IHS Global Insight analyst Andrew Neff reviews the long-awaited figures from Gazprom
Snapshot:
Significance
Investors and analysts fully expected a gory first quarter from Gazprom in its financial results, considering both the evaporation in gas demand due to the recession and the two-week halt in Russian gas exports to Europe in January owing to a dispute between Gazprom and Naftogaz Ukrainy.
Implications:
Gazprom reported a net profit decline of 62% year-on-year, with profits falling to 103.7 million roubles (US$3.3 billion) as sharply lower gas demand offset an increase in prices that actually allowed the Russian gas giant to increase its revenues compared to the same quarter in 2008.
Outlook:
Lower prices since the first quarter are likely to weigh down Gazprom’s financial results in the second and third quarters, although the Russian firm is hoping that a tentative recovery in gas demand will help boost sagging profits.
Analysis:
Taking Stock of the Carnage
Gazprom’s long-awaited revelation yesterday of its first-quarter 2009 financial results, calculated according to International Financial Reporting Standards (IFRS), finally gave investors and analysts the chance to see for themselves just how gruesome the January-March period was for the Russian gas giant, financially at least. With the decline in gas prices for Gazprom’s oil-indexed contracts with European customers finally starting to be reflected after a six-month time lag from the start of the collapse in global oil prices in July 2008, the Russian firm was expected to see its revenue from sales begin to shrink (at least according to the fourth quarter of 2008, if not compared to the first quarter of 2008).
Similarly, the financial impact of the collapse in European (and, to a lesser extent, Russian) gas demand as a result of the global recession was expected to weigh heavily on Gazprom’s volumetric sales. Furthermore, while the January 2009 Russia-Ukraine gas war is now but a memory (albeit a lingering nightmare that will not fully go away, what with the persistent threat of a new dispute since then and renewed tension between the two countries over the past two weeks), the full financial effect to Gazprom of that two-week halt in Russian gas exports to Europe via Ukraine has generated more than a little morbid curiosity among analysts seeking to understand the true health of the Russian gas giant.
Yet, whereas the club of multinational energy companies that Gazprom aspires to join has already reported its first- and second-quarter financial results to their shareholders (with more than half of the third quarter now in the books), the Russian gas giant, which is majority state-owned but has made a point of courting private shareholders, is only now getting around to telling those investors how it is doing in the midst of perhaps the company’s most turbulent period in its brief post-Soviet history. Yet in announcing a net profit of 103.7 million roubles (US$3.3 billion) in the quarter, down 62% year-on-year (y/y), Gazprom has somehow managed to exceed expectations of even more dreadful results.
(Still-High) Prices Offset Lower Volume Sales
Indeed, looking at the company’s total revenues (see table), Gazprom actually managed to increase revenues by 2.2% y/y, despite the extremely negative operation environment. The Russian gas firm managed to pull this off largely as a result of the fact that gas prices—while lower now compared to the first quarter of 2009—were substantially higher in the January-March 2009 period compared to the first quarter of 2008. This higher price environment helped to offset the sharp decline in volumetric sales year-on-year, the result not only of the drop in Europe’s gas demand but also the Russian gas export halt via Ukraine during the January dispute between Gazprom and Naftogaz.
Gazprom reported net sales of 433,239 million roubles to Europe in the first quarter, an increase of 27.8% y/y, even as volume sales plunged from 53.5 bcm in the first quarter 2008 to 37.1 bcm in the same time period this year (see table). The Russian firm said that its average sales price for gas sales to Europe, including excise tax and customs duties, stood at 12,986.4 roubles (US$411.6) per 1,000 cm in the first three months of 2009, up 54.9% y/y. Likewise, gas sales to the former Soviet countries—even with the total halt in gas supplies to Ukraine in January for nearly three weeks—still managed to register an increase from 2008, at 85,281 million roubles, 2.3% higher y/y. Volume sales of course dropped, from 25.0 bcm in the first quarter of 2008 to just 9.7 bcm this year, but substantially higher prices to Ukraine and other ex-Soviet states—at 9,219.3 roubles (US$292.2) per 1,000 cm, this was 252% above the 2008 average sales price in the same quarter—more than made up for the volume decline.
In terms of Gazprom’s gas sales to the domestic Russian market, where demand has also been eroded with the recession hitting home, the gas firm reported net sales of 157,947 million roubles in the first quarter of 2009, down 8.9% y/y. Sales volumes dropped from 105.0 bcm in the January-March 2008 period to 93.2 bcm in the same time period this year, meaning that the marginally higher y/y average price for Gazprom’s gas sales to the domestic market—at 1,695.1 roubles (US$53.7) per 1,000 cm, an increase of 2.6% y/y—was not sufficient to once again prevent Gazprom from operating at a loss in supplying its largest market in Russia.
Outlook and Implications
Overall, the first quarter of 2009 is not one that Gazprom will want to recall fondly, but then again, it could have been much worse. While total gas sales volumes plunged from 183.5 bcm in the January-March 2008 period to 140.0 bcm in the same time period this year, Gazprom nevertheless reported total net gas sales of 676,467 million roubles in the first quarter, up 13.5% y/y. Yes, Gazprom was forced to pay its own Central Asian suppliers more for gas imports (reportedly somewhere above US$300 per 1,000 cm), but then the Russian firm was—at the time—still selling gas to its European customers for upwards of US$400 per 1,000 cm.
Thus, it is not surprising that Gazprom sought in April to sharply curtail its own gas imports from Central Asia at a time when the Russian firm was watching its oil-indexed gas prices plunge under contracts with European customers. Gazprom is still grappling with negotiations on a potential restart of Turkmen gas imports following the explosion on the Central Asia-Centre gas pipeline in April that knocked out more than 90% of Turkmen gas exports to Russia, with further talks between Russia and Turkmenistan slated for next month.
In the meantime, Gazprom is trying to cope with falling European gas prices and the still-weak outlook for a recovery in demand. The Russian firm is likely to see a further drop in y/y sales volumes when it reports its second-quarter financial results, although Gazprom officials have talked of signs of a rebound. Nevertheless, falling prices in the Russian gas giant’s oil-indexed gas contracts with its European customers are sure to begin to weigh more heavily on Gazprom’s net profits in the next two quarters. The Russian gas giant’s hope for a rebound in demand to offset lower prices and boost its sagging profits may be wishful thinking at this point, although a dreadfully cold winter heating season that generates higher gas consumption could surely provide some warmth for Gazprom itself.
About the Author: Andrew Neff is senior energy analyst at IHS Global Insight
