Thursday, April 23, 2009
Gazprom’s big Eurobond sale
04-22-2009 - FSU Oil&Gas Magazine by Nnamdi Anyadike
• Gazprom’s latest bond issue has pulled in US$2.25 billion
• The company’s need for money will increase as it moves forward with plans to develop new reserves
• Russia’s government has pledged to provide extra funding if necessary, and Gazprom may need to tap this resource, since its new projects are capital-intensive and potential customers in Asia are eyeing other suppliers
April 17 was a watershed date for Russia’s relationship with Western investors. On that day, Gazprom, Russia’s gas monopoly, sold US$2.25 billion worth of Eurobonds in the form of 10-year loan participation notes (LPNs). The LPNs carry a put option after three years and a 9.25% coupon, without a premium. The sole underwriter of the issue, which followed presentations made to investors in the United States and in London earlier in April, was Credit Suisse. At the same time, Gazprom Neft, Gazprom’s oil-producing and refining arm, announced the sale of US$299 million worth of bonds in its debut domestic debt offering. These 10-year notes, which were listed on the MICEX on April 21, have a coupon of 16.7% and a put option after two years.
Return to the bond market: Gazprom’s Eurobond sale marks the return of Russia to the bond market. It is being seen as a possible opening of the floodgates for sales by other energy companies, such as Rosneft and LUKoil. Analysts believe that the Gazprom issue has served as a means for the government to test the waters for the larger sales that are due to take place next year. Russia last entered the external debt market in 2000, issuing Eurobonds that will mature in 2030 to refinance Soviet- era borrowing. Gazprom, meanwhile, was the last Russian company to launch a major Eurobond issue; it sold US$500 million worth of bonds carrying a 7.51% interest rate in July 2008. In mid-April, Finance Minister Alexei Kudrin said that the government might borrow abroad for the first time in a decade. He said Russia would hold a road show this year, with a view to entering the external market in 2010 through the sale of up to US$5 billion in Eurobonds. Oil industry observers and financial analysts generally agree that investor sentiment on Russia is improving and that the country has acquitted itself quite well in the financial crisis. They caution, though, that Gazprom’s future cash position remains precarious.
Funds needed: The company needs to spend hugely in the coming years to develop its technically challenging reserve base and upgrade crumbling infrastructure. It is not at all clear that it will be able to raise sufficient capital through the market to do this. In early April, the Moody’s ratings agency lowered Gazprom’s credit rating to Baa1, down from A3, to match that of the Russian government. Meanwhile, the other major ratings agencies, Standard & Poor’s and Fitch, have both given Gazprom a lower rating of BBB. All three ratings are still investment grade. However, Gazprom is set to see its revenues decline this year, which means that its earnings stream will be substantially lower. This, in turn, could force the company to cut its investment budget from the level of US$27.6 billion, announced only last December. Gazprom recently revised its price forecast for natural gas exported to Europe to US$257.9 per 1,000 cubic metres, compared with the 2008 average of US$409 per 1,000 cubic metres. The Russian newspaper Vedomosti points out that at an average price of US$260 per thousand cubic metres, Russia’s 2009 revenues from gas exports will be US$44 billion in 2009, down from US$73 billion last year. Analysts have already noted that the loss in revenue may delay key Arctic projects such as Yamal or Shtokmanovskoye by three to five years. The lag is troubling, given that Russia’s biggest Soviet-era gas fields are now past their prime. Demand, production down:
Gazprom’s deputy CEO Valery Golubev recently said at an energy conference that both global gas demand and Gazprom’s own gas production would be depressed by around 10% “for the next four to five years.” He said that Gazprom’s production would drop to 492 billion cubic metres in 2009, down by 12% from the originally planned level of 561 bcm and down by 10% on last year’s output figure of around 550 bcm. Analysts have called this 60 bcm drop disastrous, noting that the last time Gazprom produced such low volumes was in 1987. Prime Minister Vladimir Putin has already pledged financial aid to Gazprom, should the need arise. Indeed, this need may arise sooner rather than later. The company is already committed to spending more than US$4 billion this year to buy back a 20% stake in Gazprom Neft from Italy’s Eni, and analysts warn that the gas monopoly’s window of opportunity for launching further Eurobond issues is likely to be limited. The buyout of the Gazprom Neft stake was done at well above market price, reflecting the high value that the Kremlin sets on keeping key assets in state hands. The stake was among the assets of the stricken oil company Yukos that Enineftegaz, a company jointly owned by Eni and Italy’s power company Enel, bought in April 2007 for US$5.81 billion. Some observers believe that the Italian companies bought the stake on Gazprom’s behalf, with the understanding that it would be turned over to the gas monopoly. However, others point to the South Stream gas project, in which Eni will serve as Gazprom’s partner, as the key strategic consideration behind the high price that Gazprom paid for the 20% stake. Indeed, the US$2.25 billion worth of Eurobonds that Gazprom sold, plus a 500 million Swiss franc (US$429 million) issue two weeks earlier, was used to help cover the cost of the US$4 billion buy-back.
Bad timing: Gazprom is finding itself burdened with the high cost of the buyout at a time when oil and gas prices are low and access to the capital required for development of remote fields in Siberia is restricted. This presages a daunting future for the company. Indeed, Gazprom is discovering that while it may be Europe’s largest gas supplier and hold 25% of the world’s gas reserves, it does not automatically have the upper hand in its dealings with foreign partners. Ultimately, the Russian government is seeking to use Gazprom to position itself as a strategic energy supplier to both Europe and Asia. Towards that aim, it would ideally like to ensure that it controls all the levers of gas production. But in the case of Asia, particularly Central Asia, cash-strapped Russia is increasing finding itself being outplayed by China, a country with far deeper pockets. Beijing has already shown its mettle, using part of its US$585 billion economic stimulus package to loan US$25 billion to Russia in February and US$10 billion loan to Kazakhstan on the understanding that both recipients reciprocate by boosting oil deliveries to China. It is China, not Russia, that now holds the cards in Central Asia, a key gas- producing region. According to Indian analyst and former diplomat M K Bhadrakumar, Central Asia produces the equivalent of about 14% of Gazprom’s total output. But Bhadrakumar says these Central Asian producers believe that “Russia now lacks the financial resources to follow through on its commitments in the field of energy co-operation.” For example, while Russia’s proposed 6,700-km, US$10 billion Altai pipeline link to China is still on the drawing board, the Chinese-financed gas pipeline that will run from Turkmenistan to China via Uzbekistan and Kazakhstan is on target and due to be completed by the end of 2009. Despite the success of last week’s bond issue, Gazprom faces enormous hurdles and it is difficult to see how this over-bureaucratic entity can face the challenges of the future in its current guise.