Rusneftegaz has elected to publish its full consolidated financial statements for 2019. 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 can report profoundly successful results for 2019, achieving the highest revenues in its corporate history, and a commendable post-tax profit. This is largely as a result of international oil sales, derived for the Group’s newly established office in New York, which opened in September 2019. Similarly, since the beginning of the third quarter the Board of Directors has been actively involved in negotiations to acquire further power capacity to expand Rusneftegaz’s energy portfolio. Both of the actions are elements of a contemporary five-year plan to lessen exposure to the volatility of the Russian Ruble, the Group’s functional currency, which has fluctuated significantly over the previous decade to the detriment of the company. It has, however, been asserted that the primary objective of the Board should be to continue to invest and pool both financial and intellectual resources into the expansion of the electricity generation division, as it forecasted that this will yield the greatest economic benefits for the Group. This sector also maintains a symbiotic relationship with Rusneftegaz’s research into hydrogen power, primarily due to the use of electrolysis, which is also considered a lucrative opportunity that may yield results in the future. Whilst the Group adamantly believes that the oil and gas industry is entrenched and will continue to be active for the next century, in spite of the messages from environmental propagandists, the Board of Directors wishes to ensure that Rusneftegaz maintains the capacity to be adaptable and will continue to support its all petroleum, coal-fired generation and hydrogen investments into the future. However, it must be noted that contingency plans remain in place to repel any aggressive inclinations against the petroleum industry or the Russian Federation. For the year, the Group expanded its revenue per share from $538 to $564, albeit earnings per share remained stagnant at $179 for both periods.
Foremost, Rusneftegaz increased its revenue in 2019 by 4.8% from $537.9m to $563.7m, largely as result of rises in electricity sales from $338.2m to $361.9m, a 7.0% inflation from the year before. Turnover from petroleum also escalated but by a more modest 1.1%, yielding an overall result of $201.8m, differing from the $199.7m reported in the prior year. The significant uplift in sales in the power division is correlated with a corresponding surge in production volumes, which ascended from 10.27 TWh in 2018 to 10.46 TWh last year, or from 63.0% of installed capacity to 64.2%. Equivalently, there was also an expansion of oil production throughout the year of an additional 873 thousand barrels to 5.63m barrels, up from 4.76m barrels. Petroleum extraction overall was at its highest during the fourth quarter, with 1.45m barrels produced, an average of 15 799 barrels per day (bpd) with a peak of 16 642 bpd. Alas, this did not yield a significant upturn in revenue, which rose only marginally by 1.1% or from $199.7m to $201.8m, attributable to a deflation in the value of the Ruble rather than commodity prices, which were generally stable throughout the year. Overall, Rusneftegaz recorded its greatest revenue in the second quarter of the year at $153.1m, and the weakest in the fourth at $139.7m. This is opposed to the year prior when the strongest quarterly revenue was reported in the third quarter at $148.1m and the lowest at $120.7m in the first quarter. The strong financial performance in the second quarter of 2019 also produced the most significant quarterly post-tax profit of $48.5m, compared to the $48.4m in the third quarter, $45.5m in the third and $36.4m in the first. Overall, post-tax profits declined incrementally by 0.2% from $179.2m to $178.9m, of which $193.9m was earned through the electricity division and $39.9m derived from the oil sector. The former figure, a 17.9% year-on-year rise from $164.4m, is a notable success and vindicates the Board’s pursuit in striving for increasingly efficient and modern generation methods.
Power production peaked in the fourth quarter at 3.84 TWh, achieving a capacity utilisation of 95.6%, with only 2.06 TWh generated in the third, or a rate of 51.3%. In the first and second quarters of 2019, these totals amounted to 2.07 TWh and 2.49 TWh respectively, or 51.5% and 61.2% of generating capacity, which remained the same as 2018 at 1860 MW. For comparison, production also peaked in the fourth quarter of 2018 at 93.8%, or 3.77 TWh, but was at a nadir in the first quarter at 50.5% of capacity, or 2.03 TWh. The corresponding figures for the second and third quarters of last year were 2.33 TWh and 2.13 TWh accordingly, or 58.0% and 53.3% of the total installed capacity. Furthermore, oil extraction aggregated an average daily production rate of 15 431 bpd, 18.3% higher than the 13 041 recorded the year before, with even the least productive period in 2019 bettering the corresponding 2018 data. Thus, average daily production for each quarter was fundamentally higher than the affiliated period for the prior year. The first quarter of 2019 yielded a total of 1.35m barrels and the second 1.41m barrels, comparing to 1.34m barrels and 1.10m barrels. Extraction for the third quarter rose further to 1.42m barrels, and was axiomatically greater than the figure for 2018 at 1.09m barrels. The downturn in oil profits, however, originates from the growth in international sales, which correspondingly accrued export duty charges, although it should be noted that said revenues strengthened the Group’s statement of profit and loss when directly compared to domestic sales. Export duties accounted for $30.6m of all taxes paid, despite Rusneftegaz previously not paying any such levies since 2016, but were a necessary obligation to fulfil the Group’s largest oil contract of the year, valued at $149.7m in total. The most significant customer, nevertheless, was the sole buyer of the entirety of Rusneftegaz’s electricity production, and this contractual relationship was renewed during the period for another three years. Export duty, however, was not largest tariff of the year, due to the charge on oil production in the Russian Federation, known as the mineral extraction tax. The value of this expense rose 32.1% from $45.1 to $59.6m, with the scale of this rise is largely accountable to both increases in both the tax rate and production level, and is considered by the Board as a fundamental cost that cannot be mitigated. In terms of size, the mineral extraction levy is only comparable to corporate income tax itself, which declined as a result of falling profits to $44.4m. This fall, specifically of 13.5% from a previous figure of $51.3m, is not considered positively by management, who would rather mitigate such taxes through artificial means rather than the declivity of business. Income tax is ultimately reported in itself in the statement of profit and loss, but minor charges, such as taxes that are not classified as income tax, are recognised as an element of the costs of goods sold, with such expenses deflating by 27.6% from $9.6m to $6.9m.
The most noteworthy expense throughout the year, beyond the mineral extraction tax, was the $95.5m cost of fuel. The charge, consisting mostly of coal purchases for Rusneftegaz’s power stations but also a contingency supply of diesel for backup generators, multiplied by 1.7% during 2019 from $93.9m. The electricity sector also demands other noteworthy outlays including $2.6m on water supplies, up 0.1% from the year before, and $2.2m for transmission costs. This is inclusive of a 1.6% rise in the price of transporting electricity and a reduction in the conveyance of thermal power from $2.2m to $2.1m, a fall of 7.4%. On the other hand, the petroleum division also demands $4.6m for oil delivery costs, a nominal increase of 3.2% form $4.5m the year prior. Notwithstanding, the majority of expenses are accounted for on a Group basis, such as rents, which include not only all properties held under long-term lease contracts but also any payments incurred by staff when borrowing equipment. In 2018, such outlays totalled $4.2m; although over the course of the year these fees rocketed by 176.0% to $11.5m. Contrarily, as a result of continuing investment, the outlay for maintenance and repairs descended by 5.1% from $9.1m to $8.6m, The were varied changes for more nominal costs, with legal and professional fees propping by 27.2% from $3.3m to $2.4m, and insurance charges heightening by 8.6% to $0.2m. Other expenses, including travel costs, similarly shrank by 2.7%, but the value of fines received by the Rusneftegaz inclined by 9.2%. In general, total operating expenses amounted to $37.4m, compared to $6.9m the year before, solely as a result of the rise in export taxes, whereas general and administrative costs declined 9.4% from $10.1m to $9.4m.
Moreover, the total costs of goods sold in 2019 rose by 11.3% from $263.2m to $293.0m, largely as a result of multiple cumulative increases. As an illustration, the Group’s annual wage bill was $48.0m, up 6.8% from $44.9m in 2018, with the majority of this figure being staff involved in power and oil operations. Overall, there was a 7.2% rise on expenditure for such employees, including any contractors, from a total of $39.2m to $42.0m this year, with administrative pay also ascending 4.5% from $5.8m to $6.0m. The latter figure includes the value of director’s remuneration for the period, which rose by 0.6% to $3.2m. Of all the expenses bared by Rusneftegaz throughout the year, $168.0m are attributable to the electricity division and a further $162.1m to the petroleum division, with $11.2m also being spent but unaccountable to either sector, mostly being back-office charges. In the financial statements, the Group also records the value of expenditures that management expect to be borne in the future as provisions, the appraisal of which was assessed at $26.4m. The figure, which is recognised as a non-current liability, is the approximated monetary worth of decommissioning oil wells under the terms of the extraction licenses possessed by Rusneftegaz and its subsidiaries. The sum of this provision declined 1.5% from $26.8m in 2018, largely due to fluctuations in currency translation rates between the United States Dollar and the Russian Ruble. Moreover, there were notable alterations in the value of other liabilities, including a 20.5% recession in accounts payable from $33.0m to $26.2m and a 7.1% ascent in taxes payable, which were valued at $7.7m at the end of the year. This current liability, which includes corporate income, mineral extraction and other taxes such as export duties, was previously measured at $7.2m but increased in value by 7.1%. Rusneftegaz’s tax expense, however, is exaggerated by deferred tax liabilities of $23.7m, a number that subsided 2.9% from $24.4m in 2018, although it is somewhat mitigated and offset by deferred tax assets, which rose by 6.7% from $193 thousand, of $206 thousand. At the end of the period, the Group can report total liabilities of $84.0m, of which $50.1m are considered non-current and the remaining $33.9m are current. The former are those liabilities which are long-term and are not expected to be resolved within one year, and the latter are to be settled imminently, or at least before the end of the next financial year. Of these liabilities, $53.5m are held by the petroleum division, mostly due to the approximated charges for retiring extraction sites in the future, with $29.5m the responsibility of the power sector and the final $2.0m accountable on a group basis. Consequently, oil accounts for 63.0% of all liabilities, up from 59.3%; with the total figure standing at $54.2m in 2018, indicating a 1.2% fall overall. Likewise, the electricity segment previously held liabilities of $35.0m, or 38.3% of the total sum then, inferring a momentous decrease of 14.6% to 34.7% of obligations. Group debt also fell by 9.4% from $2.2m, despite only computing 2.3% of all liabilities in 2019 and 2.4% the year before.
Conversely, at the end of the financial year Rusneftegaz held assets worth $1.62bn, with this value growing by 13.6% from $1.43bn due to the substantial profits and corresponding investments. Of these assets, $1.40bn are regarded as non-current or illiquid, up 14.2% year-on-year from $1.22bn, and the remaining $232.3m as current or liquid, also inflating 13.6% over the period. Petroleum operations accounted for $644.1m, or 39.5%, of all resources, an expansion of 34.6% from $478.5m, when the sector held 33.4% of equity. Moreover, power production possessed 64.3% of assets, or $922.3m, in 2018, with an exponential 3.2% rise yielding $952.0m of property, 58.4% of the total, at the end of the reporting period. Assets belonging to neither segment were assessed at $33.9m, or 2.1% of the overall figure, and increased marginally by 0.6% from $33.7m when it was calculated at 2.4% of the 2018 sum. The largest component of the Group’s holdings is property, plant and equipment, which was appraised at $1.40bn, an expansion of 14.2% from the previous amount of $1.22bn. This development can be attributed to the Board’s current reinvestment strategy, where $218.4m was expended as a result in 2019, an increase of 33.6% year-on-year when $163.5m was spent. Of these new investments, $170.9m was expended on new oil and gas assets, up from $14.9m the year before, and the remaining $47.2m was utilised in the electricity generation sector, down from $148.6m. The enumeration is inclusive of $158.4m of incomplete construction projects, whereas the sum recorded one year ago stood at $1.1m, and contracted works yet to be started worth $17.0m, a rise from $1.8m. All of these additions, however, were negated by depreciation and depletion of $63.5m, and impairment valued at $2.4m, albeit the Board of Directors perceives the former as a necessary cost of business, and rises in this figure as a cost of increasing investment and therefore growth. Management does its utmost to minimise the impairment of resources, and also strives to use all assets as efficiently as possible, thus no additional property, plant or equipment was listed for sale during the period and the total remained unchanged from $6.1m in 2018. The majority of impairment charges were derived from oil operations, including adjustments to estimated petroleum reserves, which are currently estimated at one hundred million barrels. A type of asset that was not affected by deteriorations anyhow is intangibles, whose values inflated solely due to conversion differences between the Group’s functional and presentational currencies, from $141 thousand in 2018 by an additional 12.1% to a total of $158 thousand. Furthermore, there were no impairment charges registered in relation to trade and other receivables, with the figure declining by 3.5% from $33.0m to $31.9m as a result of escalating volumes of business where the customer elected to not pay of credit terms, which management considers a success. Rusneftegaz additionally holds $6.1m of assets that are held for sale, a value which remained unchanged from the prior year, mostly consisting of gold and silver bullion valued at $4.9m. The Board of Directors is also appreciative of the 3.7% growth in the quantity of inventory stocked by the Group, with the amount rising from $24.0m to $24.9m. This figure mostly comprises of $11.1m of unrefined crude oil held in storage, up 21.7% from $9.1m and 44.5% of the overall, in conjunction with fuel worth $12.1m, also expanding by 30.5% from $9.3m and encompassing 48.65 of the value. The larger consists chiefly of bituminous coal and diesel reserves for Rusneftegaz’s power division, which are reliant on a consistent and continuous supply to maintain operations. The Group also stored $984 thousand worth of refined petrochemical products that on 31 December were yet to be sold, compared to $2.7m the year prior. In addition, spare parts and materials were appraised at $3.3m, but by the end of the period declined to $721 thousand, although the former only accounted for 2.9% and the latter 4.0% of all reported inventories. These figures aggregated 9.5% and 14.0% in 2018 respectively, with crude oil constituting 37.9% of all stocks last year and fuel at 38.7%.
The second largest element of Rusneftegaz’s assets comprised of a cash sum worth $169.5m, consisting of $8.1m of long-term deposits and $161.4m of monies held in banks, both figures accelerating from $7.5m and $140.1m respectively. These savings earned a net finance income of $669 thousand, of which $667 thousand was earned on said deposits, up 11.4% from $599 thousand, and $5 thousand accrued on the banked cash. Such numbers were negated by declining overdraft costs, falling from $4 thousand to $3 thousand, but the overall position yielded a net gain of 11.5% from $600 thousand in 2018. Management demands that such amounts are held on a contingency basis, and also due to the fact that there was no additional inward investment in the Group this year, compared to the $50.0m received in 2018. Hence, most of the components of equity stagnated, with the share premium account remaining at $500.0m and the total issued capital staying at a single, solitary dollar, albeit there was a change in retained earnings aligned with the value of the business conducted, an 11.0% rise from $1.63bn to $1.81bn. The aggregate of changes in the revaluation reserve was a 6.6% surge from $37.9m to $40.4m, with this rise coming solely from a $2.5m reappraisal of the Group’s property, plant and equipment. A more significant alteration to these assets, moreover, was the reassessment arising from currency translation which totalled $18.4m. Not only did this directly impact asset values recognised in the financial statements, including an $18.4m ascension in the value of the aforementioned property, plant and equipment, but also led to a 6.6% reduction in the foreign currency translation reserve to ($801.0m) from the earlier amount of ($822.4m). Management has established and enduring policies of attempting to mitigate the potential negative effects of currency volatility through the use of extensive hedging policies, thus at the end of the year, Rusneftegaz held derivative instruments worth $1.3m. These financial assets, which have climbed in value from a previous total of $1.1m and also alleviate against other fluctuations, consist of $715 thousand of commodity price swaps and foreign currency forward contracts worth $598 thousand. The year prior, these were valued at $559 thousand and $513 thousand respectively, but whilst the Board of Directors is largely positive about this strategy, Rusneftegaz reported a foreign exchange loss of $1.5m in its financial statements.
Whilst this total receded by 94.5% from the preceding loss of $28.0m, the Group forecasts that currency conversion deficits will climb following a collapse in the value of the Russian Ruble during the first months of 2020. These declines, which happened as a result of the coronavirus pandemic, are expected to be replicated throughout the Group’s results for the current financial year. Management also expect material cost increases arising from the mitigation procedures that were introduced in March 2019, including minimising the numbers of staff working within the vicinity of others, postponing the annual general meeting and enforcing the non-working period for administrative staff as mandated by the government. Rusneftegaz has additionally been greatly afflicted by the worldwide collapse in oil prices, and does not reasonably foresee that the market will rise beyond $20 per barrel for the remainder of the year. Veritably, the Board forecasts that there shall be sufficient storage for unsold petroleum reserves until at least the fourth quarter of the year, and may elect to consign the financial results for this year entirely rather than sell at below cost price. The Group is also actively monitoring the geopolitical situation between the Russian Federation and Saudi Arabia, who may opt to increase production to further reduce commodity prices to the detriment of the shale oil industry in the Americas. Internal economists forecast that the impact of the ongoing crisis will be monumental, and whilst the Russian petroleum sector is more resilient than other global competitors, it is expected that 2020 will yield the largest losses in Rusneftegaz’s history. As a comparatively small supplier, management still does not expect that any authority will demand any cuts in production rates, but the Group may do so voluntarily. It is commendable that Rusneftegaz has accrued the technical expertise in order to manage its resources intelligently, and in doing so has accrued vast volumes of cash reserves which can be utilised in this time of need. Similarly, the Group still has not outstanding borrowings, and is therefore able to withdraw lines of credit if absolutely necessary. Needless to say in the current market conditions, a dividend will not be paid this year, but neither is it anticipated that any equity investments will be required to continue trading. As such, the Group is currently and shall continue with its international expansion, but more gradually than initially proposed, although Management is optimistic about the likelihood of expanding power generation capacity by the end of the year. Overall, in spite of the challenges forthcoming, Rusneftegaz shall be both determined and resolute in its actions, and look forward to a more prosperous future.