Good performance of Gazprom will be received positively by the market

The performance of Gazprom over the second quarter have exceeded our expectations due to higher gas sales prices in Europe and increased proceeds from gas transmission services sales. We expected this figure to fall due to the seasonal decline in gas production in the second quarter; however, the results exceeded our expectations. Apparently, gas was conveyed over longer distances, which allowed to offset lower volumes.

In addition, increased proceeds from electricity and thermal energy sales were treated as a positive surprise.

Operating expenses generally met our expectations except for tax expenses that were higher than predicted due to a higher sales volume.

As expected, the free cash flow was slightly positive - around USD 400 million. In general, in the first half of the year the Company earned about USD 200 million of the free cash flow. We estimate that by the end of the year this figure may reach some USD 1 billion. However, taking into account that the gas price in Europe rose in the second half of the year compared to the first half, and that the Company has already spent more than a half of the investment program funds, we believe our prediction may be exceeded.

Good performance of Gazprom will be received positively by the market. As the Company's profit has beaten analysts' expectations by more than 10 per cent, the outlook for dividends is likely to be revised towards an increase, which will also be welcomed by investors.

In the second half of the year Gazprom's proceeds grew 46 per cent as a result of higher gas sales prices and despite a seasonal decline in sales volumes, which fell 18 per cent if compared to the first quarter.

EBITDA met our predictions. In the second half of the year the Company improved its EBITDA profit margin to 41 per cent compared to 39 per cent over the same period last year. This happened despite of the operating expenses growth due to a rise in export duties.

In the first half of the year Gazprom nearly doubled its capital expenses, which exceeded USD 23 billion and had an impact on the free cash flow volume. Large capital expenses consume the bulk of the operating cash flow and are the biggest concern of investors.

The performance of Gazprom slightly exceeded our expectations. It happened due to relatively high gas prices and quite high sales volumes.

A rather small amount of the free cash flow weakens the accounting reports. Despite the operating cash flow amount generated by Gazprom, the investment program consumes the bulk of it. But the good news is that in the second quarter the amount became positive. We believe that in the future the gas price indexation in Russia and high gas prices in Europe will allow Gazprom to considerably boost its free cash flow giving a fresh impetus to the Company's quotes, in case the investment program does not grow and does not exceed the already high levels.