Debt to influence investment priorities

Debt is a key element to watch out for in times of turmoil. While, in a normal economic context, a high level of indebtedness is preferred by shareholders, in order to ensure a higher return on equity and therefore higher profits, in times of financial crisis a high level of debt can lead to bankruptcy, say analysts.

Clearly, the interest gearing of private energy or oil and gas companies with operations on the local market has increased since Q4 last year. In order to keep their operations stable, companies in these sectors have announced cost-cutting measures, layoffs and investment cuts or delays, in order to remain profitable or to minimize losses.

Private companies dig for financing

Rompetrol Rafinare (RRC) took out a $55 million loan in Q4 last year from its majority shareholder, Rompetrol Group Holland, controlled by the Kazakh oil company KazMunaiGaz.

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Marius Pandele, head of research at Vanguard, told Business Review that Rompetrol Rafinare has an indebtedness level of 61.25 percent of its total assets, in addition having to return a bond issuance of some EUR 600 million, plus interest.

The firm's competitor, Petrom, had a debt of 38 percent of its total assets in September last year, according to Pandele. At the end of last year, Petrom took out a EUR 375 million loan and, this year, a revolving credit line of EUR 500 million from Austrian oil and gas company OMV, its majority shareholder. However, these sums do not cover the company's audacious investment plans of EUR 1.5 billion per year.

“The rest of the financing will come either from the company's cash flow or local or external financing sources (corporate financing or financing for specific projects), depending on whether the oil price reaches an acceptable level. The company's forecast for the oil price on the medium term is $60-80 per barrel, and we foresee an increase on the long term,” company officials told BR.

Market analysts say that oil companies' investment plans will probably change. “Both Petrom and Rompetrol Group had plans to invest fairly large sums in new headquarters. Moreover Petrom has plans to produce electricity. But in the current climate, these plans could be canceled or delayed, because they will only generate additional costs and larger interest gearing,” Pandele told Business Review.

His view is confirmed by Petrom officials: “In the current economic context, Petrom is prioritizing its investment projects by their power to generate cash flow, such as making our refineries more efficient. Some Petrom investment projects could well be delayed, in accordance with the development of the oil market.”

The company recently decided to cut 3,000 jobs, as part of its restructuring program. In September last year, Petrom had 33,656 employees. Also, towards the end of last year, the company hedged its risk by insuring 40 percent of this year's oil production, in order to protect the cash flow against the negative impact of a drop in prices.

“It was insured for a minimum level of $80 per blue barrel (bbl). If, this year, the price drops below $65 per bbl, we will receive an additional $15 per bbl,” said Petrom officials. Despite the firm's measures to minimize both the effects of the crisis and pressures of the oil price fluctuation on the international markets, financial analysts are pessimistic about the company's results.

“This could be the first time since its privatization when Petrom reports losses in Q4, due to over-provisions. These are the result of the accounting value decrease, caused by the depreciation of the investments Petrom made in Russia and by the need to cover the risks of law suits with employees,” Andreea Gheorghe, chief analyst with Intercapital Invest, told BR. According to her, the unfavorable developments in Petrom's activity have already been anticipated by stock exchange investors – last year the firm's share price fell by 64 percent.

Private companies in the gas sector have announced that they might keep the same investment budget for this year, but have not yet decided. “This year's investment budget will have the same priorities as it has had for the past three years – to renew and modernize the gas distribution network,” Distrigaz Sud officials told BR. Last year, the French gas company's investment budget was some EUR 80 million.

And E.ON Gaz Distributie has announced that it will invest EUR 20.8 million in new network connections at 26 centers.

State-owned companies flag up million-euro investments

Financial analysts believe that state-owned companies could make investments without definite future incomes, as they are better placed to cope with financial problems.

For this year, Romgaz has established an ambitious investment program and its priority is to improve the performance of its gas storage facilities.

“We will maintain the gas capacity for the Szeged-Arad pipeline, which will provide the interconnection between the Romanian and EU gas transportation systems. Also, if the government decides to develop a strategic gas storage facility in Roman-Margineni, the total investment could reach between EUR 600 million and EUR 1.8 billion, and the major gas supplier could be Gazprom,” Romgaz officials told BR. According to company information, Romgaz will provide the money for the investment from its own resources.

Meanwhile, state-owned energy company Electrica has announced that it will invest some EUR 189 million in network development this year, while Hidroelectrica's 2009 investment budget is EUR 319 million.

As for recently made investments, the Vanguard specialist says two aspects must be taken into consideration here. “The good news is that funding for these projects has already been obtained, and under better conditions. The bad news is that the estimated revenues from these investments will not be as high as anticipated. We must not forget that in the next few years depreciation and amortization expenses for these investments will have to be added, which could lower the company's financial results,” said Pandele.

It remains to be seen who bet on the most profitable project and who will have to dig more for financing.

Dana Ciuraru