2019 Financial Statements
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, with a commendable post-tax profit. This is largely as a result of oil sales derived from international sources, with global commodity transactions set to become a key tenet of our future growth strategy. This includes the newly established office in New York, which began multinational trading in the weeks prior to the publication of these financial statements. 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 these actions are elements of a contemporary plan to lessen exposure to the volatility of the Russian ruble, our 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 our organization. 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 our company 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 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, our organization 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 $537,9 million to $563,7 million, largely as result of rises in electricity sales from $338,2 million to $361,9 million, a 7,0% inflation from the year before. 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 0,9 million barrels to 5,63 million barrels, up from 4,76 million barrels. Petroleum extraction overall was at its highest during the fourth quarter, with 1,45 million 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 $199,7 million to $201,8 million, 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 $153,1 million, and the weakest in the fourth at $139,7 million. This is opposed to the year prior when the strongest quarterly revenue was reported in the third quarter at $148,1 million and the lowest at $120,7 million in the first quarter. The strong financial performance in the second quarter of 2019 also produced the most significant quarterly post-tax profit of $48,5 million, compared to the $48,4 million in the third quarter, $45,5 million in the third and $36,4 million in the first. Overall, post-tax profits declined incrementally by 0,2% from $179,2 million to $178,9 million, of which $193,9 million was earned through the electricity division and $39,9 million derived from the oil sector. The former figure, a 17,9% year-on-year rise from $164,4 million, 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 utilization of 93,5%, with only 2,06 TWh generated in the third, or a rate of 50,2%. In the first and second quarters of 2019, these totals amounted to 2,07 TWh and 2,49 TWh respectively, or 51,5% and 61,3% of generating capacity, which remained the same as 2018 at 1.860 MW. For comparison, production also peaked in the fourth quarter of 2018 at 91,8%, 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 57,4% and 52,1% 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 1,35 million barrels and the second 1,41 million barrels, compared to 1,34 million barrels and 1,10 million barrels. Extraction for the third quarter rose further to 1,42 million barrels, and was axiomatically greater than the figure for 2018 at 1,09 million 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 our statement of profit and loss when directly compared to domestic sales. Export duties accounted for $30,6 million of all taxes paid, despite Rusneftegaz previously not paying any such levies since 2016, but were a necessary obligation to fulfil our largest oil contract of the year, valued at $139,4 million 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 the 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 million to $59,6 million, 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 $44,4 million. This fall, specifically of 13,5% from a previous figure of $51,3 million, 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 recognized as an element of the costs of goods sold, with such expenses deflating by 27,6% from $9,6 million to $6,9 million.
The most noteworthy expense throughout the year, beyond the mineral extraction tax, was the $95,5 million 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 $93,9 million. The electricity sector also demands other noteworthy outlays, including $2,6 million on water supplies, up 0,1% from the year before, and $2,2 million 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 $2,2 million to $2,1 million, a fall of 7,4%. On the other hand, the petroleum division also demands $4,6 million for oil delivery costs, a nominal increase of 3,2% from $4,5 million 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 totaled $4,2 million; although over the course of the year these fees rocketed by 176,0% to $11,5 million. Contrarily, as a result of continuing investment, the outlay for maintenance and repairs descended by 5,1% from $9,1 million to $8,6 million. There were varied changes for more nominal costs, with legal and professional fees dropping by 27,2% from $3,3 million to $2,4 million, and insurance charges heightening by 8,6% to $0,2 million. 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 $37,4 million, compared to $6,9 million the year before, solely as a result of the rise in export taxes, whereas general and administrative costs declined 9,4% from $10,1 million to $9,4 million.
Moreover, the total costs of goods sold in 2019 rose by 11,3% from $263,2 million to $293,0 million, largely as a result of multiple cumulative increases. As an illustration, our annual wage bill was $48,0 million, up 6,8% from $44,9 million in 2018, with the majority of this figure being staff involved in power and oil operations. Overall, there was a 7,2% rise in expenditure for such employees, including any contractors, from a total of $39,2 million to $42,0 million this year, with administrative pay also ascending 4,5% from $5,8 million to $6,0 million. The latter figure includes the value of director’s remuneration for the period, which rose by 0,6% to $3,2 million. Of all the expenses borne by Rusneftegaz throughout the year, $168,0 million is attributable to the electricity division and a further $162,1 million to the petroleum division, with $11,2 million also being spent but unaccountable to either sector, mostly being back-office charges. In the financial statements, our organization also records the value of expenditures that management expect to be borne in the future as provisions, the appraisal of which was assessed at $26,4 million. The figure, which is recognized 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 $26,8 million 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 $33,0 million to $26,2 million and a 7,1% ascent in taxes payable, which were valued at $7,7 million 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 $7,2 million but increased in value by 7,1%.
Rusneftegaz’s tax expense, however, is exaggerated by deferred tax liabilities of $23,7 million, a number that subsided 2,9% from $24,4 million in 2018, although it is somewhat mitigated and offset by deferred tax assets, which rose by 6,7% to $0,2 million. At the end of the period, our company can report total liabilities of $84,0 million, of which $50,1 million are considered non-current and the remaining $33,9 million 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, $52,5 million are held by the petroleum division, mostly due to the approximated charges for retiring extraction sites in the future, with $29,5 million the responsibility of the power sector and the final $2,0 million accountable on a group basis. Consequently, the oil sector accounts for 62,5% of all liabilities, up from 59,3% in the prior period, with the total figure standing at $54,2 million in 2018, indicating a 1,2% fall overall. Likewise, the electricity segment previously held liabilities of $35,0 million, or 38,3% of the total sum then, inferring a momentous decrease of 14,6% to 35,1% of obligations. Group debt also fell by 9,4% from $2,2 million, despite only computing 2,4% of all liabilities in 2019 and 2,4% the year before.
Conversely, at the end of the financial year Rusneftegaz held assets worth $1,63 billion, with this value growing by 13,6% from $1,43 billion due to the substantial profits and corresponding investments. Of these assets, $1,40 billion are regarded as non-current or illiquid, up 14,2% year-on-year from $1,22 billion, and the remaining $232,3 million as current or liquid, also inflating 13,6% over the period. Petroleum operations accounted for $644,1 million, or 39,5%, of all resources, an expansion of 34,6% from $478,5 million, when the sector held 33,4% of equity. Moreover, power production possessed 64,3% of assets, or $922,3 million, in 2018, with an exponential 3,2% rise yielding $952,0 million of property, 58,4% of the total, at the end of the reporting period. Assets belonging to neither segment were assessed at $33,9 million, or 2,1% of the overall figure, and increased marginally by 0,6% from $33,7 million when it was calculated at 2,4% of the 2018 sum. The largest component of our holdings is property, plant and equipment, which was appraised at $1,40 billion, an expansion of 14,2% from the previous amount of $1,22 billion. This development can be attributed to the board’s current reinvestment strategy, where $218,4 million was expended as a result in 2019, an increase of 33,6% year-on-year when $163,5 million was spent. Of these new investments, $170,9 million was expended on new oil and gas assets, up from $14,9 million the year before, and the remaining $47,2 million was utilized in the electricity generation sector, down from $148,6 million. The enumeration is inclusive of $158,4 million of incomplete construction projects, whereas the sum recorded one year ago stood at $1,1 million, and contracted works yet to be started worth $17,0 million, a rise from $1,8 million. All of these additions, however, were negated by depreciation and depletion of $63,5 million, and impairment valued at $2,4 million, 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 minimize 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 $6,1 million in 2018. The majority of impairment charges were derived from oil operations, including adjustments to estimated petroleum reserves, which are currently estimated at approximately one hundred million barrels. A type of asset that was not affected by deterioration anyhow is intangibles, whose values inflated solely due to conversion differences between our functional and presentational currencies, from $0,1 million in 2018 by an additional 12,1% to a total of $0,2 million. Furthermore, there were no impairment charges registered in relation to trade and other receivables, with the figure declining by 3,5% from $33,0 million to $31,9 million as a result of escalating volumes of business where the customer elected to not pay using credit terms, which management considers a success. Rusneftegaz additionally holds $6,1 million 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 $4,9 million. The board of directors is also appreciative of the 3,7% growth in the quantity of inventory stocked by our organization, with the amount rising from $24,0 million to $24,9 million. This figure mostly consists of $11,1 million of unrefined crude oil held in storage, up 21,7% from $9,1 million and 44,5% of the overall, in conjunction with fuel worth $12,1 million, also expanding by 30,5% from $9,3 million and encompassing 48,7% 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. Our company also stored $1,0 million worth of refined petroleum products that on 31 December that were yet to be sold, compared to $2,7 million the year prior. In addition, spare parts and materials were appraised at $3,3 million, but by the end of the period declined to $0,7 million, 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 $169,5 million, consisting of $8,1 million of long-term deposits and $161,4 million of monies held in banks, both figures accelerating from $7,5 million and $140,1 million respectively. These savings earned a net finance income of $0,7 million, of which the majority was earned on said deposits, up 11,4% from $0,6 million, and a marginal amount was accrued on the banked cash. Such numbers were negated by declining overdraft costs, but the overall position yielded a net gain of 11,5% from 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 our organization this year, compared to the $50,0 million received in 2018. Hence, most of the components of equity stagnated, with the share premium account remaining at $500,0 million 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 $1,63 billion to $1,81 billion. The aggregate of changes in the revaluation reserve was a 6,6% surge from $37,9 million to $40,4 million, with this rise coming solely from a $2,5 million reappraisal of our property, plant and equipment. A more significant alteration to these assets, moreover, was the reassessment arising from currency translations, which totaled $18,4 million. Not only did this directly impact asset values recognized in the financial statements, including an $21,4 million ascension in the value of the aforementioned property, plant and equipment, but also led to a 6,6% increase in the scale of the foreign currency translation reserve to -$801,0 million from the earlier amount of -$822,4 million. Management has established an enduring policy 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 $1,3 million. These financial assets, which have climbed in value from a previous total of $1,1 million and also alleviate against other fluctuations, consist of $0,7 million of commodity price swaps and foreign currency forward contracts worth $0,6 million. The year prior, these were valued at $0,6 million and $0,5 million respectively, but whilst the board of directors is largely positive about this strategy, Rusneftegaz reported a foreign exchange loss of $1,5 million in its financial statements.
Whilst this total receded by 94,5% from the preceding loss of $28,0 million, our organization 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 our results for the current financial year. Management also expect material cost increases arising from the mitigation procedures that were introduced in March 2019, including minimizing 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. Our company 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 projected that 2020 could 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 our organization 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 utilized in this time of need. Similarly, our company still has no 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, our organization 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 in the future. 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.
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