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The Gazprom Report Card

Derek Brower, an energy journalist and former contributor to this blog, has a piece in the new edition of Petroleum Economist providing a “report card” on the recently disappointing performance of the once unsinkable Gazprom. Excerpts below:

GAZPROM has become notorious for corporate bombast, but in Deauville, France, last June, it exceeded itself with a series of statements that now look comical. The Russian gas monopoly would become the world’s first trillion-dollar company by market capitalisation within the next seven to 10 years, the company’s boss, Alexei Miller, told a press briefing. Oil prices would double to $250 a barrel in 2008, he added gleefully. European gas prices, which are indexed against crude prices, could rise to as high as $1,500/’000 cubic metres (cm) by the end of the year, the firm suggested. Gazprom was sitting pretty.

One land war and a financial meltdown later and things have changed, although not as the state-controlled company wanted them too. When Miller made his bullish proclamations, Gazprom’s market capitalisation was about $360bn. Since then, the share price has collapsed, losing two-thirds of its value. Gazprom’s travails on the Russian stock exchange (RTS) have helped to wipe billions of dollars from the board itself.The price of oil has also fallen, although not as steeply as Gazprom’s stock. Crude prices last month were just over half of their price in June. That has not fed through to gas prices yet – the lag in the indexing is about six to eight months – but Gazprom’s purchase of a large stake in Sibneft in 2005, creating oil arm Gazprom Neft, means falling crude prices now affect the parent company more quickly than they used to. Last month, Gazprom and Russia’s other energy majors went to the Kremlin begging for help in refinancing debt and projects.Still just a gas companyAmid the controversies, diplomatic squabbles and muscle flexing it has often been hard to remember that Gazprom is just a utility company. But as investors have sold the company’s stock, that is more apparent than ever. The rapid growth of its market capitalisation until mid-2008 belied its reliance on the mundane business of selling gas to consumers in Europe and Russia. With the EU on the verge of full-blown recession, forecasts for energy-demand growth are likely to be scaled back.In Russia, where the RTS has lost almost two-thirds of its value since August and the spectre of another financial crash has arisen, a faltering economy will also hit Gazprom. In a speech in St Petersburg in June, Miller warned Europeans that rising domestic consumption – as well as a loosening of tariffs by Moscow – would soon make Russia as important to Gazprom as markets in the West. The perception that Gazprom needed the value-added customers of the EU would soon “fade away”, he said. That forecast is also now looking more speculative.Gazprom is facing other problems, too. Its cost of borrowing has risen from around 7.0% to 11.5% in recent months. Steady cash flow will give some support to infrastructure projects such as the planned Nord Stream and South Stream pipelines to Europe, but it may not be enough. Nord Stream’s costs are soaring and it still faces several obstacles, not least political (see p14). South Stream’s progress is slower, despite political support. It could cost up to $15bn and a plan recently leaked to the Russian press says it will not be on stream before 2015, two years later than planned.Gazprom needs even more money in the upstream. Developing large fields in the Yamal peninsula and Siberia will cost upwards of $70bn in the next 10 years, say analysts. With project finance drying up, Gazprom could once have issued shares to raise more cash. But its slump on the RTS has also closed that avenue.None of this troubles the company’s management. Speaking last month in Bishkek, where Gazprom was signing deals in the Kyrgyz energy sector, Miller played down the effect of the credit crisis on his company, claiming it could finance all of its projects from cash flow, would not need to tap capital markets before 2009, had no intention of buying back shares to prop up the company’s valuation, and felt under no pressure from falling oil prices. Gas companies, he said, have six months longer to deal with commodity price drops than oil companies have.Indeed, last month Gazprom said profits for the three months to the end of March rose by 31.7%, to R286.1bn ($10.6bn). Stronger than expected, said analysts, but the figures offer little clue as to how the firm is performing six months and a halving of the oil price later.Nonetheless, there are grounds for Miller’s optimism. The first is that the share price is “disconnected” from the fundamentals. Last month, the quoted price valued the company was cheaper than VW, points out Eric Kraus, special adviser to Otkritie Investment House, a Russian investment bank. “And I’d rather own a quarter of the world’s gas reserves than a VW Beetle.”Gazprom, he says, has suffered collateral damage as investors have bailed out of emerging markets. “It’s not a flight to quality. Everybody just needs cash. People haven’t been selling what they should sell, they’ve been selling what they could sell.”