Gazprom’s financial results proved to be positive

There are pretty good chances that at the end of the year Gazprom's free cash flow may hit a record.

Gazprom's financial results proved to be positive, most importantly, from the point of free cash flow volumes reaching USD 7 billion in the first quarter. It was two years ago when the Company showed such excellent results last time. It means that Gazprom has effective control of its capital investments and working capital.

Markets keep a close eye on the Company's Investment Program in particular. In the first quarter Gazprom's capital investments totaled some USD 12.7 billion - almost 1 USD billion less than in the first quarter of 2011 and almost USD 3 billion less than in the fourth quarter of 2011. In the meantime, Gazprom has not cleared so far what is going to happen with its capital investments in the future. But good thing is that the Company has the approved Investment Program which has not been reviewed towards an increase like it had happened in 2010 and 2011. That's why the chances are pretty good that an amount of capital investments will remain on relatively low level, so at end of the year free cash flow may hit a record.

It's worth mentioning that EBITDA appeared to be lower than the market had expected. This happened because of high minor operating expenses as well as lower gas selling prices, primarily in CIS countries. For instance, sales prices decreased by 15 per cent in CIS countries comparing with the fourth quarter of 2011, European selling prices lowered as well, although we anticipated that the sales prices would stay at the same level.

At first glance, Gazprom's financial results seem quite weak, but some items have exceeded our expectations.

Overall, the proceeds were 1 per cent less than we had predicted, because of higher retroactive payments of USD 2.6 billion. We anticipate that the amount of payments may come to nearly USD 5 billion at end of the year.

EBITDA was 12 per cent lower than we had expected. The reason for such decrease lied in higher operating costs including the foreign exchange losses. Apart from these factors, EBITDA was at our projected level. Good news was the strong free cash flow in the first quarter that had greatly surpassed our expectations. Capital costs were lower than predicted, and Gazprom's net debt had shown a serious downfall of 32 per cent by the fourth quarter of 2011.

Because of the fact that Gazprom publishes its financial results quite late, investors will have a keen interest in hearing some comments from the Company's management during a video conference. In particular, we would like to know more about capital investments and investment programs for 2012 and 2013, what is happening with gas contracts being under review with European consumers as well as Gazprom's marketing policy on the domestic market taking into account that independent gas producers are becoming more pro-active.

Gazprom's first-quarter results may be described as neutral. Judging by the EBITDA indicator they were little worse than we had expected. This is explained by two factors. The first factor is lower gas selling prices in the FSU countries. In the first quarter they dropped by 15 per cent versus the fourth quarter. Meanwhile, the expected drop was approximately 10 per cent. The second factor is foreign exchange loss on operating items that we envisioned, but in a smaller amount. The negative effect from retroactive payments hovering between RUB 60 and 80 billion was anticipated.

Strong generation of free cash flow was a nice surprise that happened owing to a considerable fall of the working capital and a moderate amount of capital costs. This is a positive point, however, I think it shouldn't be perceived as a reversal of the Company's general strategy in the area of free cash flow generation. At the moment, we are facing only a one-time swing.