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. Last Updated: 07/27/2016

Gazprom to Court Foreign Capital

Gazprom is aiming to raise its market capitalization by as much as $3.3 billion by ratcheting up its ADR program to sell some 14.5 percent of the firm to foreigners, officials said Tuesday.

The move - unlikely to occur in the short term - would raise foreign owners' stake in the natural gas giant to the maximum 20 percent allowed under Russian law, Gazprom deputy chairman Sergei Dubinin said Tuesday.

"No sales are expected in the near future, although there may be issues of separate tranches for capitalization purposes," Dubinin said in remarks reported by Interfax.

Gazprom is thought to be seeking more cash in order to meet demands that budget payments be made in cash, as well as to invest in company development projects and service Gazprom's debts of some $11 billion, analysts said Tuesday.

The announcement came after similar information was leaked to the press earlier this week. The leak led to a drop in trading prices for Gazprom American Depositary Receipts, tradable certificates backed by a set number of shares that allow firms to get exposure on world stock exchanges.

Gazprom ADRs lost more than 5 percent Monday after the first reports of additional ADR emissions broke Monday morning. The certificates fell further during Tuesday trading sessions.

Each Gazprom ADR is backed by 10 ordinary shares. With those ADRs trading at $8.675 - or $0.8675 per underlying share - that means that foreigners pay a hefty premium compared to locally traded Gazprom shares, which closed at $0.29 Tuesday.

Gazprom bars foreigners from buying locally traded stock. Rather than being listed on the main Russian Trading System, ordinary Gazprom shares are listed on the much smaller Moscow Stock Exchange, where the company can more readily control trades in its stock.

A senior company source told Reuters that Gazprom was considering one or two tranches of first level ADRs this year and that each could be up to 1 percent of shares.

"The volume of a tranche would not be great. We calculate the market as within 1 percent," the source said.

Some 1.98 percent of Gazprom's shares are currently floating on the market as ADRs, part of the 5.98 percent stake currently held by foreign investors. The remaining 4 percent are held by German gas giant Ruhrgas - 3.5 percent held directly and a 0.5 percent stake held by a Ruhrgas-Gazprom joint venture.

No one at Gazprom was available Tuesday to comment on where the 14.5 percent stake envisaged for the ADR program might come from.

The state holds 38.37 percent of Gazprom, with a 3.37 percent stake already earmarked for privatization having been placed with the State Property Fund.

Private Russian investors hold some 20 percent of the company, with the remaining 17 percent or so held by various Gazprom subsidiaries.

Further stock to fill the potential foreign investors portfolios could come for Gazprom and its affiliates, as well as through purchasing shares from private hands.

However, the latter tactic could mean a drop in ADR prices and a growth in the price of Gazprom domestic shares.

Before news began to leak out of the expanded ADR program, Gazprom ADRs had been trading at about $9 each - or $0.90 per underlying share. Domestic market Gazprom shares had been at $0.25 per share.

Analysts were cautious regarding Gazprom's ADR plans, saying the company will have to be careful if it is to issue fresh ADRs.

"If there will be a serious demand for Gazprom ADRs, then the project could run smoothly. However, without such favorable condition the fulfillment of Gaz prom goals could prove to be rather difficult," said Steven Dashevsky of Aton brokerage.

With more ADRs issued the difference between the two could narrow, and not in favor of ADRs, analysts said.

"The effect for the ADRs could be from neutral to negative, while for domestic shares it is likely to be positive," said Dmitry Avdeyev, an analyst for the United Financial Group brokerage.

Gazprom's ADRs rankings have sunk after the news.

Many brokerages changed their recommendations for the ADRs from "hold" to "sell," while labeling domestic Gazprom shares a definite "buy," in expectation that Gazprom will buy out its own shares on the market.