Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP), the world’s largest natural gas producer, said in an e-mailed statement that its first quarter profits fell 24 percent to RUB 357.8 billion ($11 billion), from RUB 468 billion in the same period last year. Net sales dropped from 1.32 trillion rubles to 1.22 trillion rubles, below the analysts’ expectations of 1.24 trillion rubles.


The Moscow-based oil exporter refunded 78.5 billion rubles ($2.4 billion) to major European customers in the first quarter alone. Customers in Europe were saying that its prices were too high, and they sought changes in the long-term contract. Therefore, the state-owned exporter paid them back.

“The retroactive payments are expected to continue into future statements,” Alexander Burgansky, an oil and gas analyst at Otkritie Capital, told Bloomberg Businessweek. Europe has been the biggest market for Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP) for the past several years. However, the exports to Europe declined 3 percent in the first quarter. Sales to former Soviet republics also declined 30 percent in the same period.

The Russian government owns over 50 percent of the company. Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP) has a monopoly in Russia and it owns the entire gas pipeline infrastructure in the country. The company is considered to have the biggest hydrocarbon reserves (>100bn boe). This week, the European Commission has initiated an investigation into Gazprom’s business practices in Central and Eastern Europe, as the commission is concerned that Gazprom is abusing its dominant position in CEE.

Another potential trouble for Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP) is shale gas. Some of the Gazprom’s biggest clients such as Poland, Ukraine, and China, are exploring their shale gas deposits. When they start extracting shale gas, they are likely to reduce their dependence on Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP). Shale gas is likely to become an excellent alternative to natural gas, according to the International Energy Agency.

Gazprom shares have dropped 9.6 percent in 2012.

Bank of America Merrill Lynch Analysts note:

Aside from Gazprom’s dividend yield potentially reaching 5.2% and cheap valuation, at 3x PE 2013E and 3.3x EV/DACF 2013E the stock trades at 55% and 20% discounts to EM peers; we do not expect any material catalysts in the midterm. We also think that the stock will be affected by: (1) lack of agreement with China, (2) slow growth of European volumes, (3) continuing contract renegotiations with European partners and (4) threat of higher taxation.

Deutsche Bank analysts have a different take on the earings, stating:

To summarise, Gazprom’s performance in 1Q12 was distorted by a range of non-cash one-offs, namely losses on derivatives, provision charges and FX items. Net of the one-offs, the results are still weak, primarily due to revenue miss and retroactive payments to customers. We calculate the adjusted EBITDA would come 7% below our forecast with net income missing by 14%.

Gazprom’s conference call is scheduled for Monday, 10 September. We expect the discussion to be centered on the recent news flow regarding the EU investigation into alleged market abuses by Gazprom as well as potential scale of further retroactive payments to customers. Gazprom income statement, IFRS consolidated