Gazprom Second-Quarter Profit Declines 12%, Beats Estimates

OAO Gazprom, the world’s biggest natural-gas producer, said profit fell less than expected in the second quarter, as rising Russian prices helped offset a foreign exchange loss and slower European gas sales.

Net income declined 12 percent to 170 billion rubles ($5.5 billion) from 193 billion rubles a year earlier, the Moscow- based company said today on its website. That beat the 160 billion-ruble average estimate of six analysts surveyed by Bloomberg.

Revenue rose 21 percent to 764 billion rubles driven by supplies to the domestic market and ex-Soviet republics, as well as sales of oil and electricity, the company said. Net gas sales in Europe, traditionally Gazprom’s most profitable market, and liquefied gas sales to Asia climbed 10 percent compared with a 23 percent rise in domestic sales and a 24 percent increase in sales to the former Soviet republics.

“Gazprom managed to demonstrate a significant improvement in cash-flow generation in the first half” even with “uneasy” European market conditions, Luis Saenz, a London-based director at Otkritie Financial Corp., said in an e-mailed note today. The drop in net income was caused mostly by a large, unrepeated foreign exchange gain last year, he said.

Gazprom had a foreign exchange loss of 38.4 billion rubles relating to finance income and expenses compared with a gain of 83.9 billion rubles a year earlier, the company said. Free cash flow was 56 billion rubles in the second quarter, Gazprom said in a presentation posted on the website.

Debt Burden

Net debt declined 29 percent to 975 billion rubles as of June 30 from 1.37 trillion rubles as of Dec. 31, Gazprom said. The net debt-to-Ebitda, or earnings before interest, tax, depreciation and amortization, fell to 0.8 at the end of June from 1.3 at the end of 2009, Chief Financial Officer Andrei Kruglov said on a conference call today. The Russian gas export monopoly plans to continue lowering its debt burden this year, he said in September.

Profit from domestic operations may climb almost 15-fold to as much as 120 billion rubles this year, Vasily Smirnov, a pricing official at the gas producer, said on the conference call.

Gazprom earned its first profit from domestic gas sales of 8.2 billion rubles last year after operating at a loss for years, Smirnov said.

European Exports

“This year is almost the first when we are working quite reliably and convincingly as far as profitability of gas sales in Russia was concerned,” Alexander Mikheev, deputy head of the marketing department, said on the call. “We expect this figure will be improving annually.”

The domestic market is becoming the export markets’ main competitor for Russian gas, Chief Executive Officer Alexei Miller said last month. Gazprom’s share of gas exports to Europe is shrinking as suppliers including Norway and Qatar offer more flexible terms, said Mikhail Korchemkin, director of East European Gas Analysis.

The recovery from the global economic crisis that Gazprom had been seeing since the first half of 2009 stalled in the second quarter as demand in southern and southeastern Europe declined, Miller said in June.

Sales volumes to Europe were almost flat compared with the second quarter of 2009, when exports were affected by the economic slowdown, according to the presentation.

Gazprom expects average prices under long-term contracts to rise to $327 per 1,000 cubic meters in the fourth quarter, Deputy CEO Alexander Medvedev said on the call.

Heating Momentum

The average gas price was $318 in the previous three months, and the company maintains its forecast of an average price of $308 for the whole year, Medvedev said. Prices include the spot factor Gazprom acknowledged for a portion of its sales to key European consumers, such as E.On Ruhrgas AG for three years starting from 2010, he said.

“The heating season could provide much needed momentum to Gazprom’s sales, provided the temperature is not hotter than average,” Pavel Sorokin and Alexander Bespalov, energy analysts with Alfa Bank, said in a note last week.

Sales of refined products increased by 33 percent to 166 billion rubles, while oil sales rose 13 percent and electricity and heat sales gained 32 percent, Gazprom said.

“Gazprom is not only about gas these days,” Alexander Korneev and Ildar Khaziev, analysts with Citigroup Inc. in Moscow, said last week.

Gazprom gained as much as 3 percent in Moscow today and closed at 174.20 rubles, up 2.4 percent.

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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