By Kenneth Rapoza, Forbes
Just when you thought the oil markets couldn’t make Gazprom any worse, a disappointing third quarter earnings report on Friday is likely to pull the rug out further for Russia’s energy giant.
Gazprom is due to release its third quarter results tomorrow, January 15. And they are expected to be weak thanks to the slide in natural gas and crude oil price despite improved European gas export volumes annually. Gazprom’s shares in the OTC market were marginally higher on Thursday, but on the Micex in Moscow, Gazprom settled 0.3% lower. It’s down 3.8% this year and off by 7% in the last 12 months, held together primarily by a weak ruble.
VTB Capital is forecasting a $6.9 billion loss due to the stronger dollar, which leads to a net loss for the quarter. However, free cash flow is the most important figure to watch. A weak performance on this front could disappoint investors.
Forget sanctions, the strong dollar is crushing Gazprom. A strong dollar means weak commodities, especially weak oil and gas prices.
The decrease in crude oil prices in the third quarter coupled with an estimated 29% decline in the average exported gas price for the period are the key negative drivers behind VTB Capital’s estimate of a 35% year-over-year drop in Gazprom’s net revenues to $20.3 billion. The weak domestic market, still reeling from a recession, led to a roughly 25% reduction in domestic gas sales. Some of this is also due to the role independent gas producers like SeverEnergia are playing in the market. SeverEnergia’s assets used to be part of Yukos Oil, the defunct oil firm expropriated by the Russian government in 2007 from ex-billionaire Mikhail Khodokorvsky. Gazprom is part owner of SeverEnergia.
VTB Capital analysts said they don’t expect major surprises from core operating costs. They forecast EBITDA to come in at $7.9 billion in the third, a 40% crash from the third quarter 2014. A net loss of $284 million is expected, most of it just a paper loss, which does not affect operating cash flows. Free cash flow is expected to be at least $700 million.
Given the rapidly changing macro environment, and the fact that everyone seems to be running with this week’s headline by the Royal Bank of Scotland to “sell everything”, pitching Gazprom to potential investors is a hard sell. Even at these depressed prices. There are clear downside risks to Gazprom as the self-fulfilling prophecies of capital market doom have set in.
European equities slumped to a 13-month trough on Thursday, with the automobile sector again causing some panic. In dollar terms, the MSCI MSCI +% Europe (VGK) is now down 6.67% this year, while the MSCI Russia (RSX) is down 10.24%.
