OMV Petrom S A : Conference call Q&A transcript Q3/23

OMV Petrom Q3 2023 Conference Call - Q&A Transcript

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OMV Petrom published its results for January - September and Q3 2023 on October 31, 2023. The investor and analyst conference call were broadcast as a live audio-webcast at 3:00 pm local time. Below is the transcript of the question-and-answersession, with edits for readability and clarifications/additions included in brackets.

Question from Iuliana Ciopraga (Wood & Co): Thank you for the presentation. I have a number of questions actually. First on the royalties, the change in royalties, would that impact Neptun? You are mentioning there is no short-term impact but when do [you] expect any impact? Can you comment anything on the duration of the existing concession agreements? Second, the financial results turned negative this quarter and interestingly, income is actually lower compared to previous quarters. Is that a one-off there? I mean, you do mention something about receivables, but I just wanted to understand, is it a one-off negative result that we're seeing this quarter?

Also, in the net debt, actually net [cash] position that you're reporting, do you include the financial assets - the short- term financial assets? I guess that's the treasury bills that you mentioned. Also, if I may, one final question regarding production, I mean, you're guiding that production will be better than initial guidance, but you haven't changed yet the guidance for the following two years. Is that a one-off what we're seeing right now in terms of production, or you'll just revise production a bit later?

Answer from Christina Verchere (CEO): Maybe Alina, you want to take the royalties and I'll come in with the production and we can follow with the other two?

Answer from Alina Popa (CFO): Thank you for the questions. I'll start with royalties. On the royalties, as you know, it's quite a recent piece of legislation. We got it last Friday as well. Based on our current understanding, basically the new government ordinance which introduces new royalty rates are not applicable to us short term, as we have royalty rates in our concession [agreements]. Consequently, this does not apply to the Neptun [Deep] project either. New rates apply prospectively to future concessions, and this is what we mean by short term as well.

All in all, it's a negative change for the oil and gas industry. We have one of the highest effective taxations in Europe, so having increased the royalty rate definitely is not good. We need competitive, stable and predictable fiscal regimes. With regards to durations, these are confidential information, we do not provide such details on the duration of the concessions. But I have confirmed related to Neptun, it does not apply to Neptun.

Answer from Christina Verchere: With regards to your question on the production, yes, we have, as we said, we increased our expectation for this year to above 112,000 barrels of oil equivalent [per day]. This actually means that we have a lower than 6% decline expectation for the year, better than the 8% year-on-year decline that we had anticipated [and] originally guided. This is actually driven by good operational performance and contribution from workovers [and] new wells. With regards to 2024-2025, we have on the slide that we would get to the range of 95 to 100 [kboe/d] considering no divestments. However, we are in the middle of the new mid-term planning exercise and we'll provide updates to that when we give our Q4 results for 2023 in February next year.

Alina Popa: Iuliana, I'm not sure if I understood the next question. Was it related to the financial result? Could you repeat the question please?

Question from Iuliana Ciopraga: Yes, financial result. If the financial result is negative this quarter and there's a bit of a change compared with the previous quarter.

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Answer from Alina Popa: Yes. Okay. The impact on the financial result is related to the reassessment of our receivables from the State. As you might remember, we have a receivable from the Romanian State related to Annex P and we are in arbitration with this file for quite a while. Due to the delays in the process, we had to reassess the recoverability in the sense of the timing of the recoverability and we had an impact on the financial result in Q3, out of this assessment.

Question from Iuliana Ciopraga: [Could you mention] what sort of receivables from the State?

Answer from Alina Popa: The receivables from Romanian state with regards to Annex P. It's approximately EUR 400 million. You can see it exactly in our financial statements, disclosed there. When it comes to the impact on the financial result of the delay [in] recoverability of the receivables, this is approximately EUR 30 million in Q3.

Question from Iuliana Ciopraga: And that had an impact also on the interest income because you booked a low- interest income compared to previous quarters as well, so there was a surge in interest expenses?

Answer from Alina Popa: Yes, correct, it affects both interest income and interest expense on both sides, you'll see it if you look at the different lines.

With regards to your last question related to the net debt, on the net [cash], the investments which [we] do in treasury bonds do not qualify for cash and cash equivalent because they [have maturities] longer than three months, therefore they are not reflected in our net [cash] number. I hope it's clear.

Question from Daniela Mandru Petrovici (Swiss Capital): Thank you for the presentation. I have just two short questions. First regarding the non-fuelbusiness margin that you presented on page seven of the presentation, what kind of margin are you referring to, EBITDA margin, EBIT margin? Then still with the non-fuelbusiness, can you provide, as well, the percentage of non-fuelbusiness in the R&M segment, non-fuelbusiness turnover in the total R&M segment turnover? Then the third question refers to the volumes at the regulated prices of 150 RON per megawatt [hour], if you can disclose. Because I'm sure you have the quantities, the volumes for the last quarter of 2023 and for the first quarter of next year.

Christina Verchere: Alina, do you want to take the first two?

Answer from Alina Popa: Yes. On the non-fuel business margin, we talk about the gross margin, Daniella, so it's gross margin, [it] means revenue minus cost. We don't include here the depreciation, it's a gross margin number. With regards to the non-oil business impact, I can give you a rough estimate, not [in the turnover but] a total margin, approximately 30% of the [retail] margin is the non-oil business margin. And on the regulated sales, you asked about Q4 and Q1, if I understood correctly. We have 2.2 Terrawatt hour for Q4 [2023] and a 2.6 Terrawatt hour for Q1 2024.

Question from Daniela Mandru Petrovici: Now regarding this increase in royalty quotas, because - yes, I've read in the newspapers that would apply only for the new concessions, but I spoke as well with Romgaz, they are saying that this is not true. So, I don't know, are you sure? So, [is there a] final form of the ordinances in place?

Answer from Alina Popa: So, the final form of the ordinance is in place, [it] was published on Friday, and it's applicable since then. We cannot comment on behalf of Romgaz. This is our current estimation right now and our understanding right now. This is the reason why concession agreements have royalties in them in order to ensure that we have this stability. And this understanding was also confirmed by government officials based on our hearing. So yes, as I said, based on our current understanding, this is our view for our concessions.

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Question from Daniela Mandru Petrovici: And now regarding the 0.5% turnover tax for oil and gas companies, that would apply until 2025 only, so not in perpetuity, nothing like this?

Answer from Alina Popa: It is clear in the legislation. This [was] also in the meantime published in the Official Gazette, so it was approved by the parliament, by the president, and published. And [the 0.5% tax] is applicable only for 2024 and 2025. What the legislation says is that after [2025], companies should apply the 1% [rate], so [also] oil and gas companies should apply the 1% [rate]. Now in our case, this 1% is applicable as you know, only if you have the profit tax below the 1% of the turnover, which is not our case. Therefore, for [oil and gas companies like us], it [applies for] 2024 and 2025 only.

Question from Tamas Pletser (Erste Bank): I got also two follow-ups on these issues that the colleagues already mentioned. So, there's two new taxes you mentioned on page five, where did they or [when] they announced [them] and how new are they? That would be my first question. The second issue is you mentioned about these receivables, what you revalued, can you clarify a little bit about this, what they are related to?

Answer from Alina Popa: So, the two new taxes are: one is 0.5% of revenues applicable for oil and gas companies in the years 2024 and 2025. This is the first. And second, there is a 1% tax for all the companies [for] which the profit tax is not at the level of 1% of the turnover ([is lower than 1%]). This does not apply to [OMV Petrom SA] but applies to one of our group companies, OMV Petrom Marketing, which has a [profit tax lower than 1% of turnover]. So, we will have some impact there. We are also indicating that both of these taxes have an overall [cumulated] impact in 2024 and 2025 of less than EUR 50 million per year. After 2026, we will remain with less than EUR 20 million per year, because only one of them will stay.

Answer from Christina Verchere: I think Tamas was asking sort of when did this happen, if that's correct? Yes, it actually, it was published in the [Official Gazette] last week. I'm trying to actually remember when it was actually, because it actually went through yesterday. No, it was Friday, but it went through the Constitutional Court before it went to the president, I think it's been around for about a month, Tamas.

Question from Tamas Pletser: But it has been approved as you say now, so it went through all the legislative channels already?

Answer from Alina Popa: Yes. With regards to the discounting of the receivables that impacted the financial result, this is a longer [term] receivable that we have from the Romanian State, and it is coming from privatization agreement. According to the privatization agreement, for historical pollution, we do the work, we spend the money, and then we are entitled to recover from the Romanian State [the amounts spent]. We have delays in this recovery, the reason for which we started arbitration with the Romanian State, and we have few files under arbitration. What we see now is some further delays and if our estimation [is that] the recoverability of the money is prolonged, then [we] have a negative impact on the financial results, because we are required, according to IFRS, to discount that receivable. So, this is impacting the financial results.

Question from Tamas Pletser: What are your expectations? When can you receive the money?

Answer from Alina Popa: We are continuing with our process of arbitration, so we are continuing and hopefully we will be able to recover it. We have - the entire schedule is quite detailed- different amounts and different dates.

Question from Iuliana Ciopraga: I just wanted to clarify actually if this is a one-off, I mean you're mentioning that this is not recovered, then you're going to see an impact, but what happened right now, is that a one-off or not? Or are we going to see an impact in the following quarters from this?

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Alina Popa: From the discounting of receivables, Iuliana, you are saying?

Iuliana Ciopraga: Yes.

Answer from Alina Popa: Now it depends on the evolution. I don't expect to see something similar every quarter, not at all. But depending on the evolution - so right now we have an expectation of recovery, and then depending on the evolution we might have, if there are further delays, we might have in the future, some further discounting. And we had [this] in the past also, it's not the first time. But not every quarter, definitely. It depends a lot on how successful we will be in arbitration and how fast this goes.

Question from Iuliana Ciopraga: And one more, if I may, regarding these [regulated] volumes and the prices in the first quarter of next year, do you have any visibility for the following quarters as well, for the rest of the year?

Answer from Alina Popa: For the regulated quantities [starting with Q2, these were] not yet communicated, [it is expected that sometime] in February [we will get the information] for the next year.

Question from Daniela Mandru Petrovici: So, regarding this impact of the new taxes, just for me, I want to clarify because I'm not sure I understood well the figure. So, for the 2024-2025 period, you expect an impact of less than EUR 50 million, five zero million Euros per year, correct, or in total?

Answer from Alina Popa: Per year. Then starting 2026, this impact is expected to halve, to more than halve, to EUR 20 million [per year].

Question from Daniela Mandru Petrovici: But why? Because I don't understand, we have a turnover tax of 0.5%, yes. That applies until 2025. And then from what I've seen up to now, I know for sure that your profit is larger than 1% turnover tax.

Answer from Alina Popa: On [OMV Petrom SA] correct. If you look at the consolidated accounts or if you look at Petrom SA, that's absolutely correct. But we have OMV Petrom Marketing [also], and on OMV Petrom Marketing, we have lower profitability. They buy and sell like most of the retailers, have lower profitability. On that company, we will have also, after 2026, this impact [of] less than EUR 20 million [per year].

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