As the EU is facing one of the biggest macroeconomic, geopolitical, and energy challenges in the past several decades, we decided to bring you a brief overview of the current gas situation.

Ever since the beginning of the Russian invasion of Ukraine, the EU as a whole, but its constituent members had to make decisions, some of them hard and unprecedented. Besides the decision to sanction Russia for its aggression, the decisions regarding the European reliance on Russian gas also had to be made. In fact, if we were to look at the data from 2021, the European reliance on gas has been extremely high.

Share of gas supply from Russia in the select European countries in 2021, %

As can be seen from the chart above, out of the EU member countries, Latvia leads the way with 92%, followed by Austria with 86% of the imports of natural gas, followed by Bulgaria with 79%, and Finland with 75%. Out of the larger EU economies, Poland imported 50%, Germany 49%, Italy 38%, and France 15%. Looking at the percentage closer to home, Croatia imports 16%, Slovenia 60%, while outside the EU, Bosnia and Herzegovina, Moldova, and Macedonia, all imported 100% of the natural gas needs from Russia. To better understand why this percentage was so high, one has to look at one of the main goals in the EU, i.e. the green transition and the reduction in carbon blueprints of the economies, reaching carbon neutrality by 2050. What does this mean, exactly? It means that a higher percentage of energy production would come from renewable energy, i.e. hydropower plants, wind turbines, and solar power plants.

At the same time, a reduction in fossil fuels, i.e. oil, gas, and coal would be made. At the same time, even though it is not as nearly polluting as other power sources, nuclear power was also reduced, and there has been an EU-wide movement, driven by Germany (which started after the Fukushima nuclear power plant disaster in 2011), to shut down the nuclear power plants. This all sounds good and plausible, but what about gas? First of all, the seasonality, or rather, the dependence of renewable energy sources on weather patterns. Wind turbines don’t work if there isn’t any wind. Hydro-power plants can’t operate if there isn’t enough water pressure (as can be the case if there is a prolonged drought). Solar power plants cannot work at night or when there isn’t enough sunlight. This means that an alternative power source was needed when these power sources were unavailable. Enter, gas. For the last 50 years or so, even when the Cold War was going strong, and the Berlin Wall was still standing, the Soviet Union and Europe still had connections and trade deals. One of those was for gas. Over the 1980s and 1990s (after the collapse of the Soviet Union), infrastructure was being built that could transfer cheap Russian gas to Europe. When the green transition for the EU was announced, it was only logical to think that the continual importation of cheap Russian gas would be the answer. Not only were the costs lower than importing LNG, but gas, even though it’s a fossil fuel, was deemed less harmful to the environment than other fossil fuels. Add to the fact that this relationship between Soviet Union/Russia and certain European countries and later the EU as a whole, has been going on for a long time, changing the system at the time (in the 2010s) did not make much sense, especially when a steady stream of stable energy production was needed.

This has been the situation that abruptly ended when the war in Ukraine began in February 2022. All of this was to change. With the EU continually adding new sanctions on Russia in order to stop the war, and pressure Russia into negotiations, the EU also started looking for new sources of energy, to prepare for the inevitable cut in Russian gas imports. The pressure from this could have been felt from the beginning of the conflict, but it really started going at the end of March, when President Putin signed a decree that demanded that all payments be made in roubles (in a technical sense, payments would still be made in euros, but would then be converted into roubles). The pressure, from the perspective of Russia, was to be expected. With the number of sanctions imposed on Russia to end the war, and with the ever-growing support for Ukraine, both in a humanitarian and military sense, the only way Russia could hit back is to cut back on its gas exports. In fact, it is estimated that in 2021 Russian exports of gas to the EU amounted to app. 300 million cubic meters/day (mcm/d), through Nord Stream 1, and through the pipelines in Poland and Ukraine. By now, this number is down to app. 60 mcm/d, out of which half goes through Nord Stream 1 (this app. 30 mcm/d is the 20% level that goes through the pipeline that we can often hear on the news).

This reduction has been happening over the last couple of months, as pressure from both sides mounted. In fact, Gazprom announced that on 31 August 2022, Nord Stream 1 will shut down for 3 days for maintenance, but also said that if “unexpected” complications happened, this would take even longer. As this was taking place, replacements for it had to be found, and there were several ways that this could be done, both on the supply and demand side. On the supply side, new sources of gas had to be found, and this for the most part relates to LNG imports. In total, LNG imports have increased from 96 mcm/d in the gas year 2020/2021 (the gas year 2020/2021 refers to the period from October 2020 to October 2021) to app. 195 mcm/d in the last six months. However, it should be noted that further increases are limited, as more LNG terminals are needed for regasification.

On the other hand, the demand side has been and can further be influenced. This was already done by the EU proposal to reduce the gas demand by 15%, from 1 August 2022 to 31 March 2023, compared to the same period during the years 2017-2021. Other proposals and mechanisms are currently on the table, with proposals such as gas price caps, and additional gas taxes on production companies being discussed. All of this taken together, has led to a sharp increase in gas prices across the EU, but how sharp, exactly?

The best way to look at this would be to look at gas contracts on the stock exchanges, for the spot prices, 1 month, 1 quarter, and 1 year forward prices. This can be done by looking at the various Dutch TTF forward contracts (standard contracts for gas trading and delivery in Europe), below.

Dutch TTF contract gas prices* (spot, 1 month forward, 3 months forward, 1 year forward, EUR/MWh)

*Prices as of 30 August 2022

As can be seen, the prices of gas have increased significantly since the beginning of 2020. This is true across all contracts, with spot prices increasing the most, which is to be expected. Currently, the prices are at 270/MWh for spot prices, representing an increase of 24x since the beginning of 2020, 1-month forward contract prices increased by 21x, 3 months forward by 22x, and 1-year forward prices by 18x. With the current supply and demand constraints, as well as the uncertainty regarding the further Russian supply reduction, as well as their replacements, projecting how these prices will go is extremely difficult. Furthermore, these prices are not representative of the prices paid by consumers, but a general and prolonged trend of price increases will have a negative effect on everyone.

The most recent trend of European gas prices, however, has been one of decline. This is due to the EU seeking to develop an instrument to break the link between gas and electricity prices. The details of the proposal are currently still being discussed. At the same time, the cap on electricity prices is also being discussed, with which the gas will become too expensive for electricity production, thus deterring industry usage of gas, and lowering gas demand. With all of these developments, the situation is extremely volatile and new changes could push prices in either direction.

In H1 2022, sales revenue increased by 13.7%, EBITDA decreased by 3.2%, while net profit decreased by 13.1% and reached EUR 6.4m.

In 2022, Salus recorded revenue of EUR 247.4m, an increase of 13.7% YoY. Growth in sales revenue was primarily driven by an increase in income on the domestic market, which grew by 13.6% and amounted to EUR 229m (88% of total sales revenue). Further, Salus noted an increase in every other sales segment in both domestic and foreign markets regarding goods and services revenue. As whole-seller and retailer of Pharma and medical products complemented with retail chain of 30 specialty stores in Slovenia, Gross Margin is important indicator how business is doing. In 2H Gross Margin was down 154 b.p. as increase in COGS (+15.7% YoY) could not be offset by higher sales(+13.7%). . Value of goods sold, increased to EUR 220.5 m (15.7% YoY) – resulting in relatively flat gross profit for Salus. The company noted a gross profit of EUR 26.9m vs. EUR 27m in H1 2021.

Moving further under the gross profit line to the operating expenses, in H1 2021, the Company generated EUR 19.7m, an increase of 12.7% YoY. The increase in OPEX was primarily driven by the cost of sales, including depreciation, which noted an increase amounting to EUR 1.4m or 11% YoY.

Looking over to the EBITDA it amounted to EUR 10.2m, a slight decline of 3.2% YoY. This can be attributed to the increase in both OPEX and purchase value of goods sold, which overall grew more than revenues have.

Under the EBITDA level, Salus reported higher financing expenses, resulting in a worse net financial result of EUR 64.9k (vs. EUR 341.1k in H1 2021). Other financing expenses of the company and the Group in the period January – June 2022 are higher than in the same period in 2021 due to the effect of the revaluation of financial investments valued at fair value through the income statement and higher negative exchange differences. Compared to the YE financial obligations were down 13% and they amounted to EUR 6.8m.

Finally, the net profit of the Company amounted to EUR 6.4m, noting a decrease of 13.1% YoY, mostly due to lower EBITDA achieved during the first half of the year.

Salus H1 2022 key financials (EUR m)

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