The Wall Street Journal-20080216-Earnings Digest- Gazprom Posts 6-4- Drop in Profit On Warm Weather- Operating Costs

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Earnings Digest: Gazprom Posts 6.4% Drop in Profit On Warm Weather, Operating Costs

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MOSCOW -- Russian gas monopoly OAO Gazprom said third-quarter net profit fell 6.4%, hit by unusually warm weather and rising operating costs.

Net at the gas giant declined to 113.1 billion rubles ($4.59 billion) from 120.8 billion rubles a year earlier, as operating costs surged 15%, following industry trends. Higher prices for the imported gas on which Gazprom is increasingly dependent, combined with rising salaries and maintenance expenses, eroded operating margin.

Revenue was up 5.4% to 516.2 billion rubles thanks to higher domestic selling prices. But revenue growth was crimped by a drop in crude prices to the European market and lower overall sales volumes, largely due to warmer weather in the former Soviet Union.

Gazprom, the world's largest gas producer with reserves of 29 billion cubic meters of fuel, fills a quarter of the European Union's natural-gas needs. The company plans heavy investments in underwater pipelines to cut dependence on transit countries and strengthen its position in the European market.

Despite the rise in operating costs, observers said expenses were generally under control. "There was better than expected performance in terms of transit costs, materials and electricity, but worse than expected from salaries, repairs and others. Gazprom also spent more than we forecast on purchases," Deutsche Bank analysts Pavel Kushnir and Olga Danilenko wrote in a note to clients.

Some analysts noted that the third quarter is normally the weakest for Gazprom and that sales volumes have since picked up strongly.

Gazprom this past week resolved a dispute with neighboring Ukraine over unpaid bills for natural-gas deliveries. The European Union has been keeping a close eye on relations between Moscow and Kiev after a similar disagreement in 2006 saw supplies to the 27-nation bloc fall.