Stable Corporation. Interview with Andrey Kruglov
December 26, 2014
Published in corporate Gazprom Magazine Issue 12, interview was taken by Sergey Pravosudov
Andrey Kruglov, Deputy Chairman of the Management Committee, Head of the Department for Finance and Economics of Gazprom answers the questions posed by the Gazprom Magazine.
- Mr. Kruglov, what financial results is Gazprom Group expecting at the close of 2014?
2013 was record-breaking for Gazprom in terms of some key financial indicators, such as the revenues and EBITDA. Due to the strong financial results of the last three years, Gazprom has been among the top three global majors in terms of net profit.
At present, a number of negative external factors put pressure on Gazprom’s financial indicators: in particular, the oil and petroleum products price downturn is observed, causing export gas prices linked to them drop as well. We expect the 2014 EBITDA to be higher than in 2012. An important factor which influenced the slowdown of the 2014 profitability ratios was an accrual of provision for accounts receivable by Naftogaz of Ukraine, which had an impact on the growth of the Company’s operational expenditures as well as a rise in exchange losses due to the ruble’s decline. This year gas sales to the FSU countries dropped, mostly because of reduced supplies to Ukraine. In addition, there will be a minor decline in gas supply to Europe due to a general decrease in gas demand caused by the current economic situation in the European Union.
In general, during the six months of 2014 the sales revenues of Gazprom Group grew by almost 11 per cent as compared to the 2013 figures; at the end of the year we also expect higher revenues in ruble equivalent.
I suppose that despite a small downward slide in financial performance in dollar equivalent, Gazprom will be among the global leaders in terms of EBITDA at the end of the year again.
- What is your estimate of the current state and outlooks of the Gazprom Group debt burden?
At the end of the first half of 2014, the Group’s total debt amounted to USD 57.4 billion. In spite of the considerable debt amount in absolute terms, Gazprom Group’s total debt and debt ratio are maintained on the level comfortable for the Company; at the same time, there is over USD 20 billion on the Group’s balance sheet, reducing the amount of net debt.
Gazprom Group’s net debt/corrected EBITDA ratio equaled 0.5, the admissible limit being 1.4
The consistent conservative policy of debt management provided the Group with the optimal debt portfolio and sound financial standing by the time the disadvantageous environment settled in the international financial markets. At the end of the half-year, the total debt/corrected EBITDA ratio equaled 1.0, with the Group’s admissible limit for the said indicator, in line with our corporate restrictions, being 1.6 to 1.7.
It should be noted that the Group’s net debt/corrected EBITDA ratio equaled 0.5, the admissible limit being 1.4. Thus, Gazprom Group’s debt burden is maintained at the level commensurate with that of the major oil and gas companies from developed countries and at a much more comfortable level than that of the petroleum majors from developing countries, such as Petrobras and Rosneft.
We have considerably increased the share of long-term debts, which improved the Group’s liquidity. In the first half of this year, debt with a maturity of more than five years made up about one-third of the debt structure; the amount of short-term debt decreased to 16 per cent. During the recent five years a sustained reduction of debt costs has been observed due to our efforts for refinancing high-interest loans.
As can be seen from the above, the current debt portfolio structure rules out the risk of considerable growth in interest rate on our debt portfolio. In future, we plan to stick to the conservative debt management policy, keeping the debt ratios at the comfortable level. As we see, the mentioned approach is highly estimated by the international rating agencies. Thus, in its October press release, Fitch pointed out Gazprom’s high business solvency, enabling the Company to attract finances from several sources as well as better access to financing among Russian companies. A strong credit profile and interest in the Company’s debt instruments are verified by the recent issue of Gazprom’s Eurobonds worth USD 700 million, which was the first bond placement in the international market among Russian companies since July.
- What influence may anti-Russian sanctions have on Gazprom Group’s financial standing?
It’s true that in the third quarter of 2014 the USA, the EU and a number of states supporting them introduced sanctions imposing considerable restrictions on a number of major Russian companies, considering the access to traditional finance sources as well as services and technologies required for implementing complex engineering projects (deep-water drilling, Arctic shelf operations, shale oil reserves development). The introduced financial sanctions do not apply to Gazprom, but they affected our subsidiary Gazprom Neft. As I’ve already mentioned, Gazprom was the first among Russian issuers to place a Eurobond issue after the introduction of sanctions. I’d like to point it out that the main sponsor of the issue was a major American bank J.P. Morgan; moreover, 77 per cent of end Eurobonds buyers were represented by the US and UK investment foundations.
In order to prevent the negative consequences of financial sanctions our subsidiary Gazprom Neft is engaged in attracting financing from domestic sources and from capital markets of the countries that did not endorse the sanctions.
The success of this activity is confirmed by the allocation of credit by Sberbank and Russian Agricultural Bank to Gazprom Neft in the third quarter of 2014. Thus, in September Gazprom Neft signed an agreement for a long-term borrowing from Russian Agricultural Bank worth RUB 30 billion with an interest rate of 11.90 per cent and a maturity period in 2019. The same month the company attracted long-term borrowings worth RUB 22.5 billion and RUB 12.5 billion with the interest rates of 11.98 and 12.08 per cent respectively with a maturity period in 2019.
In order to reduce the negative effect of sanctions regarding the access to services and technologies needed for complex engineering projects, Gazprom Group is in search of suppliers of the said services and technologies in the countries that do not endorse the sanctions. It is worth mentioning that the revenues from the projects directly affected by the sanctions do not have any considerable influence on the Group’s financial results. In the meantime, having a substantial reserve of its own production capacities, Gazprom may put off the deadlines of such projects that would not lead to any significant financial complications. The Company regularly assesses the possible effect from the introduction of sanctions and currently it does not expect them to substantially influence Gazprom Group’s financial results.
- What tax amount will Gazprom pay in 2014 and 2015?
Speaking about the taxation trends, it should be mentioned that gas and oil companies are the major tax payers into the Russian Federation budget. In 2013 Gazprom allocated RUB 1.8 trillion to the budget, being the major domestic tax payer for many years; at the same time, in Gazprom’s gas business alone the amount of tax payments totaled RUB 1.2 trillion.
In 2013 Gazprom allocated RUB 1.8 trillion to the budget, being the major domestic tax payer for many years
In 2014 we expect a certain growth in tax and customs payments in Gazprom Group’s gas business, which are projected at the level of RUB 1.3 trillion. An increase in the average annual severance tax rate for gas from RUB 602 to almost RUB 700 for one thousand cubic meters in 2014 (rate calculation formula was introduced in the second half of the year) as well as a hike in the corporate property tax for gas trunklines, power transmission lines and installations forming an essential part of the said facilities due to the rate growth for these facilities from 0.4 to 0.7 in 2014 are the main factors of the overall tax growth. Oil and power business payments will exceed RUB 500 billion; total tax and customs payments at the year-end are expected to exceed RUB 1.8 trillion.
In 2015 RUB 1.4 trillion may be allotted from the gas business to the budgets of all levels. The amount of tax and customs duties from oil and power businesses in the baseline scenario may be slightly higher as compared to the current year, but they will largely depend on the behavior of oil prices which vary depending on the severance tax rates, as well as on the export duties for oil and petroleum products. Speaking about the level of the Group’s tax and customs payments into the budget, it is also noteworthy that, in accordance with the law, Gazprom, unlike Russian oil companies, supplies the bulk of its marketable gas (52 per cent in the first half of 2014) in the domestic market at regulated prices which are more than three times lower than the European prices, thereby providing substantial support to the national economy.
- What are your plans for the project financing?
The project financing tools enable the Company to successfully meet the challenges of financing major investment projects and release funds for executing its large-scale investment program. In particular, such projects as Sakhalin II (USD 6.7 billion), Nord Stream (EUR 6.4 billion), the Yuzhno-Russkoye field development (EUR 1.1 billion) are being implemented jointly with foreign partners, applying the project financing methods. Gazprom’s subsidiary Gazprom Investproject attracted project financing for the Adler TPP construction (RUB 19.450 billion).
At present, it’s planned to make active use of the project financing methods in developing the Achimov deposits of the Urengoyskoye gas and condensate field, constructing the LNG plant in the Leningrad Region and the third production train of the LNG plant in Sakhalin (Train 3) and constructing the Amur gas processing and helium plant.
Later on, Gazprom Group’s projects based on the project financing methods are planned to be implemented in Russia and the CIS with the participation of the authorized subsidiary company Gazprom Investproject.
- What are your plans for cooperation with Chinese banks?
Under the current conditions we consider possible diversification of the financing sources, for instance, we actively cooperate with Asian financial institutions. Thus, cooperation prospects are being discussed with a whole number of banks, inter alia, as part of trade and corporate financing, issuing Gazprom’s bonds in offshore yuans as well as setting up the ruble – yuan payment system. We regard Chinese commercial banks not only as key partners for financing the facilities needed for supplying gas to China, but also as potential organizers of debt financing for Gazprom’s corporate needs.
- What are the prospects for Gazprom’s stock prices?
Gazprom is a major global oil and gas Company not only in terms of operational, but also key financial indicators (EBITDA and net profit). But despite the positive financial results, the behavior of the Company’s stock price was primarily affected by the following macro-factors: situation in Ukraine, sanctions against a number of Russian companies, dramatic drop in global oil prices and ruble movements.
There is no doubt that these criteria influence the stock price and market volatility in general. However, it should be noted that the Company’s shares determined the behavior of the Russian MICEX index, adding three per cent in ruble terms since the beginning of the year (RUB 138 per share at the year beginning and RUB 142 per share on November 17). As a major Russian exporter, Gazprom benefits from the decline in the ruble. I am sure that Gazprom’s securities have a considerable upside potential, which is also confirmed by the analysts’ forecasts for the stock market. Thus, according to their predictions, an average target stock price equals RUB 185, which envisages a 30 per cent growth potential of the current price.
Gazprom is considering the possibility of obtaining the listing of its securities at the Hong Kong Exchange as well as getting a higher level of listing at the Singapore Exchange
Gazprom’s major goal is to increase the shareholder value and we are taking all the internal measures aimed at increasing the capitalization. Besides improving our operational activities, we pay special attention to upgrading the corporate governance and interacting with the investment community.
- Will Gazprom enter Asian stock markets?
Last June Gazprom’s global depositary receipts were listed in the Singapore Exchange quotations. Now the possibility is being considered for listing Gazprom’s securities at the Hong Kong Exchange as well as getting a higher level at the Singapore Exchange.
As for the listing at the Hong Kong exchange, the Russian legislation does not permit the Russian regulatory authority concluding an agreement with the International Organization of Securities Commissions (IOSCO), which is the key condition for listing Russian issuers’ securities in Hong Kong. In this context another option was looked into, that is, concluding an agreement between the regulator of the Russian Federation financial market (Central Bank of the Russian Federation) and the regulator of the Hong Kong financial market (Securities and Futures Commission of Hong Kong), which may lift the legal restrictions already in 2015.
Gazprom fully satisfies the majority of quantitative, financial and operational requirements of the Hong Kong Exchange. An important factor here is that the Company runs its business in Asia in the form of partnerships and joint projects with Asian companies. Having recently signed a gas contract with China National Petroleum Corporation (CNPC), Gazprom stands a good chance for receiving support in listing from Hong Kong Exchange.
- What are Gazprom Group’s cost saving plans?
Gazprom is using a comprehensive approach to cost control which includes cost optimization at the budgeting stage, execution of the cost reduction program including performance indicators of competitive procurement of goods, works and services, implementation of cost optimization plans on separate lines of business, measures to comply with Russian President’s orders on reducing costs of acquired goods (works, services) per unit of product by at least 10 per cent a year over three years.
The said activity is not confined to the scope of the main gas business. All subsidiary companies, including the biggest ones – Gazprom Neft and Gazprom Energoholding, are required to run their own cost optimization programs.
The procurement management activity can serve as an example of setting cost optimization targets, where our goal is restraining prices for purchased materials and equipment needed by the Company, at the level of at least 20 per cent lower than the price growth rates forecasted by the Russian Ministry of Economic Development for the respective industries.
- Will Gazprom see its profitability go up or down?
Gazprom is nowadays one of the leaders in terms of profitability among the world’s energy majors. According to the IFRS statement for the last completed fiscal year, in 2013 the EBITDA profitability was 38 per cent and net profit – 22 per cent. As a comparison, at the leading US oil and gas company ExxonMobil these figures were 17 and 7 per cent respectively, at the leading Russian oil company Rosneft – 28 and 17 per cent.
In the near future a number of negative external factors will exert pressure on Gazprom’s profitability margins like, for instance, lower prices for oil and petroleum products and, as a consequence, reduction of export gas prices linked to oil, a considerable slowdown of regulated gas prices in the domestic market, foreign currency translation losses due to the decline in the ruble, as well as underpayment of gas supplies by Naftogaz of Ukraine.
At the same time, in 12 months ended June 30, 2014, EBITDA profit margins and net profit declined by only a relatively small amount – down to 37 and 18 per cent accordingly. Over the last 10 years, Gazprom’s profitability on EBITDA hovers around 35 to 45 per cent.
Later on, Gazprom’s profitability in the medium term will depend on external factors, including the oil and gas price behavior on the key markets as well as the state regulation of the industry. However, there are a number of prerequisites for the Company’s profitability to go up. Gazprom is engaged in a continuous activity on cost optimization and strict budgeting of expenses in all segments of the Company’s activity. A significant part of losses caused by the drop in oil prices is offset by the decline in the ruble. Moreover, due to the prevalence of the dollar component in the revenue over the share of losses denominated in foreign currency under the conditions of decline in the ruble, considerable cost saving and profitability growth are observed.
Another important factor may be a possible reduction of gas volumes purchased in Central Asia and its substitution by Gazprom’s own gas for export supplies, including gas from the Bovanenkovskoye field commissioned by the Company in 2012. In future, higher export volumes due to the start of gas supplies to China via the eastern route and, as we also expect, the western route will largely contribute to enhancing the operating profitability.