It is getting clear that Gazprom faces the emerging gas deficit in the European market

In general, the financial statements contain few surprises. The key financial indicators met our expectations and even slightly exceeded them.

I would like to note that the net cash flow significantly declined by the end of the third quarter to no more than USD 0.2 billion. In other words, this indicator dropped significantly versus the Company’s performance in the previous two quarters, which can be attributed to the fact that the third quarter traditionally features the lowest performance over a year. Therefore, we expect Gazprom’s net cash flow to grow again in the fourth quarter following an increase in export and domestic gas sales.

Gas sales behavior in the third quarter is not of great interest for investors any longer as the Company has already announced the 2010 preliminary gas export results. Rather than the fourth quarter performance they are interested in the Company’s 2011 export contracts and the export volumes recovery. Investors are eager to know domestic gas sales behavior and an increase in regulated gas prices in 2012.

The market is traditionally weak in the third quarter (we believe that the 2008–2009 behavior was an exception). Therefore, Gazprom’s relatively poor performance in the third quarter was quite predictable and almost fully in line with market estimates and our forecasts, in particular. In other words, the financial statement was no surprise and, accordingly, is unlikely to make any adverse impact on the share price behavior.

Gas sales were also close to what we had expected.

The fourth quarter is to be much stronger as usual. However, we are to face the emerging gas deficit in the market.

Thus, due to a cold snap in early winter, spot prices at the UK National Balancing Point and Gazprom’s contract prices moved closer to each other. Once it happened that spot prices even surpassed the contract prices. It clearly witnessed the emerging gas deficit.

Despite the pronounced comments on a decline in European gas sales by Gazprom in 2010, the market expected a bigger drop in the Company’s share price. The recent positive changes in the share price evidence that the market is aware of the fact that Gazprom faces the emerging gas deficit in Europe and that gas oversupply in Europe is only temporary.

Gazprom’s results generally coincided with our forecasts and market expectations. EBITDA turned out to be a little bit higher than we had forecast – by 4 per cent, but 2 per cent lower than the consensus forecast.

Gas sales decline in Europe (by 21 per cent) was predictable, but partly compensated by higher gas prices and payments made by some customers due to their failure to offtake gas under take-or-pay contracts.

Despite the fact that the financial statement came as no surprise to us, some comments made by Russia’s top officials yesterday were very interesting. Russian Prime Minister Vladimir Putin said it was necessary for Gazprom to provide independent producers with access to the pipeline infrastructure. We believe it is quite risky for Gazprom.

In fact, the Government demanded that measures should be taken in favor of independent producers and weakening Gazprom’s position in the domestic market. These demands embarrass us as the Russian market is gaining importance due to an increase in domestic gas prices, while spot prices and European demand remain rather low. At the same time, our investment proposition is based on the expectation that the Government will allow Gazprom to offset a reduction in proceeds from gas export by higher proceeds from domestic gas sales.