Record-breaking results

December 21, 2021

Published in corporate Gazprom Magazine Issue 12, written by Sergey Pravosudov

Famil Sadygov, Deputy Chairman of the Gazprom Management Committee, answers questions from Gazprom Magazine

Famil Sadygov

Enlarged photo (JPG, 209.7 KB)

Mr. Sadygov, what year-end financial results does the Gazprom Group expect in 2021 in terms of revenue, EBITDA, net profit, capital investments, and free cash flow?

As is well known, the year 2021 was marked by the strongest energy price growth in years due to the recovery in the global economy. Moreover, gas prices in Europe rose by orders of magnitude, considerably exceeding the record highs observed throughout the entire history of the natural gas market.

This price environment coupled with our well-structured sales policy has made 2021 one of the most successful years for the Gazprom Group. According to our projections, our revenues are going to break a record in 2021: the best previous result, which was reached in 2018 at RUB 8.2 trillion, will be confidently surpassed.

The same price environment against the background of the successful optimization measures taken in 2020 to curb the growth in operating costs has led to a twofold increase in EBITDA compared to last year. This indicator will total about RUB 3.5 trillion in 2021, an all-time record for the Gazprom Group.

Net profit will hit its highest level in the Company’s entire history, exceeding RUB 2 trillion. After the first nine months of 2021, net profit was already at RUB 1,550 billion, which is more than in any previous calendar year!

The growth in financial results has allowed us to increase capital investments across the Gazprom Group by a certain amount; the overall figure for the year 2021 is going to make up some RUB 1.9 trillion (net of VAT). Thanks to this, we have accelerated the implementation of a number of projects in the gas and oil segments, and the past months have seen the completion of some works that had been postponed in 2020, a year that was difficult for the industry. Also in 2021, the Company laid the financial groundwork to pay for the equipment required to implement the investment program for 2022, which will enable us to ensure a more even distribution of capital costs across its timeframes.

Despite the noted increase in capital expenditures, we expect the free cash flow to exceed RUB 1 trillion, which is several times more than the dividends paid out in 2021.

The use of so-called hybrid instruments makes a positive impact on the debt burden. In 2020, we placed perpetual Eurobonds. In the current year, we placed ruble instruments twice, in Q2 and Q3, to finance the gas infrastructure expansion program for the overall amount of RUB 120 billion. These instruments are counted as equity and do not affect the debt burden indicators of the Gazprom Group.

According to our plans, the Group’s overall debt for 2021 is going to remain at roughly the level of 2020. We will further reduce the debt burden by decreasing the net debt and increasing EBITDA. By the end of this year, the net debt/EBITDA ratio will, as expected, reach a comfortable level below 1.

Taxes

What is the amount of taxes that Gazprom is going to pay in 2021? How well is the process of integrating the Group’s companies into the tax monitoring system going at the moment?

First off, I would like to say that, according to our projections, the Group’s tax payments are going to make up approximately RUB 3 trillion in 2021, or about 16 per cent of the aggregate revenues of the federal budget.

We consider tax monitoring to be a reliable tool for ensuring the transparency of our activities and improving the efficiency of our interactions and mutual trust with the Federal Tax Service (FTS) of Russia. A so-called data mart developed on the basis of a Russian IT platform is used to interact with the FTS.

Currently, as many as 24 entities of the Gazprom Group are covered by the tax monitoring system. Another 12 entities have been authorized by the tax bodies to perform tax monitoring from 2022 onward. In these conditions, more than 70 per cent of the total taxes paid by the members of Gazprom’s consolidated taxpayer group will be administrated under the tax monitoring regime.

We plan to expand this practice step by step, so that all entities of the Gazprom Group can gradually transition to this form of tax control.

What approaches does the Company use to maintain a well-balanced financial position?

The Gazprom Group’s financial indicators have been and remain consistently high. Our stability was reaffirmed in the year 2020, which posed severe challenges to the entire oil and gas sector: we managed to pass an extremely difficult stress test caused by the pandemic and its consequences for the global economy.

The current year has been much more conducive to the success of our business, but even in these conditions we still adhere to a conservative approach to managing the Group’s finances. This allows us to balance the cash flows, attain our strategic goals, and create shareholder value.

I would like to outline the main principles that we apply, and will continue to apply, in managing the Company’s finances. This is key to understanding our priorities and, consequently, the dynamics of our financial indicators in the long term.

• We try to generate a positive free cash flow every year, so as to fully cover the capital investments through the cash flow from operations.

Aside from the favorable market environment and the growing proceeds from the gas, oil and power sectors of our business, rigorous cost control has been equally useful in this regard. It is only through comprehensive efforts that we can expect to improve our financial results.

• Dividend payments are an absolute priority for us. With the adoption of the new Dividend Policy, the lower limit of the dividend amount was announced publicly. We not only strictly observe the limit but also pay increasingly higher dividends year after year. Therefore, our objective is to provide a free cash flow that will be sufficient to pay the dividends in full.
• Generation of a free cash flow sufficient to pay the dividends will make it possible to keep the debt burden at a comfortable level between 1 and 2 as regards the net debt/EBITDA ratio.

Our goal is to achieve comprehensive efficiency improvement not only for the Group at large, but also for individual companies, including the largest subholdings of our gas, oil and power businesses.

We continue supporting and developing the procedure that was implemented a few years ago to control the activities of the Gazprom Group entities at every ownership level by setting target key performance indicators (KPIs), as well as budgeting the Group’s core subholdings with line-by-line consolidation of indicators for over 500 entities. Annual updates of the control perimeter and KPI composition allow us to promptly respond to ongoing changes within the Group, providing for the targeting and relevance of the indicators depending on each entity’s line of activity.

Another focus area for the financial & economic unit is the strengthening of operational oversight of all entities of the Group via a gradual transition to line item budgeting. In addition to enforcing stricter budgetary control and generating indicators oriented towards finding additional reserves to optimize both operating and investment expenses, this tool also seeks to engage nearly all functional units of Gazprom in the expert review of the Company’s key indicators.

Projections

What expectations do you have for the Gazprom Group’s main financial indicators in 2022? What are the key parameters of Gazprom’s budget for a three-year horizon?

By now, we have at our disposal a consensus forecast compiled by multiple analysts: in 2022–2024, gas prices in the world’s markets will gradually drop from the current record levels, but they will remain much higher than the pre-COVID figures.

In our budget planning activities, we use a cautiously conservative approach: the Gazprom Group’s key financial indicators must be kept at an appropriate – and rather high – level even if the export prices for gas are very moderate by today’s standards.

For instance, the average export price for gas included in Gazprom’s budget for 2021 is USD 250 (this price is calculated on the basis of all our foreign exports: Europe, China, and the CIS). However, we expect the actual figure to be over USD 280.

Thanks to the well-balanced structure of our export contract portfolio, the average price of supplies in 2022 will be higher than the one in 2021 even if spot prices decline significantly compared to the current levels.

This state of affairs enables us to predict with great certainty that the key financial indicators will grow next year. Under the most probable scenarios for 2022, the Gazprom Group’s EBITDA may go above RUB 4 trillion; net profit under the same circumstances may exceed RUB 2.5 trillion. Therefore, we expect the record-high financial indicators achieved in 2021 to be surpassed in 2022.

Without a doubt, this will be aided by the development of our key projects, such as the growth in gas supplies to China via the Power of Siberia gas pipeline and the expansion of the Amur GPP’s capacities.

In keeping with the Company’s declared development strategy (which is well known to our shareholders and investors!), we will continue to pursue a number of other key projects, including those related to the production complex, i.e. the Kharasaveyskoye and Semakovskoye fields, and the Achimov formations. The expansion of the production capacities is synchronized with the construction of the relevant gas transmission infrastructure.

In parallel, as part of our efforts towards developing the gas processing segment, we are building the Complex for processing ethane-containing gas near the settlement of Ust-Luga jointly with RusGazDobycha.

Objectives pertaining to the financing of the program for gas supply and gas infrastructure expansion in Russian regions are high on our agenda.

All in all, we expect capital expenses across the Gazprom Group in 2022 to amount to a little more than RUB 2 trillion (net of VAT) and hover around that level in the next few years. Please note that investment costs are under some pressure from the inflation processes that are now intensifying both in Russia and in other countries.

I would like to reiterate that it is a prerequisite for the drafting of the 2022 budget and the forecast for the years 2023 and 2024 that the positive free cash flow be generated with due consideration of the dividend payout to be carried out, and with the net debt/EBITDA ratio kept within the comfortable range (1–2) for each year.

To sum it up, based on the indicators embedded in the budget for 2022, we are confident that Gazprom is going to retain its stable financial position in spite of the record-high dividend payout based on the results of 2021.

Inflation

How does rising inflation in Russia and across the globe influence the operating expenses and capital investments of the Gazprom Group?

The operating expenses and capital investments of the Gazprom Group are planned with due consideration of the main macroparameters, including the inflation rate forecast issued by the Ministry of Economic Development of Russia.

As per the data published by the Federal State Statistics Service, consumer prices grew by about 6 per cent in January-November 2021. This is the highest inflation rate in more than five years. Notably, many other countries demonstrate multi-year highs in the growth of their inflation rates today. Even more acute for corporate planning is the problem of growing prices set by industrial manufacturers: these prices rose by over 20 per cent in the three quarters of 2021.

Due to a spike in the metals and energy prices, the prices for all types of material and technical resources purchased for the needs of Gazprom have been showing an upward trend since mid-2021. As compared to the prices of 2020, various types of equipment have become 10 to 40 per cent more expensive, and the prices for fabricated metal products are up by 50 to 200 per cent. The price for metal slabs – the main semi-finished product for the manufacturing of steel sheets for large-diameter pipes – grew by 100 per cent in November 2021.

Nevertheless, Gazprom continues purchasing large-diameter pipes for capital construction works under a long-term contract the prices of which are fixed and thus stay at the level of 2020, and which takes into account the advance payments previously made. Pipes will be supplied under this contract in Q1 2022 as well.

Another effective tool that lets us effectively control our expenses and alleviate the effects of inflation is the use of EPC contracts. This type of contract covers not only design, construction, and start-up and commissioning activities, but also – which is essential in the current situation! – procurement of materials and equipment, and provides for a fixed contract price which is established by the parties for the entire lifecycle of the corresponding project.

Needless to say, we have to take account of an inflationary pressure like this in our budgeting. But I would like to note that, for more than five years now, Gazprom has been systematically working to increase its investment and operational efficiency and reduce expenses, which is why we can keep the rising costs below the inflation rates.

Thanks to a number of measures implemented over the past five years to increase the investment and operational efficiency and reduce expenses, the cost price of gas production will rise by only 2 per cent over the past five years, and the cost price of transportation will even decrease by 2.3 per cent with regard to the same period. At the same time, Russia’s Ministry of Economic Development puts the index of changes in the prices of industrial manufacturers for said period much higher at 35.5 per cent.

Debt

What will happen with the debt burden of the Gazprom Group in 2022? How do growing interest rates influence the plans for the attraction of financing?

Ultimately, the debt burden of the Gazprom Group is calculated taking into account the liabilities of the Group’s companies. For this reason, the limits for debt ratios and financial & economic indicators are set up for the companies of the Group, and ongoing monitoring of external borrowings is performed in order to gradually reduce the external debt.

To achieve a more efficient use of funds and reduction of external debt burden, an increasing number of subsidiaries are being engaged in the cash pooling system.

At the same time, the parent company is active in the debt capital market. We made a number of successful transactions in the bond market for a total amount of over USD 5 billion, attracting substantial funds right in time before a considerable increase of interest rates.

With due consideration of the Company’s targets, we performed extensive work to optimize our debt portfolio throughout 2021. As a result, the value of the loan portfolio was decreased, which means that interest expenses were cut. We also managed to make the debt repayment profile more even for the next few years, as we extended the average repayment period for the corporate debt portfolio for three years up to 2028.

All in all, we managed to reduce the amount of Gazprom’s external borrowings for 2022, which is required for planned repayment of the external debt of the parent company, to RUB 272.8 billion.

In parallel, taking into account the financing (primarily, project financing) attracted by our subsidiaries and the needs of specific projects, we expect that the overall debt of the Gazprom Group may amount to about USD 79 billion. It is important to highlight that the net debt (including deposits) to EBITDA indicator in dollar terms will be maintained at about 1 based on the results of 2022.

It is equally important to note that the debt portfolio of the Gazprom Group is composed mostly of fixed-interest instruments, which has allowed us to make use of the most favorable conditions that have been observed in the global financial market over the last years.

Our positive view of the Company’s prospects is shared by rating agencies. Taking into account our successful performance and the nearest and medium-term outlooks, the S&P rating agency has revised the forecast for Gazprom’s local currency credit rating upward to ‘stable.’ We are constantly trying to improve our credit reputation, positioning the Company as a top-tier issuer in the Russian and international debt markets.

Is it planned to use perpetual bonds to attract financing in the future?

Let me remind you that we have registered a Program for perpetual bonds denominated in rubles and issued by our subsidiary Gazprom Capital, with a total value of up to RUB 150 billion. In 2021, two issues of perpetual bonds of Gazprom Capital with a total par value of RUB 120 billion were successfully placed in the Russian market. The funds obtained as a result of this were submitted to Gazprom Mezhregiongaz to be used in the financing of programs for gas supply and gas infrastructure expansion in the regions of the Russian Federation.

The experience of such targeted borrowings has been very positive for us. Accordingly, we plan to further use perpetual bonds as a source of financing for regional gas supply and gas infrastructure expansion programs. We intend to place perpetual bonds for the amount of RUB 30 billion under the current program in 2022. The funds generated from the placement of perpetual bonds will also be channeled into the construction of inter-settlement gas pipelines and so-called additional gas grid expansion, that is, construction of last-mile gas pipelines and connection of households to gas distribution networks.

When it comes to diversifying our debt portfolio, we are open to using new instruments that can be of interest to investors. Having already gained the experience of issuing hybrid Eurobonds, as well as perpetual bonds denominated in rubles, we may opt to issue green instruments of debt financing in the future.

Dividends

What are the Company’s plans with regard to paying out dividends for 2021?

On two occasions already – in 2019 and 2020 – our dividend payouts were above the levels stipulated by the Dividend Policy. Shareholders and investors can clearly see our capital distribution priorities from this fact.

As is known, the Company started paying out dividends in the amount of 50 per cent of the adjusted net profit one year earlier than was planned. So, the dividend payout is and will be determined primarily on the basis of the amount of net profit, which will be record-high in 2021. According to our calculations, the dividend base for the nine months of this year amounts to RUB 1.407 trillion. This means dividends of almost RUB 30 per share, which is already more than in the total dividend payouts for the previous two years.

The overall outcome of 2021 will depend on the results of Q4 which, as we anticipate, will make the biggest contribution to the final amount of the dividend base. We suppose that, considering the favorable conditions in the oil and gas markets, the resulting dividends for 2021 will be more than RUB 45 per share. The total dividend payout will exceed RUB 1 trillion, which will be a record figure not only for Gazprom, but for the entire stock market of Russia as well.

What factors can boost Gazprom’s capitalization?

Throughout 2021, Gazprom’s stock prices have been demonstrating an upward trend against the background of the recovering economic performance and steady increase of prices in the oil and gas markets. Our securities have broken a new record, surpassing their own historic peak that remained unbeaten for almost 14 years. We confidently maintain our leading position in terms of capitalization in the Russian stock market. However, we are convinced that the stock quotes of Gazprom’s shares are still far from their upper limit and can continue steadily going up.

The dividend yield of Gazprom’s shares on the basis of the results of 2021 is expected to stand at 13–15 per cent, which is much higher than in the previous years and considerably above the fundamentally substantiated figure for Gazprom.

Investment analysts forecast the next year to be even more successful for Gazprom, given the price conditions in the energy markets. Accordingly, the dividend payout for 2022 may be even higher. Notably, these forecasts are based on sufficient objective substantiations.

In the longer term, we expect our free cash flow to increase, and it is a factor that fosters the growth of stock quotes. This will be achieved through additional income from the implementation of our well-known key projects, especially those in the gas and oil segments.

The investment community is placing greater emphasis on sustainable development every year, and we carry out consistent and efficient work in this regard, covering all aspects of Gazprom’s ESG profile, from environmental protection and the quality of corporate governance to the social aspect.

In our relations with shareholders, we are obviously open to and ready for constant dialogue. We eagerly discuss a broad variety of issues related to the current activities and development of the Company with our shareholders, including the minority ones, and take their point of view into account during managerial decision-making. The feedback can be seen in the growth of our stock quotes observed since the beginning of the year.

The vast majority of investment bank analysts keep a recommendation ‘to buy’ with regard to Gazprom’s shares, seeing their substantial growth potential.

Due to our rich variety of assets and consistent financial policy, we are able to remain a leader in the global oil and gas industry. Our production and economic potential is enormous and continues growing.

Therefore, the investment attractiveness of Gazprom is based on truly objective factors, both short-term and long-term. In our opinion, all of this is going to have a very positive impact on Gazprom’s capitalization.