Gazprom sticks to pricing strategy after record quarter
Russia's national gas company Gazprom is expecting a bumper couple of years, as it looks at the forward price curve, the strong demand for gas in Europe and counts the revenues from the first half year.
Its Q2 net income had come in at 10% above the forecast of Sova Capital, the Moscow-based brokerage told NGW, even though its revenues fell 2% short of the expectation. Exports to Europe were up 16% while China, through the Power of Siberia pipeline, took 2bn m³ – although that is still a long way off the 9.5bn m³ the pipeline can deliver at full capacity.
It was one of Gazprom's most successful quarters by a number of key metrics, the company told analysts on an August 31 conference call. Normally a humdrum quarter, this year's falls in both LNG deliveries (-9%) and indigenous gas production in Europe (-11%) were compounded by a long winter that had drained storage to a decade-long low inventory as of end July; while less competitively priced coal and high carbon prices set by the European Union's emissions trading scheme made gas more attractive.
Gazprom expects to export 183bn m³ this year, up about 6bn m³ on 2020, regardless of when Nord Stream 2 starts up. strong prices abroad to continue into at least next year, but it will not bring all its gas to the spot market. It sells most (84%) of its gas on a hub index but retains 16% for long-term pricing, and under these contracts, it said, customers were nominating at maximum.
This leaves less available for sale on Gazprom's electronic sales platform, which is for shorter term periods and the company is also looking at more, longer-term sales contracts this year and in the future, such as profiled deliveries. Spot sales at hubs are for fixed daily volumes, whereas Gazprom can add value through seasonal delivery profiles, or "shapes" as Gazprom terms them. This reduces the need for storage downstream and hence they tend to run for a year or more.
Gazprom said oil indexed contracts provide stability for buyer and seller and while they mean lower prices now relative to spot prices, they had also ensured higher prices last year. Gazprom still has a number of long-term contracts but most of those remaining will expire later this decade.
The company will gain from even higher wholesale gas prices in Europe in the third quarter. In late July, September futures at the Dutch TTF hub surpassed $500/'000 m³, and October futures exceeded $600/'000 m3 on August 30, marking the highest price in three and a half years. But Gazprom will also take a hit to its earnings as a result of a fire that broke out in early August at its Urengoi gas condensate treatment plant, which knocked out some of its capacity.
However, Gazprom said the fire would not impact the annual gas production target as there was sufficient flexibility to move production around and the effects were already reduced. For example the company could drill into different horizons at some sites and so produce less wet gas for processing. It had also solved some of the logistical problems by diverting condensate elsewhere, such as to Novatek's stabilisation plant. It said it was too early to put a figure on the losses suffered, or any insurance payable.
Gazprom used its high level of free cashflow to lower its debt-to-equity gearing and raise the dividend again. It will also "probably" bring forward some capital projects that had been slated for 2022 into this year. Company officials told analysts August 31 that the projects would be decided at a management meeting later this month. It had earmarked 1.8 trillion rubles for capital expenditure, a figure likely to rise.
Gazprom's output was also at a ten-year peak and it expects to end the year with 510bn m³ produced, 55bn m³ more than last year, having hit another ten-year record with first-half production of 261bn m³. Oil and condensate production also broke a ten-year record.
Q2 domestic sales were also up year on year, in terms of price and volume. And it is also on track with its domestic storage injections at 72.6bn m³. The withdrawal season does not start until November 1, and it says it will meet the target.