U.S. Sanctions Sour Earnings Surprise for Biggest Gas Producer

Updated on

U.S. sanctions against the world’s biggest natural gas producer soured a surprise 71 percent surge in profit at Gazprom PJSC to push its shares lower in Moscow.

The stock sank to the lowest in more than a week after first-quarter net income rose to 382 billion rubles ($5.9 billion) from a year earlier, 8 percent above the average of eight analyst estimates compiled by Bloomberg. The shares fell as much as 2.4 percent as the U.S. announced sanctions against one of Gazprom’s largest offshore fields late on Friday.

Sanctions imposed on Russia over deadly fighting in Ukraine are both helping and hindering Gazprom. On the one hand, they raise risks for some energy projects. At the same time, the ruble’s slump amid the sanctions boosts the value of the company’s overseas earnings in the local currency.

Business is still suffering as slumping oil prices, linked to rates Gazprom charges for its gas exports, smother profit.

The first-quarter result may be “the last positive period for Gazprom in the new price environment” as foreign-currency revenues decline, Pavel Kushnir, a Deutsche Bank AG energy analyst in Moscow, said by e-mail on Monday.

Sales rose 5.7 percent to 1.65 trillion rubles, Gazprom said in a statement on Monday. In dollar terms, though, revenue slid 40.5 percent to $26.5 billion, Bloomberg calculations based on Bank of Russia exchange rates show. The ruble averaged 62.16 a dollar in the quarter, compared with 34.95 a year earlier.

‘Looked Good’

“The first-quarter earnings looked good,” Maxim Moshkov, an energy analyst at UBS Group AG, said by e-mail. The problem for the shares is the U.S. sanctions announcement, Moshkov said.

The U.S. on Friday said it would curb supplies of equipment to Gazprom’s Yuzhno-Kirinskoye field, putting at risk plans to start up the deposit after 2018 and use its production to expand output of liquefied natural gas at the Sakhalin-2 plant, the only such facility in Russia.

Gazprom, which declined to comment on the restrictions, dropped 1.1 percent to 139.80 rubles by 3.19 p.m. in Moscow trading. It touched the lowest intraday level since July 31.

The company didn’t give an outlook for total earnings this year. Gas shipments to Europe and Turkey, key revenue regions, will probably reach record highs for the full year, Gazprom said. Its total output may fall to a record low on weaker demand in Russia and Ukraine, the government estimated in July.

Free cash flow was 252 billion rubles, or about $4 billion at average exchange rates, Alexander Kornilov, an oil and gas analyst at Alfa Bank in Moscow, said Monday.

Boosting Purchases

“That’s exceeded expectations,” Kornilov said, adding that dividends from earnings this year will be secure.

Payments would be at least maintained, Gazprom Deputy Chief Executive Officer Andrey Kruglov said in June.

Gazprom’s customers in the European Union have been boosting purchases since the end of May as the decline in oil prices filters into gas contracts, with a lag of six to nine months. Its average June export price was the lowest since 2007, Bloomberg calculations based on Russian customs data show.

As prices keep dropping, Gazprom earnings will be hurt by the end of the year, Deutsche Bank’s Kushnir said. “The situation could deteriorate significantly both in free cash flow, and in its ability to pay high dividends” next year, amid higher spending on a planned gas link to China, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE