Gazprom Falls as Analysts `Shocked' by Spending Plan

By William Mauldin and Greg Walters

Aug. 22 (Bloomberg) -- OAO Gazprom, the world's biggest natural-gas producer, fell in Moscow trading after analysts said they were ``shocked'' by the company's plans to raise its investment budget to more than $40 billion this year.

Gazprom shares fell 7.35 rubles, or 2.9 percent, to 243.01 rubles on the Micex Stock Exchange as of 3:25 p.m. local time, poised for their first decline in three days.

Russia's natural-gas exporter may raise its investment budget for 2008 by about 25 percent, Interfax reported yesterday, citing Deputy Chief Executive Officer Valery Golubev. Gazprom last month already increased the budget for 2008 by 16 percent to a record 822 billion rubles ($33.8 billion). A spokeswoman for Gazprom, who asked not to be identified, said today the company had no comment on the matter.

``We're shocked by the magnitude of the numbers, especially given that the company revised its investment plans only a month ago,'' Troika Dialog analysts Oleg Maximov, Valery Nesterov and Alex Fak wrote in a note to investors today. ``This raises questions about whether the management actually intends to generate any meaningful free cash flow.''

JPMorgan Doubts

JPMorgan Chase & Co.'s Moscow-based analysts said in a note today that they ``doubt'' the ability of Russia's biggest company to invest that amount of money efficiently. The spending signals ``potential value destruction'' for the stock, the bank said in the note.

Gazprom in July said it increased spending in part to accelerate the development of new projects in the Arctic and eastern Russia. The company said it would speed up development of the Bovanenkovskoye field, its first production site on the Arctic Yamal peninsula.

The spending increase ``limits the likelihood of the company returning value to the shareholders in the short term,'' Evgenia Dyshlyuk, oil and gas analyst at Moscow-based Renaissance Capital, said in an e-mail to investors today.

State-run Gazprom, which supplies a quarter of Europe's gas, faces declining output as fields in west Siberia age. The company is being forced to develop fields far from existing infrastructure in the Arctic, eastern Siberia and off Russia's coasts.

Gazprom plans to spend as much as 10 trillion rubles ($411 billion) bringing new gas to market, Sergei Pankratov, Gazprom's deputy head of strategic development, said in Moscow on June 16.

``Gazprom is sticking to its policy of allocating windfall revenue to the investment line of the cash flow statement,'' analysts Artem Konchin and Pavel Sorokin wrote in an e-mailed note to investors today. ``While investors may prefer dividends, we would reserve judgment until the returns on this investment can be assessed.''

To contact the reporter on this story: William Mauldin in Moscow at wmauldin1@bloomberg.net. Greg Walters in Moscow gwalters1@bloomberg.net