Gazprom Facing Cash-Flow Crunch

APMiller, left, and Gazprom chairman Viktor Zubkov speaking to reporters after a general shareholders meeting in July.
Gazprom said Wednesday that the company might have trouble obtaining new loans and refinancing debts, even after posting record earnings.

"Deteriorating operating conditions for borrowers may also have an impact on management's cash-flow forecasts," the company said Wednesday in a statement.

The cost of default protection on bonds sold by Gazprom surged to a record Wednesday as concerns over how emerging markets will weather the financial crisis intensified. CEO Alexei Miller said earlier this month that the credit squeeze was not a "troubling factor" for the company, which reported a 30 percent jump in first-quarter profit.

"The feeling used to be that Gazprom was financially invincible, backed by their excellent earnings outlook," said Artyom Konchin, an oil and gas analyst at UniCredit Aton. "They will have to manage their finances better than they used to."

Gazprom closed down 7 percent at 118.22 rubles on the MICEX stock exchange. Shares of the state-run company have tumbled 71 percent from their May 19 peak as investors pulled their money out of emerging markets.

The cost of default protection on bonds sold by Gazprom increased 145 basis points to a record 1,285, according to CMA DataVision prices for credit-default swaps Wednesday afternoon in London. Companies trading at more than 1,000 basis points are considered "distressed" by investors. No data was available on volumes.

Gazprom and its subsidiaries have $55 billion in outstanding bonds and loans, according to Bloomberg data. The company is scheduled to repay $6.6 billion next year and $12.5 billion in 2010, the data show.

The energy producer has already said it was reviewing its spending program amid tightening credit markets and lower revenue expectations. It has laid out plans to spend more than $30 billion this year on new projects as output drops at mature fields in western Siberia.

First-quarter net income increased to 273 billion rubles ($10.1 billion) from 210 billion rubles a year earlier, Gazprom said Wednesday.

"These are great numbers, the best numbers they've ever had, but they are more than half a year out of date, and the world is changing beneath our feet," said Ronald Smith, chief strategist at Moscow-based Alfa Bank.

Earnings were boosted by higher gas prices in Europe, where the company supplies one-quarter of all demand.

Gazprom's prices in dollar terms rose 28 percent for European gas sales, reaching $345.5 for 1,000 cubic meters.

Natural gas price changes lag those of oil prices by about six months, meaning that Gazprom will continue to post "solid" financial results through the end of 2008, Citigroup said Wednesday.

The European gas price may peak at $500 for 1,000 cubic meters of gas in the fourth quarter before declining, Citigroup analysts Alexander Korneyev and Ildar Khaziyev wrote. Crude oil futures have tumbled 52 percent from a record $147.27 in July.

The exporter will have to "significantly" increase capital spending on gas production in the short term, limiting free cash-flow generation, Citigroup said.

Gazprom and the country's three largest oil companies earlier this month appealed to Prime Minister Vladimir Putin to provide financing for energy projects should it become necessary.