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Gazprom Warns on Profit

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MOSCOW - Russia's state gas firm OAO Gazprom warned investors Friday of a drop in profits and shrinking cash flow in 2012, sending its stock to its lowest since July 2009 before a slight recovery.

Gazprom said at an investor day in Moscow that it would generate around $1 billion in free cash flow from profits of $38 billion for 2012, two people familiar with the presentation said.

The company's stock slipped 1.5% in Moscow before pulling some losses to close down 0.9%. Since July 2009, Russia's main Micex index is up 44%.

The world's largest gas producer is under pressure from shrinking sales in its most lucrative European market amid an economic slowdown and increasing competition. Customers in Europe have demanded price cuts after it was flooded by gas intended for the U.S. market but not needed because of the rapid rise in shale gas output there.

Gazprom said it would set aside $4.7 billion to refund European customers in 2013 after price cuts, after paying back $2.7 billion last year.

Even as demand for gas slipped 1% in the first nine months of last year, Gazprom began construction of a new pipeline to deliver gas to southeastern Europe at a total cost of some $40 billion.

"The problem is more the message and the tone than the numbers. Gazprom appears unwilling to address the reality of more competition and weaker demand, instead spending more money on new fields and pipelines," said Ildar Davletshin, an analyst at Renaissance Capital.

Rivals have been moving in on Gazprom's position. Norwegian energy company Statoil ASA said Thursday it sold record volumes of natural gas to Europe in 2012.

Statoil has offered more flexible contracts linked to hub prices, while Gazprom has insisted on keeping its agreements linked to the oil price.

A spokesman for Gazprom said the company wouldn't comment on the investor presentations. Senior executives have in recent months argued that demand from Europe is certain to rise in coming years. The company is also accelerating plans to sell gas to Asia, earmarking some $40 billion to develop a gas field and build a pipeline to the Pacific coast.

Gazprom said Friday it expected exports to Europe would rise by as much as 10% next year, although analysts say a rise of around 3% is more likely. Deliveries to Ukraine--Russia's former Soviet neighbor and a key consumer--have also dropped in recent years amid complaints from Kiev that the price is too high.

"The main concern is about gas exports to Europe and the problem with Ukraine, which decreased imports from Russia last year," said Andrey Polishchuk, an analyst at Raiffeisen Bank. "Ukraine could cut imports again, or Gazprom could provide a discount, which would have a significant impact on financials."

Gazprom said it would pay dividends between 7 rubles and 8 rubles ($0.23 and $0.26) for last year, which it may have to fund through borrowing. It said profit would be down 15% on 2011 at $38 billion.

Kjetil Malkenes Hovland and Selina Williams contributed to this article

Copyright (c) 2012 Dow Jones & Company, Inc.

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