Research Notes
Gazprom – no reason for pessimism
| 27.05.09 |
We resume our coverage of Gazprom, one of the world’s largest gas producers and suppliers. As oil companies currently face low oil prices, the same lies in wait for the gas industry and 2009 may be a difficult year for Gazprom. However, the company’s long-term prospects outweigh its short-term troubles.
- 2008 was a successful year. In addition to favorable market trends, which enabled Gazprom to boost revenues by 47%, the company showed its ability to efficiently control operating expenses, which, if cleared of the cost of purchased oil, gas and oil products, rose by a modest 14%. As a result, EBITDA surged by 64%, one of the best results in the industry.
- Revenue is insured. Over the short term, about 85% of the company’s potential export earnings are insured with fines for low gas intakes, which should mitigate any negative impact from the slackening demand for gas in Europe, which dropped by more than 40% early in 2009. The company has also insured 65% of its potential revenue from domestic gas sales, but domestic demand for gas has been falling at a much slower pace than in Europe.
- Gazprom’s financial position has remained stable during the crisis. With a debt-to-equity ratio of 24%, the company is well placed to take relatively cheap loans and place bonds at a weighted average interest rate of about 9% annually. The state is ready to provide financial aid to the company if necessary.
- Delay in market deregulation. According to new government plans, domestic gas market deregulation, originally scheduled for 2011, is likely to be postponed until 2014 at the earliest. Between 2012 and 2015, domestic gas prices are expected to grow dramatically, by 35% CAGR, which is in line with the government’s pre-crisis plans for 2009-2011.
- New ‘Streams’. Once the Nord Stream gas pipeline goes into operation in early 2011, as planned, gas exports should grow by 10%. By 2013, the capacity of the pipeline is set to double. Two years later, in 2015, the South Stream pipeline should come into operation, after which gas exports should pick up by another 11%, giving Gazprom a competitive edge in Central Asian gas deliveries to Europe.
- Gas transportation opportunities. The commissioning of Russia’s first liquefied natural gas (LNG) plant in 2009, as part of the Sakhalin-2 project, is evidence that liquefied gas shipments from shelf deposits have good prospects. However, for the next ten years, Gazprom will still spend a major part of its capex on revamping its gas pipeline system with the aim of boosting gas sales by 30%.
As a result of our DCF valuation of Gazprom, we assign a BUY rating to Gazprom shares, with a target price of USD 11 per share as of May, 2010.
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Sector: O&GCompany: Gazprom