Main economic results
The overall economic environment continued to be favourable in the assessment of VKG, even despite the lower than expected global economic growth.
As the sale of oils makes up the largest part of VKG’s turnover, the Group’s financial results are influenced the most by what is happening in the global oil market. The volatile macro-environment mainly caused by the US–China trade war also spilled over to the oil markets. The OPEC+ countries led by Saudi Arabia and Russia tried to keep the prices up with additional production agreements, but the resulting increase in the volume of US shale oil is making the task increasingly difficult. Conflicts in the Middle East caused additional volatility and price leaps, but the 2019 average Brent price of 64 USD/t was still 11% lower than in the preceding year (72 USD/bbl).
VKG sells most of the produced oils on the basis of the price of fuel oil with 1% sulphur content. Compared to the Brent crude oil, the 1% fuel oil market is less liquid and the price of fuel oil may move differently from Brent, depending on the ratio between supply and demand. As VKG’s expenses are denominated in euros, the company’s results are also influenced by the US dollar rate. Thus, the Group’s results are best characterised by the following fuel oil price curve.
Source: OMJ
As the above diagram shows, the average price of 1% fuel oil was, unlike Brent, 348 EUR/t in 2019, i.e. 2% higher than in 2018. That was due to the strengthening of the US dollar on the one hand and the IMO’s 2020 marine fuel directive the entry into force of which on 1 January 2020 caused an increase in the demand for and price of 1% fuel oil in the 4th quarter of 2019.
The price of CO2 quotas grew by a half
The Estonian shale oil production is equivalent to the production of crude oil in the European refining sector which is included in the list of industries with a risk of carbon leakage. Thanks to that, shale oil production is granted free of charge greenhouse gas (GHG) quotas in the extent of approximately 70% in the greenhouse gas trading system.
The overall number of units in circulation in the European Union GHG trading system was approximately 1,65 billion a year in 2019, of which 48% was auctioned by countries and 52% was allocated to enterprises and projects free of charge. Every year, the number of units in the system during the 3rd trading period of 2013–2020 is reduced using the coefficient of 1.74%. In order to regulate the price of the quota trading unit ERU and the supply and demand, the Market Stability Reserve (MSR) was applied from January 2019 with the aim to reduce the number of quotas on the market by 24% and include these in the reserve fund over the coming five years. Such a significant reduction of the traded quotas has an impact on the price of the quotas, which in 2019 fluctuated from 15.3 to 29.81 euros/t. At the end of the year, the price of the CO2 quotas stabilised and remained at the level of 25 euros/t. The 2019 average price of the CO2 quota was 24.9 euros/t, which is more than 59% higher than in the preceding reporting period.
In 2019, free of charge quotas covered about 70% of all VKG’s emissions. As the remaining 30% had to be purchased from the market, the steep increase in the price of the quotas significantly damaged the competitiveness of VKG in the global marine fuel market. Considering also the new European Green Deal and the reduction of the free of charge CO2 quotas at the accelerated pace of 2.2% a year in the 4th trading period in 2021–2030, the decrease of the competitiveness of the EU producers will not stop before the taxation of GHG becomes a global agreement or the producers located in the Eu have been pushed out of the market.
Source: Refinitive
Regulation caused a fundamental change in the market in the 4th quarter of 2019: demand for the formerly used fuel oil with a sulphur content of 3.5% dropped steeply and demand for 1% fuel oil grew. As the 0.7% sulphur content of VKG’s shale oils is very close to the new standard for marine fuels, the oils are mixed with various cleaner, but expensive products to obtain fuel that meets the requirements at an optimal cost. Whether the increased demand for VKG’s products resulting from the aforementioned circumstances is temporary or permanent will become clear in the coming year when the market participants have adapted to the new regulation
Director of the Finance department, member of the board
Regulation caused a fundamental change in the market in the 4th quarter of 2019: demand for the formerly used fuel oil with a sulphur content of 3.5% dropped steeply and demand for 1% fuel oil grew. As the 0.7% sulphur content of VKG’s shale oils is very close to the new standard for marine fuels, the oils are mixed with various cleaner, but expensive products to obtain fuel that meets the requirements at an optimal cost. Whether the increased demand for VKG’s products resulting from the aforementioned circumstances is temporary or permanent will become clear in the coming year when the market participants have adapted to the new regulation
Director of the Finance department, member of the board
The Group’s economic results
The presented economic results are consolidated, based on the audited financial statements of 2018.
The annual general meeting of shareholders
The annual general meeting of shareholders, which confirmed the annual financial report for 2019, took place on 30 June 2020, and 100% votes represented by shares took part in it. The following resolutions were adopted at the general meeting of shareholders:
- to confirm the annual financial report for 2019;
- to pay dividends in the amount of 8,000,000 EUR for the year 2019;
- retained earnings after the distribution of profit made up 66,154,084 EUR.
Every year, VKG publishes a consolidated annual report together with an auditor’s report. The transparency of financial reporting is one of the main elements of corporate management. On 21 May 2020, the Group published the consolidated audited annual report for the year 2019. Since 2015, KPMG Baltic OÜ provides auditing services to the Group.
Revenue and its distribution
In 2019, the Group’s consolidated sales revenue grew by 23% from the preceding year. The increase in the turnover was caused by increased production (volume of shale oil products +6%, electricity production +2%) as well as by an increase in the world market prices of crude oil products (average price of fuel oil +2%). As a result of successful work, the Group managed to turn the favourable market conditions into a net profit of 35.7 million euros, which was 33% higher than in the preceding year.
In thousands of euros
| 2016 | 2017 | 2018 | 2019 | ||
|---|---|---|---|---|---|
| Sales revenue | 104 270 | 161 282 | 208 924 | 256 763 | |
| Revenue from sales of products | -106 147 | -149 630 | -170 362 | -215 743 | |
| Gross profit | -1 877 | 11 652 | 38 563 | 41 020 | |
| Marketing expenses | -3 213 | -4 046 | -5 841 | -5 304 | |
| General administrative expenditure | -9 471 | -9 480 | -9 724 | -11 123 | |
| Other business revenue | 9 827 | 7373 | 12 225 | 20 595 | |
| Other business expenditure | -1 892 | -1 485 | -853 | -2 140 | |
| Business profit | -6 625 | 4 014 | 34 370 | 43 047 | |
| Financial revenue and expenditure | -8 589 | -9 776 | -6 901 | -6 077 | |
| Profit before income tax | -15 214 | -5 762 | 27 469 | 36 970 | |
| Unplanned expenditure | |||||
| Income tax | -560 | -1 235 | |||
| Net profit of financial year | -15 214 | -5 762 | 26 909 | 35 736 |
Balance sheet
The balance sheet volume of Viru Keemia Grupp decreased by 3,548 euros in 2019, amounting to 718.8 million euros as at 31 December 2019. In 2019, the share of equity capital made up 72% of the balance sheet volume.
In thousands of euros
| 2016 | 2017 | 2018 | 2019 | ||
|---|---|---|---|---|---|
| ASSETS | |||||
| Current Assets | 64 649 | 75 552 | 108 992 | 149 819 | |
| Fixed Assets | 519 104 | 479 175 | 613 357 | 568 980 | |
| TOTAL ASSETS | 583 752 | 554 727 | 722 348 | 718 800 | |
| LIABILITIES AND EQUITY CAPITAL | |||||
| Short-Term Liabilities | 52 343 | 50 093 | 172 469 | 76 640 | |
| Long-Term Liabilities | 234 758 | 201 373 | 39 074 | 124 220 | |
| Total Liabilities | 287 101 | 251 466 | 211 543 | 200 860 | |
| Equity Capital | 296 652 | 303 261 | 510 805 | 517 940 | |
| TOTAL LIABILITIES AND EQUITY CAPITAL | 583 753 | 554 727 | 722 348 | 718 800 |
Investments
Due to the European Green Deal, the shale oil industry entered a stage in 2019 where every investment with a pay-back period of more than 3 to 5 years must be very thoroughly contemplated. VKG therefore reviewed its investment strategy for the near future and established the objective of cutting the investment volumes by nearly a third.
In 2019, investments amounted to a total of 30.2 million euros.
Operating reliability investments investments in the amount of 19 million euros made up the main part of that amount, with 4.7 million euros invested in the replacement and upgrading of amortised mining machinery in the Ojamaa Mine, 4.4 million euros in underground tunnelling works, and 5.2 million euros in oil plant repairs in VKG Oil.
Development investments amounted to 6 million euros, with VKG Oil’s circulation oil purification project of nearly 3.1 million euros and the semi-coke gas cooling project of 1.5 million euros being the largest investments.
Environmental and occupational safety investments amounted to a total of 5 million euros, of which 3.3 million euros was made up by the renovation of the Jõhvi–Ahtme heat pipelines and 1.2 million euros by the reduction of odour nuisance from the oil industry.
Environmental and occupational safety investments
In millions of euros
- Investments
- Investments into environment and occupational safety
Loan burden
In August 2019, VKG signed a new syndicate loan agreement with the local SEB, Luminor and OP banks in the amount of 123 million euros, which was used for refinancing the former syndicate loan from the same banks and repaying the loan taken from the European Bank for Reconstruction and Development. The new loan agreement is concluded for five years and gives VKG more freedom in implementing various projects.
VKG repaid the principal parts of loans to the banks in a total amount of 24.5 million euros in 2019, thereby reducing the bank loan balance to 123 million euros and the share of loan obligations to 28% of the balance sheet volume by the end of the year. VKG financed 95% of the investments made during the year from its own cash flow and 5% from new leasing contracts.
LOAN BURDEN (IN MILLIONS OF EUROS)
Taxation load
In 2019, tax revenues in the amount of 49.6 million euros went into the state budget from the activities of the Group, which is 20% more compared to the previous reporting period. The largest share comes from labour taxes in the amount of 19.5 million euros (+14%), and various environmental fees in the amount of 157.5 million euros (+12%).
LOAN BURDEN (IN MILLIONS OF EUROS)
- Labour taxes
- Environmental charges
- Excise duty
- Other taxes