| Gazprom's profit has halved in six months The financial results of the Gazprom group for the second quarter of 2004, by international standards, turned out to be worse than the most pessimistic forecasts. Despite the consistently good external environment and a significant increase in domestic gas prices, Gazprom financiers reported an almost twofold decrease in net profit - up to $800 million - compared to the data for the second quarter of 2003. This happened in connection with the extraordinary increase in the monopoly's operating expenses - by 40.3%, to $5.9 billion. These data once again indicate the ephemerality of Gazprom's cost reduction program (for this year it amounts to 30 billion rubles), which management extremely proud.
Investment company experts did not expect high results from Gazprom’s semi-annual reporting. Troika Dialog was more optimistic than others about the concern's activities. Its analysts predicted that Gazprom's net profit for the second quarter would be $1.514 billion, and costs would not exceed $5.1 billion. The United Financial Group, affiliated with Gazprom board member Boris Fedorov, believed that these figures will be at the level of $1.35 billion and $4.1 billion, respectively. And Brunswick UBS experts expected net profit of about $1.2 billion, and operating costs were estimated at $5.3 billion.
However, the monopoly outdid itself in terms of the rate of increase in costs, bringing them in just one quarter to $5.9 billion. Even good market conditions could not compensate for such a rapid increase in costs (over 40%). The selling price of a thousand cubic meters of Russian gas in Europe remained on average at $130. In ruble terms, it decreased by 10% (due to the fall in the dollar exchange rate), but this effect was completely offset by an increase in external sales, as well as 20% indexation prices for Russian consumers. As a result, sales revenue for the second quarter increased by $900 million, to $7.25 billion, or by 17%. But at the same time, net profit fell by half compared to the second quarter of 2003, to $800 million.
Gazprom complains about the increase in the tax burden, rising metal prices and the need to index employee salaries to inflation. Due to changes in taxation (increase in mineral extraction tax and customs duties), the monopolist paid $650 million to the budget excluding income tax, which is 90% more than in the same period last year. Costs for materials increased by $290 million, and another $260 million was due to an increase in the wage fund. “The fact that costs are increasing is not direct evidence of ineffective management of the company,” says its representative. “It’s just that now Gazprom is faced with the task of implementing large-scale investment projects in which it is necessary to invest significant funds.”
However, experts assess the six-month results as very bad. “The company has once again demonstrated its inability to contain rising costs and generate free cash flows, although its revenue continues to grow due to high prices in both the foreign and domestic markets,” says Brunswick UBS analyst Maxim Moshkov. According to him, Gazprom's net negative free cash flow during the reporting period amounted to $398 million, which means that the company is not making money for its shareholders. The group has seriously invested in rather dubious, in his opinion, projects - such as the purchase of shares in Mosenergo and RAO UES of Russia - and so far there is no strategy behind this.
In particular, Gazprom reported that Gazprombank paid the MDM group about $700 million for a 5.2% stake in RAO UES. Approximately the same amount will be spent on the 5.3% shares owned by Grigory Berezkin (the deal has not yet been completed), after which the concern will consolidate 10.5% of the shares of the energy monopoly, as previously reported by Chairman of the Board Alexey Miller. In addition, Gazprom confirmed the consolidation of a blocking stake in Mosenergo and will now retroactively coordinate the purchase with the FAS. Representatives of the antimonopoly service have already announced that they intend to understand on what basis these transactions were not agreed upon with them, because this was required by law.
Maxim Moshkov believes that Gazprom’s financial results will drag the company’s shares down for a day, maximum two. “The market lives with expectations that in one way or another Yuganskneftegaz will be merged with Gazprom. This makes the concern’s securities even more attractive in the medium term,” the expert believes. Alexey GRIVACHS |
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