Interview

Despite the crisis, NIS presses ahead with key investments

28.04.2020

Source: Bizlife

The pandemic of the new coronavirus has posed challenges for numerous industries and rendered the economic activity worldwide frozen. The oil sector is one of those hit hardest since it has also faced the collapse of oil demand and dramatic price decrease. We talked with Anton Cherepanov, deputy CEO and CFO of NIS about the impact of these unfavorable global trends on the domestic petroleum industry and business results of NIS in Q1, and the developments we can expect this year.

First months of 2020 were turbulent for oil companies. What principal challenges did the sector face?

The situation we have confronted is virtually unprecedented in the modern history. Concurrently with the plunge of crude oil price, we saw a dramatic decrease of the consumption triggered by the pandemic of Covid-19. The circumstances beyond the control of petroleum companies created an extremely adverse macroeconomic situation for the oil sector and oil companies that found themselves up against exceptionally grave challenges.

Turbulences disrupted the world arena early this year but they became particularly pronounced in March when the events fully reached our market. To be more specific, in March the crude price went into freefall and lost 30% of its value on one single day, which represents the biggest price drop in the last 15 years. The prices hit record lows, drifting below 20 USD/bbl at one point. We had a relatively regular year start, and only due to that the average Brent price in Q1 was “only” 20% lower than in Q1 2019. It was a serious blow for oil companies but the situation is much more complex than that since the pandemic of the coronavirus in the world and in Serbia caused a 30-40% decrease in demand for petroleum products. All these factors had a major impact on oil companies’ performance, NIC including, and the forthcoming period is going to be very challenging. All companies have announced that under these conditions they intend to cut down on investments and initiate massive savings programs in all segments that are not vital to the oil business. We believe that the biggest problem that we are facing now is falling demand for oil and petroleum products along with global economic slowdown. We hope that life resumes its normal course shortly and economic activities accelerate, which will stimulate the global energy demand.

What impact did these market disruptions have on NIS’s operations and performance in Q1?

NIS is a part of global market and global petroleum industry; it was thus to be expected that market disruptions would have a major impact on our financial results in the first three months. On the other hand, we are pleased to state that we achieved very solid operational indicators and fulfilled a sizeable investment program even despite unfavorable trends. We invested 7.7 mln dinars in the further development of the company, primarily in the area of oil and gas exploration and production and upgrade of the Pancevo Refinery. The production in Q1 amounted to 319 KT of oil equivalent, which is nearly identical to our last year’s result of 321 KT. The Refinery processed 860 KT of crude oil, which is 44% higher than in the same period last year. Given the turnaround of the Refinery in March last year the growth did not come as a surprise; however, 44% represents a noteworthy achievement. Notwithstanding the drastic reduction in fuel consumption in the second half of March, total sales of petroleum products in Q1 amount to 778 KT, that is a 7%-increase on last year’s result. At the same time, we saw a 63% increase in exports compared to last year. Therefore, we can be satisfied with achievements. This being said, adverse trends predictably had a significant impact on our financial results. Despite the crisis, we managed to retain positive EBITDA in the amount of 5.2 mln dinars in Q1, 18% lower than in the same period in the previous year. Understandably, company’s profit was most affected – we recorded net losses in the amount of 1.1 bn dinars. Let me clarify that our company was subjected to two types of shocks: on the one hand, we produce 30% of oil processed in Pancevo, whereas the remaining 70% is imported. Before March, we had bought crude at 50-60 USD/bbl, even higher. We processed that crude but have not sold it yet. And the prices have fallen in the meantime. On the other hand, due to the pandemic, the actual sales volume has shrunk significantly, both in retail and in wholesale, if compared with the planned level. All these circumstances resulted in reduction of company’s cash flow and liquidity in a very short period of time.

What measures does NIS put in place under the circumstances, and what are company’s priorities till year end?

First and foremost, I have to say that under the circumstances of preventing further spread of the virus, we as a company have two priorities. The first is to assure health and safety of our employees, external partners and consumers. It is also a precondition for our second priority – to uphold stable production, refining and distribution of oil and petroleum products. We have put lots of effort into maintaining the stability of the domestic market, and I would like to take this opportunity to extend a word of thanks to all employees of NIS because they made it happen despite the understandable concern about their health and well-being of their loved ones. Speaking about the market situation, we have developed various crisis scenarios, and long-term and short-term plans. Now it is particularly important to remain agile and willing to adjust daily to the situation in which we have found ourselves. In that regard, the first measures we took addressed company’s liquidity: cost-cutting in all areas that are not vital for our business, i.e. decrease of general and administrative expenses. Furthermore, we remain committed to operational efficiency improvement measures which proved to be a powerful lever in counteracting the negative effects of the crisis that hit the oil industry in 2014-2017. Naturally, as all other petroleum companies, we will be forced to review our investment portfolio but I can assure you that we do not intend to suspend our key development projects that will bring us an edge and financial benefit when the trends return to normal. I am confident that despite the adverse environment, this combination of measures will help us maintain financial and operational results at the level required to resume development when the situation improves.

What future developments do you expect in the global market? Can we hope for a gradual recovery?

At this moment, forecasting market developments is very ungrateful bearing in mind that the situation is largely beyond the control of oil companies and has numerous unknown factors. Still we see some encouraging signals. Firstly, upon initial failures, on 9 April OPEC+ managed to reach an agreement to reduce daily oil production by 9.7 mln bbl, which represents around 10% of the global production. It is excellent news, and this agreement will influence the crude price which we expect to grow by the end of the year. We should not, however, expect rapid growth because the growth dynamics is closely linked to the evolution of the situation with the pandemic. We start to witness certain alleviation of restrictions, both in Serbia and throughout the world, it will contribute to the economic upswing and stimulate the consumption of petroleum products. At the same time, there is surplus on the petroleum market and we are bound to experience unfavorable trends till year end. Furthermore, we can only guess if there are going to be new outbreaks of the epidemic, and how fast the world economy will recover. Even though we have no impact on these factors, we can continue doing what we have been doing so far. NIS’s main priority till the end of 2020 is to maintain positive cash flow to assure stable production, refining and sales. It is the only way to secure market stability. Besides, our results are delivered by people, and giving stability to our people will remain our priority. This year is much more difficult and challenging that we could expect. But NIS has faced numerous challenges before and we have always been able to respond successfully. I am confident that we will succeed in maintaining business continuity and creating new values for our employees, shareholders and the community where we work.