Rusneftegaz has elected to publish its full consolidated financial statements for 2018. 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:
Rusneftegaz is pleased to report on an excellent performance for the 2018 financial year, with significant increases in revenue and gross profits. The business is in commendable financial health, holding more cash and assets than ever before, with the intention of massively expanding over the course of the next five years. The Group has also increased sales to its largest customers, in spite of falls in production rates on a year-on-year basis, citing reliable and consistent output and service. Principally, the Group recorded a pre-tax profit of $230.5m, up from $223.4m, with earnings per share generated during the year rising from $175 to $179. Thus, Rusneftegaz has utilised its earned funds, alongside considerable private investment, to invest $165.5m in continually improving and raising the quality of its production in all areas.
In 2018, the Group can report a meaningful 7.0% uplift in revenues compared to 2017, from $502.3m to $537.8m, with revenue per share uplifting correspondingly from $502 to $538. This can mostly be attributed to a 14.1% increase in revenue from electricity production, from $296.4m to $338.2m, offsetting a 3.0% fall in oil revenues, which fell from $206.0m to $199.2m. The profit recorded by Rusneftegaz’s fossil fuel sector saw a marginal downturn during the period of 3.0%, from $89.8m to $78.4m. The Group has no short or long term concerns about its oil business, due to the fact that management deliberately cut production from wells during the year in order to preserve supply in future years. Thus, oil production declined to 4.76m barrels in 2018 from 6.16m barrels in 2017, or a decrease of 22.8%. Equally, this could also be considered as a fall from an average production rate of 17 789 barrels per day (bpd) to 13 401 bpd.
On the other hand, there was also a decline in electricity production during the period from 10.45 TWh to 10.27 TWh, a fall of 1.7%, or the equivalent of a decline in installed electrical capacity utilisation from 64.1% to 63.0%. Nonetheless, the company managed to increase the profit of the segment by 14.1% year-on-year from $143.3m to $164.4m. This is mostly due to an amendment in the price per MWh of the Group’s main electricity production contract; which counterbalanced the overall declines in both electricity productions rates and the value of the Ruble. This monetary devaluation was one of the major depressing factors for Rusneftegaz in the past year. Overall, the value of Group’s assets retracted by $34.8m during the year as a result of currency translations, the first such loss since 2015.
Nonetheless, the overall value of Rusneftegaz’s total assets rose extensively during the period by 13.4%, from $1.26bn in 2017 to $1.43bn. The majority of this base consists of property, plant and equipment of $1.22bn, in which the Group made large financial investments to cause a rise of 6.3% from $1.15bn in 2017, and has also spent a further $2.9m on equipment that will be delivered in 2019. Of the expenditure on new assets, a total of $148.6m was spent on completing the refurbishments to the Group’s electricity infrastructure in Cherepovets, and $14.8m was consumed on upgrading and replacing oil production assets, both representing a reduction of 23.8% and 7.0% respectively year-on-year. Both falls were foreseen by management, as investments in both sectors over the past few years have resulted in the company having high-quality assets that require less maintenance, and it is projected that the none of Rusneftegaz's power infrastructure will require a radical overhaul for at least ten years.
Moreover, the electricity division accounts for $922.3m, or 64.3%, of the Group’s $1.43bn asset total, with $478.5m of the remaining assets, or 33.4% being realised through oil production. Since the end of last year, the total value of electricity generation has climbed by 18.2% from $780.6m, and the net worth of petroleum production increased from $448.6m, or 6.7%. Accordingly, the increase in the book value of assets led to the reported loss from depreciation and depletion rising by 7.8% from $53.1m to $57.4m, with $41.5m being attributed to the power sector, compared to $14.7m for the fossil fuel segment. On the other hand, there were greater oil losses from impairment at $1.7m, as opposed to the electricity sector which only suffered write-offs of $235 thousand. The combined amount of impairment accumulated during 2018 grew 17.3%, from $1.6m to $1.9m, although external revaluations culminated in a $3.7m increase in the value of the Group’s assets, whereas in 2017 said assessments were responsible for a more significant increase of $5.4m. It is foreseen that once again in 2019, the growth of the electricity division will exceed that of the petroleum division, with Rusneftegaz set to pledge the majority of its resources in expanding its production capacity incontrovertibly in the immediate future.
It should also be noted that during the year Rusneftegaz listed $580 thousand of equipment for sale, resulting in an inflation of assets held for sale by 10.6% from $5.5m to $6.1m. The main constituent of the Group’s assets held for sale is bullion, with gold and silver reserves being held in an undisclosed location on a contingency basis. Such resources are accounted for on a technical basis as a current asset, despite having management having no plans to sell any precious metals in 2019. The other fixed assets that have been reported are intangibles and derivative financial instruments, with the value of the later rising by 17.0% during the period and being reported as a component of other income. On the other hand, the value of intangible assets fell by 5.5% during the period as a result of currency conversions, from $193 thousand in 2017 to $183 thousand in 2018. The weakness of the Ruble also contributed to a foreign exchange loss of $28.0m, an increase of 179.5% from the prior year where the loss was only $10.0m.
Alongside the currency loss, Rusneftegaz can also report in its statement of profit and loss a net financial income of $600 thousand from interest accrued, a rise of 11.1% from $540 thousand. Moreover, over the year operating expenses also declined by 28.4%, the constituents of which include transport and transmission costs. The total charge for trucking crude oil from wells fell 40.0% from $7.5mm to $4.5m, whereas the outlay to deliver thermal power and electricity rose 13.4% from $2.0m to $2.3m. There was also inflation in the value of general and administrative expenses during 2018 by 11.9%, mostly due to an increase in executive pay. The sum of remuneration for office-based roles equated to $5.8m last year, a 3.0% rise from $5.6m the previous year, with $3.2m being paid to directors in 2018 compared to $3.1m in 2017.
Other components reported as part of administrative costs include legal fees, which increased by 19.3% from $2.8m to $3.3m, and a 30.0% rise in insurance payments from $170 thousand to $221 thousand. In its accounting, maintenance and repair costs are partially divided into both general and administrative expenses and as a cost of goods sold depending on where the funds are spent. For example, maintenance as an administrative cost includes office cleaning and computer repairs, whilst as a component of cost of goods sold covers the preservation of the Group’s production assets. The outlay on administrative maintenance and repairs fell 41.0% last year, although the expenditures on technical maintenance and repairs elevated by 25.0% from $7.2m to $9.1m.
The value of the Group’s maintenance costs is overshadowed in the cost of goods sold by the substantial amount spent on fuel and staffing, with a total of $93.9m spent on coal and $39.2m on labour. Predominantly during the course of the period, wages and affiliated costs increased by 4.0% from $37.4m in 2017, although coal expenditure declined 2.1% from $95.9m. Such a fall can mostly be ascribed to a downturn in production rates, with the decline in petroleum extraction being correlated with a 1.3% fall in the expense of renting equipment from external parties. But in spite of this, water payments associated with electricity production rose from $2.5m to $2.6m, representing an increase of 6.3%.
The third-largest element of the reported costs of goods sold is the mineral extraction tax, a levy paid per metric tonne of petroleum extracted from a licenced area, and in 2018 the total amount paid was $57.4m. This represents an 8.0% rise from the $53.1m paid in oil tariffs in 2017, which can be attributed to currency translation differences, despite a fall in the amount produced. Rusneftegaz currently pays more in extraction taxes than income taxes, with the Group due to pay $51.3m for the profits earned last year, and settled a tax balance of $48.1m for earning the year before.
Likewise, tax payments that are not income tax but accounted for as a part of costs of goods sold, rose 96.2% from $4.9m to $9.6m, but the Group did not pay any export duties for a second consecutive year due to the fact that no foreign sales were made in 2018. Rusneftegaz has continued its current policy of favouring domestic sales in the Russian Federation instead of international sales, but decisions are routinely made on a case-by-case basis, with the potential onus of customs factored into such a decision. The consistent year-on-year increases in the amount of tax paid, whilst a negative, is a testament to the exemplary performance of the company in all areas, although the Group has mitigated some of its immediate tax burdens. It can therefore be reported that in the consolidated financial statements Rusneftegaz has deferred tax liabilities of $24.4m, offset by deferred tax assets of $193 thousand, with both figures rising from the year prior. In 2017, the figure for tax liabilities amounted to $20.7m, with tax assets totalling $183 thousand, corresponding with 17.8% and 5.5% rises respectively.
The rise in the value of deferred tax liabilities is generally an outlier in the broader context of the company’s reported obligations, with all debts falling considerably throughout the year. Notably, Rusneftegaz has had no loan obligations for over a year for the first time since the Group was formed, and is currently free of all long-term debt. Additionally, the value of all payables has receded markedly during 2018, with the sum of the company’s accounts payable now totalling $33.0m, down 47.4% from $63.0m, and the aggregate of taxes payable has decreased by 15.0% from $8.4m to $7.2m. The total quantity of liabilities recorded overall is $91.3m, compared to $119.6m in 2017 – a contraction of 23.7% – with non-current liabilities comprising mostly of provisions. The appraisal for the future charge of decommissioning oil fields under the terms of the licence granted is a total of $26.8m, which as a result of currency fluctuations is down 2.5% year-on-year from $28.9m; however this figure is subject to an annual review, and may fluctuate before oil production at the Group’s sites ceases.
The reduction in the extent of liabilities has consequently caused a growth in current assets, with an eminent 60.9% inflation in receivables, from $20.5m in 2017 to $33.0m. There was, however, a marginal decline in the amount of inventory accumulated during the period by 2.2%, the majority of which consists of unrefined crude oil awaiting transportation and fuel – principally coal–for deployment in the Group’s power station. In 2017, inventory equated to $24.5m, consisting of amongst other products, $8.1m of crude oil and $10.1m of fuel, but by 2018 the overall value had decreased by 2.2% to $24.0m, including $9.1m of unrefined petroleum and $9.3m of mostly bituminous coal. The total value of non-fixed assets at the end of the financial year was $210.6m, rising by 85.8% from $113.4m in 2017. The largest component of this, equating to a total of $147.6m, was liquid cash, more than doubling from its figure the year before.
In total, Rusneftegaz’s cash position grew 134.8% from $62.8m on 31 December 2017, in part due to a cash injection by the ownership of $50.0m in January 2017 to fund additional investments. By the end of the year, the Group made a net improvement in its monetary position by $112.2m before translation differences, with the largest constituent being $225.7m earned through cash flows from operations, the equivalent of a cash flow per share of $226, which is a rise from $214 in 2017. Differences in currency translation accounted for a reduction of $27.5m in the value of the reported cash reserves, whereas in 2017 said devaluation was only $16.5m. On the other hand, Rusneftegaz expects the cash flow to improve again in 2019, but also forecasts that the amount of liquid cash available will reduce as a result of Group expansion currently underway, with projections for high revenues and profits coming from new, overseas investments.
The Group will shortly announce once again that it does not plan to pay a dividend for its performance in 2018, signalling that retained earnings for the year will rise by 12.4% from $1.45bn to $1.63bn. Alongside forecasting strong economic growth in 2019, the Board of Directors is currently implementing a long-term strategic plan to expand its energy production operation beyond the Russian Federation and into developing markets, which should sustainably ascend revenues and profits in the near future. The aforementioned plan will involve Rusneftegaz purchasing competitively-priced power stations in foreign jurisdictions, renovating the plant to a high standard and producing electricity profitably. The renovations will cut emissions to appease local politicians, whilst switching generation assets to low-cost alternative fuels. The plan is expected to elevate Rusneftegaz into the upper echelons of the Russian energy market, ensuring the Group’s status both domestically and internationally.