2020 Financial Statements
Rusneftegaz has elected to publish its full consolidated financial statements for 2020. 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 broadly positive financial performance for the year. A synopsis of which is as follows:
Rusneftegaz can report largely positive financial results for the 2020 financial year, albeit figures that are significantly lower than forecasts and have been unquestionably afflicted by the ongoing coronavirus pandemic, which has not merely resulted in greater costs for our organization, but also depressed commodity values and trading. Whilst management had projected an uplift in all key performance indicators at the beginning of the year, the collapse in the oil price in April 2020 caused substantial detriment to the results of Rusneftegaz’s petroleum sector in the latter months of the year. This was largely as a direct consequence of the majority of our oil sales deriving from futures contracts, ultimately meaning that prices are fixed many months in advance. Similarly, there were notable contractions in electricity production arising from a lack of demand, although the corresponding declines in revenues and profits are marginal when compared to those in the petroleum sector. However, Rusneftegaz nonetheless managed to report a pre-tax profit of $110,0 million from turnover of $491,0 million, with both such figures down 50,7% and 12,9% respectively when compared to 2019. Our company recorded its greatest results in the first quarter, when a pre-tax profit of $62,5 million was announced from revenues of $152,8 million, howbeit there was a marked decline in these figures throughout the year.
As a result of this, revenues and profits for the first period rose by 17,2% and 35,6% respectively when compared to the same period in 2019, with our organization reporting record quarterly turnover. However, the results published for the end of June yielded a 17,2% drop in revenues to $126,5 million, in addition to a 49,2% decline in pre-tax profits when compared to the first three months of the year, or equally considerable 17,4% and 47,7% falls in turnover and earnings from the second period of 2019. At such point, the economic effects of the pandemic had become apparent and all of our offices both in Russia and the United States had been fully closed to non-essential staff for over three months. It was not until the third quarter when these workplaces began to partially reopen, for which Rusneftegaz declared a further fall in turnover, and a greater fall in profit of 11,1% and 51,1% respectively to $112,4 million and $15,5 million, or an even steeper decline of 19,9% and 74,3% from the same three months in 2019. Notwithstanding, the most significant deterioration occurred in the final quarter of the year, five months after the initial collapse in commodity prices, when our organization published revenues of $99,2 million; the lowest such figure since the fourth quarter of 2015, 11,7% down on the prior period and 29,0% lower than twelve months before. At the same time, Rusneftegaz announced its lowest quarterly profit since the loss it made in the final three months of 2014, with a total 97,9% lower than the prior quarter and 99,4% on the year before, at $0,3 million.
Such notable declines can mostly be attributed to underperformance in the oil division, reporting an annual loss of $40,0 million from revenues of $145,1 million, the worst results for the segment in Rusneftegaz’s corporate history, with turnover down 28,1% year-on-year when the sector recorded revenues of $201,8 million and a pre-tax profit of $39,9 million. Such a reduction was largely offset by the $165,0 million gain reported in the energy generation division, which earned a total turnover of $345,8 million, mitigating all losses in other areas of our company. Whilst both of these figures are lower than those reported for 2019, a decrease of 4,4% from a turnover of $361,9 million and a reduction in profit of 14,9% to $193,9 million, such results clearly evidences the financial resilience and strength of the Rusneftegaz Group’s electricity production program. Thus, in February 2021 when the board of directors announced that it intended to curtail investments in the coming years to preserve capital, it was resolved that cuts should weigh towards the oil sector, with the other areas of production having greater long-term economic prospects. Nevertheless, asset expenditures in 2020 largely went ahead as planned, with a total of $150,1 million spent on new property plant and equipment. This was a symbolic reduction of 31,3% from the $218,4 million spent the year before, and does not include $12,1 million of works to be completed and $0,9 million of schemes that are yet to be started but have been contracted. Overall outlays on assets for the period are generally harmonious with management’s expectations for the year to December 2019, but both the 92,4% decline in works to be completed from $158,4 million and the 94,9% fall in the value of contracted projects not yet started from $17,0 million is a direct consequence of the pandemic stifling Rusneftegaz’s intentions.
Nevertheless, our organization succeeded in growing the value of its asset base with an 8,2% inflation from $1,63 billion to $1,76 billion, with $1,00 billion attributable to the electricity generation sector, a further $728,5 million affiliated with the oil and gas division and the final $34,3 million allocated to administrative functions. These represent 56,9%, 41,2% and 1,9% of all assets respectively, changing from 58,4%, 39,5% and 2,1% in 2019. The most significant component of this base is $1,48 billion of property, plant and equipment, the worth of which grew 5,9% from $1,40 billion in 2019, although this was undermined by an increase in depreciation, which rose 16,6% from $46,1 million to $53,7 million, and also in depletion, the charge for which deflated by 9,2% from $17,5 million to $15,9 million. The latter is only ascribable to oil production, a sector which also incurred $20,3 million of the $20,6 million of impairment charges incurred in 2020. This was as a result of the lower commodity prices causing asset devaluations throughout the industry, from which Rusneftegaz was also afflicted. Consequently, there was a 775,3% escalation in reported impairment year-on-year, with a unique rise of 775,2% in the oil segment, which in 2019 valued these costs at $2,3 million of the total $2,4 million reported. On the other hand, alterations in the value of the Russian ruble corresponded with an increase in the worth of property, plant, and equipment of $17,7 million, the second consecutive annual rise as a consequence of currency conversion differences, albeit 3,7% lower than the $18,4 million increase in asset values recorded for the prior period. At a group level, currency translation differences led to a gain of $26,5 million being reported in the consolidated statement of profit and loss and other comprehensive income, a rise of 24,0% from the $21,4 million boost in 2019. Such numbers led to corresponding gains in Rusneftegaz’s currency translation reserve, which declined by 3,3% from $-801,1 million to $-774,5 million.
This particular reserve is the only component of our equity to be a negative integer, with the revaluation reserve being appraised at $45,4 million, up $5,00 million on the figure from last year. One of the more minor ramifications of the ongoing coronavirus pandemic is that management believed that there was no motivation to upwardly revise any of Rusneftegaz’s asset values, so instead disclosed impairment charges for those asset groups that had been overtly afflicted by its economic after-effects. The largest constituent of equity is Rusneftegaz's retained earnings, which rose 4,8% from $1,80 billion to $1,93 billion in line with the total profit announced, with the second-most being the share premium which stayed the same as the $500,0 million recorded for the last three years. Overall, management did not elect to seek external investment despite the financial burdens of the pandemic, but instead opted to withdraw a $25,0 million loan in December 2020 on a contingency basis to guarantee the payment of employee wages in 2021. Principally, borrowings amounted to one of the smaller elements of Rusneftegaz’s total liabilities, which aggregated $111,2 million at the end of the 2020 accounting year, up 32,4% on the $84,0 million owed the year before. The largest item remains provisions, the projected values of the future cost of decommissioning all oil and gas production sites upon expiry of their respective lease contracts, quantified at $26,9 million. Such an estimate is marginally up by 1,6% on the 2019 projection of $26,4 million solely due to fluctuations in currencies, whereas accounts payable declined by 1,1% from $26,2 million to $25,9 million.
The element with the lowest value, however, is taxes payable, which grew by 0,3% but remained at the $7,7 million disclosed in 2019. Taxes continued to amount to one of the most burdensome costs borne by Rusneftegaz, the greatest being the mineral extraction tax on petroleum production billed at $47,9 million, a decline of 19,7% from the $59,6 million owed in 2019. Furthermore, our organization also paid $31,9 million in export duties on international petroleum shipments, a rise of 4,4% year-on-year from $30,6 million, although management perceives both of the aforementioned levies to be a regular part of the cost of doing business, and are forecasted before production and sale accordingly. More resources are placed into managing and mitigating other modicums of taxation, instead of the duties paid on exports and mineral extraction. For example, Rusneftegaz paid $23,1 million in corporate income taxes in 2020, a figure that decreased 48,0% from the $44,4 million debited in 2019, as a consequence of the weaker financial performance over the last twelve months. The board of directors manipulates this amount in our favor by utilizing deferred tax liabilities, which are those tariffs that will be due in the future, mostly arising on the difference between the recorded book value of assets under IFRS and the worth of such properties reported to the taxation authorities. At the end of 2020, Rusneftegaz held $25,7 million of such liabilities, a sum that increased 8,6% from the $23,7 million previously recorded, although these obligations were minimally offset by a 9,3% rise in deferred tax assets, which made marginal gains but were ultimately still assessed at $0,2 million. Beyond corporate income taxes, the only other levies paid by our company that are not affiliated with petroleum production totaled $6,5 million, a sum that deflated 7,0% from $6,9 million. These were reported as a component of cost of goods sold in the Rusneftegaz’s consolidated statement of profit and loss and other comprehensive income, and include a multitude of taxes that are otherwise too minor to be recorded in their own right.
The greatest proportion of the costs of goods sold, however, continues to be fuel expenses, which fell 11,9% from $95,5 million to $84,1 million as the sole positive effect of the fall in commodity prices during the year. This value consists entirely of bituminous coal purchased to fuel our power generation facilities in Vologda Oblast, which additionally requires water supply expenses of $1,9 million on a contingency basis, a figure that similarly decreased by 29,1% from $2,6 million in 2019. Under usual circumstances, Rusneftegaz utilizes its own private boreholes to source water, but in instances where a surge in supply is required it uses supply from the mains supply. Whilst our organization can attempt to reduce water consumption, a constant and immitigable expense that remains is the cost of transmission, the value of which fell during the period as a result of the significant abatement in demand. Thus, thermal power transmission costs charged deflated by 26,6% from $2,1 million to $1,5 million and electricity transmission expenses also were 0,8% lower at $0,1 million. Whilst the energy generation division sustained substantial expenses as a result of its operations, there were also considerable costs associated with petroleum extraction. Namely, Rusneftegaz saw a 5,0% rise in the transportation costs related to trucking oil domestically across northern Russia from $4,6 million to $4,9 million, in addition to paying various fines and penalties worth $0,3 million, a 16,0% fall from 2019. On the other hand, a significant percentage of all expenses incurred are more broadly categorized, such as rents, which includes the leases for various buildings and equipment used by our company in the short term. This figure declined 3,7% year-on-year from $11,5 million to $11,1 million, similar to spending on the maintenance of Rusneftegaz’s property, plant and equipment, which also decreased from $8,6 million to $8,3 million, a 3,9% fall. This was, however, unlike the expenditure on external labor, which includes the deployment of third-party contractors, which increased 1,7% from $42,0 million to $42,7 million.
Overall, these changes in balances resulted in year-on-year alterations to the consolidated statement of profit and loss and other comprehensive income, with the value of costs of goods sold decreasing 0,1% from $293,0 million to $292,8 million, and operating expenses rising 2,7% to $38,5 million from $37,4 million. The largest adjustment was, nonetheless, in general and administrative expenditures, the value of which rose monumentally by 161,9% from $9,4 million to $24,7 million, ultimately caused by a multitude of factors. Firstly, the coronavirus pandemic precipitated a rise in otherwise unclassified expenses, including purchases of personal protective equipment for those staff unable to work remotely, by 1.952,8% from a low basis of $0,7 million to a mammoth $14,9 million. Similarly, the planned commencement of operations at Rusneftegaz’s office in New York during the first quarter of 2020 required new employees to be hired in the months before the beginning of the pandemic. Therefore, administrative wage and salary costs borne expanded 6,3% from $6,0 million to $6,4 million. This was also somewhat of a contributory factor in a monumental rise in insurance costs by 347,5% from a figure which was previously $0,2 million, but ultimately rose to $1,1 million, although a material reappraisal of risk by our management was the overarching factor. Other costs are attributable across all of Rusneftegaz’s office locations; there was an uplift in administrative repairs by 35,7% and a marginal 4,8% decrease in professional fees, including payments made to external accountants and legal personnel, from $2,4 million to $2,3 million. Of these expenses deducted from operating profit in the consolidated statement of profit and loss and other comprehensive income, an equally material component is the monetary foreign exchange loss which was appraised at $25,8 million, a 1.581,8% change from the more acute $1,5 million deficit registered in 2019.
Despite the poor trading environment, our cash balances multiplied by 38,9% from $169,5 million to $235,5 million, largely as a result of cash flows derived from operations worth $183,6 million, albeit this was a 21,0% reduction from $232,5 million earned in 2019. This is a consequence of a considerable number of non-cash expenses incurred, including the previously discussed depreciation, depletion and impairment totals, impacting negatively upon Rusneftegaz’s financial statements for the year. Whilst the majority of cash was earned from production profits, further income was acquired due to the segregation of cash balances, with $8,9 million currently being held in long-term deposits that yielded $0,7 million in net finance income for the year. This was an 11,2% rise from the year prior, with all monies earned percolating to our bank accounts, culminating in long-term deposits rising from a previous total of $8,1 million. The smallest component of Rusneftegaz’s income were nominal proceeds from derivative contracts, consisting of currency forward contracts and commodity price swaps, both of which are used for hedging purposes. Ultimately, the volatility in these values throughout the period rendered management’s forecasts ineffectual and consequentially the income from these arrangements was down 96,3% from the $0,2 million earned the year before, yielding an exiguous 0,7% rise in the worth of the reported derivative financial instruments in the consolidated statement of financial position, which remained at $1,3 million. Nevertheless, our monetary position would be even greater if it were not for an overly strong ledger of receivables worth $27,9 million, a value which declined by 12,4% from $31,9 million. Such a figure consists of $22,1 million of the aforementioned assets and an additional $5,9 million in prepayments; in comparison, these figures were appraised at $22,9 million and $5,8 million respectively last year.
Moreover, both cash and receivables constitute vital elements of Rusneftegaz’s current assets, the value of which inflated 27,1% throughout the year from $232,3 million to $295,3 million, comprising 16,6% of all assets. This includes $6,1 million of assets that are held for sale, a figure that was last altered in 2018, consisting of $2,5 million of gold bullion reserves, silver bars valued at $2,4 million and a further $1,2 million of undisclosed properties. A larger and more significant component of our current assets is the $25,8 million held in inventories, a value that rose 4,0% from a previous tally of $24,9 million. This sum consists of $11,4 million worth of extracted, unrefined crude oil, a value that raised 16,0% from $11,1 million the prior year, and $12,2 million of fuels, this is largely a supply of bituminous coal and the total of which similarly increased marginally by 0,6% from $12,1 million. More minor elements consisted of a 43,3% rise in the value of $1,0 million of spare parts from $0,7 million, and $1,3 million of all other petroleum products, which reported inflation from $1,0 million in 2019, or 28,8% in total. The remaining 83,1% consisted of non-current assets aggregated at $1,48 billion, an amount that rose 5,9% from $1,40 billion a year earlier, and includes resources such as intangibles priced nominally at $0,2 million, a value that ultimately increased 2,6% as a result of currency changes. In 2019, non-current assets accounted for 83,4% of the entirety of our asset base, with this minor reduction solely attributable to the considerable rise in Rusneftegaz’s reserves of liquid cash.
Ultimately, these gains in monetary balances originated from profits earned, with $382,5 million, or 77,9% overall, of all revenue deriving from contracts in Russia. Domestic sales, however, fell significantly by 9,2% year-on-year, although our organization registered international turnover originating from non-European states for the first time in 2020. This figure totaled $1,8 million and is attributable to the opening of an international office in New York, with management anticipating exponential growth in multinational sales next year. There was, however, a notable decline in trading within the European Union, which was valued at $142,4 million last year but fell 25,1% to $106,7 million, conclusively accounting for 21,7% of all revenues. Whereas, trading outside continental Europe amounted to 0,4% of all turnover, both values pale into insignificance when it is taken into consideration that our two largest customers are responsible for 70,4% and 19,5% of all revenue, or $345,8 million and $95,6 million respectively. However, both such figures are down on 2019 when these figures were recorded at $361,9 million, or 64,2% of all revenues, and $139,4 million, or 24,7%. The reduction in the appraisal of key contracts is affiliated with the general downturn in reported results for the year; this is despite an uplift in oil production by 7,6% year-on-year from 5,6 million barrels to 6,1 million barrels.
Petroleum production peaked for Rusneftegaz in the second quarter with 1,64 million barrels extracted, a value that was 16,2% higher than the same period in 2019. On the contrary, oil production rates were at their lowest in the final three months of the year at 1,38 million barrels, a fall of 4,8% year-on-year, with our company also reporting production of 1,58 million barrels and 1,46 million barrels in the first and third quarters respectively. Whilst these values were up 17,4% and 2,6% when compared to their corresponding period in 2019, annual electricity output was markedly reduced by 18,3%, a fall from 10,5 TWh to 8,6 TWh. Whilst management undertook proactive efforts to boost petroleum production to lift turnover, energy production was severely impacted by a lack of demand, with the 3,2 TWh peak in generation occurring in the fourth quarter, but still significantly down by 18,0% year-on-year when 3,8 TWh was produced. Performance in the first three periods was meager, with Rusneftegaz only generating 1,8 TWh in the opening three months of the year, a figure that reduced 15,0% compared to the same time in 2019. The second and third quarters saw similarly sizable reductions of 31,7% and 5,8%, or respective production rates of 1,7 TWh and 1,9 TWh. To represent the magnitude of the declines in the first three quarters of 2019, our organization produced 2,1 TWh from the advent of 2020 until the end of March, 2,5 TWh to the three months ending 30 June and a further 2,1 TWh between the beginning of July and the end September. However, the efficiency measures and investments previously made by Rusneftegaz ensured that the sector remained highly profitable throughout all four periods.
Whilst there was considerable prosperity arising from our electricity generation program, there were still rises in monetary expenses in each of Rusneftegaz’s divisions, with the aforementioned sector accountable for $128,0 million of all the financial costs borne throughout the year. This represents a 4,1% incline on the year before when this total amounted to $123,0 million, and 43,9% of all said charges arising in 2020. Similarly, 51,1% of the remaining overheads are affiliated with the oil segment, whose outlays rose 4,6% from $142,4 million to $149,0 million, with the remaining 1,0% linked to administration. This, however, represented a notable 45,7% increase from $10,0 million to $14,5 million as a consequence of the aforementioned expansion of our offerings internationally. Accelerations in expenses also corresponded to rises in liabilities, with non-current obligations inflating 54,8% from $50,1 million to $77,6 million as a result of Rusneftegaz’s new borrowings. Albeit, current liabilities abated 0,8% from $33,9 million to $33,6 million. The total reported value of such obligations were ultimately measured at $111,2 million, a 32,4% change from the previously reported value of $84,0 million, with 69,8% perceived as non-current and the residual 30,2% considered current, percentages that changed from 59,7% and 40,3% respectively from 2019. Of this total, 55,6% of obligations, or $61,8 million, were accountable to oil production, a figure that increased 17,8% from $52,5 million with the electricity generation corresponding to 41,9% of liabilities. This illustrates a worth of $46,6 million, a value that increased 58,0% from the prior period when the sum was $29,5 million, with the final 2,4% of liabilities unaccountable to any sector, however, this number did rise 37,2% from $2,0 million to $2,7 million.
Overall, whilst trading was significantly influenced by factors outside our control over the last twelve months, Rusneftegaz managed to register an enviable economic performance, revenue per share for the year totaled $491 p/s and basic earnings per share were valued at $80 p/s. Whilst both such figures are lower than in 2019, strong cash flows have enabled our organization to be able to continue to invest accordingly, with spending on generating assets rising 52,6% from $47,2 million to $72,0 million and expenditures in the oil and gas sector amounting $78,1 million. Contrarily, the outlook for 2021 continues to be poor, with restrictions continuing in key markets through the first three months of the year. Management forecasts that electricity demand shall not recover until late 2021 at the earliest, and the price of oil futures will continue to be difficult to accurately and reliable forecast. Despite Rusneftegaz continuing to maintain strong cash balances, the board of directors has opted to curtail our investment program for this year and will make decisions regarding future periods accordingly. Whilst the corporate leadership believes it is in a fortunate position to withstand a long-term pandemic, there continues to be sufficient reasons to be concerned with prolonged political tensions within the oil industry that could destabilize operations both in the near and distant future. However, there is a universal and adamantly held belief that Rusneftegaz shall emerge from this global crisis resolutely, and will continue to be steadfast, determined, and capable of meeting all challenges ahead.
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