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. Last Updated: 07/27/2016

Gazprom Figures Puzzle Analysts

Investors punished Gazprom on Wednesday for posting first-half financials far below expectations and failing to offer much of an explanation why.

The gas giant's stock closed down 3.5 percent after the company revealed January-June revenues under international accounting standards of just $9.19 billion -- about three-quarters of what it was in the same period last year. Net profit dropped 15 percent to $310 million.

The company blamed the decline on one thing -- lower gas prices in Europe, which accounts for the bulk of its revenues -- but analysts said Europe alone was not the problem.

"We think a lot of things are going wrong," said Mattias Westman, director of Prosperity Capital Management.

Although the company showed improvements in some areas, such as lowering operating costs, the figures raised concerns that the company has failed to stem the kind of financial shenanigans that cost former CEO Rem Vyakhirev and his top managers their jobs more than a year ago.

"They used every provision they could to lower their numbers so they could push for higher tariffs," said Bill Browder, managing director of Hermitage Capital, which is thought to control some 2 percent of Gazprom's stock.

Domestic sales are a money-losing proposition for Gazprom because the government keeps prices artificially low.

Although analysts said the bulk of the first-half revenue drop could be accounted for by lower prices abroad, they were at a loss to explain a decline in domestic revenues despite prices being 9 percent higher.

Analysts point to Gazprom subsidiary Mezhregiongaz, which has a virtual monopoly on domestic sales, as a possible leak. Last month, Unified Energy Systems CEO Anatoly Chubais accused Mezhregiongaz of forcing customers to buy gas through intermediaries at inflated prices.

Gazprom spokesman Igor Plotnikov denied such a scheme existed, but he said the company is investigating.

Compounding the jitters is the company's ballooning debt load, which now stands at some $15 billion, nearly $8 billion of which is short term.

Due to debt servicing and higher capital expenditures, Gazprom has a negative free cash flow for the first time since 1999, meaning it spent all its operating cash in the first half of this year, leaving nothing to pay off debt. The company notched up free cash flows of $1.4 billion in 2001 and $1.2 billion in 2000.

Most of Gazprom's short-term debt is being rolled over by new loans from Western banks backed by exports.

"[But if] there are any problems in the capital markets, if there is a credit crunch, without cash flow Gazprom could find itself squeezed," said Westman, whose fund does not own Gazprom stock because it considers the play too risky. "One could be concerned about what richer companies could do if they come in and offer to roll over the debt instead."

Yukos CEO Mikhail Khodorkovsky has long been eyeing Gazprom as a potential acquisition, should financial problems force the company to break up.

Other analysts, however, said the cash crunch at Gazprom was likely to be short-lived.

"This is yesterday's news," said Stephen Dashevsky of Aton. Prices in Europe are up and are likely to keep rising, he said.