Gazprom 3Q04 results: Cost Control Remains a Pipe Dream

Gazprom’s long-awaited 3Q04 IAS financials more or less fell in line with our
expectations. While revenues generally held to the consensus forecast, both
EBITDA and net profit overshot it by a wide margin. This earnings surprise,
however, was primarily owing to a one-off USD 675 mn non-cash gain related to
the settlement of the Ukrainian gas debt — the impact of which seems to have been
missed by the consensus. Otherwise, the figures point to further expansion of
operating costs, deteriorating margins and negative free cashflow.

On balance, we view Gazprom’s results as nothing overly exciting, especially with
the market intently focused on the government’s plans to consolidate Rosneft into
Gazprom and subsequently liberalize the latter’s share market. However,
Gazprom’s apparent unwillingness to rein in costs warrants a cautious view on the
stock.