Bloomberg has estimated that Gazprom (OGZPY) will beat Exxon Mobil (NYSE:XOM) this year to become the most profitable energy company in the world; earning $37.9 billion. Yet despite this remarkable success its shares have fallen by 18%. This is due to the fact that as well as being the most profitable, it is also the biggest spender, using its cash to finance large energy infrastructure projects.
Last year Gazprom spent $53 billion on capital expenditure projects, more than PetroChina’s $46 billion or Exxon’s $36.8 billion. The huge expenditure meant that just 7% of earnings remained to be paid out as dividends, the least amount of the top ten largest energy companies in the world.
Anaylsts at IFC Metropol and Sberbank CIB have suggested that Gazprom’s shareholders are basically paying for Vladimir Putin’s political priorities, building a pipeline to bypass Ukraine, and developing Russia’s poor Eastern regions.
Gazprom, with the backing of the Kremlin, will build the $21 billion South Stream pipeline to Europe; this is despite the fact that existing pipelines are operating at 70% capacity. It’s not even as if demand is likely to explode in the future, and warrant extra carrying capacity. The IEA has predicted that Europe’s natural gas consumption will fall by 3.5% to 550 billion cubic metres by 2015.
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The real reason to build the new pipeline is to avoid the Ukraine, giving Russia more independence and control over its gas exports to Europe.
Gazprom will also invest around $45 billion to develop the Chayanda gas field in remote eastern Siberia, a notoriously underdeveloped region of Russia.
Sergei Kupriyanov, a spokesman for Gazprom, explained that, “there are indeed a lot of investments now, but we are creating new gas production centres and new transport corridors that will bear fruits in the future.”
Ivan Mazalov, a fund manager at Prosperity Capital Management, stated that, “a lot of this expenditure is inefficient,” and that, “it is better to return cash to shareholders instead of ploughing it into capital expenditures.”
By. Charles Kennedy of Oilprice.com