IHS Global Insight Perspective | |
Significance | Gazprom Neft reported net profits of US$727 million in the first quarter, up 117% from the same time period in 2009. |
Implications | Higher oil prices, increased production, and cost reductions helped Gazprom Neft post better financials across the board in the first quarter relative to the first quarter of 2009, although the company's performance was somewhat lacking in relation to the final quarter of 2009. |
Outlook | The increase in Gazprom Neft's net profits and revenues in the quarter was largely the result of higher oil prices, but the company's sharp output growth—after years of stagnation—gives hope that the firm's ambitious 2020 strategy is achievable. |
Comparing Apples to Apples and Apples to Oranges
Gazprom Neft, the oil division of Russia's gas giant Gazprom, yesterday announced that it had posted a net profit of US$727 million in the first three months of 2010. This net profit, calculated according to U.S. Generally Accepted Accounting Principles (U.S. GAAP), represents a 117% increase year-on-year (y/y), more than doubling the US$335 million in earnings that the company reported in the January-March 2009 period. Gazprom Neft, which is 95.7%-owned by Gazprom, said that its revenues in the first quarter jumped 72% y/y, to US$7.296 billion on the back of higher crude oil and petroleum prices, as well as higher production and refining volumes.
Rosneft: 2010 Financial Performance at a Glance | |||
Q1 2010 | Q1 2009 | % Change | |
Net Profits | US$727 mil. | US$335 mil. | +117% |
Revenues | US$7.296 bil. | US$4.242 bil. | +72% |
EBITDA | US$1.586 bil. | US$957 mil. | +66% |
Notably, the company's earnings before interest, tax, depreciation, and amortisation (EBITDA) in the first quarter were also demonstrably higher. In the January-March 2010 period, Gazprom Neft's EBITDA—a key indicator of a company's true profitability—rose 66% y/y, to US$1.586 billion (see table). The company said its EBITDA growth would have been higher still, save for the strengthening of the rouble against the U.S. dollar, as well as an increase in tariffs set by Russia's pipeline monopolies. On the other hand, Gazprom Neft said that its net profits in the first quarter were somewhat inflated in comparison to the first quarter of last year—or rather, the firm's January-March 2009 net profits were somewhat depressed—due to a major one-off foreign exchange loss in the first quarter of 2009.
Similarly, while the company's financial performance in the first quarter of 2010 looks strong in relation to the same time period in 2009, a quick comparison of the January–March 2010 period to the October–December 2009 period gives some needed additional perspective. Gazprom Neft's revenues in the first quarter were actually down 3% compared to the final quarter of 2010, when the company's earnings stood at US$7.568 billion, while Gazprom Neft's EBITDA in the first quarter was 7% down from its US$1.706 billion in EBITDA in the October–December 2009 time period. Net profits, however, still compare favourably in the first quarter, as Gazprom Neft's fourth-quarter 2009 profits of US$638 million were 14% below the company's US$727 million net profit in the most recent quarter.
Outlook and Implications
Gazprom Neft's strong first quarter may serve as an early indicator of its parent firm's financial performance, as Gazprom only last month reported its full-year 2009 financial results (see Russia: 30 April 2010: Gazprom Reports 4.9% Net Profit Increase in 2009 Despite Revenue Decline). However, the sale of crude oil and petroleum products by Gazprom Neft still account for only a fraction of Gazprom's overall revenue, which is still driven by natural gas sales that account for approximately 65% of the company's total earnings. Nevertheless, the solid performance by Gazprom Neft in the first quarter cannot help but buoy Gazprom's own bottom line.
Gazprom Neft's production growth in the first quarter is an especially encouraging sign. After years of stagnation and declining output following Gazprom's acquisition of a majority stake in the former Sibneft in 2005, Gazprom Neft reported output growth of 9.4% y/y in the first quarter, to 12.157 million tonnes (986,070 b/d on average. Part of this boost is no doubt due to Gazprom's own increase in its stake in Gazprom Neft (from 75.7% formerly), as well as Gazprom Neft's accumulation of additional shares in Russia's Sibir Energy, but the end result is that Gazprom Neft is making progress towards its long-term output goal, which is a qualified success in its own right after the past few years.
No doubt that Gazprom would like to see more organic growth out of Gazprom Neft, but the oil division's acquisition-led growth is at least moving the chains toward the ambitious output target of 100 million tonnes of oil production that Gazprom Neft has set for itself. Further development of Gazprom Neft's own oilfields in Western Siberia, as well as by those companies and production units (Slavneft, Sibir Energy, Tomskneft) in which Gazprom Neft has a 50% stake or more, should help propel Gazprom's oil division closer to its 2020 goal, which also envisages an increase in refining volumes to 70–80 million tonnes and an expansion of the company's retail fuel chain to between 5,000 and 5,500 filling stations. Gazprom Neft has a long way to go to achieve those targets, but its 2020 strategy is a marathon, not a sprint, and at least the company is now moving forward rather than backward in its pursuit of its goals.