OAO Gazprom, the world's largest producer of natural gas, posted solid third-quarter profit but said it will be forced to cut spending this year due to falling demand in key markets.
Natural-gas demand is crumbling in key markets as national economies slow, and gas-export prices are set to decline significantly later this year. As a result, state-controlled Gazprom's earnings are expected to fall throughout 2009, possibly affecting the Russian company's ambitious investment plans.
Gazprom's output fell in the first two months of the year, and data from the first days of March show output down by one-fifth from average production in March 2008. This has triggered concern among analysts that lower demand will cut into its profit.
"The big question is how much demand will fall this year," said Ron Smith, chief strategist at Russia's Alfa Bank.
"It's already clear we'll have to revise the production plan approved late last year," said Andrei Kruglov, deputy chairman of Gazprom, noting lower demand in Europe, the company's key export market. "We simply won't be able to sell such volumes," he added.
Mr. Kruglov also said Gazprom might revise its investment program several times this year. The company usually reviews its spending plans twice a year.
Gazprom, which supplies a quarter of Europe's natural-gas needs, estimates it lost about $2 billion in January when supplies were cut off to European countries for nearly three weeks amid a pricing dispute with Ukraine. In February, the gas producer saw output drop 16% from a year earlier, according to government statistics this week.
Less than a year ago, Gazprom Chief Executive Alexei Miller forecast oil prices would hit $250 a barrel and voiced ambitions to boost the company's market capitalization to $1 trillion. Since then, the price of oil has plunged, taking Gazprom's share price with it. The company's stock, which has lost 80% in value since its peak in mid-May, closed 2.8% lower Tuesday on Moscow's RTS exchange.
"We think that Gazprom's difficulties are rooted in the collapse of European deliveries," said Troika Dialog analyst Oleg Maximov.
In the quarter ended Sept. 30, Gazprom's net profit rose 16% to 131.7 billion rubles ($3.66 billion) from 113.1 billion rubles a year earlier, helped by European export prices, which rose to record levels during the period. Still, the earnings missed analyst expectations.
The results were weighed down by a foreign-exchange loss and a revaluation of the option held by Italy's Eni SpA to buy a 20% stake Gazprom Neft, the Russian company's oil arm.
Gazprom's quarterly sales rose 60% to 829.7 billion rubles from 516.2 billion rubles, backed by a 25% boost in domestic gas tariffs Jan. 1 and higher export volumes. Operating profit more than doubled to 306.1 billion rubles.
"The revenue line, in particular, provides a snapshot of the world as it was before the crisis," Mr. Maximov said.