Gazprom is bankrupt?

European countries are rejecting Russian LNG, replacing it with supplies from Qatar and the United States. As a result, the share of Russian gas in the European Union has fallen to its lowest level in more than 20 years. Experts estimate that Gazprom's profitability point is at $105 per thousand cubic meters, with Russian gas exports to the EU averaging $82 as of June 2020.

Will Gazprom continue to make a loss, but about the rise in prices on company shares out of the question, or will the approaching winter period save Gazprom? The question of Fortrader magazine was commented by Nikolai Dudchenko, an independent financial analyst.

Pessimism about Gazprom is clearly exaggerated

- From time to time the media reports that the share of Russian LNG supplies is decreasing, and that Gazprom, as one of the largest gas suppliers, is almost on the verge of bankruptcy. But is this really the case?

In my previous review of PJSC Gazprom on 02.04, I already noted that the cost of gas production in the U.S. is significantly higher than the cost of production in Russia. According to different experts, this production cost in the USA is about 5$ per MMBTU (approximately $143 per 1,000 cu m, some experts call it $180 per 1,000 cu m). At the same time, the production cost of Gazprom's gas is about $52.5 per thousand cubic meters. Fitch Ratingswhich cites the level of $105 per 1,000 cubic meters, says this (quoted from RBC): "The cost of gas, if cost of sales is understood as the level of sales price, at which EBITDA becomes zero, is about $100 per thousand cubic meters. This is if we include transportation in Russia, export duty and transportation in Europe. But within that $100 there are fixed costs, such as transport via Nord Stream or via Ukraine. Therefore, it is economically profitable for Gazprom to supply Europe as long as the price of an additional 1 thousand cubic meters is more than $50-60"

In addition, it is important to understand that Gazprom supplies most of its gas under long-term contracts, where prices are tied to the price of oil. Therefore, according to experts, the long-term strategy of the U.S. is aimed at creating an independent gas market and separating it from the oil market, while maintaining payments in the U.S. national currency.

Then there are Gazprom's losses for the first quarter of this year, which amounted to 116 billion rubles. Many sources present this information as if there is a steady trend for the key financial indicators to continue falling. However, they forget that the winter of 2020 in Europe was quite warm, and in addition there was a revaluation of the company's dollar liabilities, which, in fact, had a negative impact on the financial results.

Gazprom shares are not attractive for investors

The first thing that strikes the eye here is a fairly low profitability (the 5-year average ROE was 8.73%), which may reflect poor management efficiency. Meanwhile, the company pays dividendsand the current yield is about 8.61%.

Thus, summing up, I do not consider Gazprom's shares as a long-term investment, but I would not venture to state that the company will be squeezed out of the LNG market in the nearest future. Besides, there is an impression that somebody benefits a lot from presenting the situation in a black light for Gazprom, but if we look into it, the situation is not as disastrous as they are trying to "sell" it.