Gazprom to Improve Financial Health by Cutting Debt

Not subject to any financial sanctions, Gazprom last week tapped foreign capital markets for the third time since the start of the year by selling 500 million Swiss franc ($543 million) eurobonds. But the company says it will cut its 2021 borrowing target in line with a policy to reduce its balance sheet debt load and restore its overall financial health. The Russian state-run natural gas giant saw its net debt to earnings before interest, taxes, depreciation and amortization (Ebitda) ratio jump to 2.6 in 2020 from 1.4 in 2019 mainly due to a drop in revenues amid an export crisis. The goal for 2021 is to return to a comfortable level of net debt/Ebitda below 2.0, which should allow Gazprom to use more free cash flow to reinvest in new strategic projects and pay back to shareholders in dividends instead of servicing debt. Ultimately that should also attract more stock market investors, although Gazprom has abandoned plans to list shares on Asian exchanges, an idea it floated several years ago. Gazprom’s market capitalization was $90.9 billion as of the end of last week, up from $68.2 billion as of end-2020, but still far below the May 2008 peak of $367 billion (see graph). In ruble terms, the capitalization fell less dramatically, but still nearly by a quarter -- to 6.6 trillion rubles as of Jun. 25 from 8.7 trillion rubles in May 2008. A key contribution to net debt/Ebitda reduction should come from higher revenue, as export volumes and prices recover to pre-crisis levels this year. The recovery started in the second half of 2020 and already allowed Gazprom to pay 50% of net profit in 2020 dividends, or 297.1 billion rubles ($4.1 billion), one year ahead of the new dividend policy schedule. Shareholders approved the dividends at a virtual annual meeting on Jun. 25 (NC Apr.22'21). But Gazprom also plans a set of measures to reduce balance-sheet debt this year and going forward, CFO Famil Sadygov told a recent briefing. First, Gazprom plans to reduce the 2021 borrowing program by 100 billion rubles ($1.4 billion), or some 20%, from the initially approved 511.6 billion rubles, Sadygov said. Before selling the Swiss franc bonds at 1.54% coupon last week, Gazprom sold $2 billion eurobonds in January and €1 billion ($1.2 billion) eurobonds in February. Second, Gazprom plans to continue selling perpetual bonds, which have no maturity date and which Gazprom classifies as an equity instrument rather than debt in its consolidated financial reports. The company tested the mechanism last year when it sold $1.4 billion and €1 billion ($1.21 billion) perpetual bond issues and will use it to finance a nationwide program to boost Russia's natural gas penetration rate, for which it has approved selling up to 150 billion rubles ($2.1 billion) perpetual bonds in rubles or foreign currencies this year. Gazprom last week completed the sale of the first 60 billion ruble issue as part of the approved limit (NC Jun.17'21). Third, Gazprom considers using more project financing for various upstream and downstream projects, which will also help it avoid adding more debt to its balance sheet, according to Sadygov. Gazprom is now sizing up project financing for the massive 45 billion cubic meter per year Ust-Luga gas processing and LNG project, where construction started in May, and the 32 Bcm/yr Kharasaveiskoye gas field development in the Arctic, among other projects. Gazprom expects project financing to cover 70% of project costs, significantly easing pressure on the company’s investment program. Vitaly Sokolov, Moscow