June 23, 2016
Published in corporate Gazprom Magazine Issue 12, the interview was taken by Sergey Pravosudov
Andrey Kruglov, Deputy Chairman of the Gazprom Management Committee answers questions from Gazprom Magazine
- Mr. Kruglov, what are the financial results achieved by Gazprom Group in 2015?
The decline in global energy prices is putting pressure on the financial results of all oil and gas companies across the world, and Gazprom is no exception. As a result, we estimate the Company’s EBITDA to be around USD 30 billion in 2015. At the same time, the annual EBITDA in ruble terms will not decrease by more than ten per cent against the 2014 level. This difference is caused by the USD/RUB exchange rate that we expect to grow by 60 per cent in 2015 on average.
In general, ruble depreciation will compensate for a considerable share of Gazprom Group’s losses from the oil and gas price decline in the global markets, as the foreign currency component prevails in the Company’s revenue mix, while expenses are mostly incurred in rubles. As for the net income forecast, we expect it to considerably surpass the last year’s figure, as in 2014 the net income collapsed mainly due to non-cash losses on currency differences as a result of a major weakening of the ruble.
The Company’s EBITDA will be around USD 30 billion in 2015. At the same time, the annual EBITDA in ruble terms will not decrease by more than ten per cent against the 2014 level.
- What EBITDA and net profit margins are you expecting at the end of 2015?
It is very hard to forecast Gazprom Group’s net profit in 2015. It will be determined by the net profit trend, which due to the foreign currency debt dominance in our credit portfolio will largely depend on the still volatile dollar rate at the year-end. According to our estimates, the net profit margin will more than triple, exceeding ten per cent, in 2015 against 2014.
We expect Gazprom Group’s EBITDA margin to be above 30 per cent in 2015, which is slightly lower compared to 35 per cent in 2014. The expected decline in profitability is primarily caused by a deterioration in the oil and gas market and an increase in the tax burden. Still, the Company is taking significant cost reduction efforts under the existing conditions.
- How can Gazprom’s increased ownership in WINGAS, WIEH, and WIEE influence the gas export revenues?
The growing liberalization of the European energy market steps up competition at all levels of the gas supply chain. That’s why the producers need to search for possible ways of entering new markets and getting to the ultimate consumers. By raising its shareholding in the sales and trading companies WINGAS and WIEH, Gazprom will gain direct access to an additional customer base and strengthen its positions in the European markets.
Increased ownership in these companies will enable Gazprom Group to consolidate its sales activities in Europe and to implement a long-term strategy on boosting the gas supply to the European markets and, first of all, to Germany as the major importer of Russian gas. The asset swap deal has provided Gazprom Group with direct access to wholesale customers in Europe and the possibility to reach the ultimate consumers, which will enhance the vertical integration and create opportunities for higher marginality.
Operational control over WINGAS and WIEH will provide additional competencies for building long-term relationships with the current and future clients in the European markets as well as extra experience in operating and managing the largest UGS facilities in Western Europe.
Gazprom Group’s EBITDA margin will be above 30 per cent in 2015, which is slightly lower compared to 35 per cent in 2014.
- How does Gazprom assess political risks associated with the purchase of assets abroad?
We take a comprehensive approach when analyzing the viability of purchasing assets in the global markets. It involves assessment of political and regulatory risks together with other market risks as part of the due diligence procedure. Conclusions regarding the impact of political risks on the operating activity of an asset, should Gazprom be its shareholder, are set out in a feasibility study that has to be performed for taking the final decision on whether to purchase foreign assets.
At the same time, if there are no evident contraindications involving high potential risks of the asset purchase, the key importance is given to the expected contribution of this asset into the Group’s performance, our assessment of the purchase efficiency, and asset value.
- Have the anti-Russian sanctions affected Gazprom Group’s performance?
For one thing, the US and EU have not imposed any financial sanctions against the Group’s parent company – Public Joint Stock Company Gazprom, while Canada’s financial sanctions do not make any considerable effect on our business. In this respect, the sanctions haven’t much influenced Gazprom’s ability to borrow funds. In 2015, we borrowed over USD 7 billion from a wide range of creditors, including European and American ones, and placed Eurobonds.
However, Gazprom is subject to a number of sanctions limiting equipment and service provision from certain countries to develop offshore fields in the Arctic shelf and shale oil fields in Russia. These limitations have a minimal effect on the Group’s activities as nearly total oil and gas production comes from the fields not falling under the sanctions. Moreover, we use domestically manufactured equipment.
Yet, sanctions that restrict attracting finance from foreign investors were imposed against Gazprom Neft and Gazprombank, which, nevertheless, manage to fulfill their needs for borrowed funds due to the access to a wide range of funding sources.
Still, I think that the changes in the relationships between Russia and Western countries in recent months may lead to easing and future lifting of sanctions.
- Is Gazprom facing any difficulties in financing its major investment projects (field development in the Yamal Peninsula and Yakutia, construction of the Power of Siberia gas pipeline system)?
Gazprom pursues a conservative financial policy, according to which the financing of our investment projects fits within the operational cash flow. Of course, the changes in the global energy markets over the past year had a considerable effect on our revenues, but as I have already mentioned, Gazprom gets the bulk of its income from export sales in foreign currency as it produces goods and runs its major projects in Russia, and, therefore, incurs costs mostly in rubles. Gazprom’s capital investments are nearly 80 per cent ruble-linked. Therefore, the decline in the ruble has partially compensated for the downturn in global oil prices.
The conservative financial policy that we’ve been implementing for the last ten years enabled us to face the crisis in good nick. Gazprom’s debt ratios remain low, which increases the Company’s flexibility in the current challenging situation, enables us to maintain a high degree of financial stability and to proceed with the key investment projects, including the project for gas supply to China via Power of Siberia and the Yamal resources development even in case of further aggravation of the oil and gas market environment.
In addition, Gazprom has access to international capital markets, project finance instruments and owns a substantial cash stock.
Debts and taxes
- What is your opinion of the current state and future of Gazprom Group’s debt load?
Gazprom Group’s debt load is one of the lowest among Russian oil and gas companies, it is also considered to be low according to international standards. Thus, the net debt/EBITDA ratio – the most representative debt load indicator – stood at 0.6 in US dollar terms in Gazprom Group’s IFRS results for the six months of 2015.
In 2015 and 2016, amid lower oil prices, we expect the debt ratios to grow due to the EBITDA decline; however, this growth will not affect considerably their level: the debt/EBITDA ratio will not exceed 1.8 by the end of 2016.
Despite the continuing fall of oil prices, Gazprom will retain a stable financial position due to the dominance of the foreign currency in its revenue structure and low production costs that will keep the Company competitive in the key markets, while the falling gas price will drive additional demand.
In the near future, we are going to pursue a conservative debt management policy, i.e. to pay out more than to borrow, thereby gradually reducing the debt load. We will also continue to optimize the debt portfolio and cutting down the average interest rates.
- How much will Gazprom pay in taxes in 2015 and 2016?
Gazprom is a major domestic taxpayer: in 2014, the amount of tax payments and export customs duties totaled RUB 1.2 trillion. In 2015, we forecast a slight increase in this amount – up to RUB 1.3 trillion. The main reasons for the tax increase this year are a moderate growth in the severance tax and property tax for gas mains and power transmission lines (due to the rate hike from 0.7 per cent in 2014 to 1 per cent in 2015). In addition, the increase in tax payments was conditioned by amendments to the Tax Code, which introduced an excise duty on gas supplied via the Blue Stream pipeline to Turkey since January 1, 2015.
In 2016, Gazprom may transfer about RUB 1.5 trillion to the budgets of all levels, including more than RUB 100 billion of the additional severance tax.
- What are the plans about the dividend payout?
The issue of the dividend payout is determined by the stance of our major shareholder – the Government, but the stance of the Company’s leadership remains unchanged despite the decision to increase the debt load in 2016. We intend to recommend that no less than RUB 7.2 per share be paid out in coming years, with this amount to be gradually increased if possible, depending on the external circumstances. Meanwhile, the Government authorities are discussing the necessity and timeframes for state-owned companies to switch to dividend payouts following the IFRS results, which may set a new dividend standard for state-owned companies.
- Tell us about Gazprom’s project financing plans.
Gazprom always considers project financing as a tool to implement its major investment projects, especially those carried out jointly with international partners. At present, our main projects seeking for project financing are Nord Stream 2 as well as the project on the development of Blocks 4A and 5A of the Achimov deposits in the Urengoyskoye field. In addition, the current structuring of the construction project for the Amur Gas Processing Plant is aimed to secure financing on the same principles.
The project financing model is becoming more widespread among subsidiary companies, for example, Gazprom Investproject. The company’s most well-known project is the Adler TPP. Some other major projects are currently under discussion.
- What currencies does Gazprom use for its export transactions? Do you plan to increase the trade in ruble, yuan and other currencies?
Payments for gas exports are usually made in US dollars, largely in euros, and sometimes in pounds sterling. For some contracts concluded with the CIS partners, the settlement currency is the Russian ruble.
In order to enhance flexibility, the Company is reviewing the possibility of supplementing new export contracts with provisions giving the option of paying for gas in different currencies, including the Russian ruble. Right now, Gazprom Group’s companies carry out commercial transactions in almost 40 foreign currencies.
- Is Gazprom planning to enhance the cooperation with Asian banks and stock exchanges?
Asian financial markets are booming now and we are highly interested in them. They still significantly lag behind the Western markets by key parameters, but for us they already play an important role in terms of attracting finance. Our activities in the Asian markets help diversify the pool of investors and sources of financing.
Last year, we were listed in the Singapore Exchange, and now we are looking into different options for broadening our presence in the Asian stock markets: in particular, getting a higher level in the listing on the Singapore Exchange as well as an opportunity to get listed on the Hong Kong Exchange. Moreover, Gazprom received the highest credit rating AAA from China's independent rating agency Dagong in early 2014.
In April 2015, we obtained a club-deal credit worth of USD 500 million with the active participation of Asian banks. In August, we took out a club-deal credit worth of USD 1.5 billion from five major Chinese banks. Having entered the Chinese market, Gazprom is determined to continue cooperating with its Chinese partners, inter alia, within the project financing transactions.
We see that Asian investors are also interested in Gazprom as we are building up our presence in Asia-Pacific. For instance, China will subsequently turn into a major export destination for Gazprom.
We are considering syndicated credits, project financing and bond issues in Asian currencies as the possible instruments for attracting finance in Asia-Pacific. We are making great efforts in the region and see a great potential for the development of the cooperation in the future.