INTERVIEW - Romania's Petrom Expects Oil Market To Remain Highly Volatile in Rest of 2009, Crude Prices To Recover

Petrom reported a 45% year-on-year drop to 923 million lei ($308 million/218 million euro) in its first-half net profit. First-half turnover fell by 28% on the year to 5.9 billion lei. The group expects its 2009 net profit to rise by 8.8% to 1.1 billion lei after falling 43% last year.

Here is what Mariana Gheorghe told seeNews:

Q: What is your company doing to sustain growth in 2009 and 2010 amidst the global crisis?

A: With a good operating cash flow, a solid financial structure and a prudent financial leverage, and being part of the strong OMV Group, Petrom is well positioned to cope with the challenges of the current market. Nevertheless, several measures were taken, such as prioritization of investments, cost reduction and measures to protect the company’s cash flow.

Operating measures include cash flow optimization and freezing of liquid capital, active management of receivables and liabilities, cost reduction, effective refinery capacity utilisation, revision of overall procurement and supply chain optimisation, improvement of customer retention, cooperation with customers and suppliers, and continuous divestment of non-core activities.

In view of protecting the cash flow of the company against the potential negative impact of the volatility in oil prices we have secured risk protection instruments to partially insure the cash flow from the Exploration&Production segment for approximately 40% of the estimated oil production in 2009.

In terms of USD currency exposure, Petrom has a relatively balanced USD-denominated inflows and outflows, which create a natural hedge. As such, and taking into account the liquidity of the Romanian market, it is unnecessary to make forex hedges. However, market as well as currency risks are constantly monitored.

We started a process of re-evaluation and prioritization of our investment portfolio based on the profitability of each investment project and cash-back period for each investment, so that we can maintain a solid balance. We continued our sizeable investment programme, however at a considerably lower level compared to 2008, given the current unfavourable economic conditions and the state of the oil industry in general.

Q: Has the crisis offered new expansion and sale opportunities to your company?

A: We will continue the divestment of non-core activities to streamline the cost base. These activities will be performed but they will also depend on the market's evolution.

Q: What were the main obstacles your company faced last year and in the course of this year as a result of the crisis? Are all ongoing investment projects on track?

A: 2008 was an extremely challenging year for Petrom. The company benefited from the favorable oil price environment in early 2008, but was also hit by the general economic and oil-specific downturn in the latter part of the year. After three quarters of exceptionally high oil prices, which also triggered an increase in oil industry costs, the fourth quarter saw not just a serious financial markets crisis, but also a collapse in oil prices.

Our financial performance in 2008 was affected to a large degree by one-off items such as provisions for litigations and restructuring, as well as the impairment of the Arpechim refinery. Excluding these one-off items, Petrom recorded both a significant increase in turnover, due to the favorable oil price environment during the first three quarters of the year, and improved operational efficiency in all business segments.

The benefits of our modernization efforts are becoming more and more visible: we have stabilized Romanian oil production, we are successfully integrating the service activities of Petromservice, which we acquired at the beginning of the year, and we have largely completed the turnaround in marketing.

For 2009 we expect the main market drivers like crude price, refining margins and the EUR-USD exchange rate to remain highly volatile. We anticipate the oil price will recover during 2009 from the significant drop experienced at the end of last year, but it will remain well below the average levels of 2008. The Brent-Urals spread should narrow compared to the 2008 average level.

The average EUR-USD exchange rate for 2009 is expected to be highly volatile and, overall, we are anticipating a weaker EUR compared to the average 2008 rate. We expect a highly volatile but an overall decreasing RON versus the USD and the EUR compared to the 2008 average rates.

Refinery fuel margins are anticipated to weaken from the 2008 level and the petrochemicals business is expected to suffer from reduced market demand and lower margins caused by the economic downturn. Marketing margins are expected to be lower than in 2008 and demand will be impacted by the economic downturn.

We will continue our large investment programme, albeit at a considerably reduced level compared to 2008, when we recorded record investments of 1.8 billion euro, given the current unfavourable economic conditions and the oil industry in general. The investment level for 2009 will be at approximately 1.1 billion euro.

Q: What are Petrom’s priority investment projects in the medium and long term?

A: In Exploration&Production, the focus will be on increasing the reserves portfolio, arresting natural decline and ensuring production in the long term, as well as improving efficiency. The E&P investment programme will continue in 2009, especially with focus on the drilling programme and development of the most promising major fields, but the levels have been revised downwards due to both the financial crisis and international oil price volatility.

In Refining & Marketing, the restructuring of the business and the focus on increasing the operational efficiency will continue. Within Refining, we aim to drive further incremental improvements in energy efficiency and yields development towards higher value products. Our refineries’ utilization will be optimized to the existing market conditions to fulfil product demand.

In Gas & Power, the focus will remain on expanding the gas value chain, by entering into the power market. As such, the construction of the power plant at Brazi continues according to plan, with construction started in June. The trend of declining gas consumption in Romania is expected to continue in 2009 due to lower industry demand, however the impact on Petrom’s own production is expected to be minor since we believe that gas imports will be predominantly affected.

Q: Do you plan new acquisitions? If yes, where?

A: There are bigger opportunities because, theoretically, the assets' value is decreasing, but, at the same time, one needs liquidity and a prioritization of business opportunities is needed.

(1 euro =4.2251 Romanian lei)