Gazprom Declines as Gas Supply Deal With Ukraine Delayed

OAO Gazprom slid to the lowest price since March 2009 in New York yesterday after the gas producer, which sends about half of its exports to Europe via Ukraine, failed to resolve a pricing dispute with the war-torn country.

American depositary receipts of Gazprom, Russia’s biggest company, dropped 2.6 percent to $6.44 in New York yesterday, extending this year’s decline to 26 percent. Citigroup Inc. reduced Gazprom to sell on Oct. 21, citing the prospect of lower volumes sent to Ukraine. Moody’s Investors Service, which last week cut Russia’s credit rating to the second-lowest investment grade, kept a negative outlook on the state-controlled company due to its “sensitivity” to the change.

Russia and Ukraine failed to agree on future payments in talks brokered by the European Union Oct. 21 and will discuss a temporary deal next week. Gazprom in June halted deliveries to Ukraine as a separatist conflict flared in the country’s eastern regions while international measures punished Russia for its role in the crisis. Price disputes between Gazprom and Ukraine led to European supply disruptions in 2006 and 2009.

“People are afraid of gas wars,” Ivan Manaenko, the head of research at Veles Capital LLC in Moscow, said by phone. “The talks continue but the outlook is unclear. In the worst-case scenario, if there is no agreement, it will be bad for Gazprom’s revenue.”

Russia and Ukraine will seek a temporary deal during the next round of talks on Oct. 29 to resolve the dispute, according to Energy Commissioner Guenther Oettinger. Gazprom’s ADRs rose 0.5 percent to $6.47 at 10:03 a.m. in New York.

Dividend Cut

Ukraine would pay $3.1 billion by year-end for previously delivered supplies and Russia, which has denied any involvement in the conflict, would cut its price by $100 per thousand cubic meters to $385 through March, according to a draft deal. The EU has said it will offer financial aid to Ukraine to help make the gas payments.

Gazprom’s second-quarter profit rose 13 percent as foreign currency gains made up for an increased provision to cover doubtful trade accounts receivable, primarily from Ukraine. In August, Gazprom said its first-half profit under Russian accounting standards, which is used to calculate the dividend, fell mainly because of those provisions. The company may cut its payments to shareholders 11 percent to 6.43 rubles per share, according to a government forecast published last month.

‘Worrisome Trends’

In addition to the revenue shortfall from the Ukraine standoff, Gazprom is seeing a drop in shipments to Europe and Turkey, which fell 3.9 percent in January-September compared with the same period a year ago, while shipments to the former Soviet states declined 11 percent, data compiled by Bloomberg show.

“There are worrisome trends as Gazprom already reduced supplies to Europe in the last quarter,” Elchin Mammadov, a utilities analyst at Bloomberg Intelligence in London, said by phone yesterday. “If it fails to reach an agreement with Ukraine, the threat of less revenue from its major export market increases.”

The ruble, the world’s worst performing major currency since June, has tumbled 21 percent this year as oil prices declined. International sanctions have sapped the country’s access to financing and are threatening to send the $2.1 trillion economy into recession.

‘Long-Term Buy’

Gazprom dropped 0.4 percent to 133.50 rubles, or $3.23, in Moscow yesterday. Each ADR represents two shares. The Bloomberg Russia-US Equity Index slipped 1.9 percent to 72.89.

Twelve of 19 analysts covering the stock recommend buying it, while five have a hold rating and just two have a sell. The stock, which has fallen in each of the past three years, has a 12-month return potential of 36 percent, according to their estimates.

To Ilya Balakirev, a senior analyst at UFS Finance Investment Co., the geopolitical risks are overblown and Gazprom is cheap.

“Gazprom is a strong long-term buy, simply because Europe needs Russian gas,” Balakirev said by phone from Moscow yesterday. “Winter is coming, it’s getting cold in Europe and Europeans need Russian gas for heating and other needs.”

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