GEO No91 And Price Cuts Will Erode Revenue And Shrink Net Margins

Key Takeaways

• Reduced regulated gas prices and increased royalties could negatively affect Romgaz's revenue and net margins due to decreased income and increased operational costs.
  
• High investment demands and project challenges may constrain cash flows, leading to cautious dividend payouts and potential revenue impacts from production setbacks.
  
• Strong operational performance, strategic investments, and financial resilience positions Romgaz for growth, diversification, and dominance in the regional gas industry.

Catalysts

Explores for, produces, and supplies natural gas in Romania.

• The regulated gas selling price for Romgaz was reduced by 20% starting in April 2024, which could negatively impact future revenue by significantly reducing income from such sales, particularly as 56% of their sales are projected at these prices.
  
• The increased gas royalties introduced by GEO No. 91 could lead to higher operational costs, significantly impacting net margins as the company will incur more expenses on gas produced despite exemptions on existing concession agreements.
  
• The company faces significant investment needs, including the Neptun Deep project and a new combined cycle gas turbine power plant, which may constrain cash flows and contribute to a cautious dividend payout approach, impacting earnings distribution to shareholders.
  
• The expected start of commercial production at the Iernut power plant in 2025 could initially face operational challenges and production setbacks, potentially affecting revenues and net profit derived from power production.
  
• Plans to maintain production levels until 2027 without the Neptun Deep project coming online could involve increased costs for well reactivations and field optimizations, which may pressure net margins and result in higher expenses.

SNGN Romgaz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SNGN Romgaz's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 37.3% today to 25.4% in 3 years time.
• Analysts expect earnings to reach RON 3.1 billion (and earnings per share of RON 0.38) by about December 2027, up from RON 2.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.5x on those 2027 earnings, up from 7.3x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 27.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.47%, as per the Simply Wall St company report.

SNGN Romgaz Future Earnings Per Share Growth

Risks

• Strong operational performance and strategic investments, such as in Neptun Deep and Caragele field developments, indicate potential for increased natural gas production and revenue growth in the future. (Revenue impact)
  
• Despite a decline in natural gas revenues, Romgaz has managed to achieve a historically high net profit margin of 40.4% for the first 9 months of 2024, showing strong financial resilience and operational efficiency. (Net margins impact)
  
• Strategic projects like the new gas turbine power plant and potential renewable energy investments could enhance Romgaz's energy production capacity and revenue diversification, supporting long-term growth. (Revenue and earnings impact)
  
• Successful issuance of EUR 500 million in bonds with a strong reception from international investors suggests robust financial backing and confidence in Romgaz's strategic plans, potentially securing future financial stability and earnings. (Earnings impact)
  
• The increase in gas production and a significant market share (52% of the total sanction in Romania) highlight Romgaz's dominant position in the regional gas industry, which could lead to sustained revenue streams. (Revenue impact)

Valuation

• The analysts have a consensus price target of RON 5.61 for SNGN Romgaz based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of RON 6.61, and the most bearish reporting a price target of just RON 4.92.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be RON 12.1 billion, earnings will come to RON 3.1 billion, and it would be trading on a PE ratio of 21.5x, assuming you use a discount rate of 13.5%.
  
• Given the current share price of RON 5.49, the analyst's price target of RON 5.61 is 2.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.