Gazprom’s first quarter results surpass market forecasts

Gazprom’s first quarter results can be called neutral, they met my expectations. The Group achieved record high EBITDA, and its capital investments were also record high. The resulting free cash flow turned to be negative. However, such capital investments are quite explainable – the first quarter features a lot of prepayments for the procurement of products, particularly for pipes.

The negative free cash flow was not a big surprise for the market either. Although we expected this factor not to be negative, but tending to zero.

There is no doubt that capital investments are to decline in the second quarter resulting in EBITDA getting smaller, because the first quarter is constantly outstanding due to seasonal factors, and one should understand that the second and mostly third quarter results are to be much lower.

According to my forecasts, the resulting Group’s annual EBITDA may slightly exceed USD 62 billion. The Group’s net income is expected to surpass USD 40 billion. And, based on the first-quarter results, I’m not going to revise my forecasts yet.

Gazprom's first quarter results came as no surprise for the market, as it had been already thoroughly informed of the Company's gas prices and supply volumes. The Company's financial statements closely approached the consensus forecast.

There still remain a lot of uncertainties concerning the next-year contracts with Europe and gas supplies to China. We would also appreciate comments on the negotiations with Ukraine as well as a general outlook of the European gas market for the next year. We hope to receive answers to these questions during the teleconference.

The negative free cash flow was not breaking news for the market either, because it had been no surprise for a long time that Gazprom's huge capital investments consume most of its free cash flow: in the first quarter the Company absorbed nearly one third of its annual capital investments. As to the annual results, we hope that the free cash flow will exceed the last-year figures by a half.

In the second quarter the Company's financial results may decline. This is also proven by Gazprom's data on gas sales in Europe and the CIS countries: natural gas sales in the second quarter were about 30 per cent lower versus the first quarter. At the same time we expect that gas prices will be higher, and foreign currency translation gains, which were nearly USD 2 billion in the first quarter, will drop down to USD 500 million.

In total, Gazprom's annual net profit is expected to be some USD 43 billion, that is to say, its ruble equivalent will significantly exceed RUB 1 trillion.

Gazprom’s first quarter results, though expected to be high, still surpassed the market forecasts.

Large capital investments were the only shortcoming that resulted in the negative free cash flow based on the quarter results. But the market was ready for it as well.

Gazprom is often criticized by analysts for substantial capital investments when they become larger than was expected or projected by the Company itself. In this case, analysts at a teleconference will be anxious to know if Gazprom still holds to its annual investment plan. If the plan is retained, the market will not disapprove the negative free cash flow of the first quarter caused by the absorption of the bulk of the annual capital investments.

In the first quarter Turkey and Italy purchased considerable volumes of gas, Naftogaz Ukrainy brought back 11 billion cubic meters of natural gas to RosUkrEnergo, Sakhalin II progressed well during the period of disasters in Japan, the information about the gas supply prices and volumes is available. In this context, it’s increasingly interesting to see what comes next. The market expects strong results in the second quarter as well, but the third and the fourth quarters may be worse for the Company, taking into account lower gas demand in Europe and the attainment of the last-year production and export levels in August.