Gazprom Says Crisis May Impact Borrowing, Cash Flow

By Greg Walters

Oct. 22 (Bloomberg) -- OAO Gazprom, Russia's natural-gas exporter, said it may have trouble obtaining new loans and refinancing debts even after posting record earnings.

``Deteriorating operating conditions for borrowers may also have an impact on management's cash flow forecasts,'' the Moscow-based company said today in a statement on its Web site.

The cost of default protection on bonds sold by Gazprom surged to a record today as concerns over how emerging markets will weather the financial crisis intensified. Chief Executive Officer Alexei Miller had previously said that the credit squeeze wasn't a ``troubling factor'' for the company which reported a 30 percent jump in first-quarter profit.

``The feeling used to be that Gazprom was financially invincible, backed by their excellent earnings outlook,'' said Artyom Konchin, an oil and gas analyst at UniCredit Aton in Moscow. ``They will have to manage their finances better than they used to.''

Gazprom slid 8.7 percent to 107.93 rubles on Moscow's Micex Stock Exchange as of 5:37 p.m. local time. Shares of the state- run company have tumbled 71 percent from their May 19 peak as investors pulled their money out of emerging markets.

The cost of default protection on bonds sold by Gazprom increased 145 basis points to a record 1,285, according to CMA Datavision prices for credit-default swaps at 2 p.m. in London. Companies trading at more than 1,000 basis points are considered ``distressed'' by investors. No data was available on volumes.

Outstanding Bonds

Gazprom and its subsidiaries have $55 billion in outstanding bonds and loans, according to data compiled by Bloomberg. The company is scheduled to repay $6.6 billion next year and $12.5 billion in 2010, the data show.

The energy producer has already said it's reviewing its spending program amid tightening credit markets and lower revenue expectations. It has laid out plans to spend more than $30 billion this year on new projects as output drops at mature fields in western Siberia.

First-quarter net income increased to 273 billion rubles ($10.1 billion) from 210 billion rubles a year earlier, Gazprom said today. That beat the 221 billion-ruble median estimate of eight analysts in a Bloomberg survey.

``These are great numbers, the best numbers they've ever had, but they are more than half a year out of date, and the world is changing beneath our feet,'' said Ronald Smith, chief strategist at Moscow-based Alfa Bank.

Lag Behind

Earnings were boosted by higher gas prices in Europe, where the company supplies a quarter of all demand. Gazprom's prices in dollar terms rose 28 percent for European gas sales, reaching $345.5 for 1,000 cubic meters.

Natural gas prices lag oil prices by about six months, meaning Gazprom will continue to post ``solid'' financial results through the end of 2008, Citigroup Inc. said in an e- mailed research note today.

The European gas price may peak at $500 for 1,000 cubic meters of gas in the fourth quarter before declining, Citigroup analysts Alexander Korneev and Ildar Khaziev wrote. Crude oil futures have tumbled 52 percent from a record $147.27 in July.

The exporter will have to ``significantly'' increase capital spending on gas production in the ``short term,'' limiting free cash flow generation, Citigroup said.

Gazprom and the country's three largest oil companies earlier this month appealed to Prime Minister Vladimir Putin to provide financing for energy projects should it become necessary.

Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point, or 0.01 percentage point, is equivalent to $1,000 on a contract that protects $10 million of debt from default.

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