Gazprom reports 4% increase in January to September 2013 net profits on stronger gas sales

Confirmation of the rebound

Going into 2013, Gazprom promised that it would rebound from a disappointing 2012, and the numbers from the company's nine-month financial results according to International Financial Reporting Standards (IFRS) indicate that Gazprom has fulfilled that promise. The company reported that its net income in the January-September 2013 period stood at RUB 858.8 billion (USD25.3 billion), an increase of nearly 4% over the same time period in 2012. Gazprom's bottom-line income was boosted by increased sales revenue, which rose 12.5% y/y to RUB3.773 trillion (see chart, "Gazprom's 9-months financial performance at a glance"). Increased gas exports and higher average gas sales prices to Europe – Gazprom's core export market – propelled the company's sales revenue higher, more than offsetting lower gas sales to Ukraine, as well as the domestic market in Russia.

Looking at just the third quarter, Gazprom's net income fell 10.5% y/y to RUB276.1 billion, due in part to lower gas sales revenues from Ukraine (which reduced imports of Russian gas as well as fell behind in payments during this period), but in the bigger picture, the Russian state-run gas firm's nine-month financial results reflect a stronger performance on the back of a resurgence in European demand for Russian gas. Overall, European imports of Russian gas in 2013 were even higher than Gazprom originally expected, up 16% to 162.7 Bcm for the full year, according to data released by the Energy Ministry earlier this month, including a 15.6% y/y increase in the January-September 2013 period, to 126.8 Bcm. Gazprom demonstrated its reliability as a key gas supplier to Europe, raising export volumes as continental Europe's other main suppliers – Norway, Algeria, and Libya – all provided lower gas supplies in the midst of various production disruptions.

Additionally, the detrimental impact of retroactive price discounts for European buyers – which weighed on Gazprom's 2012 financial results – was substantially reduced in 2013. Gazprom recorded RUB133.2 billion in net losses in the January-September 2012 period from retroactive price adjustments for European customers, whereas the company posted a RUB73.4 billion net gain in the same nine-month period in 2013, given that the actual rebates paid out (only to Germany's RWE) were much less than the amount for which Gazprom had already taken a charge against earnings. Furthermore, Gazprom benefited from higher average realised sales prices for gas exports to Europe in the January-September 2013 period, with prices up 2.8% y/y, to RUB12,114.8 (USD357.2) per 1,000 cm. Higher average sales prices and increased gas exports by volume meant that Gazprom's overall sales revenue attributable to Europe increased 14.5% y/y in the January-September 2013 time period, to RUB1.224 trillion (see chart, “Gazprom's 9-months 2013 gas sales at a glance”).

Gazprom's better-than-anticipated gas sales revenues and export volumes to Europe offset the company's weaker sales to the former Soviet countries, including Russia. Gazprom sold 42.2 Bcm in gas to the former Soviet states (not including Russia) in the first nine months of the year, down from 47.9 Bcm in the same time period in 2012, largely because of Ukraine's aggressive push to reduce its reliance on Russian gas imports. With average realised prices down 14.8% y/y as well, at RUB8,301.7 (USD244.9) per 1,000 cm, Gazprom took in just RUB289.7 billion in sales revenue from the ex-Soviet states in the nine-month period, down 33%. Ukraine's inability to stay current in payments for gas supplies, with state-run Naftogaz Ukrainy failing to make payment for August import volumes on time, triggering a stand-off with Gazprom over Ukraine's arrears, also weighed on Gazprom's revenue intake. However, in December 2013, Russia and Ukraine agreed to a deal that slashes Naftogaz's import price in 2014 – at least for Q1 – by 33%, to just USD268.5 per 1,000 cm, which should enable the Ukrainian state firm to make payments for imports on time and ease the long-running tension between the two companies over gas prices and supplies (see "related articles").

Gazprom also supplied less gas to its home market in the nine-month period, but this was partly offset by higher realised prices. The state-run firm – which has been ceding market share in Russia to oil firms and gas independents in recent years – sold 170.8 Bcm of gas in Russia in the January-September period, down from 183.3 Bcm in the same period in 2012, but Gazprom's average sale price rose to RUB3,143 (USD92.7) per 1,000 cm, up 13.4% y/y. Overall, Gazprom's sales revenue from the Russian market rose 5.6% y/y, to RUB536.9 billion, in the first nine months of 2013.

Outlook and implications

The state-run Russian gas giant, which lost its monopoly on Russian LNG exports from December 2013 following legislative changes but retained its monopoly on pipeline gas shipments, experienced a slight drop in gas exports by volume in the January-September 2013 period. Although gas exports fell 0.8% y/y, to 339.8 Bcm, the company experienced a 16.1% y/y increase in revenues from gas sales during this period, to RUB2.124 trillion, bolstered by higher overall prices. The company's financial performance in its other main business segments was mainly better, with sales of refined petroleum products up 14.6% to RUB1.002 trillion, while sales of electricity and heat increased 3.0% y/y to RUB 251.0 billion. However, Gazprom's sales of crude oil and gas condensate were down sharply in the nine-month period, declining 28.9% y/y to RUB155.4 billion.

Despite this, the overall outlook for Gazprom appears quite good; a far cry from suggestions at this time last year that the company was in a death spiral. Resurgent European demand for Russian gas – with cold winter weather bolstering consumption thus far in January as well – bodes well for the state-run gas giant, although tough negotiations remain in store to reach a potential settlement with the European Union (EU) on an antitrust investigation into the Russian company. However, Gazprom's outlook brightened considerably, following the resolution of the dispute with Ukraine on gas prices and supplies, although time will tell if the recent agreement will hold, given the continued political violence and growing chaos that has engulfed the country since the Ukrainian government in November 2013 turned its back on plans to sign an association agreement with the EU.

Gazprom's plans to diversify its export partners – and thus reduce its dependence on Europe as a market and on Ukraine as a market and transit state for exports – are also taking shape, with a long-awaited gas supply and purchase agreement with China National Petroleum Corp. (CNPC) now expected to be signed this year. Despite the inability of Gazprom and CNPC to finalise a deal by end-2013, as the two sides had hoped, Gazprom now says that a deal with CNPC is "imminent", with various reports pointing to the likelihood of a final commercially binding contract being signed during Russian president Vladimir Putin's planned visit to Beijing in May. Finalising a deal with CNPC would represent a major victory for Gazprom in diversifying its gas export partners, as well as increasing overall gas sales, reaffirming the Russian state company's rebound from 2013 and laying the foundation for solid growth in the future.

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