Bloomberg: Putin’s China gas coup risks lower returns for Gazprom

What’s good for Russia isn’t necessarily good for the country’s largest company. President Vladimir Putin hailed an “epochal event” after state-run natural gas exporter OAO Gazprom (GAZP) signed a $400 billion deal to supply fuel to China for 30 years. The agreement was a boost for Putin, who showed he can build ties with Asia’s largest economy at a time when the crisis in Ukraine is souring relations with the U.S. and Europe.

Whether it’s a boost for Gazprom is less clear. The gas sales agreement probably doesn’t justify the expense of building a pipeline to China and developing giant fields in eastern Siberia, analysts from Renaissance Capital said. The project’s likely to divert cash away from dividends toward Gazprom’s already giant capital expenditure budget.

“Capex on the pipeline alone will be value destructive,” Ildar Davletshin, an analyst at Renaissance Capital in Moscow, said in a note for investors just after the deal was announced. “New capex will likely cause free cash flow to turn negative in the medium term, limiting Gazprom’s ability to increase dividends.”
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