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Gazprom: Having passed the bottom

Contributed by Veles Capital

By Dmitry Lyutyagin (Veles Capital)

- We have revised our estimation of Gazprom’s shares. The reason for up-dating the company’s model was the report by IAS for 1H 2009, the budget draft for the next year and corrections of WACC method calculation.
 

- The provided financial report of the gas monopoly totally brought no surprises. As it has been expected, the second quarter was worse than the first one and likely was the weakest within the whole year. In 1H 2009 the financial estimates were affected by the decline of the gas sale at all markets by 22.3% average, and by the reduction of the retail price of gas by 9.6% in the state of the far abroad and by 24% in Russia. As a result within the six months of the year 2009 sales slipped by 24.1 bn USD or by 32.8% and formed 49.285 bn USD, operating profit and EBITDA showed reduction by 56.7% and 52.6% respectively and formed 12.98 bn USD and 16.18 bn USD.
 

- Operating activity margins reduced significantly in 2Q 2009 versus the 1Q estimates. However, as we mentioned above, we forecast moderate recovery of the efficiency in 3Q already. The future results we be affected positively by the growth of gas buying by the partners from the far abroad, the sale volume is expected to reach the before-crisis levels late third quarter – early fourth quarter, and also by having no contract for buying expensive Turkmen gas. The recovery of finances will slightly be held back by the gas price slipping in Europe by 12.2% due to the special features of the gas contracts.
 

- As for the corrections of Gazprom model, we should mention that WACC calculation method has been detailed, which turned into the growth of the given estimate on behalf of higher premium for the corporate risks. We have also reflected the forecasts and targets in the investment program, which have been provided in the monopoly’s budget draft for the next year. Particularly the investment program of Gazprom for 2010 will form 802.4 bn RUR, 663.56 bn RUR out of which are to be spent on the capital construction. According to the 2010 budget draft the sum total volume of the income and inflow forms 3.8 bn RUR (growth by 14.5% versus 2009 forecast. We see the income inflow to be more optimistic and suppose the growth by 16% occurs.
 

- As a result of executing the corrections, the new fair value of Gazprom shares formed 8.955 USD, versus 9.016 USD forecasted earlier (0.68% down). But due to the significant growth potential, which forms more than 45%, we confirm our recommendation BUY for the shares of the company.