Gazprom Upbeat on Gas Prices; Sees Higher Profits

MOSCOW (Dow Jones Newswires), Nov. 8, 2010

Gazprom, the world's largest producer of natural gas, Monday but said it expects profits to rise for the rest of the year both at home and abroad, after weak European demand dented quarterly earnings.

Kremlin-controlled Gazprom has failed to impress investors, who have criticized the company for spending too much on big infrastructure projects at a time of falling demand in Europe--its key export market.

But analysts say strong results in the first two quarters of the year were due to higher domestic prices and successful cost-cutting, while it also held back on big spending.

Gazprom beat analyst expectations for the April to June period when posting a net profit of 169.73 billion rubles ($5.51 billion), compared with RUB192.56 billion during the same period a year earlier. Seven analysts polled by Dow Jones Newswires had forecasted RUB161.8 billion.

"We believe Gazprom is improving and slowly becoming more shareholder friendly," said Oswald Clint, an analyst at Bernstein brokerage.

Gazprom has delayed the development of its two high-cost Arctic fields Shtokman and Bovanenkovo due to lower demand for its gas in Europe amid an economic slowdown.

The company supplies around a quarter of Europe's gas needs, though its market share has dropped in the last two years due to lower demand and inflow of alternative energy sources such as liquefied natural gas.

Gazprom, nevertheless, remains upbeat on the European market. Sales on the continent rose 10% in the second quarter from a year earlier despite a steady average gas price of $285 per 1,000 cubic meters.

European prices, which are linked to the oil price, are expected to average $318 in the third quarter and $327 in the fourth quarter, Gazprom's Deputy Chief Executive Alexander Medvedev said during a conference call.

But the European demand outlook remains uncertain, say analysts, who are worried about attempts by some costumers such as Italy's Edison to review their take-or-pay contracts with Gazprom.

"The weak demand outlook in Europe is still a major concern," said Alfa Bank analyst Pavel Sorokin.

Skeptical of the company's ability to generate cash throughout 2010, investors failed to reward Gazprom's valuation after a strong first quarter. Gazprom's stock remains undervalued compared with its international peers, mainly due to a falling European market share, but continued strong earnings in the second quarter could boost the stock, said Citi Bank analyst Alexander Korneev.

"We believe that the stock deserves more recognition this time around," Korneev said.

Gazprom closed 2.4% higher at RUB174.8 in Moscow, outperforming the Micex index, which was up 1.8%.

A plan by the Russian government to liberalize gas prices for domestic consumers is supporting Gazprom's earnings, Medvedev said. Last year, the company saw its first profits from domestic sales and expects net profit from Russian sales to total between RUB110 billion and RUB120 billion this year, Medvedev said.

Gazprom's total sales in the three months rose 21% to RUB764.48 billion, from RUB633.38 billion a year earlier, helped by higher domestic prices. Analysts had expected second-quarter sales of RUB763.7 billion.

Operating profit totaled RUB238.42 billion in the second quarter, up from RUB149.34 billion a year earlier.

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