The cash flow of Gazprom goes into negative territory

Because of the record investment program and low gas prices.
Gazprom approved a predictably record volume of the investment program for 2018 with a volume of over 1.2 trillion rubles, for which the company will also need record borrowing. According to analysts, Gazprom will be able to attract money from the market without problems, unless there is a tightening of sanctions. But peak investments in 2018-2019 lead to the fact that the company's cash flow will become negative, even if Gazprom continues to beat records on gas exports to Europe.

Gazprom published a preliminary plan for the investment program for 2018 with a volume of 1.278 trillion rubles, which is 40% more than the initial level of 2017. Capital investments will amount to 798.5 billion rubles, long-term financial investments - 439.5 billion rubles. Gazprom also plans to borrow 417 billion rubles. (an increase of 45%). At the same time, the company traditionally revises the volume of the investment program and loans in the fall of the reporting year in a larger direction. So, in early November, investments for 2017 grew by 24% compared to the initial estimate, to 1.129 trillion rubles.

The increase in the investment program was predictable, as Gazprom needs to simultaneously build three export gas pipelines - Nord Stream 2 and expand the system for it in the north-west of Russia, the Turkish Stream and the Siberian Power, as well as the Amur Gas Refinery for deliveries to China. In addition, it is required to prepare the Chayandinskoye field for gas supply via the "Force of Siberia". None of these projects, Gazprom, has so far been able to attract project financing. If by the end of the year the company succeeds in reaching an agreement with the Sakhalin-1 consortium on buying gas to expand the LNG plant in Sakhalin, this project could be included in Gazprom's investment program in 2019.

Under long-term financial investments, Gazprom usually means investing in joint ventures, in particular, investments in Nord Stream 2 and Turkish Stream are reflected in this line. According to Dmitri Marinchenko of Fitch, Gazprom apparently set aside funds for Nord Stream 2 for 2018 without calculating external financing. Gazprom and five Western companies - Shell, Engie, OMV, Uniper and Wintershall - agreed to give the project a bridge loan for € 6.65 billion, which will cover 70% of the gas pipeline cost, the remaining 30% will give the monopoly as the sole shareholder. Nevertheless, the partners hoped that they would be able to attract banks' money instead of bridge loans, but against the background of the latest US sanctions, this option now seems extremely problematic.

Gazprom in the current situation without special problems will be able to attract the planned 417 billion rubles., Mostly through the issue of Eurobonds, Mr. Marinchenko believes. He adds that the company's absolute debt burden remains low. At the same time, if there is a new tightening of sanctions, the cost of borrowing for Gazprom can grow. "The tense investment program gives Gazprom arguments to ask for a decrease or at least non-increase of the tax burden, as well as not to increase the payment of dividends," says Dmitry Marinchenko.

Next year should be the peak in terms of the volume of the investment program, in 2019, investments may begin to decline. As a result, according to Fitch estimates, in 2018 the cash flow of the company will be negative, in 2019 - close to neutral without paying dividends (that is, negative with payment). The rise in oil prices and, consequently, gas prices of Gazprom can make adjustments to these calculations. At the same time, record volumes of Gazprom's gas exports have relatively little impact on the profitability of the business and will not allow the company to return to financing the investment program from cash flow, as in more profitable years. According to Fitch, this year the company can supply 195 billion cubic meters to non-CIS countries against 179 billion cubic meters in 2016, but this will only add 4% to the consolidated EBITDA of the group.