Net income falls 86% for Russia’s Gazprom amid lower demand in Europe

By STEPHEN BIERMAN
Bloomberg

OAO Gazprom, Russia’s natural-gas exporter, said profit fell 86% on soaring foreign exchange losses, while the ruble collapse helped it generate record free cash flow.

Net income shrank to 159 billion rubles ($3 billion) in 2014 from 1.14 trillion rubles the previous year, the Moscow-based company said. That compares with an average estimate of 665 billion rubles from five analysts surveyed by Bloomberg.

The results reflect lower demand in Europe, Gazprom’s largest export market, as a mild start to the winter and increased supplies of liquefied natural gas (LNG) weighed on prices.

European buyers also tapped gas from storage before increasing purchases from Gazprom as they waited for a drop in crude prices to filter through to oil-linked gas-supply contracts.

“The most interesting part of what we noticed is record free cash flow,” said Dmitry Loukashov, an oil and gas analyst at VTB Capital in Moscow. “They’ve never been able to generate that much.”

The ruble’s almost 50% collapse helped to both lower capital expenditures and buoy revenue. The company generated 654 billion rubles of free cash flow, 90% more than the previous year, according to calculations based on numbers in the report. Net operating cash flows rose 10%.

FX Loss

A jump in the net foreign exchange loss to 1.07 trillion rubles eroded Gazprom’s profit as it revalued foreign-currency borrowings. The loss was 145 billion rubles in 2013.

Russia’s dispute with Ukraine over gas pricing and debt also cut into Gazprom’s earnings. The company also had a charge for impairments and provisions of 313 billion rubles, more than quadruple a year earlier. That included 34.1 billion rubles for a reserve against non-payments from state-run NAK Naftogaz Ukrainy.

Sales rose to 5.59 trillion rubles in 2014 from 5.25 trillion rubles a year earlier, according to the statement. While natural gas exports to the Europe Union and customers in former Soviet Union dropped, as did dollar-denominated prices, last year’s collapse in the ruble buoyed revenue reported in the Russian currency.

The company shrugged off accusations from the EU that it gouged customers and abused its dominant position in eastern European markets.

“Gazprom believes the complaints brought by the European Commission are unfounded and expects the situation will be resolved using an agreement previously reached between the Russian government and the European Commission,” the company said in its report.

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