The downfall of a giant [Gas in Transition]
Russia’s state gas exporter Gazprom felt the full force of the Kremlin’s gas war against Europe in 2023, suffering its first annual loss in more than two decades. The dismal result took analysts by surprise and caused the company’s already-weak stock price to tumble to a new low. Looking forward, a decision is expected this month on whether Gazprom will still pay out dividends, a major source of revenue for the Russian budget. Russian investors will also be hoping that a planned trip by Russian President Vladimir Putin to Beijing in mid-May yields some progress on the stalled Power of Siberia 2 pipeline project.
A shadow of its former self
Gazprom was for many years Russia’s largest company by market capitalisation, thanks to its monopoly over the country’s once significant and lucrative gas exports to Europe. Back in 2007, when Gazprom was the third-largest company globally, then-chairman and future Russian president Dmitry Medvedev said he wanted to see it become the world’s first trillion dollar company.
Years of serving as the Kremlin’s favoured geopolitical weapon meant that ambition was never achieved. But Gazprom’s true downfall came after Russia’s invasion of Ukraine, when it drastically cut gas flow to Europe as part of Moscow’s effort to coerce Western leaders into withdrawing support for Kyiv. Russian pipeline exports to Europe were cut to 28.3bn m3 in 2023 – their lowest level since the early 1970s, and down from 63.8bn m3 in the previous year and 175-180bn m3 in 2018-2019.
While the initial drop in volumes in 2022 was more than offset by soaring gas prices in Europe, this was not the case in 2023, when prices eased closer to pre-crisis levels. The company’s average export price dropped by 61% to $305/1,000 m3 last year, according to the Gazprombank Price Index Center.
The collapse in exports led Gazprom to swing to a net loss of 629bn rubles ($6.9bn) last year, its first since 1999, from a profit of 1.226 trillion rubles in 2022, according to company results announced on May 2. Revenues slumped to 8.5 trillion rubles, versus 11.7 trillion rubles a year earlier, led by a halving of revenues from gas sales to 3.125 trillion rubles, while EBITDA dropped to 1.77 trillion rubles, from 3.63 trillion rubles.
Gazprom was also stung by more than $17bn in non-cash asset impairment charges last year, which analysts at BCS Global Markets (BCS GM) noted was almost certainly related to the loss of market share in Europe.
Following the earnings announcement Gazprom’s share price on the Moscow stock exchange dropped to its lowest level on record. BCS GM noted that the results were much worse than expected. The brokerage had forecast a net loss three times smaller, while the market consensus was that Gazprom would earn a small net profit.
The company is now worth only around 3.63 trillion rubles ($40bn) – a fraction of its peak market cap of $367bn in May 2008. In contrast, Russia’s largest oil producers Rosneft and Lukoil are worth about $68bn and $60bn respectively, while its top LNG exporter Novatek is valued at $41bn. Unlike its gas pipeline exports, Russia has maintained high oil and LNG exports over the past two years, in spite of Western sanctions, explaining why Gazprom’s peers have fared comparatively better.
Indeed, Gazprom's value has fallen so low over the past year that in November 2023, its own oil-focused subsidiary Gazprom Neft temporarily surpassed it in capitalisation.
The dividend question
What remains to be seen is whether Gazprom will maintain its dividend policy in light of the dire financial results. On the back of the European price surge in the first half of 2022, the company surprised analysts by announcing a dividend payout of more than 1.2 trillion rubles – one of the largest in its history. But it then cancelled dividends for the rest of 2022, in light of falling export volumes in Europe and the Kremlin charging it an extra 1.25 trillion rubles in mineral extraction tax (MET) that year.
However, as recently as December, Gazprom’s management said that dividends for 2023 would be paid according to its policy from 2019, which is to distribute at least 50% of adjusted net profit. Despite reporting the net loss, Gazprom is yet to reveal its adjusted net result. BCS GM estimates adjusted net profit for the year came to 760bn rubles, although it acknowledges that Gazprom’s own figure could be very different.
Dividends will ultimately be a political decision, according to BCS GM. Despite positive signals from Gazprom in December, the company’s net debt to EBITDA ratio reached 2.96 at the end of 2023, up from 1.07 a year earlier. A ratio of above 2.5 allows the company to waive the dividend.
“Thus, whether to pay the full 50% of adjusted net income or some smaller dividend is a political decision to be made with the ministry of finance and other key players in May,” BCS GM believes. “Our view is that Gazprom could afford the $4bn dividend of 15.8 rubles/share — there is at least a 50/50 chance of this outcome, but no dividend or a 25% payout are also fully possible.”
Eastern promises
With no end yet in sight to the war in Ukraine, and given Europe’s embrace of LNG and commitment to eliminating Russian gas imports completely, Gazprom is very unlikely to reclaim anything close to the market share it once had on the continent. As such, the company’s fortunes rest greatly on expanding exports to China. Its supplies to the country via the Power of Siberia pipeline are steadily ramping up, and are on track to reach a peak of 38bn m3/year in 2025-26, from 22.7bn m3 in 2023 and 15.3bn m3 in the previous year.
Russia needs new routes to China to continue this growth. However, Moscow’s successive rounds of talks with Beijing over the last few years have failed to yield a long-term gas deal to underpin the construction of the 50bn m3/yr Power of Siberia 2 pipeline. In the meantime, progress appears to be slow on the development of a smaller, 10bn m3/yr pipeline in the Far East. And despite Kazakhstan recently claiming it could transit up to 35bn m3/yr of Russian gas to China, Beijing is yet to express an opinion on this proposal.
President Putin is set to travel to Beijing on May 15 and 16, according to Bloomberg, and this has led to speculation that Moscow might finally clinch the Power of Siberia 2 contract it has been seeking. Such an outcome “holds the potential to provide a significant positive catalyst for Gazprom’s stock,” according to BCS GM.
Nevertheless, Power of Siberia 2 will not make a tangible impact on Gazprom’s export volumes for many years to come. If a contract with China was signed tomorrow, it would still likely take until the end of the decade if not later for the first gas to flow.