Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2021-Q3

[Takayuki Uematsu, executive]

Now I would like to start. First, on Page 1, this is the table of contents, which I will follow in my presentation. Going to Page 2, I would like to discuss the impact of COVID-19 pandemic first.

Let me move on to Page 3. As for the impact of COVID-19, as written at the top, there has been no major impact on the company's business continuity. In terms of the impact on markets and demand, there are comments in 3 areas. The first is crude oil price as shown here. The price rose on Saudi Arabia's voluntary production cuts and OPEC+ agreements. Up until recently, the price hovered around USD 50 as written here. And at the moment, Dubai crude oil is around USD 60.

Next is petroleum products. The four-major-product market stayed stable, while the jet fuel market rallied gradually, though domestic demand is slow to recover. The national average up until Q3 was 39%, while the company's figure was 56%, meaning that there was a significant impact in jet fuel. Next is petrochemical products. Paraxylene prices remained sluggish, while benzine prices improved significantly after November, following the rise in styrene monomer prices.

In terms of the impact on earnings, it's as written here. Needless to say, it's very hard to estimate the precise impact of COVID-19 because of constant fluctuation in demands and supply balance. Given such limitations, however, our outlook is as written here at the bottom, just for your reference. The assumptions are also provided here. For the full year, as you can see, projected ordinary profit, including the impact of inventory valuation, is JPY 75 billion and the profit attributable to owners of parent is JPY 50 billion.

Moving on to Page 4. Circumstances surrounding wind power generation business and the company's progress. Starting this year, the bidding process will start for wind power generation projects, meaning that this is a critical timing for our company.

So let me elaborate on this on Page 5. Circumstances surrounding the wind power generation business. There are 4 key areas with which I suppose you are all familiar. The third point says energy from offshore wind power generation is defined as the main power source for renewable energy. The fourth point explains the green growth strategy with the following 3 points. The government set initial targets of 10 gigawatts by 2030 and 30 to 45 gigawatts by 2040. The government-led centralized project formation scheme means that further acceleration is expected going forward.

The government has already designated promotion areas for occupation for next 30 years under the act on the utilization of the sea areas for the development of renewable energy power generation facilities so further acceleration is expected. As for infrastructure development, in terms of grid operation rules for renewables, grid construction, connecting wind power sites and the users and the construction of terminals and ports, we expect the progress in the development of these infrastructure facilities by the central government as well as by local governments.

Page 6 shows a list of company's wind power generation projects and the pipeline, both for onshore and offshore. We have increased our staffing since November last year in order to prepare for the bidding process of wind power generation products. As for onshore, as you can see on the table, there are 4 areas under construction and 1 area under development.

For offshore, there is 1 which is under construction. And the 4 are going through feasibility studies. In terms of tendering, the Akita, Yurihonjo offshore site is approaching the due date for bidding at the end of May this year. In terms of the selection of an operator, we expect the successful bidder to be announced sometime in autumn 2021. That's our expectation.

In terms of assessment, we are examining 2 projects at the moment. One is offshore, north of Niigata and the other is offshore, Ishikari Bay, Hokkaido. At the bottom, you can see our outlook on wind power generation capacity in the future. We are expecting to reach 0.3 gigawatts for 2021, 0.4 gigawatts for 2022 and 0.5 gigawatts for 2024. If we include offshore capacity, we should reach 1 to 1.5 gigawatt by 2030. That's our target. We are aiming to become a leading company in wind power or offshore wind power generation, and that is a major milestone towards the aspiration.

Please turn to Page 7. These are the projects under construction. Please refer to them later. There is a photo as well as a description of each project.

Let me move on to Page 8. Q3 FY 2020 financial results. As for the P&L summary, you can see that on Page 10 onwards, let me give you some highlights first. As of the end of Q3, we have already achieved the full year guidance for this fiscal year both in terms of ordinary profit, excluding the impact of inventory valuation and the profit attributable to owners of parent. As for the full year guidance, mainly due to the inventory valuation driven by the rising crude oil prices and the improving performance of the petroleum business, we have made an upward revision.

Thirdly, under the COVID-19 circumstances, we are negatively affected by lower crude oil prices, lower overseas market prices and downturn in jet fuel and gasoline sales volumes. However, thanks to expanded supply to Kygnus Sekiyu and the effect of short positions, we expect steady growth in earnings, especially in our petroleum business.

Page 9 summarizes Q3 FY 2020 financial results. I will explain the summary at the top of the slide later in my presentation. So please refer to the comment on each segment. First, petroleum business. Due to a fall in jet fuel prices and the decrease in sales volumes, earnings deteriorated. However, thanks to the brisk domestic market conditions and the expanded supply to Kygnus Sekiyu, we were able to increase sales volumes of the 4 major products and increase earnings. Ordinary profit, excluding inventory valuation, was JPY 31.9 billion, up JPY 20.4 billion year-on-year.

As for the petrochemical business, due to the deterioration of paraxylene prices and decrease in sales volumes caused by regular maintenance at Maruzen Petrochemical during the first quarter as well as the negative time lag related to naphtha acceptance, ordinary profit was negative JPY 7.4 billion, down JPY 16.2 billion year-on-year. Oil E&P earnings were down following a fall in crude oil prices. Ordinary profit was JPY 8.1 billion, down JPY 22.5 billion year-on-year. Other business ordinary profit was JPY 9.3 billion, up JPY 1.5 billion year-on-year.

Page 10, consolidated income statement. Please refer to the table. Line #4, ordinary profit was JPY 34.5 billion, down JPY 18.5 billion year-on-year. Line 8, profit attributable to owners of parent was JPY 16.5 billion, down JPY 3.3 billion year on year. Line 9, impact of inventory valuation, negative JPY 7.4 billion. As a result, line 10, ordinary profit, excluding the impact of inventory valuation, was JPY 41.9 billion, down JPY 16.8 billion year-on-year. Line 11, Dubai crude oil price was USD 39. Line 12, exchange rate was JPY 106. For your reference, Dubai crude oil price between January and September was USD 41. Exchange rate was JPY 108. That was the results. As for line #11, I will elaborate on this next page.

Page 12. Q3 FY 2020 financial results, this is a variance analysis of consolidated ordinary profit compared with the same period of the previous year. First, petroleum business, plus JPY 20.4 billion. As you can see in the green box, margin and sales volume, plus JPY 13.8 billion. Let me give you a breakdown. Margin was JPY 7.7 billion-plus, of which 4 major products, plus JPY 33.8 billion; others, plus JPY 3.9 billion. Just for information, margin for 4 major products was up JPY 0.3 year-on-year. Margin for non-4 major products, that was JPY 3.9 billion, including minus JPY 9.6 billion of jet fuel. However, naphtha, heavy oil C and others compensated for that to maintain a total of non-4 major products at JPY 3.9 billion.

Next is sales volume. It was plus JPY 600 million for the petroleum products. For 4 major products, it was plus JPY 10.5 billion, thanks to the expanded supply to Kygnus Sekiyu. For non-4 major items, however, as mentioned earlier, jet fuel and others suffered from significant decrease in sales volumes. So it was negative JPY 9.9 billion, of which the impact of jet fuel oil was negative JPY 6.6 billion. As for imports and purchases, because of the decreased sales volume of jet fuel, sales volume was down. And the unit prices for imports and purchases are also down because of the decline in overseas prices.

As a result, imports and purchases was plus JPY 6.8 billion, out of which the impact of jet fuel was JPY 3.8 billion. Exports was negative JPY 1.3 billion. Thus, the breakdown of JPY 13.8 billion in margin and sales volume. Expense and other was plus JPY 6.6 billion, out of which in-house fuel cost impact was JPY 7.6 billion. It was plus JPY 7.6 billion.

Moving on to the yellow box, petrochemical business, it was negative JPY 16.2 billion. The breakdown is as shown here. This is mainly due to the deteriorating prices of petrochemical products, including the aroma market. As for Maruzen Petrochemical, as mentioned earlier, there was a negative time lag for naphtha acceptance. That was a technical reason behind the significant decline in petrochemicals. As for sales volume, there was a negative impact from Maruzen's Petrochemical's regular maintenance. As for expense and other, in relation to tax payments of equity method companies, it was plus JPY 2.1 billion.

Next is oil E&P. It was negative JPY 22.5 billion. The breakdown is shown in the box. It was mainly due to the fall in crude oil prices. Sales volume is shown as being positive here, but it was due to the positive time lag from the previous year. For your reference, we were able to secure a similar production output as in the previous year. As for expense and other, as explained earlier, there was a decrease in tax payment of equity method companies. That was the reason. Other was plus JPY 1.5 billion. All in all, ordinary profit is down JPY 16.8 billion from the same period of the previous year.

Next is consolidated balance sheet. Line 3, net worth was JPY 248 billion, an increase of JPY 8.2 billion from the end of March. Line 4, net worth ratio was 14.8%, an improvement of 0.2%. Line 6, net debt equity ratio was 2.28x, an improvement of 0.13 points.

Next is Page 14, highlights of consolidated capital expenditures. Compared with the previous year, total capital expenditures increased JPY 8.6 billion. This is mainly due to the regular maintenance in the petroleum and the petrochemical businesses.

Next, let me move on to the full year forecast. Page 16, please. The forecast is as shown on the table. Let me go through it. Line #1, consolidated ordinary profit is JPY 75 billion. Ordinary profit, excluding the impact of valuation, is JPY 65 billion. To the right, you can see the previous announcement numbers. Compared with the previous announcement, ordinary profit is revised up by JPY 48 billion or JPY 23 billion, excluding the impact of inventory valuation.

Next is breakdown by segment. I will give you the breakdown without the impact of inventory valuation. Petroleum business, JPY 48 billion, up JPY 17 billion. Petrochemical business, minus JPY 8.5 billion, up JPY 4 billion. Oil E&P, JPY 13 billion, up JPY 2 billion compared with the previous announcement. For other, there is no change from the previous announcement. Thus, a breakdown of JPY 23 billion increase compared with the previous announcement. All of the segments are revised upward.

Line 6, impact of inventory valuation. It is plus JPY 10 billion compared with the previous announcement of minus JPY 15 billion. The upward revision is JPY 25 billion, which gives a considerable impact on the profit attributable to owners of parent, which is in line 7, and it is JPY 50 billion. The upward revision is JPY 41.5 billion. Line 8, dividend per share is JPY 80 per share, unchanged from the previous announcement. Please refer to preconditions on the right-hand side. Line 13, January to March Dubai crude oil is expected to be $55. Line 14, exchange rate is JPY 104. Those are the assumptions of the revised guidance.

Moving on to Page 17, variance analysis with the previous announcement. The major change is made in the petroleum business. In petroleum business, margin and sales volume is JPY 17.1 billion, most of which comes from margin. Margin is plus JPY 16.6 billion. The breakdown is JPY 11.5 billion for 4 major products and plus 5.4 -- JPY 5.1 billion for others. The previous announcement was slightly conservative for 4 major products. And for other items, there was an improvement in market conditions.

Next, sales volume is plus JPY 2.7 billion, most of which is attributable to 4 major products. Because we took a conservative view on the impact of COVID-19, the situation turned out to be not as bad as we had expected. So the growth rate compared with the previous announcement is 101%. For expense and others, imports and purchases is minus JPY 1.6 billion. Because of the improving overseas markets, margin has deteriorated or purchasing price has risen while import volume has increased. That's why minus JPY 1.6 billion, exports is minus JPY 600 million.

That's the summary of sales volume, including expense and other. Petroleum business as a whole is JPY 17 billion, higher than the previous announcement. Petrochemical business is up as well, mainly because of the improvement in petrochemical markets. Oil E&P is up due to better price trends. For January to December, we are expecting JPY 2 billion higher than in the previous announcement.

Page 18 shows a comparison of capital expenditures with the previous announcement. There is no major change here.

That's all I have for my presentation. But let me mention one more thing before we close this session. That is about our oil E&P business. Please refer to Page 40 of the presentation. We have just issued a press release regarding our successful bidding for offshore Block 4 of United Arab Emirates. The details are available in the press release but let me give you the highlight on offshore Block 4 in United Arab Emirates. You can see the position of the block on the map at the bottom of the slide.

As you can see, this block is located right next to the area occupied by Abu Dhabi Oil Co. We won the bid for concession and will be conducting exploration and production as soon as possible. The main points are as follows: first, oil indications have been confirmed in part of the block. The block is adjacent to the exploration zone of our group company, Abu Dhabi Oil Co. And through integration with their processing, storage and shipping facilities, we can reduce our capital investment and operating expenses and maximize synergy. Through production from this block, we can build a robust business portfolio that allows us to secure earnings even under a low oil price environment while maintaining a certain crude oil production level. Last but not least, with the view towards the creation of sustainable society, we will proactively study the development and adoption of CCS, CCUS and other technologies required for decarbonized society.

That's all I have for today. Thank you very much.