OREANDA-NEWS. Fitch Ratings says that the weaker rouble has helped OAO Gazprom to mitigate lower gas prices and volumes in 2014. Gazprom reported fairly strong IFRS results in 2014, and has kept adequate leverage ratios and a very comfortable cash buffer.

While we expect that in 2015-2017 Gazprom's financial performance may deteriorate due to lower oil prices than in 2011-1H14, it will benefit from a full year's rouble devaluation. We expect it to maintain a strong credit profile above what its Long-term Issuer Default Rating (IDR) 'BBB-'/Negative implies, as the latter is capped by the Russian Federation's ratings (BBB-/Negative).

In 2014, Gazprom's net rouble-denominated revenues from gas sales were flat on 2013, despite lower gas prices and volumes. The sharp rouble depreciation in 2H14 mitigated a 9% fall in Gazprom's average realised gas price to USD203.6 per thousand cubic meters (mcm) and an 8% drop in its total gas sale volumes to 440bn cubic meters of gas (bcm) in 2014. Its average gas price in Europe, including Turkey, its key market by value, dropped to USD349/mcm or by 8% in 2014 while its sales volumes to this region were down 9% on 2013 to 159bcm. Using Fitch's Brent price deck of USD55 per barrel of oil (bbl) in 2015, USD65/bbl in 2016 and USD80/bbl in 2017 and 2018, we expect Gazprom's gas prices in Europe to average USD244/mcm in 2015-2018, or 35% lower than the USD375/mcm average gas price in 2011-2014, while we believe that the company's gas sales volumes will remain largely flat.

Gazprom reported strong rouble-denominated EBITDA and funds from operations (FFO) in 2014. We attribute this to rouble depreciation, as well as opex and capex control measures undertaken by Gazprom, mainly since 2H14. The company largely stayed away from the international capital markets in 2014 and has had to rely on internally generated cash flows and limited available bank funding for financing its operations and capital investments. In 2014 its capex was down 10% on 2013 to RUB1.3trn, and we expect Gazprom to step up capital discipline as it earmarks RUB1.6trn for capital investments in 2015. Gazprom may decide to phase out several costly projects, in particular, new liquefied natural gas (LNG) plants in the current low oil price environment.

Last week, the EU Competition Commission issued objections to Gazprom's business practices in eastern Europe. We believe that this may accelerate the move towards market-based pricing across that region, but the changes are by themselves unlikely to threaten Gazprom's ratings. For more details, refer to the comment EU Gazprom Charge May Accelerate Move to Spot Pricing published on 28 April 2015.

At end-2014, Gazprom's FFO adjusted net leverage edged up nearly 50% to 1.1x and its interest coverage was flat at 16.6x. Our base case forecast indicates that the company's FFO adjusted net leverage should remain below 1.5x and FFO interest cover above 10x in 2014-2016, which is well below our negative rating guidance of FFO adjusted net leverage above 2.5x and FFO interest cover of below 8x on a sustained basis.

With over RUB1trn in cash and short-term deposits and RUB532bn in short-term debt (including derivative financial instruments) at end-2014, Gazprom had a comfortable liquidity profile. We note that RUB638bn or 61% of Gazprom's cash and short-term deposits at end-2014 were with related Gazprombank (BB+/Negative), an entity under US and EU sanctions. As 90% of its borrowings at end-2014 were denominated in foreign currencies, mainly in US dollars, the company is exposed to further rouble depreciation. Overall, by 2020 Gazprom needs to repay or refinance over RUB1.8trn in borrowings. Given the limited scale of domestic capital markets and banking institutions, we expect the company to return to international capital markets in the near future or scale back its capital investment programme. We also believe that Gazprom's largest subsidiary, JSC Gazprom neft (BBB-/Negative), may continue seeking funds from the Russian sovereign wealth fund to co-invest in its greenfield upstream projects.