Rusneftegaz has elected to publish its full consolidated financial statements for 2014. These results were prepared in accordance with International Financial Reporting Standards, otherwise known as IFRS, and have been audited by Deloitte. Foremost, the directors can report a positive financial performance for the year. A synopsis of which is as follows:
For the 2014 financial year, Rusneftegaz can announce that it made a pre-tax profit of $122.5m from overall revenues of $552.9m, despite a considerable deflation in the value of the Russian Ruble and an extensive depression in commodity prices during the fourth quarter. It is significant that Rusneftegaz managed to remain profitable this period, albeit the loss of value incurred as a result of foreign currency translation differences is a profound disappointment, and is unlikely to be rectified in the short term. However, the position of the Group remains strong, although the incoming management intends to manoeuvre the company and its affiliates from its dependency on oil earnings in these volatile times. As such, the newly-composed Board of Directors has undertaken a thorough and extensive review of all operations, concluding that oil production will be greatly reduced for the sake of the long-term viability of the petroleum division. This will be illustrated once the final production data for the first quarter of 2015 is published at the end of April. The major caveat of any fall in the level of production is a corresponding decline in revenues next year, and whilst there is no direct and immediate solution to this issue, management foresees the future of Rusneftegaz as a variegated energy conglomerate with focus and impetus placed on all facets of modern petroleum and power production.
Nevertheless in 2014, total oil production equated to 8.35m barrels, with an average daily extraction of 22 890 barrels. This yielded a pre-tax profit of $118.5m from a turnover of $368.6m in the Group’s petroleum division. Likewise, the amount of electricity generated throughout the year amounted to 11.53 TWh, or 70.8% of Rusneftegaz’s installed capacity of 1 860 MW. Such a figure culminated in a pre-tax profit of $15.5m, derived from revenues reported at $184.3m, although management has greater aspirations for this particular sector of the Group in the near future. The new ownership’s commitment and ambition for the company is also noteworthy, with an initiative to spend over $1.0bn on new infrastructure over the next five years to ensure Rusneftegaz becomes a titan of the industry. In comparison, expenditure on assets only aggregated $29.5m last year, despite holding cash reserves of $107.7m.
At the end of the year, the Group held total assets of $851.2m, of which $300.5m comprises electricity infrastructure, with a larger share of $431.5m attributable to the oil division. The largest single component of Rusneftegaz’s reported asset base consists of property, plant and equipment valued at $713.8m, although this figure has fluctuated markedly during the period. Thus on 31 December 2014, the total losses from currency conversion differences equated to $507.0m, vastly more than the $2.3m cost of impairment and the $40.1m depression caused by depreciation and depletion. Whilst the worth of these assets was revised upwards by $2.2m upon review, declines in valuations caused by the weakened Ruble is thematic across the financial statements, with the figure for intangible assets now only reported at $162 000.
Of the total reported assets, $715.4m are considered as fixed assets with the remaining $135.8m regarded as non-fixed assets, including $22.0m of receivables and $5.0m of assets held for sale, which is composed of mostly of bullion. Current assets also encompass inventories worth $1.1m, which is constituted mainly by $428 000 of crude oil, along with fuel, petroleum products and spare parts. One of the positives of the financial results is the increase in the value of derivative financial instruments by $62 000 to $696 000, which is recognised as a non-current asset and includes the Group’s hedging. Such a rise is reported as an element of other income in the statement of profit or loss, and comes despite the relative quandary of creating dependable price swaps and forward contracts during the year.
On the other hand, at the end of the year Rusneftegaz also holds liabilities of $137.6m, of which $37.0m is affiliated to petroleum production, $28.8m is linked to power generation and $70.6m is the remaining sum of a loan withdrawn in 2010. Similarly to the Group’s assets, all liabilities are reported depending on their likelihood to be settled within the next fiscal year. This incorporates non-current liabilities valued at $35.4m, of which the largest constituent is provisions appraised at $31.4m, which is the approximated financial burden of fulfilling Russian regulatory requirements to recondition the Group’s oilfields upon the expiration of an extraction licence. It also includes current liabilities accounted for at $102.2m, consisting of the aforementioned borrowings due to be resolved next year, accounts payable valued at $27.6m and $3.9m of taxes payable. Along with said owed funds, Rusneftegaz also held a liability of $4.0m in regards to the differences between taxation law and the accounting tax treatment of assets, albeit this is somewhat negated by a deferred tax asset measured at $718 000. Overall, the financial results for the year yielded an income tax charge of $24.8m, although the largest levy imposed was the mineral extraction tax which resulted in a payment of $179.3m. In conjunction with taxes other than income tax, said oil resource tariff was accounted for as component of costs of goods sold, with a figure of $5.3m registered on the financial statements for the former.
The costs of goods sold equated to $396.4m in total, with the second-greatest constituent after the mineral extraction tax being fuel expenses, mostly bituminous coal for the Group’s power operations. Rusneftegaz similarly paid $5.4m under the terms of rental contracts, $2.0m in water rates, a total of $11.7m for maintenance and a further $45.6m in staff costs. Administrative expenses of $12.2m are also reported in the statement of profit and loss and other comprehensive income, as well as legal fees totalling $3.4m, plus insurance premiums worth $655 000. Furthermore, the smallest facet of the income statement is operating expenses worth $8.8m, embodying $1.7m of transmission costs and a further $7.1m in transportation expenditures, which involves the shipment of petroleum from the source of extraction to the local refinery. This figure may decline, however, next year depending on the extent production is cut.
The new management board intends to take remedial action to ensure the short-term commercial success of the Group, and will announce that there will not be a dividend paid for the 2014 financial results. Additionally, an equity contribution of $25.0m has been made by the new ownership, after the Board of Directors requested additional funds for Rusneftegaz’s planned investment programme, with the financial performance for the fourth quarter being the worst in the company’s history. Thus, company executives are also contemplating whether to alter the amount of currency held in long-term deposits, with the Group currently holding $5.4m in accounts, generating a net finance income of $421 000. Upon a potential adjustment, finance income could be lowered to provide the security of a greater amount of liquid cash, ensuring that Rusneftegaz has adequate monetary resources to manage any material change in circumstances during upcoming financial periods.
Contrarily, however, the Board perceives that all indicators demonstrate that the Group is in robust fiscal health, with revenue being earned through a plethora of customers, the largest of which is the Rusneftegaz’s electricity generation contract valued at $192.5m. Ultimately the Group also managed to remain profitable, and delivered revenue and earnings per share of $553 and $122 respectively, undeterred by external economic factors of which it has no control. The long-term outlook for oil revenues, however, will be less certain until a stabilisation in commodity prices, by which time the board will have reviewed all available options for the sector and formulated a plan accordingly. Likewise, the forecast for the petroleum segment in 2015 is not optimistic, but Rusneftegaz has the capability and intrinsic resilience to ensure that the Group prospers regardless. As such, the incoming regime intends to pivot the direction of Rusneftegaz away from its dependency on petroleum, and will focus resources on the expansion of the power generation division to variegate its income sources. Management is projecting that the majority of the company’s future growth will derive from such investments in electricity, and will commit further funds once the viability of the plan is proven. In the immediate term, this will involve an overhaul and modernisation of all existing infrastructure, before an eventual expansion of capacity and the purchase of further plants. Sequentially, the ambition of the ownership is to expand the Rusneftegaz to be one of the largest companies in both the Russian Federation and the world, and intends to do so as soon as possible.