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Results for Q3 and January – September 2007

  • Upward trend of the quarterly results consolidates
  • Cumulative results continue to be strongly affected by the RON appreciation
  • Successful efforts of maintaining a stable crude production in Romania in the last two quarters
  • 52% investments increase in 1-9/07 versus comparable period of last year
  • Exploration success discoveries: Torcesti to already start production in Q4/07 and Delta IV to come on stream by mid 2008
  • Exploration expenditures Petrom Group in 1-9/07: RON 300 mn

Mariana Gheorghe, CEO of Petrom: “During the first nine months of this year, we have been facing an environment influenced by the strong appreciation of the national currency against USD and EUR and by significant variations of the crude price (which increased by approximately 20% during the specified period). The results for the third quarter are much better than the ones recorded in the second quarter, due to peak levels of the crude price. The company is still in the middle of the restructuring process and the characteristics of the environment we operate in had a negative influence on our results for the first nine months comparing to the same period of last year. However, the results match the company’s expectations for this year.

The upcoming period will also be a challenging one considering that we estimate that the crude price will stay high; these are favorable conditions for our exploration and production activities, but will put a great pressure on the refining margin. We will continue the sustained investments programs so that we should reach our strategic objectives and secure the company’s long term success even in a less favorable environment.”

Q2/07 Q3/07 Q3/06 %

Key performance indicators (RON mn)

1 -9/07 1 -9/06 % 2006
548 691 697 -1% EBIT 1,633 2,460 -34% 2,777
548 968 896 8% EBITDA 2,356 3,045 -23% 3,596
548 661 569 16% Net income 1,548 1,997 -22% 2,285
548 3,238 3,363 -4% Turnover 8,672 9,675 -10% 13,078
548 1,054 801 32%

Investments *

2,376 1,561 52% 2,937
29,667 27,510 36,011 -24%

Employees at the end of period

27,510 36,011 -24% 32,837

*the investments include increases of Petrom share participations

The financials are unaudited and prepared according to RAS; all the figures refer to Petrom SA unless otherwise stated.

The Company’s turnover for 1-9/07 decreased by 10% yoy mainly due to lower selling prices and lower quantity sold in R&M segment (because of the turnaround in Arpechim). This was partly offset by the higher turnover generated by the Gas business.
The operating expenses decreased in 1-9/07 by 6% under the influence of lower expenses with utilities (as a result of the renegotiation of the contracts), with taxes (decrease as a result of the decrease of the number of employees according to the restructuring programme in place) and reduced provisions (due to improved credit risk management and less litigations in place). The operating expenses have been also influenced by the decrease of raw materials expenses due to lower crude import quantities and prices. This positive effect on operating expenses has been offset by higher expenses with third party related services, and higher depreciation of the tangible and intangible assets.
The EBIT of the Company amounted to RON 1,633 mn in 1-9/07, 34% below the RON 2,460 mn result recorded in 1-9/06, mainly due to the weaker EBIT generated by the E&P as a result of the production decline, lower delivered quantities, higher stocks of oil products in other segments than E&P and negative impact of the RON appreciation by 14% against USD.
In Refining and Marketing, the EBIT showed a negative value but improved versus 1-9/06, reflecting the positive developments in the Marketing business due to the implementation of the Full Agency system that triggered a decrease of the staff related costs. The increase of supply margin in the refining business was more than compensated by the higher expenses with services generated by the turnaround at Arpechim and lower deliveries.
In Gas, the EBIT has decreased, mainly due to the integration of the natural gas distribution activities into the gas division.
The net profit decreased in 1-9/07 by 22% in comparison with the same period of 2006 as a consequence of the weaker operational result.

Investments

The total investments realised in 1-9/07 amounted to RON 2,376 mn, exceeding by 52% the amount performed in 1-9/06.
The investments in Q3/07 increased by 32% in comparison with the same period of the last year and by 37% in comparison with Q2/07.
The investments have been directed mostly to E&P – 68%, while the R&M business benefited from a 22% share of the investments. The rest of 10% represents investments in Corporate (mainly Petrom Solutions), Gas and Chemicals.
The investments in E&P were two times higher than 1-9/06, being directed mainly to the development and production drilling and to the wells modernisation program. In refining, the investments were directed to the diesel hydrotreater (HDS) project at Petrobrazi and to the new FCC gasoline hydrotreater unit, scheduled for start-up in early 2009.

Exploration and Production

  • Successful efforts of maintaining a stable crude production in Romania
  • Further strengthening of RON adversely impacted oil revenues and OPEX in USD/boe
  • Investments continue to be high in 1-9/07: RON 1,615 mn, more than two times higher than 1-9/06

The EBIT of the Exploration and Production business of Petrom SA decreased by 31% in the first nine months of 2007 over the same period of last year. The strengthening of RON vs USD by 14% (revenues are USD-benchmarked whereas the majority of the costs are in RON) and the production decline were the main drivers of the decrease.
Total oil and gas production in Romania amounted to 52.77 mn boe in 1-9/07 [3.5% lower than 1-9/06] due to natural decline and external factors. Domestic oil production is affected by the delays in permitting needed to continue drilling of new wells and the shutdowns needed for the modernization program, while the overall gas production is impacted by the shutdowns of major customers and by limitation of the gas distribution network.
The oil and gas production in Kazakhstan reached 1,225 thousand boe (or 4,500 boe/day), increasing by 6% over 1-9/06 volumes [4,200 boe/day].
E&P Petrom investments in Romania amounted to RON 1,615 mn, two times higher than 1-9/06 levels. The step increase of investments shows Petrom’s engagement in both drilling and modernization and efficiency programs.
The domestic production cost of USD 16.41/boe was 21% higher compared to 1-9/06, mainly driven by the strengthening of the RON against the USD by 14%, lower production levels and higher salaries and service related costs increase. The domestic production cost expressed in RON/boe increased only by 4%, a clear indication of the significant impact of RON appreciation against the USD.
The Downhole Technology Modernization Program is ongoing and significant efforts are undertaken in order to accelerate it. The Anti Corrosion Program is continuing the execution phase and by the end of the year a significant progress on this project is expected.
In accordance with the exploration strategy, the 3D seismic surveys continued with success in the first nine months of 2007. Two new 3D seismic surveys were started in Q3/07 and 8 new wells based on new technology have been drilled (cumulative 1-9/07: 23 exploration and appraisal wells).
The Torcesti discovery was one of the first wells of this exploration drilling campaign. Production testing in Q1/07 confirmed flow rates of 130.000 cm of natural gas and 11 tons of condensate per day (app.900 boe/day). The production is expected to start at the end of 2007.
During Q3/07, several discoveries of new reservoirs have been reported: “Delta 4” (oil), “Mamu 4320” (gas and condensate), “ 900 Ochiuri” (oil), “Abrămuţ” (oil and gas) and “7 W Predeşti” (gas). The most important of them, Delta 4, is the first successful offshore exploration in the last eight years. The well Delta 4 was drilled in the exploration block Histria XVIII, located in the Black Sea. Tests confirmed a daily flow rate of up to 357 tons of oil and 35,000 cubic meters of gas, in total approximately 2,800 boe/d. The further appraisal and development of this discovery are under review. The new discovery is expected to come on stream by mid 2008.
Petrom SA spent RON 223 mn on exploration activity in 1-9/07, thereof RON 129 mn were expensed and RON 94 mn were capitalised.

International

In Kazakhstan, new 3D geological models for the Aktas, Tasbulat and Tukmenoy fields were compiled. The drilling campaign, using these new models, has commenced in Q3/07.
The well South Rovnaya 2 was drilled in Q2/07 and has successfully appraised the gas-condensate discovery from last year. The license was extended for one more year, in order to allow for additional production testing and thereafter the full evaluation of the results.
The re-completions of all existing wells for the Komsomolskoe field were finalized and drilling preparations for the new wells have commenced. The oil field development is planned to be finalized in 2008.
The production optimization programs in Kazakhstan, using modern oilfield technologies are ongoing.
In Russia, the execution of the exploration work program has commenced mid of the year and one well has been completed and three more are currently drilling in Saratov.
International exploration expenditures amounted RON 73.

Refining and Marketing

  • Significantly weaker refining environment during Q3/07, with a historical low of refining margins in July, mainly on account of the raising costs of feedstock
  • Nine months throughput per station reached 2.41 mn liters - expected annual throughput per station of 2.9 mn liters
  • The non-oil business sales up 76% over the 1-9/06
  • In September, the Full Agency Program reached a number of 416 filling stations
  • 27 filling stations built and 44 under construction in 1-9/07

The EBIT of R&M business was RON -591 mn, improved compared to 1-9/06 as a strong Marketing result more than offset the effects of a weaker Refining result.
The results of the refining business have been adversely impacted by the deteriorated environment of last months, on account of raising feedstock costs and lagging product prices.
Both refineries were able to run at high rates during Q3/07, following the turnaround completed earlier this year at Arpechim.
In the first nine months of 2007, Petrom’s refineries processed a volume of crude oil of 4.50 mn tons by 13% lower than in 1-9/06, due to the Arpechim turnaround which lasted 6 weeks. Consequently, the overall utilization rate decreased at 75%, from 86% in the same period of last year. The imported crude oil processed by the two refineries decreased by 23% in 1-9/07 [1,221 thousand tons] in comparison with 1-9/06 [1,595 thousand tons].
Petrochemical and special product sales amounted to 476 thousand tons, increasing by 5% over the same period of 2006. Starting with July 1, Petrom is selling diesel with 2% biodiesel content, as required by law.
Total marketing sales in 1-9/07 amounted to 3,355 thousand tons, lower by 17% yoy due to a reduction of export sales by 44% as a result of the Company’s decision to optimize the refining product mix and a higher demand on the domestic market.
Domestic sales were 4% higher than in 1-9/06, driven by higher demand, upgrade of filling station network and improved retail station management.
Retail sales reached 1,115 mn liters, by 23% higher compared to 1-9/06 [906 mn liters]. Nine months throughput per station improved by 43% to 2.41 mn liters [1-9/06: 1.69 mn liters]. That value corresponds to an annual throughput per station of 2.90 mn liters.
Commercial domestic sales were lower by 5% against the level recorded in 1-9/06, amounting to 1,475 thousand tons, while exports were 992 thousand tons, from a previously 1,787 thousand tons achieved in 1-9/06 (-44%).
The non-oil business sales amounted in 1-9/07 RON 226.3 mn, 76% over the 1-9/06 [RON 128.9 mn], due to portfolio reorganisation, purchasing process optimisation and saving consumables through the centralized supply.
Petrom sold through its subsidiaries 963 mn liters in 1-9/07 to the retail customers, out of which 61% accounted for retail international sales.
At the end of September 2007 a total of 416 filling stations were running under the Full Agency system, from a total of 437 operational Petrom SA filling stations. Petrom Group operates 780 filling stations, out of which 244 filling stations in Republic of Moldova, Bulgaria and Serbia.
Capital investment
in Refining business continued, with the diesel hydrotreater (HDS) project at Petrobrazi at peak construction phase. Also, progress has been recorded for the new FCC gasoline hydrotreater unit, scheduled for start-up in early 2009. In Marketing, the investments were directed mainly to the construction of new filling stations, modernizing of the existing ones and to the Supply & Logistic projects. They remained however far under the last year’s level, which included the acquisition of the retail networks in Bulgaria, Serbia as well as in Romania.

Gas

The EBIT generated by the Gas business of Petrom SA in the first nine months of 2007 amounted to RON 80 mn, 10% down in comparison with 1-9/06 due to higher operational expenses. Explicitly the integration of the natural gas distribution activities into the gas division has put a financial burden on the result.
The consolidated gas sales volume of Petrom Group amounted to 4,046 mn cm in 1-9/07, up by 13% compared to the same period of 2006. This was achieved despite the fact that the total natural gas consumption of Romania has dropped by 8% compared to 1–9/06.
The consolidated gas sales to third parties reached 3,260 mn cm, by 15% higher than in the same period of the previous year, which was mainly driven by the purchase of additional volumes from third parties and sales to the market instead of injection into storages (due to the limited availability of storage volume in the Romanian storages).
Petrom has injected in 1-9/07 a total volume of 266 mn cm of natural gas. The total volume stored at the end of September 2007 amounted to 362 mn cm.
The imported gas price for 1-9/07 was at USD 285/1,000 cm, while the regulated domestic gas price for producers was USD 179.6 /1,000 cm [RON 440.8].

Chemicals

The sales volume generated by Doljchim in the first nine months of 2007 increased by 33%, to 552 thousand tons [1-9/06: 416 thousand tons]. In 1-9/07, the domestic market sales, accounted for approx. 44% from total sales, especially for fertilizers. Favorable market conditions contributed to a significant rise of ammonium nitrate sales in 1-9/07 compared to 1-9/06 by 153%. Also urea and methanol domestic market sales were up, by 155% and 53%, respectively. Stimulated by higher sales on the domestic market, in 1-9/07, Doljchim achieved record production levels of fertilizers In 1-9/07, the investments in Doljchim, amounting to RON 14 mn, almost three times up over 1-9/06, were directed mainly towards the works for environmental protection, health and safety, infrastructure and the plants safety of operation for fire risk.