If you don’t trust Gazprom, where else can you go?
June 25, 2010
Annual Meeting
Gazprom annually convenes the annual General Shareholders Meeting on the last Friday of June. Being compulsory for every public company, this event has been regularly held since 1995. On this day the Company’s management summarizes the outcomes of the previous year and announces the plans for the future.
In 2010 the Meeting took place on Friday, June 25. On this day shareholders gather around the Gazprom high-riser located in the Nametkina Street early in the morning – visitors from all over Russia and other countries arrive to take part in the Meeting. On Friday people were queuing at the registration desk since 9 o’clock in the morning. The weather on that day was rather unusual – Friday set the first summer temperature record with nearly 33 degrees Celsius in Moscow.
The annual Shareholders Meeting is a great day for many shareholders. There is more to it than just the announcement of the dividend amount. People come here to meet their former colleagues and associates and to get answers to the questions of vital importance.
Features of portrait
As usual, the Meeting is attended by quite a lot of retired persons who obtained the Gazprom shares from privatization and by the Company’s former employees.
Valery Gorokh is one of them. He worked in the gas industry for 33 years, with the 22-year service in the Russian North, where he pre-developed the Vuktylskoye field in the Komi Republic and constructed the Ukhta – Torzhok gas trunkline. Valery says that he annually visits Shareholders Meetings since 1999 to see his friends and former colleagues. “I had a lot of shares, but sold almost all of them afterwards, leaving some to be permitted to the Shareholders Meeting. Now, I regret it,” he says.
Students are also among the Company’s shareholders. Vyacheslav Semyonov and Bogdan Krivko, third-year students at Moscow State University of Economics, Statistics and Informatics, say that they took an interest in the security market two years ago and purchased a hundred of the Gazprom shares each. They visited the Meeting “just out of sheer interest” to look at the well-known people they used to see on TV.
A time of challenges and opportunities
By 10 o’clock the shareholders who came to the Meeting gather in the big Conference Hall colored in Gazprom’s traditional blue. Journalists are not permitted here, a special Press Center has been arranged for them with a large screen for online broadcasting of the Meeting. The keynote speech is also broadcast live via the Internet and telephone. This is not a novel practice for Gazprom – it was introduced 5 years ago, thus enabling shareholders to hear anything going on in the Conference Hall, the venue of the Shareholders Meeting, even when they are away on vacations.
The Presidium is composed of Members of the Gazprom Board of Directors including Alexey Miller, Chairman of the Company’s Management Committee and Viktor Zubkov, Chairman of the Board of Directors, First Deputy Prime Minister of the Russian Federation.
Opening the Meeting Alexey Miller defined the main challenges faced by Gazprom last year and the ways of meeting them. The main adverse factor Gazprom had to deal with was the consumer demand drop provoked by the financial crisis and, subsequently, a substantial decrease in the cash flow.
As a result, the Company had to perform a thorough ranking of investment projects by priority and to adjust their financing parameters. The 2009 Investment Program was finally cut by 17 per cent and the capital investments – by 30 per cent versus the initial level.
At the same time, last year Gazprom continued its major projects execution and the efforts aimed at the resource base build-up and the gas transmission system development.
Thus, Alexey Miller reported that the Company’s reserves growth rate exceeded the extraction rate in line with the five-year trend owing to geological exploration, as well as to new subsurface licenses acquisition and new projects initiation. In addition to production activities in the Company’s traditional provinces, Gazprom continued execution of the Yamal megaproject, developed the Arctic shelf deposits and started active operations in Eastern Russia. Alexey Miller emphasized that the Company launched the stand-alone project on developing the deep-seated Achimov deposits in the Urengoy field, a more complicated process as compared to gas production from the conventional Cenomanian deposits.
According to the Gazprom head, in 2010 the Company will manage to recover two-thirds of the last-year’s decreased production and to surpass the pre-crisis level of 2008 by producing 565.5 billion cubic meters, a record amount over the last 13 years.
Among Gazprom’s transportation projects the priority this year is given to launching the construction of a new gas export corridor – the Nord Stream gas pipeline. Being implemented in cooperation with foreign partners, the project will link Russia to Germany, our traditional customer, convey gas to other European consumers mitigating the gas transit risks related to the former Soviet Union states and allowing to increase the volume of gas deliveries to the European market.
The Gazprom head also stated that another gas transmission project, South Stream, was a success. “The momentum has been gained,” said Alexey Miller and confirmed that the gas pipeline would be constructed in or before 2015.
These projects appeared to be especially significant as the annual Shareholders Meeting coincided with a new conflict on gas transit to Europe – with Belarus this time.
Alexey Miller highlighted that the Company had started Russian liquefied natural gas (LNG) exports last year for the first time in the national history: Gazprom launched its stand-alone LNG marketing project to Asia-Pacific on the basis of the Sakhalin II gas. In addition, Gazprom Group replenished its portfolio with long-term supply of LNG volumes until 2028.
In addition, Alexey Miller informed the shareholders that the level of natural gas supply to Russian regions had risen from 54 to 63 per cent since 2005. He also assured the shareholders that the gas prices for population would remain non-market, subsidized and state-regulated in the long run.
Over the last year Gazprom significantly reinforced its stance on the oil market as well. The Company increased its shareholding in Gazprom neft up to 95.68 per cent by obtaining a 20 per cent stake from Italian Eni and gained control over the oil refining assets of Serbian NIS and over the Moscow Refinery.
The Gazprom head reported on the results of the Power Generation Strategy execution by the Company – last year Gazprom finalized consolidation of its power generating assets within the specialized company, Gazprom energoholding, thus transforming itself into Russia’s largest owner of generating assets.
Matters of concern
The Gazprom Management Committee Chairman unveiled the dividend amount recommended by the Board of Directors for this year – RUB 2.39 per share.
Dividends are traditionally the most important issue for shareholders. Most questions addressed to the Presidium are dedicated to this particular subject, shareholders can discuss dividends long and enthusiastically. Some of them are not satisfied with the dividend amount, others – with the payment deadlines.
The dividend amount recommended for 2009 was 6.6 times larger as compared to 2008. In fact, this means the return to the pre-crisis level – the maximum dividend value ever paid by Gazprom was only a little larger – RUB 2.66 per share.
Though, shareholders have their own manner of calculation. Pensioner Andrey Puchko received, in exchange for vouchers, some 1.8 thousand of the Gazprom shares, which, as he counted, yielded a little more than 4 thousand rubles over 2009. “This doesn’t make a substantial addition to the retirement benefit. I wish they paid at least RUB 10 per share,” he comments. Shareholder Levon Babayan received the Gazprom shares during the privatization period as well. “Of course, I am not pleased with the dividend amount, but if you consider what is going on in the world, I will possibly not complain now,” he says.
Andrey Kruglov, Deputy Chairman of the Management Committee, head of the Company’s financial sector explained that almost a half of the net profit received during 2009 derived from revaluation of financial investments and, therefore, was not secured by the real money. He stated that Gazprom was planning to make amendments into the Dividend Policy and exclude the part of the profit that was not secured by the real cash flow. When responding to the questions about the dividend payment deadlines he noted that the Shareholders Meeting was to be followed by the meticulous work on defining the specific amount payable to each shareholder. “The reconciliation process takes some 3–4 months and first dividend payments are actually made in autumn,” he noted. The Deputy Chairman also informed the shareholders that the Company was implementing the Informatization Program designed to speed up the dividend payment process.
In addition, there were a lot of questions about the remuneration amount for the Board of Directors Members. This year it was recommended to retain the remuneration at the level of the past year and pay off RUB 15.106 million to each Board of Directors Member – non-government official. When asked these questions Viktor Zubkov pointed out, “Being the Government officials, we serve on a voluntary basis. In fact, we are not getting a cent.” After that he joked, “All we get from Mr. Miller is a cup of tea with no sugar.”
Tea with sugar was soon fetched to the Presidium and the shareholders were reminded that in the previous year Members of the Board of Directors had given their remuneration for charity.
Believing in better future
As was found out, shareholders are not only worried about the dividends and remunerations. This is the third Shareholders Meeting in a row for pensioner Gennady Martynovich who emphasized that the value of the Gazprom shares had fallen several times over the two years. “We don’t know how to make use of the shares. We need to be instructed, but Gazprom doesn’t instruct us,” complains the shareholder.
Just as if responding to this assertion Pavel Maly, the Managing Director of UBS, explained in his address to the Meeting that the Gazprom shares were a very reliable instrument and one could invest in them with no fear.
“For many years they have been a most attractive investment object for both Russian and international investors,” he said. Owing to the Gazprom shares liberalization in 2005, they were transformed into the most liquid market instrument: over the last six months the daily trade turnover amounted to USD 1.2 billion – an unattainable level for most companies from FSU and Eastern Europe. Pavel Maly also noted that Gazprom had created a great shareholder value for its shareholders over the last decade – the shares had grown 8 times in price over that period. “This quite noticeable in the crisis environment,” he added.
Pavel Maly underlined that Gazprom was the world’s largest public petroleum company owing to production and storage volumes, an entire system of long-term contracts with reliable European consumers, a well-planned development and diversification strategy, a unique gas transmission system, as well as the fact that it is a key energy supplier for Russian businesses. “No wonder 90 per cent of brokers recommend today to purchase the Gazprom shares, while the so-called target price on shares in their recommendations has grown by 20 per cent,” he said.
At the same time, until now the price of the Gazprom shares hasn’t reached half of the peak level of mid-2008. According to Pavel Maly, in addition to the apparent factors such as a decrease in the demand and the gas price, the investors’ close attention to shale gas production also made an impact. “Investors are absolutely fascinated by the unexpected flurry caused by shale gas on the global markets.” He noted that shale gas was unlikely to replace the conventional one, but created a serious factor of uncertainty. “This is the challenge faced by the Company. It is necessary to distinctly explain to the gas market how the Company will deal with it,” he added.
Summing up his address, he pointed out that Russian companies were expected to constantly improve their transparency standards, corporate management and capital efficiency. “A company that can meet this goal will soon outrun the stock market and become an absolute leader around the globe. We in UBS are absolutely confident that Gazprom fits perfectly into this group,” he summed up.
It is apparent that financial investors trust Gazprom. Common people who are not so skilled in financial issues also trust Gazprom as it became clear from interviews with shareholders. Despite the displeasure with dividends and the indignation with remuneration, Vyacheslav Omelchenko, a shareholder and a former employee of Gazprom, is not going to sell his shares. “I will keep them for my children and grandchildren,” he says. Vladislav Khromov received a small block of shares in the 1990s and increased his stake five times having purchased some more shares a couple of years ago. He explained that “it is better to invest in Gazprom shares rather than trusting Sberbank with money,” and asked a rhetorical question, “if you don’t trust Gazprom, where else can you go?”