Government Ordinance #27 And High Taxes Will Compress Future Net Earnings

Key Takeaways

• Government regulations and high taxes are squeezing margins and hindering earnings growth despite increased gas production.
  
• Extensive investments, potential project delays, and rising financial costs pose risks to free cash flow and future profitability.
  
• Romgaz's strong financial performance, market dominance, and ongoing investments position it for stable revenue growth despite regulatory and market challenges.

Catalysts

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

• The ongoing Government Emergency Ordinance #27, which mandates selling natural gas at a regulated lower price, is likely to compress revenues. Additionally, with the ordinance potentially extending, revenue challenges may persist, impacting overall earnings negatively.
  
• Despite an increase in gas production, the pressure of higher taxes, including windfall tax, royalties, and contributions to the energy transition fund, will likely compress net margins and overall profitability, making earnings growth challenging.
  
• The significant CapEx investments, notably in the Neptune Deep project and CCGT power plant, represent large cash outflows that might not start generating corresponding revenue until much later, straining free cash flow and impacting net income in interim periods.
  
• The anticipated delays and challenges in completing the CCGT power plant could further impact earnings by affecting future power sales and necessitating prolonged operation of less efficient, older assets, thereby impacting future net margins.
  
• The company's move towards increasing debt through bonds issuance to support investment activities could elevate financial costs in the future, potentially impacting net earnings if interest burdens increase or project execution does not meet market expectations.

SNGN Romgaz Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SNGN Romgaz's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 40.6% today to 34.1% in 3 years time.
• Analysts expect earnings to reach RON 3.4 billion (and earnings per share of RON 0.35) by about March 2028, up from RON 3.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting RON4.4 billion in earnings, and the most bearish expecting RON2.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 7.2x today. This future PE is lower than the current PE for the GB Oil and Gas industry at 12.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.18%, as per the Simply Wall St company report.

SNGN Romgaz Future Earnings Per Share Growth

Risks

• Romgaz reported a historical annual net profit of RON 3.22 billion in 2024, a 14.5% increase from the previous year, indicating strong profitability and a robust financial position. This could positively impact future earnings.
  
• The company's gas production increased by 3.6% in 2024 due to operational improvements and investments in new wells and infrastructure, indicating a potential for stable or increasing future revenue from gas sales.
  
• Romgaz has maintained a leading position in the Romanian gas market, supplying a substantial 58% of total gas deliveries, which supports sustained high revenue levels.
  
• The progress on the Neptun Deep project, expected to deliver first gas in 2027, represents significant future production potential and revenue growth opportunities.
  
• Despite regulatory challenges and market volatility, Romgaz's significant CapEx of EUR 1 billion planned for 2025 indicates ongoing investments in production capacity and infrastructure that could lead to improved operational efficiencies and future revenue growth.

Valuation

• The analysts have a consensus price target of RON5.707 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 RON6.61, and the most bearish reporting a price target of just RON4.92.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be RON10.1 billion, earnings will come to RON3.4 billion, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of RON5.98, the analyst price target of RON5.71 is 4.8% lower. 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.