Key condition for development of business of PAO Gazprom

Last year was very difficult for the global energy market. Under extremely unstable economic conditions Gazprom, as before, adhered to a course of conservative financial policy. Such approach to financial planning completely justified itself once again. Despite everything, the corporation could achieve positive results again. Also it counts not only on preservation and strengthening of the taken positions but even on expansion of the achievements. However in many respects it will depend on the clear, transparent and stable conditions of activity determined, first of all, by the Russian authorities.

Positive dynamics

«Despite adverse external economic conditions, in 2016 Gazprom achieved positive results. We exported record volumes of gas – 179.3 billion cubic meters. It was generated a positive free cash flow of 202 billion rubles. And also continued a tendency of reduction of volumes of capital expenditure and reached 17 percent cut in expenditure in relation to 2015”, the Vice Chairman of the Board of PAO Gazprom Andrey Kruglov reported. “We keep the aspiration to follow the principles of financing of the investment program at the expense of operational cash flow».
According to him, for last year Gazprom could show good results at the remaining volatility in the oil and gas market and keep positive dynamics on such key indicators as revenue and net profit. «In ruble expression in relation to 2015 the revenue of Gazprom Group supported a stable tendency and increased on 1%. Thus oil and electrical power segments of our business effectively supplement gas business and show even higher growth rates of revenue. As a result the net profit of Group showed growth on 21% in annual expression», Andrey Kruglov specified.
Let’s remind that the revenue for 2016 of Gazprom Group (minus an excise, a value added tax — the VAT and the customs duties) increased from 6.073 trillion rubles to 6.111 trillion and the net profit (relating to shareholders of PAO Gazprom) grew from 787 billion rubles to 952 billion.
«At realization of financial strategy Gazprom is concentrated on control of expenses, optimization of the investment program, effective debt management, decrease in currency risks and also on observance of the balanced dividend policy», Andrey Kruglov reported.

Control and optimization

Increase of efficiency of activity of the company is impossible without strict control and optimization of capital expenditure and operating expenses. In Gazprom this activity is conducted within multilevel complete system of planning, budgeting, realization and the analysis of control of purchases. The staff of many divisions of Gazprom including the departments which are responsible for strategy, economic examination, budgeting, designs and construction is involved in work of this system and the specialized department which is responsible for management of corporate expenses. Such approach provides the versatile analysis, control and search of the most optimum decisions.
So, implementation of the program of optimization (reduction) of expenses of the company allowed to save to Gazprom in 2016 in total about 19.7 billion rubles in operating and investment activities. In plans for the 2017 is economy of 12.2 billion.
«One of the results of our work on control of expenses, in particular, is maintenance of one of the lowest levels of production expenses in the world, Andrey Kruglov told. “Growth of expenses of the company is caused mostly by increase in tax burden. And specific cost of production in 2016 grew on 1% only — to 880 rubles for 1000 CBM».

Tax field

Gazprom is one of key taxpayers of Russia. The taxes paid for 2016 by Gazprom Group made 1.966 trillion rubles. A share of taxes in revenue of the company made about 32%. More than 60% of the budgetary receipts, as well as earlier, made the customs duties and a tax on mining (MET).
Despite importance and stability of tax regime for investment climate in Russia, parameters of tax taxation of oil and gas branch continue to change annually. The tendency of growth of rates of MET on gas remains. The MET formula on gas and gas condensate was entered in 2014. «Refusal of annual increase in rates of MET at gas in the manual mode was the purpose of introduction of formular calculation. At the expense of the account in a new formula of the key macroeconomic parameters, such as the price of oil, ruble exchange rate to dollar, gas price in foreign countries and some other factors,” Andrey Kruglov explained. “For Gazprom Group and independent producers of gas the uniform coefficient of withdrawal — termless, at the level of 0.15 was established. However the formula in an original form existed slightly more than a year. The first change increasing withdrawal coefficient for the enterprises of Gazprom Group was brought in 2015. The withdrawal coefficient for us was increased from 0.15 to 0.2051 for a period of one year — 2016. The sum of additional withdrawal made about 100 billion rubles». According to him, in 2016 the situation repeated. The withdrawal coefficient for Gazprom Group was increased on the three-year period from 2017 to 2019 through changes of coefficients in a MET formula. «The sum of additional withdrawals was estimated in 2017 about 70 billion rubles in comparison with 2016. Or on 170 billion in comparison with the level of 2015″, Andrey Kruglov specified. Thus, from 2015 to the current year change of coefficient of withdrawal for Gazprom Group were carried out annually.
«On a formula of MET there is a base rate. Withdrawal coefficient is 15%. For 2018 we already established the raising coefficient at a rate of 1.4022. That is, for three years to us the raising coefficient is already defined. Therefore that is planned in the fourth quarter of 2017 — the increased coefficient to the increased coefficient”, the Head of Department of PAO Gazprom Karen Oganyan explained. “It is difficult even to assume what will happen in 2018. In my understanding, decisions simply somehow to compensate some dropping-out income of the budget are made».
Therefore, according to him, there is no confidence that in 2018 there will not be made any next «individual» decision on increase of tax burden of Gazprom. «But we hope that it will not happen. Because a question is not only and not so much in some additional withdrawals and in clear and transparent rules of the game that we could plan the production activity,” Karen Oganyan told. “Today we do not see it concerning Gazprom that is certainly very sad».

Domestic market

Work in the Russian market of gas continues to remain rather difficult for Gazprom. Taking the provided advantages at determination of the prices, independent suppliers realize gas to generally large consumers in highly profitable regions that does not correspond to the balanced development to gas supply of the Russian consumers. Therefore normal development of gas industry of Russia and domestic market of gas requires creation of equal working conditions in domestic market and, first of all, fair pricing for all participants of the market. «The solution of the specified task, in our opinion, at the first stage has to be consolidated to gradual liberalization of price control. In this regard we continue work on transition from directive establishment of the prices to establishment for PAO Gazprom of price range in which gas extracted by society could be implemented at contractual prices,” Andrey Kruglov reported. “Offers on modification of the government resolution providing cancellation of state regulation of the price of natural gas are studied, on any of which stages of delivery the technology on liquefaction is applied». According to him, now the Ministry of Energy prepared a draft of the government resolution, allowing PAO Gazprom to realize gas at the unregulated prices to producers of the liquefied natural gas intended for export within the contracts of supply of gas signed after January 1, 2017. For study of these and other questions connected with development of the market of gas the special working group with specialists of Federal Antimonopoly Service of Russia is created.

Free stream

As it was more than once declared by Gazprom, the company conservatively approaches financial planning and follows the principle of providing capital investments with own cash flow from operating activities. In 2016 when the environment of the markets of oil and gas was one of the most unsuccessful in a decade, and in parallel with it tax burden of corporation, despite it grew, strategic projects of Gazprom were successfully carried out. «We managed to show a considerable positive free cash flow of more than 3 billion dollars,” Andrey Kruglov stated. “Though, I will remind that gas prices in Europe in the summer of last year fell to the region of 150 dollars for 1000 CBM. Gazprom did not sell gas at such low prices since 2005″.
Such indicators became the result of positive dynamics of gas export, growth of the income from oil and electric power generation business, and also rigid discipline of management of capital investments.
«We expect that we will keep a positive cash flow. At least, on some similar order of figures, I think, we can be guided,” Andrey Kruglov considers. “Such confidence to us is given with that in the current year volumes of the realized gas on internal and the export markets are comparable or even higher in comparison with results of last year. Thus the average price of the gas exported most likely will be higher than in 2016 and even higher than we planned in the budget. All this allows us saying that positive dynamics on a cash flow will remain. And even, maybe, the result will be better than for last year».

Debt loading

Thanks to strong fundamental indicators and conservative financial policy Gazprom holds debt loading at the comfortable level and keeps steady situation. «For ensuring predictability and stability we seek to have a comfortable stock of liquidity. Annually in a planned order we repay on average from 10 to 20% of debt portfolio. The peak of the forthcoming planned repayments of debt obligations of Group falls on 2018”, Andrey Kruglov reported. “At the same time, reserved liquidities and broad access to sources of loan financing allows us carrying out successfully planned repayments».
Speaking about access to sources of loan financing, it should be noted productive work of Gazprom in the markets of the debt capital. In the financial policy the company adheres to the balanced approach for the purpose of ensuring comfortable volume of debt loading.
«In 2016 – at the beginning of 2017 we concluded a number of successful bargains on attraction of financing. It should be noted the credit from Bank of China in the first quarter of 2016 of 2 billion euros. This first bilateral credit agreement with the Chinese bank and the largest transaction of Gazprom on the amount of financing attracted directly at one credit organization,” Andrey Kruglov told.” “In April, 2017 we placed Eurobonds for the sum of 850 million pounds sterling. It is the largest transaction in Great Britain among the comparable companies in emerging markets for the last three years. This year Gazprom also entered the market of ruble bonds with two loans of 15 billion rubles. In June we attracted the loan under guarantees of export and credit agency of Austria». Thus, Gazprom uses a wide set of financial instruments in various currencies.


In May of the current year the Board of Directors of PAO Gazprom recommended to Meeting of Shareholders to increase dividends by results of activity of Gazprom in 2016 to 8 rubles 4 kopeks that makes 20% of net profit on IFRS for 2016 or practically all volume of free cash flow. Dividend payments of Gazprom following the results of 2016 will become the largest among the Russian public companies, both on absolute value, and on the volume of payments in the state budget. «Stocks of Gazprom have very attractive dividend profitability at the level of the leading energy companies of the world — about 7%. Besides, I want to remind that in 2016 the price of shares of the company grew on 36% in dollar expression, and, considering dividends, the indicator of profitability of investments of shareholders made 43%» Andrey Kruglov noted.
According to him, the position of the company concerning dividends consists in observing balance of interests between financial inquiries of shareholders and plans for development of Gazprom.

Corporate management

Gazprom conducts constant work on improvement of corporate management. The company tries to follow the best world practices in approach to this question. In 2016 the hard work in this sphere was carried out. One of important achievements is confirmation of Moscow Interbank Currency Exchange of implementation of all requirements for quality of corporate management for further being of stocks PAO Gazprom in the highest quoted list. Also the operating Board of Directors of PAO Gazprom included three independent directors which status was confirmed with the Russian exchanges. «We continue work directed on further increase of transparency of activity of the company. So, the content of the materials presented to shareholders to Annual general shareholder meeting in 2017 is included the report on transactions in which commission there is an interest. And such practice will proceed further», Andrey Kruglov stated.

Short-range plans

Key elements of the investment program of Gazprom Group for 2017 are investments in oil business 26% of which account for capital investments and 68% for gas business. Thus more than 70% of capital investments in gas business are collected in the investment program of the head company which for 2017 makes 911 billion rubles.
«The main projects of gas business can be divided conditionally on western and eastern. The project directed on strengthening of positions of Gazprom in the European market, increase of efficiency of transport routes and decrease in transit risks belongs to the western. These are construction projects of gas pipelines Nord Stream-2, Turkish Stream, as well as Ukhta-Torzhok», Andrey Kruglov declared. “To east it is possible to refer the projects connected with gas export to China. It is development of the Chayandinsky field and construction of the Force of Siberia gas pipeline and the Amur gas-processing plant. Both directions are strategically important for Gazprom».

Key moments

According to Andrey Kruglov, the stable tax and regulatory environment is necessary for a sustainable development of Gazprom. «In turn, we conduct continuous work on control of capital and operational expenditure, on efficiency increase. We pursue conservative financial policy and we use wide circle of tools to the most effective management of a debt and liquidity”, Andrey Kruglov claims. “The dividend policy of Gazprom allows balancing current needs of our shareholders and the purpose of long-term development of the company. Besides, in interests of all our shareholders Gazprom conducts serious work on increase of level of corporate management. In the conditions of the existing environment there is a certain instability and volatility which demand the responsible and balanced approach to planning of additional measures for optimization of expenses and increase in the income».