EBITDA surpasses market projections and consensus by approximately 10 per cent, EBITDA margin reaches 38 per cent versus expected 35 per cent

Gazprom's EBITDA and net profit were a positive surprise in Q3. EBITDA surpassed our forecast by 9 per cent and consensus - by 10 per cent. The net loss was also lower than expected. Export beyond the CIS was the engine of growth. Gazprom takes utmost advantage of the unfavorable market conditions in the EU and Turkey in seeking to increase its market share.

For example, Gazprom's export beyond the CIS increased by 23 per cent year-on-year to 45 billion cubic meters, whereas export to the CIS grew by 5 per cent to 6.3 billion cubic meters. However, the average price for export beyond the CIS dropped by 31 per cent year-on-year to USD 224 per thousand cubic meters, whereas the average price for export to the CIS - by 19 per cent to USD 173 per thousand cubic meters.

Due to considerable export supplies the operating cash flow grew by 31 per cent year-on-year and by 42 per cent in the quarter - to RUB 410 billion. Given the considerably slowing growth of the capital costs, the free cash flow turned to be positive and amounted to RUB 29 billion compared to the negative value of Q2. We believe that export supplies beyond the CIS continued to grow in Q4 2015, and we expect a little but positive free cash flow despite the seasonal increase of the capital costs towards year-end. We advise to keep the Company's shares.

We consider Gazprom's Q3 results as positive due to EBITDA and positive FCF (free cash flow). The Q3 net profit adjusted to currency fluctuations and other non-monetary items amounted to USD 6.1 billion, which was 7 per cent more than expected. EBITDA of USD 7.8 billion (18 per cent more compared to that of the previous quarter and 41 per cent less compared to the last year) was higher than forecasts by 7 per cent and 10 per cent, respectively.

We believe that a higher EBITDA and smaller capital investments explain the recovery of the free capital flow, which amounted to USD 2 billion following the 9-month results of 2015. According to our forecasts, the Company will strengthen FCF due to smaller capital investments and working cash capital outflow.

The net debt increased from USD 25.9 billion in Q2 to USD 30.4 billion in Q3 following the payout of dividends of over USD 3 billion. However, these positive results will hardly influence the Company's quotes given the ongoing oil price plunge.

The steep fall of prices for oil (a 50 per cent drop) and gas (a 9 per cent drop at the Zeebrugge Hub) in Q3 compared to the last year was a key factor affecting Gazprom's results. These factors will continue to affect in Q4 as well. The net profit in Q3 dropped by 35 per cent compared to the last year - to USD 20.5 billion (1 per cent higher than our forecasts).

EBITDA was 1 per cent lower mainly because of the inconsistency in costs caused inter alia by the change in assets. However, the price for purchased oil and oil products surpassed our projections.

The Company's results in Q4 including FCF will be affected by the oil and gas price fall. Yet, we believe it won't influence the amount of year-end dividends. The Company projected to keep dividends stable - RUB 7.2 per share, which means a dividend yield of 5.5 per cent, whereas the budget expected to have RUB 7.9 per share.

EBITDA surpassed our projections and consensus of the market by approximately 10 per cent, the EBITDA margin reached 38 per cent compared to the expected 35 per cent. The net loss amounted to RUB 2 billion, which was considerably below our expectations and market forecasts.

Within EBITDA the operational costs, which turned to be lower than expected, were affected by the positive change in the balance of finished products, by other lower than expected costs, as well as by profit from derivative financial instruments. The Group's financial result was negatively affected by the net loss of RUB 400 billion caused by exchange differences resulted from the debt revaluation against the backdrop of a falling ruble.

We believe that FCF generated in Q3 will allay apprehensions that Gazprom might have negative FCF for the whole of 2015. This will be welcomed by the market.