Strong Q1/08 results supported by continuous progress in the restructuring and modernization programs
- Strong results in Q1/08 driven by the favorable international oil price environment and successful restructuring and modernization efforts in all business segments: EBIT increased by 161% compared to Q1/07, net income by 156% while turnover was up by 35%
- Investments almost tripled in Q1/08 compared to Q1/07, confirming the commitment to Petrom’s long term developments
- Integration of Petromservice on track, creating the basis for increased efficiency in E&P
- On schedule finalization of the tender for the construction of the Brazi power plant confirms entry into the power market
Mariana Gheorghe, CEO of Petrom: “The strong results recorded in Q1/08 are the consequence of the favorable international oil price environment and the continuous progress of our restructuring and modernization programs. The successful turnaround programs in Exploration and Production started to yield results and the integration of the recently acquired oil service activities of Petromservice into the newly established business division, Exploration and Production Services, is progressing in line with the established schedule, and will lead to increased efficiency at the Exploration and Production activity. Similar good progress was recorded in Refining and Marketing, as well as in Gas and Power, with the investment programs advancing as planned. All these positive results reinforce our confidence that the modernisation of Petrom is on track and form the basis for the future growth of the company.”
Key performance indicators (RON mn)
Employees at the end of period
The Company’s turnover increased by 35% to RON 3,719 mn compared to Q1/07 mainly due to higher R&M domestic sales, which were generated mainly by selling price increases. The same trend was recorded in E&P and in G&P.
Other operating revenues decreased by 31% compared to Q1/07 to RON 3,839 mn due to lower revenues resulting from inventory movements, compensated to some extent by a slight increase in sale of assets.
Operating expenses increased by 11% compared to Q1/07, to RON 2,809 mn, mainly due to the increase of raw materials expenses caused by higher crude oil prices, cost of merchandise sold in G&P and higher staff costs and also due to the PSV integration starting with February. These negative effects on operating expenses were partly offset by higher revenues from release of provisions for risks and charges and reduced costs of third-party services.
The EBIT amounted to RON 1,029 mn, 161% above the RON 394 mn result in Q1/07.
The Company’s financial result improved from RON 58 mn in Q1/07 to RON 123 mn, mainly due to FX effects.
The corporate tax charge increased in Q1/08 by RON 104 mn to RON 175 mn, due to the increase in operational result.
The net profit increased by 156% compared with Q1/07 as a direct consequence of the higher operational result offset by higher corporate taxes.
As a result of Petrom’s business activities, significant tax contribution was generated for the state budget amounting to RON 1,456 mn as compared to RON 1,404 mn in Q1/07. Income tax (RON 175 mn), excise duties (RON 679 mn), royalties (RON 172 mn) and VAT payable (RON 208 mn) accounted for around 85% of the total tax contribution in Q1/08.
Investments (RON mn)
Exploration and production
Refining and marketing
Gas & Power*
* From Q1/08, Chemicals (Doljchim) is no longer reported separately but under Gas & Power division
The total investments were RON 2,047 mn, 271% up on Q1/07.
The investments were directed mostly to E&P (86%) including the purchase price and other investments related to Petromservice. Approximately 10% of the total investments have been allocated to R&M. The investments in G&P represented 2%. The remaining 2% was mainly directed to IT investments in Petrom’s Solutions and also to Corporate and Others, representing investments in the PetromCity project.
Exploration and Production
- Strong results due to higher international oil prices and progress in modernization efforts
- Investments in Q1/08 more than four times higher than in Q1/07
- Overall production levels at similar levels to Q1/07, with a slight increase of 1% in crude production
- Well modernization program with 567 wells modernized ahead of plan
EBIT increased by 74% compared to Q1/07, from RON 630 mn to RON 1094, and by 42% compared to Q4/07, mainly driven by a continuous, favorable crude price development.
E&P investments in Romania increased by 338% compared to Q1/07, to RON 1,765 mn, mainly due to the acquisition of Petromservice, but also related to development and production drilling and to the ongoing well modernization program. Petrom SA spent RON 127.7 mn on exploration activity in Q1/08 of which RON 20.2 mn was expensed, and RON 107.5 mn was capitalized.
The domestic realized crude price increased by 76% to USD 85.15/bbl compared to Q1/07 due to higher international prices. However, the domestic realized crude price increased only by 66% in RON terms over the same period last year, due to the strengthening of the RON against the USD compared to Q1/07.
Domestic production costs of USD 17.08/boe were 11% higher compared to Q1/07, mainly driven by the strengthening of the RON against the USD (by 4% compared to Q1/07), lower production levels and higher salaries and service related costs. When expressed in RON/boe, domestic production costs increased by 6% compared to Q1/07, a clear indication of the significant impact of RON appreciation against the USD. Domestic production costs in RON/boe decreased by 2% in Q1/08 vs. Q4/07 (6% decrease when expressed in USD) due to the depreciation of the USD in Q1/08.
Total oil and gas production in Romania amounted to 17.57 mn boe and was 1% lower than in Q1/07. Domestic oil production continued to be affected by natural decline and the shutdowns needed for the modernisation program. Overall gas production was negatively impacted by temporary shutdowns at major customers and network limitation.
Crude oil production in Romania amounted to 1.13 mn tons, 1% higher than in Q1/07, and at the same level as in Q4/07. Production stabilization was the result of the investment program (modernization and turnaround) and the implementation of a new organization.
Natural gas production reached 1,439 mn cbm, 3% lower than in Q1/07 and 1% higher than Q4/07. The good gas performance recorded in Q1/08 compared to Q4/07 was driven by demand generated by the exceptionally cold weather and the higher than expected production levels of the Mamu production block.
Oil and gas production in Kazakhstan amounted to 452 thousand boe, 2% lower than in Q4/07 and 9% higher than in Q1/07. Production was affected by a large number of wells flooded and wells awaiting workover or shut in wells for side-track.
The comprehensive turnaround program continued throughout Q1/08. After six months, the turnaround program is starting to get momentum, with most projects reaching a steady course. The most significant achievement is the increase in the number of completed wells by 47%. Moreover, 15 field re-development studies have been launched together with a huge effort to embed modern modeling tools and digitize well data.
The Downhole Technology Modernization Program/Well Modernization Program progressed, with 567 wells already modernized.
Exploration and Production Services (EPS)
The acquisition and integration of the acquired oil services business of Petromservice into Petrom will support two strategic objectives of the E&P division: The stabilization of the oil and gas production and the reduction of production costs. For the integration of the newly acquired oil services, a new sub-division was created within Petrom: Exploration and Production Services (EPS), effective January 2008. EPS results are consolidated in E&P financials.
The legal transfer of the business was completed on February 1, 2008. As of this date, 9,775 employees from Petromservice (PSV) and approximately 3,550 employees from E&P Drilling and Production Services (DPS) have been transferred to EPS.
The transfer of EPS included some 11,000 assets from PSV and around 25,000 assets from DPS.
EPS has been organized under a functional structure with three major departments, namely Workover and Drilling, Maintenance as well as Logistics. Administration functions, such as Human Resources, Controlling, Procurement and HSEQ are structured as cross-functional departments, with E&P or existing Petrom headquarter functions.
The Vision of EPS is to provide best exploration and production services to Petrom E&P: High quality drilling, workover, maintenance and logistic services. In order to accomplish this vision, a structured turnaround program was implemented, consisting of two phases:
The 100 Days Stabilization Phase, ending on April 30, 2008, aimed at integrating the EPS business into Petrom at operational level (equipment, IT, HSE). During this period, the new management was able to fulfil all its service obligations to E&P, resulting in no interruption of the oil and gas production.
The second phase, Quick Win and Strategy Orientation Phase, aims to set out the details of the EPS strategy, and the realization of first improvements is in preparation.
Through the integration of EPS production costs should be reduced by USD 1.5 per barrel.
A consequent Adjustment of the Service Portfolio of EPS (phase 3) will start in Q4/08. The turnaround program will be finished by 2010, with the final phase – Reaching Cost and Quality Targets –.
EPS will contribute significantly to the overall success of the Group by providing efficient and innovative solutions in-house or with selected business partners. At the interface between E&P and EPS, the integration will guarantee synergies by using joint procurement and warehouse management. An aligned and homogenous process management system will ensure smooth day-to-day work ordering and execution. The new set-up allows a coordinated modernization of equipment and development of know how in EPS and E&P.
Refining and Marketing
- Increasing crude prices led to higher feedstock and own energy costs, offset by inventory gains
- The new diesel hydrotreater at the Petrobrazi refinery was successfully commissioned and passed its performance tests
- Throughput per filling station is continuously improving due to full agency system implemented
EBIT of the R&M business improved significantly compared to Q1/07, from RON -307 mn to RON -118 mn, despite the deterioration in the refining environment, partly due to favorable inventory valuation increases in the rising product price market. Profitability was also helped by continued improvement in the yield of high value products such as aviation fuel and diesel, along with further reductions in refining own fuel consumption and losses. EBIT improved versus Q4/07 (RON -474 mn) as this was mostly due to inventory valuation increases.
R&M investments increased by 109% compared to Q1/07, from RON 95 mn to RON 198 mn. In Refining, investments were mainly related to the diesel hydrotreater (HDS) project at Petrobrazi and to the new FCC gasoline hydrotreater unit scheduled to for start-up in early 2009.
In marketing, the investments are mainly focused on reconstructing and modernizing the existing, old style Petrom filling stations and on the rebuilding of the main terminals within Supply & Logistics.
The total quantity of crude processed in Q1/08 amounted to 1,459 thousand tons, lower by 13% compared to Q1/07, of which 403 thousand tons represented imported crude oil.
Refining utilization rate decreased compared to Q1/07 to 73%, as the refineries minimized the use of expensive crude imports in the current low margin environment.
Petrochemical and special product sales were 9% less than the Q1/07 level due to lower domestic demand for petrochemicals.
Petrom successfully increased biodiesel content in diesel fuel to 3% at the start of the year, on schedule, and in line with Romanian regulations.
Total marketing sales of 1,128 thousand tons increased by 1% in comparison with Q1/07 and decreased by 17% in comparison with Q4/07, business being seasonally weaker in the first quarter.
White product sales on the domestic market were 7% above Q1/07 level, driven by the 37% jet fuel sales increase qoq and also by the higher demand, the upgrade of the filling station network and improved retail station management. Domestic gasoline sales were up by 2% compared to Q1/07, while domestic diesel sales increased by 6% compared to the same period of 2007.
Retail sales increased in comparison with Q1/07 by 21% to 383 mn liters, while commercial domestic sales amounted to 391 thousand tons, being 25% lower than in Q1/07, due to lower demand for fuel oils in the domestic market.
Exported quantities have been higher in Q1/08 compared to Q1/07, mainly due to placing on the international market the fuel oil quantities which could not be sold locally: the domestic customers sourced their needs from lower priced gas during this period.
As a result of the implementation of the full agency system, amongst other factors, the average throughput per filling station is continuously improving. We expect an annualized throughput per filling station of 3.6 mn liters by the end of 2008.
Petrom sold through its subsidiaries 281 mn liters of fuel to retail customers in Q1/08, of which 61% represented international sales.
The non-oil business also registered a significant increase. The total turnover increased to RON 90 mn, 62% higher compared to Q1/07, due to portfolio and purchase process optimization.
The number of Petrom SA operating filling stations reached 455 at the end of the quarter.
The modernization of the existing filling station network will remain the focus in 2008, with 75 filling stations to be re-constructed during the year; 4 of them already opened in Q1/08 and another 10 being under construction.
Gas and Power (G&P)
- The consolidated EBIT for G&P includes the result of Doljchim as of January 2008
- The divestment process for Petrom Distributie Gaze SRL commenced; this is expected to be finalized by Q3/08
- The tender for the power plant construction was finalized
EBIT generated by the G&P business of Petrom SA was of RON 70 mn, 21% higher compared to Gas EBIT in Q1/07. The inclusion of the result of the fertilizer plant Doljchim, which is shown as part of G&P starting from Q1/08, more than compensated the difficult market conditions for marketing and trading in Romania.
Investments in G&P were more than twelve times higher than in Q1/07.
The power related investments amounted to RON 12.82 mn and were directed to site preparation (underground demolition and rerouting) and the first payment for the power plant construction of the combined cycle power plant Brazi.
The investments in Doljchim amounted to RON 24.75 mn, more than eleven times higher than in Q1/07. These were directed mainly towards works for environmental protection, mechanical equipment, health and safety, infrastructure and the plants safety of operation for fire risk.
The gas sales of Petrom SA decreased by 3% compared to Q1/07, due to lower market demand, the natural decline of production and some technical problems caused by adverse weather conditions.
Gas sales increased by 4% compared to Q4/07 due to lower temperatures.
The average import gas price in USD increased to USD 370/1,000 cbm compared with USD 300/1,000 cbm, while the import price in RON increased from RON 840/1,000 cbm in Q1/07 to RON 912/1,000 cbm. The regulated end user gas price for households and industrial customers in Romania increased by 8.5 % as of February 1, 2008.
The average regulated gas price for Romanian producers was USD 197/1,000 cbm (RON 487/1,000 cbm), up by 28% compared to Q1/07 (22% in RON terms).
However, the gas price increase in February 2008 did not impact the result of G&P since, in accordance with the agreement made with the Romanian government in March Petrom contributed RON 14.5 mn in Q1/08 to the newly established Social Gas Fund. The Social Fund was set up to make grants to alleviate the burden of gas price increases on low income Romanians who rely on gas for domestic heating.
Petrom extracted from storage 200 mn cbm in Q1/08. The total remaining volume of natural gas in storage at the end of March was 9 mn cbm, compared to 106 mn cbm in Q1/07.
As natural gas distribution is not considered to be a core activity of Petrom S.A., the strategic decision was made to divest this activity to a qualified partner who will guarantee the continuation and the future development of PDG. This divestment process should be finalized in the second half of 2008.
Doljchim profited from relatively high sales prices of methanol and achieved an EBIT of around RON 11 mn.
Selling prices of chemicals products have been higher this year, but the quantities sold in Q1/08 were lower because of the shutdowns necessitated by improvement works at the fertilizers and ammonia plants in January and February 2008. The volume of Doljchim sales decreased by 17%, to 146 thousand tons (Q1/07: 176 thousand tones).
Export sales represented around 34% of total sales. Doljchim's products were exported mainly to neighboring countries such as Hungary, Bulgaria and Serbia, but also to other countries like Slovakia, Austria, Macedonia, Italy, Spain and Turkey.