2016 BVB TOP GAINERS: A TOUGH YEAR FOR THE OIL & GAS INDUSTRY

Profits by RON 900 million higher, turnover by RON 2.5 billion lower! These are the key figures at the end of 2016 against 2015, for the oil and gas sector listed on the Bucharest Stock Exchange (BVB). The figures in the preliminary reports may change, however they reveal a clear trend of the industry’s revival, among other reasons as a result of the positive impact of increasing oil prices. Tough times don’t last, tough people do!

The seven companies that represent the oil and gas sector at the Bucharest Stock Exchange have reported aggregate profits for 2016 of RON 2.95 billion. The amount is by about 50% higher than the profits made by the same companies in 2015, the positive developments occurring amid lower aggregated turnover at sector level by about 7%, from RON 40.3 billion in 2015 to RON 37.5 billion in 2016. Concomitantly, total losses decreased from RON 720 million in 2015 to only RON 4 million in 2016 (see the table ‘Improved results for oil and gas industry at the BVB’).

Obviously, the main driver of these positive developments at industry level is OMV Petrom! The largest player in the local industry and one of the important regional players, turned from a loss of RON 690 million in 2015 to a profit of over RON 1 billion in 2016. However, a noteworthy part came from other players, including Transgaz or Conpet or Oil Terminal Constanta, which contributed significantly to changing the trend and the market sentiment in the field.
Thus, Transgaz surprised analysts and investors by reporting a preliminary profit of RON 596 million, by 22% higher than the one reported in 2015 and thus a new historical high profit.

Improved results for the oil and gas
Conpet, in turn, had a similar success: the company reported a profit of RON 64 million! The amount is only 2% higher than the profit reported in 2015 but, as the profit in the previous year was a historic high, the exceeding of this level, although modest, is in itself an achievement according to financial analysts.

THE HEAVYWEIGHTS IN THE SECTOR

“Transgaz reported outstanding preliminary results in 2016, the profit of RON 595.7 million marking an annual leap of 22% and a new record level,” Alpha Securities brokerage house analysts say in a report sent to clients after the publication of results by the fourth largest company in the field by turnover listed at the BVB (after OMV Petrom, Rompetrol and Romgaz). “The growth in annual profit was supported by the stunning performance in the fourth quarter, when the company made a profit of RON 237.2 million, 2.2 times higher than the one achieved in the same quarter of the previous year, significantly exceeding our estimates,” (author’s note – of RON 115 million), they add, emphasizing the surprising evolution of the company.

In Q4 both business directions of the company performed very well! Thus, if the 8.5% increase in revenues from international transit can be attributed to a slight RON depreciation against the reference currencies, the 48% leap in revenues from internal transit was determined by a 21% increase in the transported volumes.
Therefore, Transgaz benefited from the higher demand for natural gas, driven on one hand by the harsh winter and, on the other hand, by a higher demand coming from chemical fertilizers producers. On the whole year, Transgaz posted revenues of RON 1.36 billion from domestic transport, RON 328.6 million from international transport, RON 57.4 million from balancing. Other revenues, including amounts from reservations of transit rights, totalled RON 118 million. Overall, the figures are significantly higher than those reported in 2015 (see the table ‘Transgaz revenues’).

Transgaz revenues
OMV Petrom is yet the company which influenced the figures at the sector level.

The company’s sales in 2016 fell by about 10% against 2015 to RON 16.2 billion (RON 18.1 billion in 2015). The main reason was the decline in the value of petroleum products sales. This was due, on the one hand, to the slight decrease of the quantities sold and, secondly, because the average oil price in 2016 was (in spite of an upward trend since February) lower than the average price in 2015. According to OMV Petrom’s preliminary report, the average price of Urals oil in 2016 was of USD 42.1 per barrel, by 18% below the price in 2015, of USD 51.45 per barrel.
According to the statistics conducted by the survey and statistical information company Statista, headquartered in Hamburg, with global activity, the average price of Brent crude oil was of USD 43.35 per barrel in 2016, by about 17% lower than the average price in 2015 - which, according to the same source, was of USD 52.35 per barrel (slight differences may come up depending on the source, which may be given by methodology and/or by the trading system used as quotation provider).

A contribution to the lower OMV Petrom turnover had the drop in the volume of natural gas sold. But the increase of electricity sales had a positive contribution, offsetting the negative trend in the oil and gas segment (see the table ‘OMV Petrom output and sales’). In conclusion, the Downstream Oil sales represented 72% of the consolidated sales, while sales in the Downstream Gas accounted for 25%; the Upstream sales accounted for about 3%.
It is to be noted that the upward trend in oil prices in the second half of the year had a major role in the positive changes of the reported results! Thus, the upturn of oil prices led to the upward revision of the value of oil and gas, and thus of EBIT at group level in 2016 recorded a value of RON 1.47 billion. Unlike in 2015, this indicator had a negative value of RON 530 million after recording the devaluation of deposits, due to lower crude oil price estimates at the time.

OMV Petrom output and sales

The difference between the average oil price in 2016 and the one in 2015 (USD 43.35 per barrel in 2016, by about 17% lower than the average price in 2015) is one of the explanations put forward by Rompetrol Rafinare for the relatively poor figures reported by the company in 2016 against the previous year. Rompetrol Rafinare (RRC) reported in 2016 a gross turnover of USD 3.56 billion (about RON 15.3 billion), down by 7% against the previous year (when it reported a turnover of USD 3. 83 billion), while the net profit fell by 23% from USD 64.6 million (about RON 268 million) to USD 49.8 million (i.e. approximately RON 200 million).
In the fourth quarter, the company registered revenues of USD 995 million, by 34% higher than in the same period of the previous year. The volatility of results from one period to another (a decrease of 7% per year and 34% increase in Q4 2016 against Q4 2015) was the result of the volatility on the world oil market. The price of Brent crude oil, for example, had in early 2016 a dramatic fall, reaching lows of USD 30 per barrel in January, before starting a gradual recovery to reach a high of USD 56 per barrel in December after the OPEC and the non-OPEC oil producers’ summits, when production cuts were decided.
Altogether, Rompetrol Rafinare reached new historic highs on the operational side. Thus, the Petromidia refinery processed 5.41 million tonnes of raw material in 2016, by about 9% more than in 2015; Vega refinery processed 354,000 tonnes of raw materials, by 8% more than in the previous year. The gasoline production increased by 20%, from about 2.68 million tons in 2015 to 2.75 million tons in 2016, while fuel sales on the domestic market increased by 13% and exports by 4% (see the table ‘Rompetrol, turnover and production’).

Rompetrol turnover and production

In contrast, 2016 was not a very good year for Romgaz - the main national producer of natural gas and the third largest company by turnover listed in the oil and gas sector in Bucharest. Romgaz reported a preliminary turnover of RON 3.41 billion, by 15.8% lower than in 2015, mainly due to the fall in natural gas demand in key sectors and to the strong competition from imported gas. The company’s profit fell by 14% from RON 1.19 billion in 2015 to RON 1.02 billion in 2016.

The decrease in turnover and profit come amid significant lower activity of the company. Thus, the amount of gas extracted decreased by 24% in 2016 from 5.563 billion cubic meters in 2015 to 4.219 billion cubic meters, and the amount of the delivered own gas decreased by the same percentage from 5.484 billion cubic meters to 4.165 billion cubic meters (see the table ‘Romgaz turnover and production’).
The fall in gas volumes extracted and delivered was, however, albeit to a small extent, offset by the increased revenues from storage (by 3.9% to RON 345.4 million), following higher sales of stored gas in 2016 and the small decrease in revenues from electricity sales (of RON 336 million in 2016, by only 5.7% lower than in the previous year).
On the other hand, in 2016, following intensive exploration of onshore deep areas, Romgaz discovered the largest own deposit the last 30 years, with estimated reserves of gas up to 27 billion cubic meters.

Romgaz turnover and production

Conpet indicators

RISING STARS AND NEGATIVE DEVELOPMENTS

Pleasant surprises came from less visible companies: Conpet Ploiesti and Oil Terminal Constanta. Thus, the first pleasant surprise was Conpet Ploiesti, which reported a higher profit, albeit slightly, than the one in 2015, when it registered a historical highest profit. The national carrier of crude oil by pipelines and railways reported in 2016 a turnover of RON 380.5 million, slightly lower than in 2015, given a slight increase in the quantities transported: the volume of transported oil was of approximately 7.1 million tons in 2016 against 6.99 million tons in 2015.
Despite the decrease in turnover, the company reported a RON 64 million profit, by 1.8% higher than in 2015 and by 2.8% higher than budgeted (see the table ‘Conpet indicators’).
The slight decrease in turnover is explained by the company as due to reducing the contracted quantities for transport in the Country subsystem. According to the release, the quantity contracted with OMV Petrom for transport by the Country subsystem for 2016 fell by 8.6% (about 347 thousand tons) as compared to the one concluded in 2015. The quantities transported in the Country subsystem in recent years show a steady decline that is due, on the one hand, to the natural decline of deposits and, on the other hand, to the decrease in investments in new wells by OMV Petrom.
In the Import subsystem, the quantity under contract with Petrotel-Lukoil in 2016 increased by 17.9% (approx. 395 thousand tons) against the one under contract in 2015, the maximum processing capacity the refinery could reach, given that in 2016 there was no discontinuity for overhaul.

The development in 2016, as compared to 2015, is therefore different in the two systems of transport: the quantity transported by the Import subsystem increased by 308,000 tonnes as compared to the previous year, whereas the amount transported by the Country subsystem fell by 220,000 tons.
For the market, the most important element is the fact that for this level of profit the company may hand dividends of RON 7.24 per share - which means a yield of about 7% against the shares market price, at the date of the report; that comes in addition to the 50% growth recorded in the past 12 months on the market.
Even more spectacular were the Oil Terminal results! The company posted a profit of RON 15.4 million in 2016, by more than 2.5 times higher than in the previous year. Oil Terminal Constanta has a strategic position in the Black Sea region, the largest operator by the sea, specialized in crude oil, liquid petroleum and petrochemical products and other goods and raw materials, in import, export and transit. In 2016 the volume of brokered products (5.9 million tons) increased by 9.3% against the level in 2015 (5.4 million tons) (see the table ‘Oil Terminal indicators’). Exceeding the volumes was the issue that led to reaching a turnover of RON 160.6 million, by 16.1% higher than in 2015; proportionally, the revenues from services supplied have increased by 16.5%, i.e. RON 22.4 million.

Oil terminal indicators

The only companies in the oil and gas sector listed in Bucharest which had a negative trend in terms of financial results in 2016 were therefore Rompetrol Well Services and Petrolexportimport. About the latter, it’s not much to be said, as it is in a serious financial situation following the seizure by ANAF in June 2015 on movable and immovable property of the assets, for tax receivables of RON 110.5 million. The company has not posted its preliminary results for 2016, whereas in the previous two quarters it posted losses of about RON 1.2 million. However, the developments in recent years reveal that the company is no longer a player to be considered.
Unlike it, Rompetrol Well Services, although it also faces a difficult situation, continued to hold on the market. The company continued the negative trend from previous years, but managed in 2016 a substantial reduction in losses. Thus, if in 2015 reported losses of RON 29.6 million, last year the losses amounted to only RON 3.7 million. The results were registered on the background of the ongoing decline in turnover, which dropped from RON 49.9 million in 2015-RON 31.1 million last year.

The Rompetrol Well Services operations were affected by the oil price development, which led to the postponement of major projects for exploration and production of hydrocarbons and therefore to the postponement or to cuts of investments involving well services – in the area where it operates.

The company has balanced these negative effects by significantly cutting the staff costs (from RON 21.2 million in 2015 to RON 15.8 million in 2016). The minus given by assessment adjustments of fixed assets was also reduced (from a minus of RON 11.3 million in 2015 to a deficit of only RON 6.6 million last year). Hence the operating result was significantly improved from a loss of RON 80.6 million in 2015 to a minus of only RON 36.8 million in 2016.

EXPLANATIONS AND PROSPECTS

The sectorial global development of the figures from financial reports is not necessarily surprising therefore as trend, as the increase in oil prices was an element whose positive impact was predictable. If only we consider the impetus given by the revaluation of assets in the Upstream area where OMV Petrom (the factor that led to record losses in 2015 when they were re-evaluated downwards due to lower oil prices). At the same time, the additional consumption of natural gas, as a result of the cold winter, is expected to give a positive impulse to the Transgaz results.
The positive development was, however, relatively surprising in terms of amplitude - the figures reported being better than the analysts’ estimates. The listed oil and gas companies have therefore fundamentally pulled upwards the Bucharest Stock Exchange and this was turned into a supporting element for growth of the entire market. The removals of the special tax on constructions (the well-known ‘pole tax’) since January 1, 2017, the tax easing (which will support demand) and the prospect of continuous upward trend of oil prices are the prerequisites to obtain similar performances this year.

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