Gazprom’s Quarterly Net Profit Halves on Europe Discounts

on Nov 5, 2012
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On November 2, the Russian natural gas giant OAO Gazprom (MCX:GAZP) released its second quarter results, reporting a 50 percent drop in net profit. And while the state-run company’s results beat analysts’ estimations, they also highlighted Gazprom’s declining sales in Europe, with the region seeking to reduce its reliance on Russian gas.

**Gazprom Reports 50 Drop in Net Profit**
Gazprom’s net income for the period ended June 30 fell to Rb150.8 billion (£3 billion), from Rb303.7 billion in the same quarter of 2011, while the company’s revenue slid 2.4 percent to Rb1.01 trillion. Despite the decline in net income, Bloomberg reports that the gas exporter’s profit was still higher than an average estimate of Rb140.3 billion. The company shares rose 1.2 percent in Moscow on the back of the news.

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“We remain cautious on the name, due to the company’s weak marketing policy in the EU, which is likely to jeopardise the company’s market share going forward, and continued value destruction from questionable investments,” UralSib Capital said in a note, as quoted by Bloomberg.
**European Sales Decline**
As noted in Gazprom’s press release, net sales of gas decreased by Rb228,150 million, or a 15 percent decline, to Rb1,244,126 million in the six months ended June 30, 2012 compared to same period in 2011. Net sales of gas to Europe and other countries fell one percent. Reuters quotes a company source and an analyst as saying that the trend has continued well into October, with exports to Europe falling eight percent for the first 10 months of the year. In addition, Gazprom’s sales to Europe are expected to decline further in the coming years on account of increased shale gas supply, as well as because of the emergence of a spot market as an alternative to Gazprom’s long-term contracts with oil-indexed pricing.

!m[The World’s Biggest Natural Gas Producer Ordered To Expand Into Asia](/uploads/story/720/thumbs/pic1_inline.png)The Financial Times reports that Gazprom, which covers approximately one fourth of Europe’s gas needs, has been forced to pay more than Rb133 billion to European customers who had paid for gas in advance and were seeking retroactive discounts on their contracts.

Declining sales and retroactive discounts, however, are not the only Europe-related problems of Gazprom, with the European Commission initiating a probe in September into Gazprom on suspected market abuses. The FT quotes Ildar Davletshin, an analyst at Renaissance Capital as saying that although the probe was unlikely to result in a huge fine for Gazprom, it was crucial for the Russian company to start looking to other markets. “The pressure will be building on them to reform and restructure and I think the [Russian] government realises that,” notes Mr Davletshin as quoted by the FT. “They rely just on Europe and Europe is getting crowded. They need to move into Asia.”

**President Putin Says the Company Should Look East**
Vladimir Putin seems to have realised the need for expansion in the East, with Reuters reporting that the Russian President has ordered Gazprom to forge ties with fast-growing consumers such as Japan and China. While Russia has been trying to secure a deal to sell pipeline gas to China, the world’s top energy consumer, both countries have so far failed to reach an agreement on issues such as routes and prices. “The deal with China would be a great boost for Gazprom,” points out Sergey Vakhrameyev, an analyst with Metropol brokerage, as quoted by Reuters. “Prices in China are quite high at the moment, and Gazprom would have benefited from the agreement.”

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