Gazprom Rally at Risk on Ukraine Gas Prepayment Demand

Photographer: Alexander Zemlianichenko Jr./Bloomberg

A employee stands outside OAO Gazprom's new Bovanenkovo deposit, a natural gas field near Bovanenkovskoye on the Yamal Peninsula in Russia. The gas producer’s ADRs traded at 2.9-times estimated 12-month earnings yesterday, compared with an average 12 times among its global peers, data compiled by Bloomberg show. Close

A employee stands outside OAO Gazprom's new Bovanenkovo deposit, a natural gas field... Read More

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Photographer: Alexander Zemlianichenko Jr./Bloomberg

A employee stands outside OAO Gazprom's new Bovanenkovo deposit, a natural gas field near Bovanenkovskoye on the Yamal Peninsula in Russia. The gas producer’s ADRs traded at 2.9-times estimated 12-month earnings yesterday, compared with an average 12 times among its global peers, data compiled by Bloomberg show.

OAO Gazprom’s 24 percent rally from this year’s low in March will probably end soon as the crisis in Ukraine threatens to disrupt the Russian gas producer’s exports, according to Sberbank Asset Management.

The state-run company’s demand that Ukraine pay up front for its natural gas or be cut off from the supply could backfire on Gazprom, which uses pipelines that traverse the country for about half of its natural gas deliveries to Europe. Shutting off the tap to its western neighbor might disrupt deliveries to the rest of the region, said Anton Rakhmanov, who manages $5 billion in assets as the head of Sberbank Asset Management in Moscow.

“Ukraine has no money to prepay for the supplies, and the payments will depend on the international aid to Ukraine, particularly from the International Monetary Fund and other lenders,” Rakhmanov said by phone yesterday. “The Russian market is driven by the Ukraine crisis, and until it’s resolved there can be absolutely no sustainable rally in Gazprom.”

The company’s American depositary receipts rose 2.4 percent in New York yesterday. It was the best performance on the Bloomberg index of the most-traded Russian stocks in the U.S., which gained 0.5 percent. RTS stock-index futures fell 0.2 percent to 122,150 in the U.S. hours. The stock traded 0.2 percent lower by 10:23 a.m. in Moscow today.

Gazprom has demanded that Ukraine prepay for an estimated $1.7 billion of fuel for June or be cut off. Russia, the world’s second-largest producer of natural gas after the U.S., has twice since 2006 withheld deliveries to the country.

Insurgent Ambush

The ADRs jumped to $8.01 in New York yesterday, reducing this year’s drop to 7.4 percent. Thirteen of 21 analysts surveyed by Bloomberg recommend buying the gas producer’s Moscow-listed share, while seven rate it the equivalent of hold, according to data compiled by Bloomberg. Only one analyst has a sell recommendation.

The turmoil in the former Soviet republic continued yesterday as insurgents killed seven Ukrainian soldiers and wounded eight others in an ambush near an eastern rebel-held stronghold. The government says Russian President Vladimir Putin is stoking unrest that’s threatening to rip the country apart as it prepares for a presidential election on May 25.

“A sustainable rally in Gazprom shares is unlikely until the presidential election is behind us,” Kirill Pyshkin, who helps manage about $10 billion in assets at Mirabaud Asset Management AG in London, said in an e-mailed response to questions yesterday.

‘Extremely Cheap’

“Gazprom is extremely cheap, and yet the current rally most likely will be short-lived,” said Karen Kostanian, an analyst at Bank of America Corp. in Moscow. Investors are “waiting for more clarity on the Ukrainian situation,” she said.

The gas producer’s ADRs traded at 2.9-times estimated 12-month earnings yesterday, compared with an average 12 times among its global peers, data compiled by Bloomberg show. The low multiple makes Gazprom “more attractive” than Russian oil companies, “especially if you are willing to look through the near-term geopolitic noise,” Rob West, an analyst at Sanford C. Bernstein in London, wrote in an e-mailed response to questions yesterday.

“Europe’s high reliance on Russian gas will minimize the extent and the duration of any supply interruption to Europe through Ukraine,” West wrote.

IMF Pledge

The company is moving Ukraine to prepayments because it owes $3.51 billion for fuel delivered in 2013 and through April this year, Chief Executive Officer Alexey Miller said in Moscow on May 12. Gazprom sent Ukraine a bill for an estimated $1.7 billion of imports next month, reiterating yesterday that it will cut off supplies on June 3 if the country doesn’t start paying in advance.

While Ukraine is able to pay off at least part of its debt, having received the first $3.2 billion of a $17 billion IMF aid package last week, Russia has not seen any willingness to do so, Prime Minister Dmitry Medvedev said in Moscow on May 12.

The IMF’s pledge is “clearly not enough,” and the country will need the $15 billion in loans promised by other international organizations, the IMF’s Managing Director Christine Lagarde said in Berlin yesterday.

“Ukraine’s current overdue debt is $3.5 billion, and no one can doubt that it is a weighty and objective reason for applying the prepayment mode stipulated in the relevant contract,” Gazprom spokesman Sergei Kupriyanov wrote in an e-mailed statement yesterday.

The Market Vectors Russia ETF (RSX), the biggest U.S. exchange-traded fund that holds Russian shares, added 1 percent to $24.27, while the RTS Volatility Index, which measures expected swings in futures, climbed less than 0.1 percent to 31.35 in U.S. hours.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Alex Nicholson

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