Galt & Taggart has published an update on Georgian Oil and Gas Corporation:
GOGC released 1H19 unaudited results. Revenue was up 17.8% y/y to US$ 160.4mn in 1H19, mostly due to a 19.8% y/y (US$ 106.7mn) increase in sale of gas. Revenue from electricity generation, second largest revenue category, was also up 21.6% y/y,while GEL-denominated gas pipelines rental revenues were down 7.1% y/y. Meanwhile, operating expenses increased 14.9% y/y to US$ 130.9mn in 1H19. Higher revenues helped adjusted EBITDA to grow by 21.7% y/y to US$ 36.5mn. Notably, more than 90% of the construction works on Gardabani II CCPP have been completed as of October 2019. GOGC’s strong financial position is attested by a one-notch rating upgrade from S&P in October 2019 to BB- outlook stable.
GOGC’s 1H19 revenue was up 17.8% y/y to US$ 160.4mn, driven by increased gas sales revenue (+19.8% y/y to US$ 106.7mn). Gas demand was mostly affected by increased demand from TPPs as well as from commercial sector. Notably, increased demand from TPPs was a result of reduced hydro generation in 1H19 (down 9.7% y/y) due to unfavorable hydrological conditions. Importantly, gas sales to commercial sector were recorded for the first time, and this new category lifted average gas sale price toUS$ 126.6/mcm in 1H19 compared to 115.5/mcm in 1H18.
Gardabani TPP operated for 165 days during 1H19, compared to only 134 days in1H18, as hydrogeneration reduced. As a result, revenue from electricity generation was up 21.6% y/y to US$ 40.6mn in 1H19 (25.3% of total). Rent from gas pipelines is the only GEL-denominated revenue category for GOGC since September 2017, when an annual fixed GEL 42mn fee was introduced. Consequently, GEL’s 10% depreciation against dollar in 1H19 (vs. 1H18 average) reduced pipeline rental revenue in US-terms by 7.1%y/y to US$ 7.9mn, while in GEL terms income remained flat. Oil transportation revenue declined 15.1% to US$ 3.6mn, as crude oil through put in WREP was down. Significant growth in revenue from crude oil sales (up 70.8% y/y to US$ 1.6mn), which makes uponly 1% of total revenue, was partially driven by increased volumes (up 53.9% y/y) aswell as higher global crude oil prices.
1H19 operating expenses were up 14.9% y/y to US$ 130.9mn. Cost of gas, largest expense category, which combines gas purchased for resale (85% of cost of gas) and gas used by Gardabani I, grew 19.6% y/y to US$ 114.5mn. Gas costs for resale increased in both, volume (+12.8% y/y) and price (+ 3.8% y/y) terms. As a result this category was up 16.7% y/y to US$ 97.9mn. Cost of gas used in electricity generation also grew 39.9% y/y to US$ 16.7mn as demand on gas from Gardabani I increased inthe reporting period. Other expenses, accounting for 12.5% of total, decreased 9.9% y/yto US$ 16.4mn helped by GEL’s depreciation in the period.
1H19 adjusted EBITDA grew by 21.7% y/y to US$ 36.6mn, supported by high revenues. This translated into an adjusted EBITDA margin of 22.8% in 1H19, slightly above the last year’s level (22.1% in 1H18). Income from equity investments plummeted to US$ 0.3mn in 1H19 vs. US$ 0.9mn a year before as Kartli Wind Power Station’sequity was reduced. Net profit dragged down mostly by non-cash FX costs. GEL’s 7% depreciation against dollar during 1H19 led to a non-cash FX loss of US$ 16.7mn in 1H19, compared to US$ 11.2mn gain in 1H18 (when GEL strengthened). As a result, the bottom line plummeted 68.5% y/y to US$ 11.9mn in 1H19.
Cash balance pressured by significant capital expenditures related to GardabaniII construction. Investments stood at US$ 62.3mn in 1H19, one of the highest capital investments made by the company. Construction of Gardabani II reached the final stage with 90% construction works already finalized by Oct-19. Test-regime is planned to start in November, with the launch of the CCPP expected in Dec-19. Cash flows from operating activities stood at US$ 2.6mn in 1H19, compared toUS$ 26.6mn in 1H18. GOGC made higher cash payments (+16.1% y/y) to suppliers in1H19 mostly related to the increased gas sales volumes.
At the same time, cash receiptsfrom customers remained mostly flat (+0.2% in USD), causing the fall in operating cashflows. In addition, earnings on deposits plunged as high capex (related to Gardabani II) reduced cash balance at banks from US$ 182.8mn as of 1H18 to US$ 68.4mn by June19. GEL’s 17% depreciation against dollar as of end-June 2019 compared to end-June 2018, was the main reason behind the decreased balance sheet items. GOGC’s asset structure has undergone significant transformation in 1H19 as Gardabani II construction reached the final stage. On the back of large investments related to this construction, GOGC’s cash balance decreased significantly (down 62.6% y/y to US$68.4mn), while PPE balance increased (+10.1% y/y to US$ 395.1mn). GEL’s depreciation reduced overall asset balance by 11.4% y/y (to US$ 623.6mn), while in GEL terms the balance increased (+3.7% y/y).
