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Crisis could hit Gazprom refinancing plans

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By Ed Crooks

Published: October 22 2008 13:29 | Last updated: October 22 2008 19:19

Gazprom on Wednesday warned that the credit crisis could make it more difficult to obtain new borrowings and refinance its existing debt as it reported a sharp rise in first-quarter profits on higher gas tariffs and larger export volumes.

The gas group, majority-owned by the Russian government, said that the global liquidity crisis could affect its ability to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to previous transactions. It also warned that the crisis might affect the ability of some units to repay their outstanding loans which would then have an impact on management’s cash flow forecasts.

Gazprom shares closed 7.4 per cent lower at Rbs109.50 on Wednesday and have fallen more than 60 per cent in the past year. In May, it was the world’s third biggest company by market capitalisation but has since lost two-thirds of its value.

Credit default swaps on Gazprom’s debt, a kind of insurance against debt default and measure of perceived credit risk, rose sharply on Wednesday to 1,400 basis points, according to Markit, a data provider. That means it would cost $1.4m to insure $10m of Gazprom’s debt for five years. A figure of more than 1,000 is widely seen as a sign of a company at risk of default.

Its net debt as of the end of March 2008 was 10 per cent less than what it had at the end of 2007 due to a significant increase in cash and cash equivalent assets, the company said. But Gazprom’s net debt balance of Rbs1,103bn ($41.7bn) was still very high — the result of borrowing a record amount last year to fuel an acquisition spree in Russia, including control of Royal Dutch Shell’s Sakahlin-2 project.

Earlier this month, Gazprom’s chief executive Alexei Miller said Gazprom was under no risk from the financial crisis. Sergei Kupriyanov, another official, also said last week Gazprom would not have problems raising money abroad during the crisis.

If credit remains tight, Gazprom can borrow against its export revenues, as it has done in the past when Russia has been in financial turmoil. It also has the comfort of the government’s promise of support.

The company has already asked for $1bn in state funds as part of a rescue package being disbursed by the government to fund investment projects. However fears have been growing over the stability of the Russian economy.

Gazprom is facing big demand for investment when costs across the industry have been soaring. It also cannot delay its big projects because the gas is already committed to export customers, or is needed to replace declining fields for the domestic market, analysts say.

Developing the Shtokman gas field off the north coast of Russia, a technically challenging project, has been estimated at $15bn-$20bn, but will be ”much more expensive than people might think,” according to Christophe de Margerie, the chief executive of Total, one of Gazprom’s likely partners in the development.

Fields and pipelines in Russia’s far east for supplying China and Korea could cost about $100bn, Gazprom has suggested, while opening up the deserted Yamal peninsula in the north of Russia, the location of vast gas reserves, could cost $200bn, according to an estimate from Shell.

Falling steel prices will help curb those costs, but the demand for capital spending is still huge.

Gazprom has threatened to pull out of a deal to buy a controlling stake in Kovykta, the vast gas field in Siberia. While it is likely to be a negotiating tactic, at least in part, it is also evidence of its constrained ambitions.

The results for the three months to March, reported under international accounting standards, were better than analysts’ expectations, boosted by rising prices for gas sales to the European Union.

Gazprom has a monopoly on Russia’s gas exports, and its prices in European markets follow the cost of oil with a six- to nine-month lag, and so will keep rising until about the turn of the year.

Profit for the period was up 32 per cent at Rbs286bn ($10bn) and sales increased by 40 per cent to Rbs903bn, beating expectations.

Alex Fak, an analyst at Troika Dialog in Moscow, said there should not be any worries about Gazprom’s solvency.

He said once it had cut its stake in Gazprombank, a banking subsidiary – removing about $10bn of debt from the company – Gazprom’s net debt would be only about 60 per cent of 2008’s earnings before interest, taxation, amortisation and depreciation, which was “really quite a manageable number”.

Additional reporting by Catherine Belton in Moscow and Enid Tsui inLondon



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