error. The turnover and the profits, as well as the other indicators calculated on this basis, were established based on the estimated amount of gas delivered during May - September, on these months the balance sheet for gas was not finalized, as a result of lack of clear regulations on gas supply to household consumers and assimilated consumers.
Even so, it is obvious that the performances of the company in the first nine months of 2016 were affected by the falling consumer demand for natural gas on the Romanian market; it fell by about 6% - according to the company’s estimates. Gas sales were significantly affected by weather conditions, by the drastic decrease in gas demand in key sectors, by the inaccurate regulatory framework to build up the minimum gas stocks and, not least, by the competition with the import source and by the unfavorable fiscal competition on the gas market.

UPWARD FIGURES

Even punctually and only partially positive, at the sector’s level there were developments contrary to the trend. An example is Transgaz, which reported for the nine months in 2016 revenues of RON 1.264 billion (about EUR 281 million), slightly higher (by 2.5%) than the revenues achieved in the same period of 2015 (RON 1.233 billion - the equivalent of about EUR 274 million); we can only talk about a partially positive development, as in terms of profit Transgaz reported in the first nine months of 2016 results of only RON 358.5 million, thus by 6.7% less against the same period in 2015 when it registered a profit of RON 384.3 million.

Therefore, against the figures provided in the income and expenses budget, the Transgaz revenues from exploitation activities (before the construction activity) increased by RON 40,716 thousand, being influenced by the higher revenues from transport, higher revenues from international transport of gas due to the variations in exchange rates of currencies for ongoing contracts and by the unfulfilment of revenues from equalization operations.

At the same time, the operating expenditures before the construction activity decreased by 10% as compared to the approved programme, their level being by RON 97,678 thousand lower than the provisions in the income and expenses budget, mainly due to savings in expenditure for equalization activity, in the expenses related to auxiliary materials and in expenses on works and services provided by third parties. The result was translated into a slight increase in revenues and a slight decrease in profit. The figures have not surprised the market analysts, proof standing the fact that after the publication of financial results, the market price of TGN shares has not registered significant declines. Moreover, according to the Alpha Finance Romania analysts - brokerage division of Alpha Bank, the company’s prospects are still positive, being estimated, according to the report ‘Earnings Review, 22 November 2016’ a profit of RON 460 million at year end; thus, significantly higher than envisaged in the 2016 income and expenses budget (of RON 398 million).

Another example is Oil Terminal, which for the first nine months of 2016 achieved a turnover of about RON 116 million, by 16% higher than the one achieved in the same period of 2015. A series of other income (sale of goods – RON 0.7 million, other operating income – RON 2.7 million) add to the revenues; so that, on the whole the nine months the revenues totalled RON 119.6 million, by almost 20% higher than those reported for the same period in 2015. 2016 was therefore relatively favourable for Oil Terminal; the company has brokered transactions of 4.3 million tons of petroleum products, well above the budgeted level (3.7 million tons) and also above the volume of transactions carried out in the same period of 2015 (of 4.1 million tons). The company recorded significant increases in spending during the nine months as compared to the same period last year: so, the personnel expenditures increased by approximately 10% (from RON 43 million in nine months in 2015 to over RON 47.2 million in nine months in 2016), expenditures on external services were higher by 58% (from RON 19.4 million to RON 30.7 million) and the expenditures on the amortization of tangible and intangible assets increased by 15% (from RON 8.3 million to RON 9.2 million).

Oil price development

Another exception to the negative trend is Rompetrol Rafinare Constanţa (RRC); the positive developments were registered in profits, but not in turnover. Thus, during nine months in 2016 RRC has achieved a turnover of USD 2.57 billion (approx. RON 10.2 billion) against USD 3.1 billion in the first nine months in 2015 (approx. RON 12, 3 billion), thus registering a decrease of 17%. On the other hand, the profit went in the opposite direction, from USD 14.8 million during January - September 2015 (equivalent to RON 59 million) to USD 20.8 million in the same period of 2016 (equivalent to RON 83 million). The company, member of KMG International, recorded thus a higher profit by 41% as compared to the same period of 2015, the positive trend being driven by programmes to optimize production processes, to increase the share of products such as petrol, diesel, kerosene in the total finished goods, as well as by the reduced operating costs, according to the statements of Director General Yedil Utekov. Also, the evolution of financial indicators was positively influenced by the refining margins, which have improved in 2016; in the first nine months of the year the gross refining margin was by about 10% higher against the same period last year.

Petromidia refinery processed in nine months more than 3.8 million tons of raw materials; the sales of the refining division increased by 4% on the domestic market, however exports decreased, given the reduced demand on the relevant market; in the first nine months in 2016, through the refinery and petrochemical divisions, the company exported a total of 1.7 million tons of products, mainly to partners in the Black Sea region.

Another fairly positive development, thus contrary to the negative trend of the industry as a whole, was registered by Conpet in terms of profit, on the background of falling turnover - although almost insignificant. The company reported a 1% drop in turnover in nine months in 2016 as compared to nine months in 2015 (from RON 308.5 million to RON 305.4 million); the turnover was higher than the budgeted level (by 1.9%); the decrease was due to lower quantities contracted for transport by the susbsystem ‘Country’ - is actually an effect of falling OMV Petrom operations. More specifically, the quantity contracted by OMV Petrom for transport by the subsystem ‘Country’ during the nine months of 2016 decreased by approx. 200 thousand tons against the same period in 2015; this reduction reflects a continuation of the negative trend recorded by OMV Petrom in this sector - a trend driven on one hand by the natural decline of the fields in operation, and secondly by the reduced investments conducted by OMV Petrom in drilling new wells. In parallel, by the subsystem ‘Import’, the quantity contracted by Petrotel-Lukoil in nine months of 2016 increased by approximately 20% (about 332 thousand tonnes) against 2015 - this amount covering the output capacity that the Petrotel-Lukoil refinery can achieve.
In conclusion, although during the first nine months of 2016, as compared to the same period in 2015, the quantity transported by Conpet by the import subsystem increased by about 90 thousand tons, this increase was not sufficient to offset the decline by 153 tonnes of the quantity transported by the internal subsystem. Overall, the total amount of goods transported was lower by 1.2% in the first nine months of 2016 against the same period in 2015, from 5,297 to 5,235 tons. But the company managed through a better management of costs, managing a profit of RON 56.7 million in the first nine months in 2016, by 9% higher than the one reported for the same period in 2015. On the domestic transport subsystem the profit recorded was of RON 38.5 million in nine months in 2016, by only 2.5% lower than the one reported for the same period last year (RON 39.5 million); on the import subsystem, the profit was of RON 15.5 million, by 82% higher than in the same period in 2015 (RON 8.5 million).

POSITIVE PROSPECTS

Returning to the sector as a whole, one can say that beyond the figures showing a negative prospect for the oil and gas companies listed on the BVB, there are a number of elements that lead to a slightly positive prospect for the coming years - both internal and external elements. This could take place as of 2017! At least this could be the conclusion if considering the events on the international oil market in late 2016, following the upward trend in oil prices in recent months and, not least, following the estimations from important international institutions.
We refer mainly to the OPEC and non-OPEC oil exporters’ decision to cut production, which is a historic agreement as it is the first such agreement in the past about eight years. Under this agreement, Russia, the largest non-OPEC producer, will cut 300,000 barrels per day. The cut in Russian oil output is to be achieved gradually by the end of March 2017, when the country could reach an extraction level by 200,000 barrels lower than the level recorded in October 2016, of 11,247 barrels (benchmark level - the largest output in its modern history).

The positive trend of oil prices since July 2016, when the first signs of stabilization were noticed, has been thus strengthened, and the trend was strongly positively stimulated. So, at the end of the first decade in December 2016, the oil price already recorded an increase of about 20% -25% against the level recorded at mid-year (see the graph ‘Oil price developments’).
The two decisions (the agreement among the OPEC members and between them and the oil producers outside the organization) and the fact that the level of USD 40 per barrel proved to be a strong support level for oil prices are further arguments in support of forecasts indicating a continuation of the upward trend in oil prices for the coming period. Thus, the Energy Information Administration - the US government agency estimates for 2017 an average price of USD 52 per barrel for Brent crude oil (against an average of about USD 43 per barrel in 2016) and a level of USD 51 for WTI crude. This is the level the two types of crude oil were traded at the end of 2016, following a rally of about 20% - 25% against the mid-year levels.

Somewhat higher for 2017 are the price estimates made by the Goldman Sachs analysts who, counting on Saudi Arabia’s determination to keep the agreement between OPEC members and those outside the organization working, have changed the forecast upwards for the WTI crude oil in Q2 2017 from USD 55/barrel to USD 57.5/barrel. An amendment in the same direction was operated at the end of 2016, by the World Bank analysts, who estimate for 2017 an average oil price of USD 55 per barrel – by USD 2 more than the original estimates.

DOMESTIC PROSPECTS

These external factors are elements that lead to a positive prospect for the local oil and gas industry, at least in the light of the impetus that it can bring to some companies’ operations, such as OMV Petrom or Conpet. Thus, for OMV Petrom the oil price increase would lead to the efficient exploitation of deposits that currently have relatively high costs, which would boost operations. At the same time, by increasing the amount of oil extracted, OMV Petrom would give a positive impulse to Conpet - whose infrastructure is used for oil transportation to the refinery.
Besides the positive external premises for the industry (given by the above mentioned trend of rising oil prices), there are a number of domestic elements, related to the internal life of some specialized companies, which position the sector on an optimistic outlook. For example, the announcement made by OMV Petrom and Hunt Oil Company of Romania, at the end of the year, according to which they have started experimental production of gas from the deposit at Padina, it is another positive element.
Another domestic event with the potential to boost the return of the oil and gas local sector to growth, is the Romgaz press release showing that the audit conducted out by the US company DeGolyer & MacNaughton has confirmed Romgaz’s assessments of natural gas resources and reserves and the amount of annual reserve replacement rate (which in 2013 - 2015 had an average of 83%). However, according to a release issued by the company in early September 2016, during 2011 - 2016 Romgaz has conducted exploration operations in eight blocks which have confirmed contingent resources of approximately 17,000 million Nmc of gas (normal cubic meter).

Another potentially positive element for Romgaz is the company’s decision to enter the electricity generation segment. In this regard, Romgaz has taken over the Iernut thermal power plant from Elcen, and the procedure for construction of a new gas thermal plant is underway. The project in Iernut will be conducted with Romgaz own funds and funds from the National Investment Plan (PNI), the Ministry of Energy’s funding programme.

Good news comes from Transgaz as well. In early December, company officials confirmed its interest in the acquisition of a 66% stake of the Greek natural gas pipelines operator DESFA. Such an acquisition would position Transgaz better in the development of the vertical gas corridor that will allow the gas transmission from the Caspian region to Central Europe.

CONCLUSIONS AND FORECASTS

The figures in the oil and gas sector listed to the BVB show that it has gone through a relatively difficult year; the negative effects on the companies’ balance sheets, however, were relatively well monitored and the changing of paradigm on the international oil market changes for the better the prospects regarding 2017.
Meanwhile, the sector’s heavyweights, through the internal events during 2016, seem to be positioned, better than ever, for the new economic context. That makes the oil and gas companies listed on the BVB potential winners, as of 2017, despite not exactly encouraging developments in the first nine months of 2016.

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