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Johanna Kirienko

on 6 March 2013

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Presented by Zhanna Kirienko and Jonny Noble
6 March 2012
Company Analysis Introduction (Gazprom position and operations)
Mission and Vision
Porter’s Five Forces Analysis
Core Competences
Value Chain
Corporate Governance
SWOT and TOWS Analysis
BCG Matrix
Conclusion Agenda Introduction Gazprom – oil and gas monopoly in Russia
Listed in:
Major listing – Moscow Stock-exchange
London and Frankfurt – ADRs
World rating:
Among the 20 largest companies for oil extraction
1st place in gas extraction
World – 17 %
Russia – c. 70%
According to Forbes 2011, 3rd most profitable company in the world (after Exxon Mobile and Nestle) Introduction (2) What Gazprom does:
Geological exploration
Sales of gas and other carbohydrates
In Russia: Yamal, Arctic shelf, Eastern Siberia, Far East
Worldwide: Libya, Vietnam, India, Venezuela, Kazakhstan (Caspian Sea shelf), Uzbekistan and other Introduction (3) Gazprom’s markets
Domestic – Russia
FSU – 70 % of the supply to the market
Europe – 25 % of the supply to the market, primarily to Germany, Italy, Turkey
Gas pipelines: “Blue Stream”, “Northern Stream” (since December, 2011), “Southern Stream” (as from 2015)

Non-core assets:
Gazprombank – 41.73 % of the bank’s shares
OAO “SIBUR Holding”
OAO “United machinery plants”
OAO “Gazprom-Media Holding” MISSION and VISION MISSION:

OAO Gazprom views its mission in reliable, efficient and balanced supply of natural gas, other energy resources and refined products to consumers


OAO Gazprom’s strategic goal is to establish itself as a leader among global energy companies by diversifying sales markets, ensuring reliable supplies, increasing operating efficiency and using scientific and technical potential MISSION and VISION (2) PRINCIPLES of OPERATIONS

Permanent raising of operating efficiency by using experience and scientific and technical potential;

Diversifying through high performance projects to create product with high added value;

Meeting the interests of all shareholders;

Improving corporate governance;

Improving transparency of business;

Establishing personal responsibility in its leadership for managerial decision-making; Porter's Five Forces Analysis Porter Five Forces Analysis for Gazprom Bargaining Power of Buyers

Low – medium: scarcity of natural resources
The substitutes are not available in large quantities
Balance presence of the long-term agreements with established clients, as well as sales at the spot price creates controlled approach to the price policy

Bargaining Power of Suppliers

Through the Federal channels (where the majority of the products are developed) and thanks to being the monopoly in the sector the bargaining power suppliers is kept at a favourable level Porter Five Forces Analysis for Gazprom (2) Threat of New Entrants
Low: the scarcity of the natural resources creates considerable barriers for the new businesses enter market
It is a capital-intensive business
Gazprom posseses the advantages of the established infrastructure, latest technologies, R&D facilities and trained staff
Threat of Substitutes
Low (but developing): the diversified portfolio within the sector of oil and natural gas counterweighs the threats of substitutes Porter Five Forces Analysis for Gazprom (3) Intensity of Existing Rivalry
High: the rivalry among the existing rivals is tough. The existing competitors fight for the access to the reserves available across the world. They have to retain the qualified employees, maintain the control of the infrastructure and logistics, transportation and new projects INTRODUCTION (ARCTIC SHELF) Arctic Shelf Total area of shelf fields in the world is 32M sq.km

Originally was used for fisheries and sea animals hunting

20th century – exploration for natural resources: first one in 1900 in Caspian Sea

Today: Mexican Gulf, Lake Maracaibo (Venezuela), North Sea, Arabian Gulf Arctic Shelf The Shtokmanov gas and condensate field:

Total reserves of natural gas – 3.9 trillion m3 and 56 million tonnes of condensate

Planned extraction: 71.1 billion m3 a year = 1/8 annual gas consumption in Europe

Kirinskoye gas and condensate field:

Sakhalin island shelf
136 billion m3 reserves PESTEL PESTEL - Political Russian Federation is the successor of the USSR

Thanks to the leading party “United Russia” the results of elections are known in advance

It is also known by the name of “the party of thieves and crooks” given by the opposition

Taxation – moderate. But one-time windfall tax is used in Russia on occasions representing a risk (copied from the U.K.) PESTEL - Economic Annual GDP growth 3.5 - 4%

Unemployment (5.2 %) and inflation (5.06 %) are at the lowest points since 1991

But Russian economy is dependent on the global commodity prices fluctuations

Oil and gas represent 25 % of GDP; 50 % of the Federal budget; 80 % of exports

Russia takes 120th place (of 183 countries) for bureaucratic challenges for business environment development PESTEL - Social Collectivism – co-operation and collaboration, especially in cold weather conditions, rather than competition

Egalitarianism – mutual support, principles of sharing, equal distribution of benefits

Human rights violation (Khodorkovsky, Magnitsky cases)

Corruption and bribery: Russia takes 143th place (of 183 countires)

Terrorism in the Southern part of Russia – North Caucasus PESTEL - Technical Russia as a developing country

Software/Internet services just start developing

Russia takes 3d place (after USA and Japan) in the amount of R&D specialists with the advantage of the education in a narrowed rather than generalized specialization

Nanotechnology is a stumbling priority PESTEL - Environmental 68 % of energy produced in the country pollutes the fossil fuels

According to the official data, 75 % of surface water is polluted

Air pollution is the cause for 18 % childhood and 10 % adult diseases PESTEL - Legal Intellectual property – ambiguity of the legislation

Loopholes in the legislation

Bribery and corruption Core Compteneces and Challenges Gazprom was derived from the former state-owned gas monopoly, making it the largest gas company in the world, with control of over 70% of Russia’s gas reserves (2011)

No competition (monopoly), while huge demand in domestic market
Ability to rapidly develop gas distribution network throughout Europe, Middle East, APAC regions

Strategic alliances and acquisitions for further expansion Core Competencies BP and Gazprom negotiating over expansion of pipeline from Germany to bring vast quantities of gas into Britain by 2016, competing against British Gas Strategic Alliance - Example Spans the entire production chain and distribution network from the wells to the end user

Expanding into other energy areas such as oil, electricity, and regional heating and hot water:
Enhances economies of scale
“One-stop shop” for customers

Very competitive in Europe where energy prices are high Gazprom’s Value Chain Increased interest in gas production from unconventional resources may reduce demand in N America, China, EU

Challenging environmental conditions, raw materials affect production costs, while climate changes reduce demand

Russian tax laws for export, control over transactions in foreign currency, and export customs inspections

Revenue from export in $ and € while all costs are in Rubles

Risky long-term contracts for fixed volumes at fixed prices

Accuracy of estimations of amount of hydrocarbon reserves

Successful integration following acquisitions

Land, property costs, registration errors, town planning Gazprom’s Challenges, Cont. Investment in outdated technology of production plants (some dating back to WWII), and information systems
Deep global recession has huge affect on Gazprom
EU regulations encourage competition, splitting between suppliers and transporters, and diversification of sources

Russian gov. still has >50% shares, influence in Board of Directors, and regulates wholesale, transport, retail prices

Pipelines transit through unstable countries (i.e. Ukraine, Belarus, Moldova) who can suspend the flow and siphon gas

Expansion to other continents is logistically more complex

Stricter H&S regulations, risk of environmental damage Gazprom’s Challenges Financials
We are analysing Gazprom’s performance based on their last annual report and financial statements from 2011

Gazprom trades on MICEX and RTS stock exchanges

Reuters has a good set of data for Gazprom from the LSE (GAZPq.L), which we can use to compare to their historic performance and that of the industry Financial Statements US$1 = 30.7 RR at today’s rate of exchange Gazprom Income Statement 2011 (B RR) Gazprom Balance Sheet 2011 (B RR) Gazprom Cash Flow Statement 2011 (B RR) 2011 values based on Gazprom’s annual report, the rest from Reuters QR - We see that Gazprom can pay back their short-term liabilities with its short-term assets (QR > 1)

CR - Gazprom is in a reasonable liquidity position and can pay its short-term obligations with its most liquid assets

In both cases Gazprom is in a better position compared to the energy sector, despite the decline from 2011 Liquidity (Financial Strength) Based on Reuters data Inventory Turnover is low, implying either poor sales or excess of inventories, but due to the nature of the business and complexity of distribution, this is probably the norm, especially considering it is similar to the sector

Total Assets Turnover is relatively high which implies that Gazprom has been using its assets efficiently to generate sales and revenue Asset Management (Efficiency) 2011 values based on Gazprom’s annual report, the rest from Reuters ROA - Although a lot higher then the industry, this includes cost of debt, but not cost of equity

ROE - Increased well above 10% in 2012, and very good compared to industry levels Return (Management Effectiveness) Based on Gazprom 2011 financial results EBIT = (profit before tax) + (interest paid)
= 1,142,015 + 63,580 = 1,205,595 BRR

NOPAT = EBIT (1 - tax)
= 1,205,595 (1 - 0.2015) = 962,668 BRR

ROIC = NOPAT / total assets
= 962,668 / 9,520,655 = 10.11% Business Performance Leverage ratio = Assets / Equity
= 9,520,655 / 7,540,012 = 1.26 *

Debt/Equity ratio = (current + NC liabilities) / Equity
= 1,980,643 / 7,540,012 = 26.3% *

Times Interest Earned (TIE) = EBIT / interest expense
= 1,205,595 / 63,580 = 18.96 *

Debt/Capital ratio = 16.57% ** * Based on Gazprom 2011 financial results
** Based on Gazprom 2011 annual report Debt Management WACC Analysis Risk-free rate in Russia = 2.25
Market-risk premium in Russia = 8.25
Gazprom beta = 1.6

Cost of equity = 11.85 %
Cost of debt = 9.19 % (av. for 2011)

Weights: Equity (79 %), Debt (21 %)

WACC = 9.36 + 1.93 = 11.25 %

ROIC = 10.11 % WAAC Analysis (2) Based on Reuters data Share Price Analysis Corporate Governance Governance - Board of Directors BOD is composed of 11 members with two committees and
no division into Executives and Non-executives Whole management chain is considered closely associated with the Kremlin:

The 2011 Chairman of the Board of Directors (Viktor Zubkov) was previously the Russian Federation Prime Minister

2011 deputy of board (Alexey Miller) was previously appointed by Putin as CEO, but was later removed to the board following criticism over lack of knowledge of the industry

Reliability: History of various “abuse of authority” cases, some of which went to trial, and PwC scandal
Bottom line: Hard to form objective strategy Gazprom Management Issues Culture Alexey Miller:
Gazprom’s outstanding competitive advantage is strong corporate spirit of leading company

Striving for the integrity and best global
recognized practices

Legacy of Russian culture (at AGM):
Egalitarianism Strategic Analysis Porter Generic Strategy Cost Leadership Strategy:

In the market of standardized product

Extraction by using the latest technologies to lower the costs where possible

Using the low bargaining power of the suppliers and the customers

Decreasing the transportation cost through the pipelines’ development SWOT Analysis TOWS High Market share Low Low Market growth High Off-take
contracts Domestic
and FSU market
types) LNG
projects Pipelines
contracts Shelf BCG MATRIX CONCLUSION Recommendations Diversify into other natural resources extraction within the energy sector (traditional and renewable)

Invest into R&D for the renewable/ new types of energy resources to prevent the rigidities within the company

Consider diversification of the portfolio with the help of other relevant industries (vertical integration opportunities)

Develop the non-core assets to spread the risks Gazprom’s annual report 2011: http://www.gazprom.com/f/posts/51/402390/annual-report-2011-eng.pdf
Gazprom’s financial statement 2011: http://www.gazprom.com/f/posts/51/402390/financial-report-2011-eng.pdf
Reuters: http://uk.reuters.com/business/quotes/chart?symbol=GAZPq.L
MJM Energy: http://www.mjmenergy.com/MZINE/2011/rdh.htm
This is Money: http://www.thisismoney.co.uk/money/news/article-2237831/BP-secret-talks-Gazprom-pipe-Russian-gas-supply-Britain.html
Gazprom management issues: http://www.foreignaffairs.com/articles/137615/ahmed-mehdi/putins-gazprom-problem Resources Resources, Cont. http://www.rbc.ru/companies/gazprom.shtml
http://www.gazprom.com/about/management/corporate-governance/ THANK YOU
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