Gazprom demonstrates robust financial performance in the 2nd quarter

Nadezhda Kazakova, Analyst, JP Morgan

Gazprom’s performance is better than it was assumed in the consensus forecast by Interfax. For instance, EBITDA was 6.5 per cent up against the consensus forecast, while the net income surpassed the market expectations by 4.9 per cent. A slight deviation of IFRS statistics on sales volumes and prices from the figures published three months ago in the RAS financial statements turned out to be a surprise.

Besides an unexpected growth of proceeds in the oil and gas sector driven by a surge in petroleum products sales, an emphasis should be placed on effective cost management in the 2nd quarter of 2010 which resulted in an EBITDA excess over the market estimates as well as in a 20 per cent reduction of personnel expenditures versus the 2nd quarter of 2009 to 14 per cent (preventing the indicator from a decline) of the Company’s total expenditures as compared to 15 per cent in the 1st quarter of 2010.

The most volatile item, miscellaneous expenditures, dropped by 59 per cent versus the 2nd quarter of 2009.

Maxim Moshkov

Maxim Moshkov, Analyst, UBS

Gazprom achieved better financial results than it was estimated by the market due to higher gas prices in the EU and a lower export duty. The vast free cash flow generated by Gazprom provides an opportunity for higher dividend payments in 2010. We assessed Gazprom’s free cash flow at USD 1.8 billion in the 2nd quarter and at USD 10.7 billion in the first half of 2010. This can be partly explained by the effective management of working capital and the sale of GazEnergoPromBank. The free cash flow of Gazprom is expected to total USD 4.2 billion throughout 2010.

Gazprom’s performance is still positively appraised as the domestic gas prices liberalization is expected to persist and the gas prices pegging to oil quotations will be retained in long-term contracts.

Lev Snykov

Lev Snykov, Analyst, VTB Capital

Gazprom demonstrated robust financial performance in the 2nd quarter of 2010 fully meeting the market expectations. We observe a considerable improvement in the Company’s EBITDA. The Company also shows very positive changes in the free cash flow which is mainly explained by non-operating factors although.

Gazprom’s performance is expected to further improve in the 3rd and 4th quarters of 2010. During the 2nd quarter the natural gas market was not so vigorous, at the same time we should note gas sales recovery versus the same period of the last year. We expect that gas sales will further improve during the 3rd and the 4th quarters as well.

Pavel Sorokin

Pavel Sorokin, Analyst, Alfa-Bank

Gazprom’s financial performance slightly surpassed the expectations, but this is unlikely to make a strong impact on the Company’s quotations as they represent the results of the 2nd quarter, while the global market is focused nowadays on Gazprom’s current sales in Europe and Russia as well as on the increasing scope of the investment program. Most of Gazprom’s expenditures kept growing mainly due to the oil and gas asset purchases and raw material transit costs. The European demand for Gazprom’s gas fell in the 2nd quarter even below the level of 2009 which was not pretty favorable. In these circumstances natural gas demand in the year end period is quite significant for Gazprom as it can improve the annual average demand for Russian gas.

The opinions expressed in this section may not necessarily coincide with the official position of Gazprom