Russia's Gazprom, the world's largest gas producer, reported on Wednesday a worse than predicted 20 percent fall in second-quarter net profit, blaming lower sales in Europe and higher operating expenses.
Net profit fell to 113 billion roubles ($4.62 billion), to International Financial Reporting Standards, from 141 billion in the same period last year and below the average of 129 billion in a Reuters poll of 11 analysts.
Revenue rose 5 percent to 532 billion roubles, in line with forecasts, but the bottom line was hurt by high operating expenses, which jumped 18 percent year-on-year to 390 billion roubles.
Gazprom said revenues fell due to lower sales of gas in Europe -- Germany, Italy, Slovakia, France and Poland -- mainly due to warmer weather.
In Russia and the former Soviet Union, revenues rose due to higher prices, while in the oil segment sales from crude oil fell as more was refined. Sales of refined products were lifted by higher sales at petrochemical holding Sibur.
But the gains were offset by operating expenses.
Expenses on oil and gas purchases rose 18 percent to 84 billion roubles as Gazprom had to pay more for imports of gas from Central Asia.
Staff costs rose by a quarter to 53 billion roubles on higher salaries and pension obligations, while other expenses rose 58 percent to 49 billion.
Higher operating expenses offset the operating profit margin, which fell to 31 percent in the first half of 2007 from 37 percent in the first half of 2006.
Debt Keeps Rising
Net cash from operating activities almost tripled in the first half of 2007, year-on-year, to 713 billion roubles, but Gazprom said the change was mostly due to working capital changes at its banking arm Gazprombank.
Without this 488 billion rouble changes, cash flow generation was 225 billion, down from 244 billion in the first half of 2006.
Gazprom's total long-term borrowings, including affiliates, rose to 1.105 trillion roubles from 806 billion at the end of 2006, making it Russia's most indebted company by far.
Net debt fell by 28 percent in the first half of 2007 to 578 billion. "This increase can be explained by a significant increase in our cash and cash equivalents in bank accounts primarily due to temporary placement of funds in Gazprombank from third parties," said Gazprom.
Capital expenditure on gas transportation was flat in the first half but rose 80 percent to 68.5 billion roubles for gas production, by 30 percent to 26 billion roubles for oil production, and in refining doubled to 15.6 billion roubles.
Gazprom, often criticized for not investing enough in production, said investment was focused mainly on new gas fields, such as Yuzhno-Russkoye in West Siberia, which it is developing with Germany's BASF.
It also invested the first big money in the Arctic Yamal peninsula, its next big growth area, focusing on fields such as Kharasavei and Bovanenkov.
Gazprom also said it provided a $182 million guarantee in April to the National Oil Corporation of Libya under a production-sharing deal to develop a field in the country.